<PAGE>
================================================================================
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 September 30, 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 November 8, 1996: 9,944,383
================================================================================
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
Assets 1996 1995
------ ------------- ------------
Invested assets: (unaudited)
<S> <C> <C>
Fixed maturities:
Available-for-sale, at fair value (amortized cost: $522,861 and $490,667) $ 521, 220 $ 505,832
Held-to-maturity, at amortized cost (fair value: $149,560 and $158,131).. 142,277 140,046
---------- ----------
663,497 645,878
Equity securities, at fair value (cost $5,848 and $5,277)...................... 6,155 5,999
Mortgage loans, net............................................................ 68,427 61,467
Policy loans................................................................... 18,962 14,043
Investment real estate, net.................................................... 6,674 6,864
Other invested assets, net..................................................... 14,082 17,322
Closed block invested assets................................................... 296,279 304,557
---------- ----------
Total invested assets............................................................... 1,074,076 1,056,130
Cash and cash equivalents........................................................... 8,009 25,301
Accrued investment income........................................................... 11,352 11,347
Ceded reinsurance recoverables...................................................... 60,699 62,876
Accounts receivable, net............................................................ 11,187 8,907
Deferred policy acquisition costs................................................... 84,997 70,168
Property, plant and equipment, net.................................................. 20,355 20,340
Other assets ....................................................................... 2,815 3,472
Closed block other assets........................................................... 25,487 22,234
---------- ----------
Total assets ....................................................................... $1,298,977 $1,280,775
========== ==========
Liabilities and Shareholders' Equity
------------------------------------
Future policy benefits:
Life........................................................................... $ 41,632 $ 37,982
Accident and health............................................................ 62,634 58,081
Policyholder account balances:
Universal life contracts....................................................... 253,473 185,171
Annuity contracts.............................................................. 206,751 216,905
Policy and contract claims.......................................................... 51,130 59,641
Other policyholder funds............................................................ 13,476 12,793
Unearned premium revenue............................................................ 10,374 10,505
Amounts payable to reinsurers....................................................... 5,374 7,359
Deferred income taxes............................................................... 4,014 5,630
Other liabilities................................................................... 24,665 41,546
Closed block liabilities............................................................ 390,018 388,263
Discontinued operations............................................................. 35,748 50,637
---------- ----------
Total liabilities................................................................... 1,099,289 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.............................................................. 9,974 11
Unrealized appreciation (depreciation) of invested securities at fair value, net (1,611) 14,926
---------- ----------
Total shareholders' equity.......................................................... 199,688 206,262
Commitments and contingencies....................................................... - -
---------- ----------
Total liabilities and shareholders' equity.......................................... $1,298,977 $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 Nine Months Ended
September 30, September 30,
------------- -------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Insurance premiums:
Life.................................................................... $ 16,700 $ 19,676 $ 48,165 $ 59,851
Accident and health..................................................... 32,737 38,745 101,840 116,945
Policyholder assessments................................................ 7,048 5,125 18,814 16,581
Premiums ceded to reinsurers............................................ (11 ,878) (14,285) (34,999) (45,621)
--------- --------- --------- ---------
44,607 49,261 133,820 147,756
Investment income, net....................................................... 13,682 19,310 40,162 55,695
Realized investment gains (losses)........................................... (212) (21) (26) 1,410
Contribution from closed block............................................... 980 - 2,412 -
Ceding commissions and other income.......................................... 3,836 4,349 9,639 13,856
--------- --------- --------- ---------
Total revenues............................................................... 62,893 72,899 186,007 218,717
--------- --------- --------- ---------
Policyholder benefits:
Life ........................................................................ 13,438 18,597 40,958 54,147
Accident and health.......................................................... 20,757 26,105 62,346 82,968
Reinsurance recoveries....................................................... (10,410) (11,982) (25,612) (32,376)
--------- --------- --------- ---------
23,785 32,720 77,692 104,739
Interest credited to policyholder account balances:
Annuity contracts....................................................... 2,755 3,088 8,513 9,278
Universal contracts..................................................... 3,342 2,624 8,798 7,685
Other................................................................... 1 759 (1) 2,251
--------- --------- --------- ---------
Total policyholder benefits.................................................. 29,883 39,191 95,002 123,953
--------- --------- --------- ---------
Expenses:
Policy acquisition costs..................................................... 12,337 10,948 35,280 35,369
Other insurance operating expense............................................ 13,078 13,089 38,240 36,029
--------- --------- --------- ---------
Total expenses............................................................... 25,415 24,037 73,520 71,398
--------- --------- --------- ---------
Dividends to policyholders................................................... - 2,466 - 7,860
--------- --------- --------- ---------
Income from continuing operations before income taxes........................ 7,595 7,205 17,485 15,506
--------- --------- --------- ---------
Income tax expense........................................................... 2,658 5,353 6,120 9,908
--------- --------- --------- ---------
Net income from continuing operations........................................ 4,959 1,852 11,365 5,598
--------- --------- --------- ---------
Net income (loss) from discontinued operations............................... 22 671 (408) 915
Extraordinary charge for demutualization expense, net........................ - 2,547 - 5,848
--------- --------- --------- ---------
Net income................................................................... $ 4,937 $ (24) $ 10,957 $ 665
========= ========= ========= =========
Earnings per common share:
Weighted average common shares outstanding................................ 9,944,383 - 9,944,383 -
========= ========= ========= =========
Net income from continuing operations..................................... $ .50 N/A $ 1.14 N/A
========= ========= ========= =========
Net income................................................................ $ .50 N/A $ 1.10 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>
Nine Months Ended
September 30,
-------------
1996 1995
---------- -----------
<S> <C> <C>
Net cash provided (used) by operating activities............................. $ (7,130) $ 5,249
---------- -----------
Cash flows from investing activities:
Purchase of fixed maturities.............................................. (163,380) (163,046)
Sales, maturities, calls and principal reductions of fixed maturities..... 171,447 159,587
Purchase of mortgage loans................................................ (9,960) (8,950)
Proceeds from repayment of mortgage loans................................. 2,920 1,595
Change in closed block invested assets.................................... (1,226) -
Other, net................................................................ (3,358) (3,183)
---------- -----------
Net cash used by investing activities................................... (3,557) (13,997)
---------- -----------
Cash flows from financing activities:
Policy cashouts in connection with demutualization and IPO................ (6,877) -
Deposits to policyholder account balances................................. 34,165 37,658
Withdrawals from policyholder account balances............................ (33,893) (24,734)
Extraordinary charge for demutualization expense.......................... (5,848)
---------- -----------
Net cash provided (used) by financing activities........................ (6,605) 7,076
---------- -----------
Net decrease in cash and cash equivalents.................................... (17,292) (1,672)
Cash and cash equivalents at beginning of period............................. 25,301 2,553
---------- -----------
Cash and cash equivalents at end of period................................... $ 8,009 $ 881
========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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 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 nine month periods ended September 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 September 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........... $ 72,134 $ 268 $ 338 $ 72,064
Obligations of states and political subdivisions.. 6,129 31 223 5,937
Debt securities issued by foreign governments..... 10,824 223 403 10,644
Corporate securities.............................. 248,709 6,957 4,949 250,717
Mortgage-backed securities........................ 185,065 2,122 5,329 181,858
--------- ---------- --------- ---------
$ 522,861 $ 9,601 $ 11,242 $ 521,220
========= ========== ========= =========
Held-to-maturity:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies........... $ 3,246 - $ 13 $ 3,233
Corporate securities.............................. 139,031 8,193 897 146,327
--------- ---------- --------- -------
$ 142,277 $ 8,193 $ 910 $ 149,560
========= ========== ========= =========
</TABLE>
(3) Closed Block
Summarized condensed financial information of the closed block as of
September 30, 1996 (in thousands) is as follows:
<TABLE>
<CAPTION>
Assets
------
<S> <C>
Invested assets:
Fixed maturities:
Available-for-sale, at fair value ($186,690 amortized cost)......................... $185,817
Held-to-maturity, at amortized cost ($60,575 fair value)............................ 57,626
--------
243,443
Policy loans........................................................................... 48,653
Other invested assets, net............................................................. 4,183
--------
Total invested assets...................................................................... 296,279
Cash and cash equivalents.................................................................. 5,245
Accrued investment income.................................................................. 5,340
Ceded reinsurance recoverables............................................................. 1,230
Accounts receivable, net................................................................... (634)
Deferred policy acquisition costs.......................................................... 14,306
--------
Total closed block assets.................................................................. $321,766
========
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Liabilities
-----------
<S> <C>
Life future policy benefits................................... $301,876
Policyholder account balances for annuity contracts........... 885
Policy and contract claims.................................... 312
Other policyholder funds...................................... 72,295
Dividends payable to policyholders............................ 7,622
Deferred income taxes......................................... (249)
Other liabilities............................................. 7,277
-----
Total closed block liabilities................................ $390,018
========
</TABLE>
Condensed statements of income for the closed block for the three and nine
months ended September 30, 1996 (in thousands) are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1996 September 30, 1996
------------------ ------------------
<S> <C> <C>
Revenues:
Insurance premiums and policyholder assessments, net of reinsurance....... $ 5,498 $16,653
Investment income, net.................................................... 5,290 16,436
Realized investment gains ................................................ 69 53
Other income.............................................................. 1 10
------- -------
Total revenues............................................................ 10,858 33,152
------- -------
Policyholder benefits and expenses:
Total policyholder benefits............................................... 5,627 18,039
Policy acquisition costs.................................................. 465 1,493
Other insurance operating expense......................................... 1,156 3,064
------- -------
Total benefits and expenses............................................... 7,248 22,596
Dividends to policyholders................................................ 2,630 8,144
------- -------
Contribution from the closed block........................................ $ 980 $ 2,412
======= =======
</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
September 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 nine months ended September 30, 1995,
represent the financial condition and results of operations of Guarantee Mutual
Life Company and its subsidiaries.
Operating Results for the Three and Nine Months Ended September 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 nine months ended September 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 Nine Months Ended
September 30, September 30,
------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
(In thousands) (In thousands)
Revenues:
Premiums and policyholder assessments, net................. $50,105 $ 49,261 $150,473 $147,756
Investment income, net..................................... 18,972 19,310 56,598 55,695
Realized investment gains (losses)......................... (143) (21) 27 1,410
Ceding commissions and other income........................ 3,837 4,349 9,649 13,856
------- -------- -------- --------
Total revenues.................................................. 72,771 72,899 216,747 218,717
Policyholder benefits and expenses:
Gross benefits............................................. 38,982 44,702 118,932 137,115
Reinsurance recoveries..................................... (10,329) (11,982) (25,478) (32,376)
Interest credited to policyholder account balances......... 6,857 6,471 19,587 19,214
------- -------- -------- --------
Total policyholder benefits................................ 35,510 39,191 113,041 123,953
Total expenses............................................. 27,036 24,037 78,077 71,398
Dividends to policyholders................................. 2,630 2,466 8,144 7,860
------- -------- -------- --------
Total policyholder benefits, expenses and dividends............. 65,176 65,694 199,262 203,211
------- -------- -------- --------
Income from continuing operations before income taxes........... 7,595 7,205 17,485 15,506
Income tax expense.............................................. 2,658 5,353 6,120 9,908
------- -------- -------- --------
Net income from continuing operations........................... $ 4,937 $ 1,852 $ 11,365 $ 5,598
======== ======== ========= =========
</TABLE>
Investment Income, Net. Net investment income decreased $338 thousand, or
1.8% for the third quarter of 1996 from 1995, and increased $903 thousand, or
1.6% for the nine months ended September 30. This increase was caused mainly by
the $19.3 million increase in the average invested asset base for 1996 over
1995. The investment yield was 8.2% for 1996 and 8.3% for 1995. At September 30,
1996, invested assets and cash and cash equivalents had increased $654 thousand
from December 31, 1995. Significant increases include $45.9 million assets
acquired from Security Life Insurance Company of American on July 31, 1996.
Significant decreases during 1996 include a $17.6 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 and losses
decreased $122 thousand for the third quarter of 1996 from 1995, and $1.4
million for the nine months ended September 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 two fixed maturity securities that was deemed to be other
than temporary.
Income Tax Expense. Income tax expense decreased $2.7 million for the
third quarter of 1996 from 1995, and $3.8 million for the nine months ended
September 30. These decreases are due primarily to the absence in 1996 of the
equity add-on tax of $2.0 million for the third quarter and $3.7 million for the
nine months ended September 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 under-
writing income for the three and nine months ended September 30, 1996 and 1995.
<TABLE>
<CAPTION>
Group Underwriting Income
Three Months Ended September 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.................. $32,055 $14,948 $ 47,003 $27,003 $24,382 $ 51,385
Ceded to reinsurers....................... (674) (9,825) (10,499) (916) (11,784) (12,700)
-------- ------- --------- -------- -------- ---------
Net premiums.............................. 31,381 5,123 36,504 26,087 12,598 38,685
Ceding commissions........................ - 3,687 3,687 69 4,221 4,290
-------- ------- --------- -------- -------- ---------
Total net premiums and ceding
commissions.......................... 31,381 8,810 40,191 26,156 16,819 42,975
-------- ------- --------- -------- -------- ---------
Gross policyholder benefits............... 19,821 9,145 28,966 15,769 18,173 33,942
Ceded to reinsurers....................... (529) (8,916) (9,445) 417 (9,519) (9,102)
-------- ------- --------- -------- -------- ---------
Net benefits.............................. 19,292 229 19,521 16,186 8,654 24,840
Policy acquisition costs and expenses..... 11,966 6,374 18,340 9,966 8,888 18,854
-------- ------- --------- -------- -------- ---------
Total net benefits and expenses........ 31,258 6,603 37,861 26,152 17,542 43,694
-------- ------- --------- -------- -------- ---------
Underwriting gain (loss) ................. $ 123 $ 2,207 $ 2,330 $ 4 ($ 723) ($ 719)
======== ======== ========= ======== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
Group Underwriting Income
Nine Months Ended September 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.................. $93,072 $51,082 $144,154 $79,381 $75,491 $154,872
Ceded to reinsurers....................... (1,813) (28,984) (30,797) (2,713) (38,563) (41,276)
-------- --------- --------- -------- -------- ---------
Net premiums.............................. 91,259 22,098 113,357 76,668 36,928 113,596
Ceding commissions........................ (176) 9,475 9,299 309 13,370 13,679
-------- --------- --------- -------- -------- ---------
Total net premiums and ceding
commissions.......................... 91,083 31,573 122,656 76,977 50,298 127,275
Gross policyholder benefits............... 59,097 31,161 90,258 53,217 55,045 108,262
Ceded to reinsurers....................... (481) (22,555) (23,036) (81) (27,873) (27,954)
-------- --------- --------- -------- -------- ---------
Net benefits.............................. 58,616 8,606 67,222 53,136 27,172 80,308
Policy acquisition costs and expenses..... 34,150 19,793 53,943 26,776 25,481 52,257
-------- -------- --------- -------- ------- ---------
Total net benefits and expenses........ 92,766 28,399 121,165 79,912 52,653 132,565
-------- -------- --------- -------- ------- ---------
Underwriting gain (loss) ................. ($ 1,683) $ 3,174 $ 1,491 ($ 2,935) ($ 2,355) ($ 5,290)
========= ======== ========= ========= ========= =========
</TABLE>
8
<PAGE>
Core products net premiums increased $5.3 million, or 20.3% for the third
quarter of 1996 over 1995, and $14.6 million, or 19.0% for the nine months ended
September 30. These increases are due primarily to increased sales of all core
products through the existing seventeen regional group offices and the opening
of three additional regional group offices in Boston, Phoenix, and Miami during
1996. First year annualized premiums for core products generated from the
regional group offices have increased $10.1 million, or 42.2% to $34.0 million
during the first nine months of 1996 over 1995.
Specialty products net premiums decreased $7.5 million, or 59.3% for the
third quarter of 1996 from 1995 and $14.8 million, or 40.2% for the nine months
ended September 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 $5.3 million reduction in net premiums in the third quarter and a
$11.4 million reduction in net premiums for the nine months ended September 30.
During the third quarter of 1996, Guarantee Life continued to manage growth in
the excess loss product during the current cycle in the group health insurance
industry. As a result, excess loss net premiums decreased $2.3 million in the
third quarter and $3.8 million for the nine months ended September 30.
Core products net benefits increased $3.1 million, or 19.2% for the third
quarter of 1996 over 1995 and $5.5 million, or 10.3% for the nine months ended
September 30. These increases are the net effect of the increase caused by
higher premium volume, which was offset by significant improvement in
underwriting experience in all core products.
Specialty products net benefits decreased $8.4 million, or 97.4% for the
third quarter of 1996 from 1995 and $18.6 million, or 68.3% for the nine months
ended September 30. These decreases were caused by lower premium volume combined
with improved underwriting experience in both the SMART and excess loss
products.
Total group expenses decreased $514 thousand, or 2.7% for the third quarter
of 1996 from 1995 and increased $1.7 million, or 3.2% for the nine months ended
September 30. These changes are the net effects of increases in variable
expenses such as commissions and premium taxes from increased premiums in core
products, offset by decreases in the corresponding expenses in specialty
products. Other operating expenses for core products have increased over 1995 at
a decreasing rate, as the business has grown. Certain operating expenses for
specialty products are decreasing, but at a slower rate than net premiums, as
the block of business must be administered during the runoff of the SMART
product and the management of the excess loss product during the current cycle
in the group health insurance industry.
Insurance Operations--Individual
The following table sets forth certain summarized financial data for
Guarantee Life's individual insurance business for the three and nine months
ended September 30, 1996, and 1995.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1996 1995 1996 1995
---- ---- ---- ----
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Revenues:
Premiums and policyholder assessments, net................... $13,601 $10,576 $37,116 $34,160
Investment income, net....................................... 16,295 16,454 48,676 48,174
Realized investment gains.................................... 147 20 1,056 1,179
Ceding commissions and other income.......................... 150 59 350 177
------- ------- ------- -------
Total revenues.................................................... 30,193 27,109 87,198 83,690
Policyholder benefits and expenses:
Gross benefits............................................... 10,016 10,760 28,674 28,853
Ceded to reinsurers.......................................... (884) (2,880) (2,442) (4,422)
Interest credited to account balances........................ 6,857 6,471 19,587 19,214
------- ------- ------- -------
Net policyholder benefits.................................... 15,989 14,351 45,819 43,645
Expenses..................................................... 8,345 5,183 22,429 19,141
Dividends to policyholders................................... 2,630 2,466 8,144 7,860
------- ------- ------- -------
Total policyholder benefits, expenses and dividends............... 26,964 22,000 76,392 70,646
------- ------- ------- -------
Income from continuing operations before income taxes............. $ 3,229 $ 5,109 $10,806 $13,044
======= ======== ======= =======
</TABLE>
9
<PAGE>
Net premiums and policyholder assessments increased $3.0 million, or 28.6%
for the third quarter of 1996 over 1995 and $3.0 million, or 8.7% for the nine
months ended September 30. Approximately $1.2 million of these increases were
generated by the block of universal life policies acquired during the quarter.
Universal life products accounted for the remainder of the increases.
Total individual policyholder benefits increased $1.6 million, or 11.4% for
the third quarter of 1996 from 1995. Excluding interest credited to policyholder
account balances, total individual policyholder benefits increased $1.3 million,
or 15.9% for the third quarter 1996 from 1995, due to a combination of the
universal life policies acquired during the quarter, increased mortality in the
universal life products, offset by improved mortality in the traditional
products. Interest credited on policyholder account balances increased $386
thousand, or 6.0% for the third quarter of 1996 from 1995. This increase was due
to the combination of the interest on the new block of universal life policies
and significant increases in universal life account balances, offset by lower
crediting rates on both the annuity and universal life account balances.
Total individual policyholder benefits increased $2.2 million, or 5.0% for
the first nine months of 1996 over 1995. Excluding interest credited to
policyholder account balances, total individual policyholder benefits increased
$1.8 million, or 7.4% for the first nine months of 1996 over 1995, due to higher
claims in both the traditional and universal product lines, as well as increase
from the block of universal life policies acquired. Interest credited on
policyholder account balances for the nine month period increased $373 thousand,
2.0%, for the first nine months of 1996 over 1995, as the interest on the
acquired universal life policies was partially offset by lower rates on
increased account values. Weighted average interest crediting rates for the nine
months ending September 30, 1996 and 1995 were 5.90% and 6.01% for universal
life products and 5.49% and 5.94% for annuities.
Total individual expenses increased $3.2 million or 61.0% for the third
quarter of 1996 over 1995, and $3.3 million, or 17.2% for the nine months ended
September 30. The increase is due to an increase in DPAC amortization, which
increased $3.3 million over 1995, due to improved margins in the universal life
product, and a smaller change in estimates based on actual experience in 1996
compared to 1995.
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.
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
nine months ended September 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 products run off, 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 July 31, 1996, Guarantee Life Insurance acquired Security Life Insurance
Company of America's entire universal life insurance block of business in a cash
transaction for a purchase price of $5.4 million, which was funded from existing
capital resources. This acquisition added approximately 21,000 policies, $45.9
million of invested assets, and $56.6 million of policyholder account balances
to Guarantee Life's individual life insurance business.
10
<PAGE>
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 or nine months ended September 30, 1996, although
the interest rate environment can affect sales of certain of Guarantee Life's
products 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 or increased 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, 4, and 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(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 *
10(o) Amendment No. 1 to The Guarantee Life Companies Inc. Directors
Stock Incentive Plan
10(p) Revised Exhibit A to The Guarantee Life Companies Inc. and
Guarantee Life Insurance Company Executive Severance Plan
27 Financial Data Schedule
11
<PAGE>
-----------------------------------------------------------------------
* Incorporated by reference as an exhibit to Registrant's Form 10-Q for
the fiscal quarter ended June 30, 1996 (Commission File No. 0-26788).
** 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 reports on Form 8-K have been filed during the quarter for this
report is filed.
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: November 8, 1996 /s/ WILLIAM L. BAUHARD
-----------------------------------------------------
William L. Bauhard
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
12
<PAGE>
Exhibit 10(o)
Amendment No. 1
The Guarantee Life Companies Inc.
Directors Stock Incentive Plan
AMENDMENT dated as of August 15, 1996, to The Guarantee Life Companies
Inc. Directors Stock Incentive Plan (the "Plan").
WHEREAS, The Guarantee Life Companies Inc. (the "Company") adopted the
Plan on May 9, 1996, 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; and
WHEREAS, pursuant to Section 7 thereof, the Board of Directors of the
Company may amend the Plan; and
WHEREAS, due to changes in the rules applicable under Section 16 of the
Securities Exchange Act of 1934, as amended, the Plan can now provide greater
flexibility in certain respects without causing the Participants thereunder to
be exposed to any potential liability under Section 16.
NOW, THEREFORE, the Board of Directors amends the Plan in the manner
set forth below:
1. Use of Stock to Exercise Options. Section 5(b) (iii) of the Plan
--------------------------------
is deleted in its entirety and a new Section 5(b) (iii) is inserted in lieu
thereof, to read as follows:
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 or she has elected to purchase. Upon receipt of
payment in cash, in Shares or any combination thereof, the Company
shall deliver to the Participant as soon as practicable a certificate
or certificates for the Shares then purchased. Any Share surrendered to
exercise any Options hereunder shall be valued at the Fair Market Value
thereof on the last business day immediately prior to the date of
exercise. Notwithstanding anything else contained herein to the
contrary, no Share may be used to exercise any Options hereunder unless
such Share shall have been (i) acquired in the market (i.e., not from
the Company or any underwriter acting on behalf of the Company) or
(ii) owned by the Participant or the Participant's spouse for a period
of not less than six months.
2. Plan Amendments. The third sentence of Section 7 of the Plan is
---------------
deleted in its entirety and a new sentence is inserted in lieu thereof, to read
as follows:
The Board at any time or from time to time may amend or terminate the
Plan except that no termination, amendment or modification of the Plan
may, without the consent of a Participant or the permitted transferee
of an Option, alter or impair the rights and obligations arising under
any then outstanding Option.
3. Effective Date. This Amendment shall be and become effective as
--------------
of August 15, 1996.
IN WITNESS WHEREOF, the Board of Directors of The Guarantee Life
Companies Inc. has caused this Amendment No. 1 to be executed as of the date
first written above.
THE GUARANTEE LIFE COMPANIES INC.
By: /s/ Richard A. Spellman
-------------------------------
Its: Senior Vice President
------------------------------
13
<PAGE>
Exhibit 10(o)
The Guarantee Life Companies Inc. and
Guarantee Life Insurance Company
Executive Severance Plan
REVISED
EXHIBIT A
PARTICIPANTS
Tier I
Chief Executive Officer
Tier II
Executive Vice President-Individual Division
Senior Vice President-Group Division
Senior Vice President-Investment Division and Treasurer
Senior Vice President-Group Operations
Senior Vice President-Chief Financial Officer
Senior Vice President-Strategic Development
Senior Vice President-Marketing-Individual Division
Senior Vice President, General Counsel and Secretary
Senior Vice President-Group Marketing
Senior Vice President-Chief Information Officer
Senior Vice President-Human Resources and Administration
Tier III
Vice President-Investor Relations
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from Condensed
Consolidated Balance Sheet as of September 30, 1996 (unaudited) and the
Condensed Consolidated Statement of Income for the nine months ended September
30, 1996 (unaudited) and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 521,220
<DEBT-CARRYING-VALUE> 142,277
<DEBT-MARKET-VALUE> 149,560
<EQUITIES> 6,155
<MORTGAGE> 68,427
<REAL-ESTATE> 6,674
<TOTAL-INVEST> 1,074,076
<CASH> 8,009
<RECOVER-REINSURE> 60,699
<DEFERRED-ACQUISITION> 84,997
<TOTAL-ASSETS> 1,298,977
<POLICY-LOSSES> 155,396
<UNEARNED-PREMIUMS> 10,374
<POLICY-OTHER> 460,224
<POLICY-HOLDER-FUNDS> 13,476
<NOTES-PAYABLE> 0
0
0
<COMMON> 99
<OTHER-SE> 199,589
<TOTAL-LIABILITY-AND-EQUITY> 1,298,977
133,820
<INVESTMENT-INCOME> 40,162
<INVESTMENT-GAINS> (26)
<OTHER-INCOME> 12,051
<BENEFITS> 95,002
<UNDERWRITING-AMORTIZATION> 35,280
<UNDERWRITING-OTHER> 38,240
<INCOME-PRETAX> 17,485
<INCOME-TAX> 6,120
<INCOME-CONTINUING> 11,365
<DISCONTINUED> (408)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,957
<EPS-PRIMARY> 1.10
<EPS-DILUTED> 1.10
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
