<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
Assets 1996 1995
------ -------- ------------
Invested assets: (unaudited)
<S> <C> <C>
Fixed maturities:
Available-for-sale, at fair value (amortized
cost: $479,771 and $490,667)................... $ 476,967 $ 505,832
Held-to-maturity, at amortized cost (fair
value: $156,577 and $158,131).................. 150,054 140,046
---------- ----------
627,021 645,878
Equity securities, at fair value (cost
$5,848 and $5,039)............................... 6,057 5,999
Mortgage loans, net............................... 64,072 61,467
Policy loans...................................... 14,882 14,043
Investment real estate, net....................... 6,754 6,864
Other invested assets, net........................ 19,477 17,322
Closed block invested assets...................... 294,819 304,557
---------- ----------
Total invested assets................................ 1,033,082 1,056,130
Cash and cash equivalents............................ 781 25,301
Accrued investment income............................ 11,985 11,347
Ceded reinsurance recoverables....................... 58,910 62,876
Accounts receivable, net............................. 9,307 8,907
Deferred policy acquisition costs.................... 71,096 70,168
Property, plant and equipment, net................... 20,562 20,340
Other assets......................................... 2,085 3,472
Closed block other assets............................ 23,403 22,234
---------- ----------
Total assets......................................... $1,231,211 $1,280,775
========== ==========
Liabilities and Shareholders' Equity
------------------------------------
Future policy benefits:
Life.............................................. $ 39,697 $ 37,982
Accident and health............................... 59,590 58,081
Policyholder account balances:
Universal life contracts.......................... 192,450 185,171
Annuity contracts................................. 208,631 216,905
Policy and contract claims........................... 52,549 59,641
Other policyholder funds............................. 13,130 12,793
Unearned premium revenue............................. 10,333 10,505
Amounts payable to reinsurers........................ 4,466 7,359
Deferred income taxes................................ (429) 5,630
Other liabilities.................................... 22,911 41,546
Closed block liabilities............................. 387,470 388,263
Discontinued operations.............................. 45,577 50,637
---------- ----------
Total liabilities.................................... 1,036,375 1,074,513
========== ==========
Shareholders' equity:
Common stock $0.01 par value; 30,000,000 shares
authorized, 9,944,383 shares issued and
outstanding...................................... 99 99
Additional paid-in capital........................ 191,226 191,226
Retained earnings................................. 5,512 11
Unrealized appreciation (depreciation) of
invested securities at fair value, net........... (2,001) 14,926
---------- ----------
Total shareholders' equity........................... 194,836 206,262
Commitments and contingencies........................ -- --
---------- ----------
Total liabilities and shareholders' equity........... $1,231,211 $1,280,775
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands except share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30,
------------------ ------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Insurance premiums:
Life................................ $ 16,342 $ 20,248 $ 31,466 $ 40,175
Accident and health................. 34,931 39,054 69,105 78,198
Policyholder assessments............ 5,926 5,133 11,765 11,456
Premiums ceded to reinsurers........ (12,489) (14,820) (23,122) (31,335)
-------- -------- -------- --------
44,710 49,615 89,214 98,494
Investment income, net................ 13,530 18,453 26,481 36,384
Realized investment gains............. 101 1,121 185 1,431
Contribution from closed block........ 1,403 -- 1,432 --
Ceding commissions and other income... 3,285 4,827 5,803 9,507
-------- -------- -------- --------
Total revenues........................ 63,029 74,016 123,115 145,816
-------- -------- -------- --------
Policyholder benefits:
Life.................................. 13,803 17,319 27,520 35,551
Accident and health................... 19,691 28,556 41,586 56,863
Reinsurance recoveries................ (7,561) (10,734) (15,202) (20,395)
-------- -------- -------- --------
25,933 35,141 53,904 72,019
Interest credited to policyholder
account balances.....................
Annuity contracts................... 2,808 3,097 5,758 6,190
Universal contracts................. 2,711 2,553 5,456 5,061
Other............................... -- 750 -- 1,491
-------- -------- -------- --------
Total policyholder benefits........... 31,452 41,541 65,118 84,761
-------- -------- -------- --------
Expenses:
Policy acquisition costs.............. 11,762 11,606 22,944 24,422
Other insurance operating expense..... 13,119 12,022 25,164 22,939
-------- -------- -------- --------
Total expenses........................ 24,881 23,628 48,108 47,361
-------- -------- -------- --------
Dividends to policyholders............ -- 2,630 -- 5,394
-------- -------- -------- --------
Income from continuing operations
before income taxes.................. 6,696 6,217 9,889 8,300
-------- -------- -------- --------
Income tax expense.................... 2,344 2,911 3,461 4,555
-------- -------- -------- --------
Net income from continuing operations. 4,352 3,306 6,428 3,745
-------- -------- -------- --------
Net income (loss) from discontinued
operations........................... (559) (399) (429) 244
Extraordinary charge for
demutualization expense, net......... -- 1,380 -- 3,300
-------- -------- -------- --------
Net income............................ $ 3,793 $ 1,527 $ 5,999 $ 689
======== ======== ======== ========
Earnings per common share:
Weighted average common shares
outstanding........................ 9,944,383 9,944,383
========= =========
Net income from continuing
operations......................... $ 0.44 $ 0.65
========= =========
Net income.......................... $ 0.38 $ 0.60
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------
1996 1995
-------- -------
<S> <C> <C>
Net cash provided (used) by operating activities......... $ (9,667) $ (3,370)
-------- -------
Cash flows from investing activities:
Purchase of fixed maturities........................... (90,308) (93,766)
Sales, maturities, calls and principal reductions of
fixed maturities...................................... 91,530 105,134
Purchase of mortgage loans............................. (4,620) (5,580)
Proceeds from repayment of mortgage loans.............. 1,935 940
Other, net............................................. (4,612) (6,214)
-------- -------
Net cash provided (used) by investing activities..... (6,075) 514
-------- -------
Cash flows from financing activities:
Policy cashouts in connection with demutualization
and IPO............................................... (6,877) --
Deposits to policyholder account balances.............. 21,426 26,327
Withdrawals from policyholder account balances......... (23,327) (17,399)
Extraordinary charge for demutualization expense....... -- (3,300)
-------- -------
Net cash provided (used) by financing activities..... (8,778) 5,628
-------- -------
Net increase (decrease) in cash and cash equivalents..... (24,520) 2,772
Cash and cash equivalents at beginning of period......... 25,301 2,553
-------- -------
Cash and cash equivalents at end of period............... $ 781 $ 5,325
======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996 and 1995
The following notes should be read in conjunction with the notes to consolidated
financial statements contained in the 1995 Form 10-K of The Guarantee Life
Companies Inc. ("Guarantee Life").
(1) Summary of Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements
include The Guarantee Life Companies Inc. and its direct and indirect
wholly-owned insurance subsidiaries. These financial statements have been
prepared in conformity with generally accepted accounting principles for
interim financial information and reflect all adjustments (consisting only
of normal recurring items) which are, in the opinion of management,
necessary to present fairly the financial position and results of
operations for the periods presented.
Operating results for the three and six month periods ended June 30, 1996
are not necessarily indicative of the results that may be expected for the
year ending December 31, 1996. These financial statements should be read
in conjunction with the audited consolidated financial statements for the
fiscal year ended December 31, 1995, contained in Guarantee Life's annual
report on Form 10-K for the year ended December 31, 1995.
(2) Investments
Fixed maturities at June 30, 1996 (in thousands) are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies................ $ 58,845 $ 236 $ 454 $ 58,627
Obligations of states and political subdivisions..... 6,130 30 223 5,937
Debt securities issued by foreign governments........ 8,033 212 365 7,880
Corporate securities................................. 226,910 6,992 5,492 228,410
Mortgage-backed securities........................... 179,853 1,958 5,698 176,113
-------- ------ ------- --------
$479,771 $9,428 $12,232 $476,967
======== ====== ======= ========
Held-to-maturity:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies................ $ 7,483 $ 154 $ 9 $ 7,628
Corporate securities................................. 142,571 7,049 671 148,949
-------- ------ ------- --------
$150,054 $7,203 $ 680 $156,577
======== ====== ======= ========
</TABLE>
(3) Closed Block
Summarized condensed financial information of the closed block as of June
30, 1996 (in thousands) is as follows:
<TABLE>
Assets
------
<S> <C>
Invested assets:
Fixed maturities:
Available-for-sale, at fair value ($180,776 amortized cost)..... $179,349
Held-to-maturity, at amortized cost ($66,568 fair value)........ 63,583
--------
242,932
Policy loans...................................................... 48,690
Other invested assets, net........................................ 3,197
--------
Total invested assets............................................... 294,819
Cash and cash equivalents........................................... 2,515
Accrued investment income........................................... 4,673
Ceded reinsurance recoverables...................................... 1,311
Accounts receivable, net............................................ 219
Deferred policy acquisition costs................................... 14,685
--------
Total closed block assets........................................... $318,222
========
</TABLE>
5
<PAGE>
<TABLE>
Liabilities
-----------
<S> <C>
Life future policy benefits......................................... $ 869
Policyholder account balances for annuity contracts................. 301,595
Policy and contract claims.......................................... 306
Other policyholder funds............................................ 72,374
Dividends payable to policyholders.................................. 7,595
Deferred income taxes............................................... (500)
Other liabilities................................................... 5,231
--------
Total closed block liabilities...................................... $387,470
========
</TABLE>
Condensed statements of income for the closed block for the three and six
months ended June 30, 1996 (in thousands) are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1996 June 30, 1996
------------------ ----------------
<S> <C> <C>
Revenues:
Insurance premiums and policyholder assessments, net of reinsurance.... $ 5,428 $11,155
Investment income, net................................................. 5,662 11,146
Realized investment gains.............................................. (44) (15)
Other income........................................................... 5 7
------- -------
Total revenues......................................................... 11,051 22,293
======= =======
Policyholder benefits and expenses:
Total policyholder benefits............................................ 5,585 12,412
Policy acquisition costs............................................... 511 1,028
Other insurance operating expense...................................... 920 1,907
------- -------
Total benefits and expenses............................................ 7,016 15,347
Dividends to policyholders............................................. 2,632 5,514
------- -------
Contribution from the closed block..................................... $ 1,403 $ 1,432
======= =======
</TABLE>
The closed block includes only those revenues, benefits, expenses and
dividends resulting from the policies which were included in the closed
block on December 26, 1995, the effective date of Guarantee Life Insurance
Company's conversion to a stock life insurance company. The pre-tax income
of the closed block is reported as a single line item, Contribution from
closed block, in Guarantee Life's condensed consolidated statements of
income. Income tax expense applicable to the closed block is reflected as a
component of income tax expense.
The excess of closed block liabilities over closed block assets as of June
30, 1996 represents the estimated future contribution from closed block,
which will be recognized in Guarantee Life's statements of income over the
period the underlying policies and contracts remain in force.
If, over the period the closed block remains in existence, the actual
cumulative contribution is greater than the expected cumulative
contribution, only such expected contribution will be recognized in
Guarantee Life's statements of income. The excess will be paid to closed
block policyholders as additional policyholder dividends. Alternatively, if
the actual cumulative contribution is less than the expected cumulative
contribution, only such actual contribution will be recognized in Guarantee
Life's statements of income. However, dividends will be changed in the
future, to increase actual contributions until the actual cumulative
contributions equal the expected cumulative contributions.
6
<PAGE>
ITEM 2 -MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following analysis of the consolidated financial condition and results
of operations should be read in conjunction with the condensed consolidated
financial statements and the notes thereto included herein.
Background
On December 26, 1995 (the "Effective Date"), Guarantee Mutual Life Company
was converted to a stock life insurance company, Guarantee Life Insurance
Company ("Guarantee Life Insurance"), and became a wholly-owned subsidiary of
The Guarantee Life Companies Inc. (the "Holding Company"). The Holding Company
had no significant operating results during 1995. The consolidated financial
condition and results of operations of The Guarantee Life Companies Inc. and
subsidiaries (together, "Guarantee Life") for all periods prior to the
Effective Date, including for the three and six months ended June 30, 1995,
represent the financial condition and results of operations of Guarantee Mutual
Life Company and its subsidiaries.
Operating Results for the Three and Six Months Ended June 30, 1996 and 1995
As part of the conversion to a stock life insurance company, Guarantee Life
Insurance established a Closed Block to provide for dividends on certain
policies that were in force on the Effective Date. After the Effective Date,
the operating results from the Closed Block are reported on one line,
Contribution from closed block, in the 1996 consolidated statement of income.
For comparability with 1995, the following table presents the results of
operations for the three and six months ended June 30, 1996 combined with the
results of operations of the Closed Block. Management's discussion and
analysis addresses the combined results of operations unless noted otherwise.
Combined Results of Operations
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -------------------
1996 1995 1996 1995
------- -------- -------- --------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Revenues:
Premiums and policyholder assessments, net................ $50,138 $ 49,615 $100,369 $ 98,494
Investment income, net.................................... 19,192 18,453 37,627 36,384
Realized investment gains................................. 57 1,121 170 1,431
Ceding commissions and other income....................... 3,290 4,827 5,810 9,507
------- -------- -------- --------
Total revenues.............................................. 72,677 74,016 143,976 145,816
Policyholder benefits and expenses:
Gross benefits............................................ 38,264 45,877 79,947 92,413
Reinsurance recoveries.................................... (7,501) (10,733) (15,148) (20,394)
Interest credited to policyholder account balances........ 6,274 6,397 12,731 12,742
------- -------- -------- --------
Total policyholder benefits............................... 37,037 41,541 77,530 84,761
Total Expenses............................................ 26,312 23,628 51,043 47,361
Dividends to policyholders................................ 2,632 2,630 5,514 5,394
------- -------- -------- --------
Total policyholder benefits, expenses and dividends......... 65,981 67,799 134,087 137,516
------- -------- -------- --------
Income from continuing operations before income taxes....... 6,696 6,217 9,889 8,300
Income tax expense.......................................... 2,344 2,911 3,461 4,555
------- -------- -------- --------
Net income from continuing operations....................... $ 4,352 $ 3,306 $ 6,428 $ 3,745
======= ======== ======== ========
</TABLE>
Investment Income, Net. Net investment income increased $739 thousand, or
4.0% for the second quarter of 1996 over 1995, and $1.2 million, or 3.4% for the
six months ended June 30. This increase was caused mainly by the $19.9 million
increase in the average invested asset base for 1996 over 1995. The investment
yield was 8.2% for both 1996 and 1995. At June 30, 1996, invested assets and
cash and cash equivalents had decreased $24.5 million from December 31, 1995.
Significant decreases during 1996 include a $28.0 million decrease in unrealized
gain on invested assets recorded at fair value, as well as payments in January,
1996 to those policyholders receiving cashouts as part of the demutualization,
and to the IRS to settle the examination of Guarantee Life's 1992 federal income
tax return.
7
<PAGE>
Realized Investment Gains. Net realized investment gains decreased $1.1
million for the second quarter of 1996 from 1995, and $1.3 million for the six
months ended June 30. Gains and losses occur primarily as a result of
dispositions of Guarantee Life's invested assets as part of its ongoing
investment management activity. The primary transactions during 1996 included
the sale of a block of equity securities, as well as the recognition of a
decline in value of a fixed maturity security that was deemed to be other than
temporary.
Income Tax Expense. Income tax expense decreased $567 thousand for the
second quarter of 1996 from 1995, and $1.1 million for the six months ended June
30. These decreases are due primarily to the absence in 1996 of the equity
add-on tax of $819 thousand for the second quarter and $1.7 million for the six
months ended June 30 which was recorded in 1995. Increased taxes on the higher
pre-tax earnings offset this decrease.
Insurance Operations--Group
The following tables set forth Guarantee Life's group insurance
underwriting income for the three and six months ended June 30, 1996 and 1995.
<TABLE>
<CAPTION>
Group Underwriting Income
Three Months Ended June 30,
--------------------------------------------------------------
1996 1995
----------------------------- -----------------------------
(In thousands)
Core Specialty Core Specialty
Products Products Total Products Products Total
-------- --------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Gross insurance premiums....................... $31,713 $ 17,613 $ 49,326 $26,650 $ 25,429 $ 52,079
Ceded to reinsurers............................ (743) (10,232) (10,975) (583) (13,419) (14,002)
------- -------- -------- ------- -------- --------
Net premiums................................... 30,970 7,381 38,351 26,067 12,010 38,077
Ceding Commissions............................. -- 3,175 3,175 88 4,707 4,795
------- -------- -------- ------- -------- --------
Total net premiums and ceding
commissions................................. 30,970 10,556 41,526 26,155 16,717 42,872
Gross policyholder benefits.................... 20,881 9,228 30,109 18,415 18,697 37,112
Ceded to reinsurers............................ (70) (6,908) (6,978) (498) (9,833) (10,331)
------- -------- -------- ------- -------- --------
Net benefits................................... 20,811 2,320 23,131 17,917 8,864 26,781
Policy acquisition costs and expenses.......... 11,523 6,762 18,285 8,668 8,522 17,190
------- -------- -------- ------- -------- --------
Total net benefits and expenses.............. 32,334 9,082 41,416 26,585 17,386 43,971
------- -------- -------- ------- -------- --------
Underwriting gain (loss)....................... $(1,364) $ 1,474 $ 110 $ (430) $ (669) $ (1,099)
======= ======== ======== ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
Group Underwriting Income
Six Months Ended June 30,
--------------------------------------------------------------
1996 1995
----------------------------- -----------------------------
(In thousands)
Core Specialty Core Specialty
Products Products Total Products Products Total
-------- --------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Gross insurance premiums....................... $61,019 $ 36,135 $ 97,154 $52,376 $ 51,110 $103,486
Ceded to reinsurers............................ (1,139) (19,160) (20,299) (1,797) (26,779) (28,576)
------- -------- -------- ------- -------- --------
Net premiums................................... 59,880 16,975 76,855 50,579 24,331 74,910
Ceding Commissions............................. (176) 5,787 5,611 241 9,149 9,390
------- -------- -------- ------- -------- --------
Total net premiums and ceding
commissions................................. 59,704 22,762 82,466 50,820 33,480 84,300
------- -------- -------- ------- -------- --------
Gross policyholder benefits.................... 39,274 22,015 61,289 37,447 36,873 74,320
Ceded to reinsurers............................ 48 (13,638) (13,590) (498) (18,354) (18,852)
------- -------- -------- ------- -------- --------
Net benefits................................... 39,322 8,377 47,699 36,949 18,519 55,468
Policy acquisition costs and expenses.......... 22,188 13,417 35,605 16,810 16,593 33,403
------- -------- -------- ------- -------- --------
Total net benefits and expenses.............. 61,510 21,794 83,304 53,759 35,112 88,871
------- -------- -------- ------- -------- --------
Underwriting gain (loss)....................... $(1,806) $ 968 $ (838) $(2,939) $ (1,632) $ (4,571)
======= ======== ======== ======= ======== ========
</TABLE>
Core products net premiums increased $4.9 million, or 18.8% for the second
quarter of 1996 over 1995, and $9.3 million, or 18.4% for the six months ended
June 30. These increases are due primarily to increased sales of all core
8
<PAGE>
products through the existing seventeen regional group offices and the opening
of two additional regional group offices in Boston and Phoenix.
Specialty products net premiums decreased $4.6 million, or 38.5% for the
second quarter of 1996 over 1995 and $7.4 million, or 30.2% for the six months
ended June 30. These decreases were primarily due to Guarantee Life's decision
to stop writing the SMART fully insured major medical product in 1995, causing
a $3.6 million reduction in net premiums in the second quarter and a $6.1
million reduction in net premiums for the six months ended June 30. During the
second quarter of 1996, Guarantee Life continued to manage growth in the excess
loss product line during the current cycle in the group health insurance
industry. As a result, excess loss net premiums decreased $1.3 million in the
second quarter and $1.6 million for the six months ended June 30.
Core products net benefits increased $2.9 million, or 16.2% for the second
quarter of 1996 over 1995 and $2.4 million, or 6.4% for the six months ended
June 30. These increases are the net effect of the increase caused by higher
premium volume, which was offset by significant improvement in underwriting
experience, especially in the dental, short-term disability, and long-term
disability product lines.
Specialty products net benefits decreased $6.5 million, or 73.8% for the
second quarter of 1996 from 1995 and $10.1 million, or 54.8% for the six months
ended June 30. These decreases were caused by lower premium volume combined
with improved underwriting experience in both the SMART and excess loss product
lines.
Total group expenses increased $1.1 million, or 6.4% for the second quarter
of 1996 over 1995 and $2.2 million, or 6.6% for the six months ended June 30.
These increases were primarily due to increased spending in the home office and
regional group offices, as significant additions were made to personnel and
information systems after March 1995 in support of the growth of the core
product lines.
Insurance Operations--Individual
The following table sets forth certain summarized financial data for
Guarantee Life's individual insurance business for the three and six months
ended June 30, 1996, and 1995.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
---------------- ----------------
1996 1995 1996 1995
------- ------- ------- -------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Revenues:
Premiums and policyholder assessments, net of reins. ceded...... $11,787 $11,538 $23,514 $23,584
Investment income, net.......................................... 16,438 16,142 32,382 31,720
Realized investment gains....................................... 133 908 908 1,159
Ceding commissions and other income............................. 116 33 200 118
------- ------- ------- -------
Total revenues.................................................... 28,474 28,621 57,004 56,581
Policyholder benefits and expenses:
Gross benefits.................................................. 8,155 8,765 18,658 18,093
Ceded to reinsurers............................................. (523) (402) (1,558) (1,542)
Interest credited to account balances........................... 6,274 6,397 12,731 12,742
------- ------- ------- -------
Total policyholder benefits..................................... 13,906 14,760 29,831 29,293
Expenses........................................................ 7,675 6,438 14,084 13,958
Dividends to policyholders...................................... 2,632 2,630 5,514 5,394
------- ------- ------- -------
Total policyholder benefits, expenses and dividends............... 24,213 23,828 49,429 48,645
------- ------- ------- -------
Income from continuing operations before income taxes............. $ 4,261 $ 4,793 $ 7,575 $ 7,936
======= ======= ======= =======
</TABLE>
Net premiums and policyholder assessments increased $249 thousand, or 2.2%
for the second quarter of 1996 over 1995 and were level for the six months ended
June 30. This increase is the result of growth in the universal life product
line.
Total individual policyholder benefits decreased $854 thousand, or 5.8%
for the second quarter of 1996 from 1995. Excluding interest credited to
policyholder account balances, total individual policyholder benefits decreased
$731 thousand, or 8.7% for the second quarter 1996 from 1995, due to improved
mortality in both the traditional and
9
<PAGE>
universal life product lines. Interest credited on policyholder account
balances decreased $123 thousand, or 1.9% for the second quarter of 1996 from
1995. This decrease was due to lower crediting rates on both universal life and
annuity products.
Total individual policyholder benefits increased $538 thousand, or 1.8%
for the first six months of 1996 over 1995. Excluding interest credited to
policyholder account balances, total individual policyholder benefits increased
$549 thousand, or 3.3% for the first six months of 1996 over 1995, due to higher
claims in both the traditional and universal product lines. Interest credited
on policyholder account balances for the six month period decreased only
slightly in 1996, as lower rates offset the increased account values. Weighted
average interest crediting rates for the six months ending June 30, 1996 and
1995 were 5.87% and 5.97% for universal life products and 5.49% and 5.89% for
annuities.
Total individual expenses increased $1.2 million or 19.2% for the second
quarter of 1996 over 1995, but were flat for the six months ended June 30. The
second quarter increase is due to an increase in DPAC amortization, caused by
the improved mortality in the universal life product line. Offsetting this, the
individual insurance business has successfully implemented several expense
management initiatives, contributing to decreases in other operating expenses of
$18 thousand and $514 thousand for the second quarter and year to date,
respectively.
Policyholder dividends increased slightly during 1996, reflecting an
unchanged dividend scale applied to slightly higher policy values.
Liquidity and Capital Resources
The Holding Company's ability to pay dividends to its shareholders and meet
its obligations, including debt service and operating expenses, primarily
depends upon its net income and the receipt of sufficient funds from its
insurance subsidiaries. The payment of dividends by Guarantee Life Insurance
is regulated under Nebraska law. Under Nebraska law, Guarantee Life Insurance
may pay dividends only from the earned surplus arising from its business and
must receive the prior approval of the Director to pay a dividend, if such
dividend would exceed certain statutory limitations. Effective March 13, 1996,
the statutory limitation was amended from "the lesser of" to "the greater of"
(i) 10% of Guarantee Life Insurance's capital and surplus as of the preceding
year end and (ii) the net gain from operations for the previous calendar year.
Nebraska law gives the Director broad discretion to disapprove requests for
dividends in excess of these limits. Based on this limitation and 1995
statutory results, Guarantee Life Insurance would be able to pay $10.2 million
in dividends to the Holding Company in 1996 without obtaining the Director's
approval. However, Guarantee Life Insurance had undertaken with the Nebraska
Department of Insurance, in connection with the demutualization, that it would
not, without the prior approval of the Director, declare or pay any dividends
to the Holding Company before June 26, 1996.
Historically, Guarantee Life has generated positive cash flow from
operating activities and net deposits to policyholder accounts, and used these
funds to purchase fixed maturity securities or other invested assets. During
the six months ended June 30, 1996, Guarantee Life made significant payments for
income taxes and policyholder cashouts in conjunction with the demutualization.
Additionally, as the policy and contract claims associated with the SMART and
Special Risk product lines run off, and if excess loss volume continues to
decline, significant amounts of cash will be required from operations. If
future sales and premium volumes are insufficient to fund these payments, cash
may be required from investing or financing activities to fund these payments.
On June 27, 1996, Guarantee Life Insurance signed a letter of intent to
acquire Security Life Insurance Company of America's entire universal life
insurance block of business in a cash transaction for a purchase price of $8.5
million, which will be funded from existing capital resources. This acquisition
is expected to add approximately 21,000 policies and $51 million of policyholder
account balances to Guarantee Life's individual life insurance business. This
transaction closed on July 31, 1996.
Interest Rate Changes
Interest rate changes may have temporary effects on the sale and
profitability of the universal life and annuity products offered by Guarantee
Life's insurance operations. For example, if interest rates rise, competing
investments (such as annuities or life insurance offered by Guarantee Life's
competitors, certificates of deposit, mutual funds, and similar instruments) may
become more attractive to potential purchasers of Guarantee Life's products
until Guarantee Life increases the rate credited to holders of its universal
life and annuity products. Guarantee Life constantly monitors interest rates
with respect to a spectrum of durations and sells policies and annuities that
permit flexible responses to interest rate changes as part of its management of
interest spreads.
10
<PAGE>
Changes in interest rates have not had a significant impact on Guarantee
Life's net income in the three or six months ended June 30, 1996, although the
interest rate environment can affect sales of certain of Guarantee Life's
product lines and may affect surrender and withdrawal rates. For example,
Guarantee Life's annuity sales declined during 1995 and 1996, during which time
Guarantee Life has maintained the spread between crediting rates and earned
rates on its annuities and other interest-sensitive life insurance products.
However, the profitability of Guarantee Life's products is based upon not only
interest rate spreads but also on persistency, mortality, morbidity and
expenses.
Part II OTHER INFORMATION
ITEMS 1, 2, 3, and 5 are either inapplicable or are answered in the
negative and are omitted pursuant to the instructions to Part II.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders (the "Annual Meeting")
was held on May 9, 1996. The results of the matters voted upon at the
Annual Meeting are shown below.
Election of Directors. The following directors were elected:
---------------------
<TABLE>
<CAPTION>
Votes
Director Votes For Withheld Term
------------------- ---------- -------- -------
<S> <C> <C> <C> <C>
Frederick M. Bekins 5,378,297 121,892 3 years
C. R. "Bob" Bell 5,378,061 122,128 3 years
Thomas T. Hacking 5,381,671 118,518 3 years
A. J. Scribante 5,380,821 119,368 3 years
</TABLE>
Directors whose terms of office continued after the Annual Meeting:
Robert D. Bates
John R. Cochran
Eugene A. Conley
Theodore C. Cooley
James M. McClymond
Bernard W. Reznicek
Janice D. Stoney
William F. Welsh II
Independent Auditors. The appointment of KPMG Peat Marwick LLP as
--------------------
the Company's independent auditors for the year 1996 was ratified with
5,340,730 votes for, 36,266 votes against and 123,193 abstentions/broker
non-votes.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are being filed pursuant to Item 6(a) of
Form 10-Q. Exhibit numbers refer to the paragraph numbers under Item 601
of Regulation S-K:
2(a) Plan of Conversion of Guarantee Mutual Life Company**
2(b) Amendment No. 1 to Plan of Conversion**
3(a) Amended and Restated Certificate of Incorporation of The
Guarantee Life Companies Inc.***
3(b) Amended and Restated Bylaws of The Guarantee Life Companies
Inc.***
4 Form of Certificate of The Guarantee Life Companies Inc.
Common Stock, par value $0.01 per share**
10(a) The Guarantee Life Companies Inc.'s 1994 Long Term Incentive
Plan**
11
<PAGE>
10(b) The Guarantee Life Companies Inc. and Guarantee Mutual Life
Company Executive Severance Plan**
10(c) Guarantee Mutual Life Company Retirement Plan**
10(d) Guarantee Mutual Life Company Supplemental Retirement Plan**
10(e) Guarantee Mutual Life Company Equalizer Plan**
10(f) Employment Agreement with Robert D. Bates**
10(g) Severance Agreement with Theodore C. Cooley**
10(h) Reinsurance Agreement between Mercantile and General
Reinsurance Company plc and Guarantee Mutual Life Company,
effective May 1, 1986**
10(i) Reinsurance Agreement between Mercantile and General
Reinsurance Company plc and Guarantee Mutual Life Company,
effective July 1, 1986**
10(i)(a) Letters dated September 8, 1995 regarding the Reinsurance
Agreement filed as Exhibit 10(i)**
10(j) Interests and Liabilities Agreement attached to Quota Share
Treaty between Guarantee Mutual Life Company and Lincoln
National Life Insurance Company, dated January 17, 1995**
10(k) Interests and Liabilities Agreement attached to Quota Share
Treaty between Guarantee Mutual Life Company and Phoenix
Home Life Mutual Insurance Company, dated January 17, 1995**
10(l) Guarantee Mutual Life Company Phantom Stock Plan as Amended
and Restated**
10(m) Amendment No. 1 to The Guarantee Life Companies Inc.'s 1994
Long Term Incentive Plan**
10(n) The Guarantee Life Companies Inc. Directors Stock Incentive
Plan
27 Financial Data Schedule
---------------------------------------------------------------------
**Incorporated by reference as an exhibit to Registrant's
Registration Statement on Form S-1, Registration No. 33-92992.
***Incorporated by reference as an exhibit to Registrant's Form 10-K
for the fiscal year ended December 31, 1995 (Commission File No.
0-26788).
(b) No current reports on Form 8-K have been filed during the fiscal
quarter of the period covered by this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
THE GUARANTEE LIFE COMPANIES INC.
Date: August 9, 1996 /s/ WILLIAM L. BAUHARD
-------------------------------------------------
William L. Bauhard
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
12
<PAGE>
Exhibit 10(n)
THE GUARANTEE LIFE COMPANIES INC.
DIRECTORS STOCK INCENTIVE PLAN
I. Purposes
--------
The purposes of the Plan are to enable the Company to attract, retain and
motivate the best qualified directors and to enhance a long-term mutuality of
interest between the directors and shareholders of the Company.
II. Definitions
-----------
Unless the context requires otherwise, the following words as used in
the Plan shall have the meanings ascribed to each below, it being understood
that masculine, feminine and neuter pronouns are used interchangeably, and that
each comprehends the others.
A. "Board" shall mean the Board of Directors of the Company.
B. "Code" shall mean the Internal Revenue Code of 1986, as amended.
C. "Common Stock" shall mean the common stock of the Company, par value
$0.01 per share, any common stock into which such common stock may be changed,
and any common stock resulting from any reclassification of such common stock.
D. "Company" shall mean The Guarantee Life Companies Inc.
E. "Fair Market Value" means the closing market price of Shares on the
relevant date, according to a stock quotation source selected by the Board. If
the Shares did not trade on the relevant date, then Fair Market Value is
determined as of the most recent date for which a quoted price is available, or
as of the most recent date for which quoted bid and asked prices are available,
whichever is most recent. Should Fair Market Value be determined at the time of
the most recent quoted bid and asked prices, Fair Market Value shall be equal to
the average of such bid and asked prices.
F. "Option" shall mean the right to purchase one Share at a prescribed
purchase price on the terms specified in Section 5 of the Plan. The Options are
nonqualified stock options not intended to qualify under Section 422 of the
Code.
G. "Participant" shall mean a director of the Company who is not an
officer or employee of the Company or any of its subsidiaries.
H. "Plan" shall mean The Guarantee Life Companies Inc. Directors Stock
Incentive Plan, as set forth herein and as amended from time to time.
I. "Share" shall mean a share of Common Stock.
<PAGE>
III. Administration
--------------
The Plan shall be administered by the Board. The Board shall have full
authority to interpret and administer the Plan, to establish, amend and rescind
rules for carrying out the Plan, to construe the respective option agreements
and to make all other determinations and to take all other actions that it
deems necessary or desirable for administering the Plan. Each determination,
interpretation or other action made or taken by the Board shall be final and
binding for all purposes and upon all persons. The Board may delegate its
powers and functions hereunder to a duly appointed committee of the Board. No
member or former member of the Board or any agent shall be liable for any
action or determination made in good faith with respect to the Plan.
IV. Shares; Adjustment Upon Certain Events
--------------------------------------
Shares to be issued under the Plan may consist, in whole or in part, of
treasury shares or authorized but unissued Shares not reserved for any other
purpose. The aggregate number of Shares that may be issued under the Plan shall
not exceed 90,000 Shares, except as provided in this Section 4. Where Options
are for any reason canceled, or expire or terminate unexercised, the Shares
covered by such Options shall again be available for the grant of Options,
within the limits provided by the preceding sentence. In the event of any
Share dividend or Share split, recapitalization, merger, consolidation,
combination, spin-off, distribution of assets to shareholders (other than
ordinary cash dividends), exchange of shares, or other similar corporate
change, the aggregate number of Shares available for Awards under Section 5(a)
or subject to outstanding Options and the respective exercise prices applicable
to outstanding Options shall be appropriately adjusted by the Board and the
Board's determination shall be conclusive, provided that any fractional shares
-------------
resulting from any such adjustment shall be disregarded.
V. Awards and Terms of Options
---------------------------
A. Grant. Each Participant in office on the effective date of the
-----
Plan shall automatically be granted an Option to purchase three thousand (3,000)
Shares. Each Participant who first becomes a director after such effective date
shall automatically be granted, on the first business day next following the
Participant's election to the Board, an Option to purchase three thousand
(3,000) Shares.
B. Option Agreement. Options shall be evidenced by a written option
----------------
agreement embodying the following terms:
(i) Exercise Price. The purchase price per Share of an Option
shall be the Fair Market Value on the date such Option is granted.
(ii) Period of Exercisability. Each Option granted hereunder shall
be exercisable on the date which is the six (6) month anniversary of the
date of grant and shall expire upon the tenth (10th) anniversary of the
date of the grant thereof. Options may be exercised only during the
continuance of that Participant's service as a director of the Company
and the one year period immediately following a Participant's
termination of service as a director. Notwithstanding the foregoing, if
any Participant terminates service as a director (other than
<PAGE>
on account of retirement at or after age 70) within six months of the
date on which such Participant receives the grant of an Option, such
Option shall be forfeited as of such date of termination.
(iii) Procedure for Exercise. A Participant electing to exercise one
or more Options shall give written notice to the Secretary of the Company
of such election and of the number of Shares he has elected to purchase.
Upon receipt of payment in cash, the Company shall deliver to the
Participant as soon as practicable a certificate or certificates for the
Shares then purchased.
VI. Nontransferability of Awards
----------------------------
No Award shall be transferable by the Participant otherwise than by will
or under the applicable laws of descent and distribution or to a member of the
Participant's immediate family or a trust or other entity, the only beneficial
owners of which are members of the Participant's immediate family. For
purposes of this Section 6, a person shall be considered to be part of a
Participant's immediate family if he or she is the Participant's spouse, child
(including stepchild), grandchild, parent or sibling. In addition, no Award
shall be assigned, negotiated, pledged or hypothecated in any way (whether by
operation of law or otherwise), and no Award shall be subject to execution,
attachment or similar process. Upon any attempt to transfer, assign,
negotiate, pledge or hypothecate any Award, or in the event of any levy upon
any Award by reason of any attachment or similar process contrary to the
provisions hereof, such Award shall immediately become null and void.
VII. Effectiveness, Termination and Amendment
----------------------------------------
The Plan shall become effective on May 9, 1996 and shall terminate at
the close of business on April 30, 2006. No Awards shall be granted under the
Plan after April 30, 2006. The Board at any time or from time to time may
amend or terminate the Plan except that the Plan may not be amended more than
once every six (6) months other than to comport with changes in the Code and
the regulations thereunder and no termination, amendment or modification of the
Plan may, without the consent of a Participant or the permitted transferee of
an Award, alter or impair the rights and obligations arising under any then
outstanding Award.
VIII. General Provisions
------------------
A. No Right to Remain as a Director. The Plan shall not impose any
--------------------------------
obligations on the Company to retain any Participant as a director nor shall it
impose any obligation on the part of any Participant to remain as a director of
the Company.
B. Rights as a Shareholder. A Participant (or a permitted transferee
-----------------------
of an Option) shall have no rights as a shareholder with respect to any Shares
covered by his Option until he shall have become the holder of record of such
Share(s) and no adjustments shall be made for dividends in cash or other
property or distribution or other rights in respect to any such Shares, except
as otherwise specifically provided for in the Plan.
<PAGE>
C. Issuance of Stock Certificates; Legends; Listing. Upon any exercise
------------------------------------------------
of an Option and payment of the exercise price thereof, a certificate or
certificates for the Shares shall be issued by the Company in the name of the
person exercising such Option and shall be delivered to or upon the order of
such person. Certificates for Shares issued upon exercise of an Option shall
bear such legend or legends as the Board, in its discretion, determines to be
necessary or appropriate to prevent a violation of, or to perfect an exemption
from, the registration requirements of the Securities Act of 1933, as amended,
or to implement the provisions of any agreements between the Company and the
Participant with respect to such Shares. If at any time the Board shall
determine in its discretion that the listing, registration or qualification of
the Shares covered by the Plan upon any national securities exchange or the
over-the-counter market or under any state or federal law, or the consent or
approval of any governmental regulatory body, is necessary or desirable as a
condition of, or in connection with, the sale of Shares under the Plan, no
Shares will be delivered unless and until such listing, registration,
qualification, consent or approval shall have been effected or obtained, or
otherwise provided for, free of any conditions not acceptable to the Board.
D. Severability of Provisions. If any provision of the Plan shall
--------------------------
be held invalid or unenforceable, such invalidity or unenforceability shall not
affect any other provisions hereof, and the Plan shall be construed and enforced
as if such provision had not been included.
E. Headings and Captions. The headings and captions herein are
---------------------
provided for reference and convenience only, shall not be considered part of the
Plan, and shall not be employed in the construction of the Plan.
F. Controlling Law. The Plan shall be construed and enforced
---------------
according to the laws of the State of Delaware.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Balance Sheet as of June 30, 1996 (unaudited) and the
Condensed Consolidated Statement of Income for the six months ended June 30,
1996 (unaudited) and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 476,967
<DEBT-CARRYING-VALUE> 150,054
<DEBT-MARKET-VALUE> 156,577
<EQUITIES> 6,057
<MORTGAGE> 64,072
<REAL-ESTATE> 6,754
<TOTAL-INVEST> 1,033,082
<CASH> 781
<RECOVER-REINSURE> 58,910
<DEFERRED-ACQUISITION> 71,096
<TOTAL-ASSETS> 1,231,211
<POLICY-LOSSES> 151,836
<UNEARNED-PREMIUMS> 10,333
<POLICY-OTHER> 401,081
<POLICY-HOLDER-FUNDS> 13,130
<NOTES-PAYABLE> 0
0
0
<COMMON> 99
<OTHER-SE> 194,737
<TOTAL-LIABILITY-AND-EQUITY> 1,231,211
89,214
<INVESTMENT-INCOME> 26,481
<INVESTMENT-GAINS> 185
<OTHER-INCOME> 7,235
<BENEFITS> 65,118
<UNDERWRITING-AMORTIZATION> 22,944
<UNDERWRITING-OTHER> 25,164
<INCOME-PRETAX> 9,889
<INCOME-TAX> 3,461
<INCOME-CONTINUING> 6,428
<DISCONTINUED> (429)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,999
<EPS-PRIMARY> .60
<EPS-DILUTED> .60
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
