<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-------------------
FORM 10-Q
-------------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 1996 Commission File Number 0-26788
THE GUARANTEE LIFE COMPANIES INC.
(Exact Name of the Registrant as Specified in its Charter)
Delaware 47-0785066
(State of Incorporation) (I.R.S. Employer Identification Number)
8801 Indian Hills Drive, Omaha, Nebraska 68114
(Address of Principal Executive Offices)
Registrant's telephone number: (402) 361-7300
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: Yes [ X ] No [ ]
Shares of common stock outstanding as of May 3, 1996: 9,944,383
================================================================================
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, ,
---------------------------
ASSETS 1996 1995
------ ---------------------------
Invested assets: (unaudited)
<S> <C> <C>
Fixed maturities:
Available-for-sale, at fair value
(amortized cost: $500,142 and $490,667).................................... $ 504,152 $ 505,832
Held-to-maturity, at amortized cost (fair value: $149,683 and $158,131)..... 137,487 140,046
---------------------------
641,639 645,878
Equity securities, at fair value (cost $7,394 and $5,039)....................... 7,864 5,999
Mortgage loans, net............................................................. 62,435 61,467
Policy loans.................................................................... 14,357 14,043
Investment real estate, net..................................................... 6,797 6,864
Other invested assets, net...................................................... 18,932 17,322
Closed block invested assets.................................................... 297,127 304,557
---------------------------
Total invested assets............................................................. 1,049,151 1,056,130
Cash and cash equivalents......................................................... 90 25,301
Accrued investment income......................................................... 10,786 11,347
Ceded reinsurance recoverables.................................................... 65,231 62,876
Accounts receivable, net.......................................................... 11,063 8,907
Deferred policy acquisition costs................................................. 70,268 70,168
Property, plant and equipment, net................................................ 20,655 20,340
Other assets...................................................................... 2,251 3,472
Closed block other assets......................................................... 22,630 22,234
Total assets...................................................................... $1,252,125 $1,280,775
===========================
LIABILITIES AND SHAREHOLDERS' EQUITY
----------------------------------------
Future policy benefits:
Life............................................................................ $ 38,642 $ 37,982
Accident and health............................................................. 58,319 58,081
Policyholder account balances:
Universal life contracts........................................................ 189,115 185,171
Annuity contracts............................................................... 214,229 216,905
Policy and contract claims........................................................ 53,788 59,641
Other policyholder funds.......................................................... 13,121 12,793
Unearned premium revenue.......................................................... 10,404 10,505
Amounts payable to reinsurers..................................................... 7,154 7,359
Deferred income taxes............................................................. 1,918 5,630
Other liabilities................................................................. 29,958 41,546
Closed block liabilities.......................................................... 387,782 388,263
Discontinued operations........................................................... 50,358 50,637
---------------------------
Total liabilities................................................................. 1,054,788 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............................................................. 2,217 11
Unrealized appreciation of invested securities carried
at fair value, net..................................................... 3,795 14,926
---------------------------
Total shareholders' equity........................................................ 197,337 206,262
Commitments and contingencies..................................................... - -
---------------------------
Total liabilities and shareholders' equity........................................ $1,252,125 $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 MARCH 31,
------------------------------
1996 1995
--------------- -------------
<S> <C> <C>
REVENUES:
Insurance premiums:
Life................................. $ 15,124 $ 19,927
Accident and health.................. 34,174 39,144
Policyholder assessments............. 5,838 5,728
Premiums ceded to reinsurers........ (10,633) (15,919)
------------------------
44,503 48,880
Investment income, net................... 12,951 17,931
Realized investment gains (losses)....... 85 310
Contribution from closed block........... 29 -
Ceding commissions and other income...... 2,518 4,679
------------------------
Total revenues........................... 60,086 71,800
------------------------
POLICYHOLDER BENEFITS:
Life..................................... 13,718 18,231
Accident and health...................... 21,895 28,307
Reinsurance recoveries................... (7,641) (9,661)
------------------------
27,972 36,877
Interest credited to policyholder
account balances........................ 5,693 6,345
------------------------
Total policyholder benefits.............. 33,665 43,222
------------------------
EXPENSES:
Policy acquisition costs................. 11,182 12,815
Other insurance operating expense........ 12,044 10,917
------------------------
Total expenses........................... 23,226 23,732
------------------------
Dividends to policyholders............... - 2,764
------------------------
Income from continuing operations
before income taxes..................... 3,195 2,082
------------------------
Income tax expense....................... 1,118 1,644
------------------------
Net income from continuing operations.... 2,077 438
------------------------
Net income from discontinued operations.. 129 643
Extraordinary charge for
demutualization expense, net............ - 1,921
---------- --------
Net income (loss)........................ $ 2,206 $ (840)
========================
Earnings per common share:
Weighted average common shares
outstanding............................ 9,944,383 -
=========================
Net income from continuing operations... $.21 n/a
========================
Net income.............................. $.22 n/a
========================
</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>
THREE MONTHS ENDED MARCH 31,
------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
NET CASH PROVIDED (USED) BY OPERATING (7,103) (7,168)
ACTIVITIES............................. -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed maturities........... (47,327) (25,689)
Sales, maturities, calls and
principal reductions of fixed
maturities.......................... 40,637 31,874
Purchase of mortgage loans............. (2,320) (4,180)
Proceeds from repayment of mortgage
loans................................. 1,264 1,313
Other, net (4,913) (333)
-------- --------
Net cash provided (used) by (12,659) 2,985
investing activities -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policy cashouts in connection with
demutualization and IPO............... (6,867) -
Deposits to policyholder account
balances.............................. 11,150 14,589
Withdrawals from policyholder account
balances.............................. (9,732) (10,149)
Extraordinary charge for
demutualization expense - 1,921
-------- --------
Net cash provided (used) by financing
activities........................... (5,449) 6,361
-------- --------
Net increase (decrease) in cash and
cash equivalents....................... (25,211) 2,178
======== --------
Cash and cash equivalents at beginning
of period.............................. 25,301 2,553
-------- --------
Cash and cash equivalents at end of
period................................. $ 90 $ 4,731
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 month period ended March 31, 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 March 31, 1996 (in thousands) are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
Available-for-sale:
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies....... $ 61,717 $ 952 $ 318 $ 62,351
Obligations of states and
political subdivisions............ 6,131 57 50 6,138
Debt securities issued by foreign
governments....................... 8,037 236 297 7,976
Corporate securities............... 228,609 9,166 4,891 232,884
Mortgage-backed securities......... 195,648 3,647 4,492 194,803
-------- ------- ---------- --------
$500,142 $14,058 $10,048 $504,152
======== ======= ========== ========
Held-to-maturity:
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies......... $ 3,900 $ 403 $ - $ 4,303
Corporate securities............... 133,587 12,340 547 $145,380
-------- ------- ---------- --------
$137,487 $12,743 $ 547 $149,683
======== ======= ========== ========
</TABLE>
(3) CLOSED BLOCK
Summarized condensed financial information of the closed block as of March 31,
1996 (in thousands) is as follows:
ASSETS
<TABLE>
<CAPTION>
Invested assets:
Fixed maturities:
<S> <C>
Available-for-sale, at fair value ($186,848 amortized cost).......... $188,718
Held-to-maturity, at amortized cost ($63,109 fair value)........... 57,990
--------
246,708
Policy loans....................................................... 49,213
Other invested assets, net......................................... 1,206
--------
Total invested assets........................................................ 297,127
Cash and cash equivalents.................................................... 1,005
Accrued investment income.................................................... 5,021
Ceded reinsurance recoverables............................................... 1,371
Accounts receivable, net..................................................... 169
Deferred policy acquisition costs............................................ 15,064
--------
Total closed block assets.................................................... $319,757
========
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES
<S> <C>
Life future policy benefits........................................... 302,059
Policyholder account balances for annuity contracts................... 851
Policy and contract claims............................................ 703
Other policyholder funds.............................................. 72,532
Dividends payable to policyholders.................................... 7,594
Deferred income taxes................................................. 655
Other liabilities..................................................... 3,388
--------
Total closed block liabilities........................................ $387,782
========
</TABLE>
Condensed statement of income for the closed block for the three months ended
March 31, 1996, (in thousands):
<TABLE>
<CAPTION>
REVENUES:
<S> <C>
Insurance premiums and policyholder
assessments, net of reinsurance......... $ 5,727
Investment income, net................... 5,484
Realized investment gains 28
Other income............................. 3
-------
Total revenues........................... 11,242
-------
POLICYHOLDER BENEFITS AND EXPENSES:
Total policyholder benefits.............. 6,827
Policy acquisition costs................. 517
Other insurance operating expense....... 987
-------
Total benefits and expenses............. 8,331
Dividends to policyholders.............. 2,882
-------
Contribution from the closed block...... $ 29
=======
</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 March 31,
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 months ended March 31, 1995, represent the
financial condition and results of operations of Guarantee Mutual Life Company
and its subsidiaries.
OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 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 months ended March 31, 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.
<TABLE>
<CAPTION>
COMBINED RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31,
------------------------------
1996 1995
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Revenues:
Premiums and policyholder
assessments, net $50,230 $48,880
Investment income, net 18,435 17,931
Realized investment gains
(losses) 113 310
Ceding commissions and other 2,521 4,679
income ------- -------
Total revenues 71,299 71,800
Policyholder benefits and expenses:
Gross benefits 41,684 46,538
Ceded to reinsurers (7,648) (9,661)
Interest credited to account 6,456 6,345
balances ------- -------
Total policyholder benefits 40,492 43,222
Expenses 24,730 23,732
Dividends to policyholders 2,882 2,764
------- -------
Total policyholder benefits, expenses 68,104 69,718
and dividends ------- -------
Income from continuing operations 3,195 2,082
before income taxes ======= =======
Income taxes 1,118 1,644
Net income from continuing operations $ 2,077 $ 438
======= =======
</TABLE>
INVESTMENT INCOME, NET. Net investment income increased $504 thousand, or 2.8%
in 1996. This increase was caused mainly by an increase in the average invested
asset base, which increased $21.6 million, or 2.1% in 1996. The investment
yield for 1996 was 8.1%, compared to 8.0% in 1995. At March 31, 1996, invested
assets and cash and cash equivalents had decreased $32.2 million from December
31, 1995. Significant decreases include a $17.7 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.
REALIZED INVESTMENT GAINS (LOSSES). Net realized investment gains decreased
$197 thousand in 1996. Gains and losses occur primarily as a result of
dispositions of Guarantee Life's invested assets as part of its ongoing
investment
7
<PAGE>
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 $526 thousand in 1996,
primarily due to the absence in 1996 of the $931 thousand equity add-on tax that
was recorded in 1995. Increased taxes on the higher pre-tax earnings offset
this decrease. During 1996, the effective rate was 35%, compared to 79% in
1995.
INSURANCE OPERATIONS--GROUP
The following table sets forth Guarantee Life's group insurance underwriting
income for the three months ended March 31, 1996, and 1995.
<TABLE>
<CAPTION>
GROUP UNDERWRITING INCOME
THREE MONTHS ENDED MARCH 31,
------------------------------------------------------
1996 1995
------------------------------- ---------------------
(IN THOUSANDS)
CORE SPECIALTY CORE SPECIALTY
PRODUCTS PRODUCTS TOTAL PRODUCTS PRODUCTS TOTAL
--------- ---------- -------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Gross insurance premiums.............. $29,305 $18,522 $47,827 $25,726 $ 25,682 $ 51,408
Ceded to reinsurers................... (396) (8,928) (9,324) (1,214) (13,360) (14,574)
------- ------- ------- ------- -------- --------
Net premiums.......................... 28,909 9,594 38,503 24,512 12,322 36,834
Ceding Commissions.................... (176) 2,613 2,437 153 4,442 4,595
------- ------- ------- ------- -------- --------
Total net premiums and ceding
commission........................ 28,733 12,207 40,940 24,665 16,764 41,429
------- ------- ------- ------- -------- --------
Gross policyholder benefits........... 18,393 12,788 31,181 19,033 18,177 37,210
Ceded to reinsurers................... 118 (6,731) (6,613) - (8,521) (8,521)
------- ------- ------- ------- -------- --------
Net benefits.......................... 18,511 6,057 24,568 19,033 9,656 28,689
Policy acquisition costs and expenses. 10,664 6,654 17,318 8,142 8,071 16,213
------- ------- ------- ------- -------- --------
Total net benefits and expenses.... 29,175 12,711 41,886 27,175 17,727 44,902
------- ------- ------- ------- -------- --------
Underwriting (loss)................... $ (442) $ (504) $ (946) $(2,510) $ (963) $ (3,473)
======= ======= ======= ======= ======== ========
</TABLE>
Core products net premiums increased $4.4 million, or 17.9% in 1996. This
increase was due primarily to increased sales of all core products through the
seventeen regional group offices, as well as a reduction in the amount of
premiums ceded.
Specialty products net premiums decreased $2.7 million, or 22.1% in 1996. This
decrease was primarily due to Guarantee Life's decision to stop writing the
SMART product in 1995, causing a $2.5 million reduction in net premiums. During
the first quarter 1996, Guarantee Life continued to not emphasize growth in the
excess loss product line during the current low-margin cycle in the group health
insurance industry. As a result, excess loss direct premiums decreased $4.7
million, or 25.1% in 1996. This reduction was offset by a $4.4 million
reduction in ceded premiums, as Guarantee Life has retained more of the
business.
Core products net benefits decreased $522 thousand, or 2.7% in 1996. This
decrease is the net effect of the increase caused by higher premium volume,
which was offset by significant improvement in underwriting experience,
especially in the life and LTD product lines.
Specialty products net benefits decreased $3.6 million, or 37.3% in 1996.
This decrease was caused by lower premium volume combined with improved
underwriting experience in the SMART product, both of which were offset by
poorer underwriting experience in the excess loss product line.
Total group expenses increased $1.1 million, or 6.8% in 1996. This increase
was primarily due to the increased spending in the home office and regional
group offices, as significant additions were made to personnel and information
systems after March of 1995 in support of the growth of the core product lines.
8
<PAGE>
INSURANCE OPERATIONS--INDIVIDUAL
The following table sets forth certain summarized financial data for Guarantee
Life's individual insurance business for the three months ended March 31, 1996,
and 1995.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------
1996 1995
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Revenues:
Premiums and policyholder
assessments, net of
reinsurance ceded............. $11,727 $12,046
Investment income, net......... 15,943 15,578
Realized investment gains
(losses)...................... 776 251
Ceding commissions and other
income........................ 84 85
------- -------
Total revenues...................... 28,530 27,960
Policyholder benefits and expenses:
Gross benefits................. 10,503 9,329
Ceded to reinsurers............ (1,035) (1,140)
Interest credited to account
balances...................... 6,456 6,345
------- -------
Total policyholder benefits.... 15,924 14,534
Expenses....................... 6,410 7,519
Dividends to policyholders..... 2,882 2,764
------- -------
Total policyholder benefits, expenses
and dividends 25,216 24,817
------- -------
Income from continuing operations... $ 3,314 $ 3,143
before income taxes ======= =======
</TABLE>
Net premiums and policyholder assessments decreased $319 thousand, or 2.6%, in
1996. This decrease is the net effect of a decline in the amount of traditional
life insurance in force, offset by increased policyholder assessments.
Guarantee Life realized no net premiums or benefits from its individual accident
and health line of business in 1996, or 1995, as a result of the reinsurance of
this business pursuant to a coinsurance agreement.
Total individual policyholder benefits increased $1.4 million, or 9.6% in
1996. Excluding interest credited to policyholder account balances, total
individual policyholder benefits increased $1.3 million in 1996, due to poorer
mortality in both the traditional and universal life product lines. Interest
credited on policyholder account balances increased $111 thousand, or 1.7% in
1996. This increase was due to the increased account values, as average
crediting rates decreased slightly. Weighted average interest crediting rates
for the three months ending March 31, 1996 and 1995 were 5.91% and 5.94% for
universal life products and 5.52% and 5.85% for annuities.
Total individual expenses decreased $1.1 million, or 14.7% in 1996, reflecting
a $555 thousand decrease in DPAC amortization, due mainly to the poorer
mortality in the universal life product line. Additionally, the Individual
division has successfully implemented several expense management initiatives,
contributing to the $591 thousand decrease in other operating expenses.
Policyholder dividends increased slightly during 1996, reflecting an unchanged
dividend scale applied to increasing 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 amount of net investment income and receiving 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 has undertaken with the
Nebraska Department of Insurance, in connection with the
9
<PAGE>
demutualization, that it will not, without the prior approval of the Director,
declare or pay any dividends to the Holding Company before June 26, 1996.
In January, 1996, Guarantee Life executed a $30.0 million senior secured
revolving line of credit to be used for general corporate purposes and to fund
surplus infusions to subsidiaries and future acquisitions. The credit agreement
has a term of five years and replaced a previous line of credit. Funding for
the new credit facility is being provided by Chemical Bank, Norwest Bank
Nebraska, N.A. and State Street Bank and Trust Company.
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 three
months ended March 31, 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.
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.
Changes in interest rates have not had a significant impact on Guarantee
Life's net income in the three months ended March 31, 1996, although the
interest rate environment has affected sales of certain of Guarantee Life's
product lines and may affect surrender and withdrawal rates. For example,
Guarantee Life's sale of annuities 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 product
portfolio. 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 through 5 are either inapplicable or are answered in the negative and
are omitted pursuant to the instructions to Part II.
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**
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
<PAGE>
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**
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: MAY 9, 1996 /S/ WILLIAM L. BAUHARD
-------------------------------------------------
WILLIAM L. BAUHARD
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
DATE: MAY 9, 1996 /S/ JOHN E. BURCH
-------------------------------------------------
JOHN E. BURCH
VICE PRESIDENT AND CONTROLLER
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1996 (UNAUDITED) AND THE
CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH31,
1996 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 504152
<DEBT-CARRYING-VALUE> 137487
<DEBT-MARKET-VALUE> 149683
<EQUITIES> 7864
<MORTGAGE> 62435
<REAL-ESTATE> 6797
<TOTAL-INVEST> 1049151
<CASH> 90
<RECOVER-REINSURE> 65231
<DEFERRED-ACQUISITION> 70268
<TOTAL-ASSETS> 1252125
<POLICY-LOSSES> 150749
<UNEARNED-PREMIUMS> 10404
<POLICY-OTHER> 403344
<POLICY-HOLDER-FUNDS> 13121
<NOTES-PAYABLE> 0
0
0
<COMMON> 99
<OTHER-SE> 197238
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44503
<INVESTMENT-INCOME> 12951
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<OTHER-INCOME> 2547
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