<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 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
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
-------------------- ----------------
NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
-------------------
Common Stock, $.01 Par Value
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K. [ ]
As of February 28, 1997, 9,910,197 shares of Common Stock were outstanding. The
aggregate market value of such shares held by nonaffiliates was approximately
$209,352,912.
Select materials from the Proxy Statement for the Annual Meeting of
Shareholders, scheduled for May 8, 1997, have been incorporated by reference
into Part III of this Form 10-K.
Select materials from the 1996 Annual Report to Shareholders have been
incorporated by reference into Parts II and IV of this Form 10-K.
<PAGE>
PART I.
ITEM 1. Business.
General
On December 26, 1995, Guarantee Mutual Life Company was converted to a stock
life insurance company (the Demutualization), renamed Guarantee Life Insurance
Company, and became a wholly-owned subsidiary of The Guarantee Life Companies
Inc. (Holding Company). For this discussion, "Guarantee Life" will refer to the
operations of the consolidated companies, and "Guarantee Life Insurance" will
refer to Guarantee Life Insurance Company. Prior to the closing of the initial
public offering (IPO) on December 26, 1995, the Holding Company was a subsidiary
of Guarantee Life Insurance, with no operations.
Guarantee Life Insurance was organized in Nebraska in 1901 as a mutual
assessment association and became a mutual legal reserve life insurance company
in 1931. The Holding Company, a Delaware corporation, was formed on November
28, 1994, in anticipation of and for the purpose of facilitating the
Demutualization.
Guarantee Life operates in two business segments, the Group Insurance business
and the Individual Insurance business, providing group life and health insurance
to employers and other groups and providing life insurance and annuities for
individuals. Guarantee Life's principal business operations are conducted by
Guarantee Life Insurance, which is authorized to transact life and health
insurance in 48 states and the District of Columbia.
Guarantee Life manages five basic risks: mortality, morbidity, investment
yield, persistency and expense. Product pricing is generally determined by
reference to actuarial calculations and statistical assumptions principally
relating to mortality, morbidity and persistency, investment yield assumptions,
estimates of expenses and management's judgment as to market and competitive
conditions. The premiums and deposits received, together with assumed investment
earnings, are designed to cover policy benefits, expenses and policyholder
dividends and return a profit to Guarantee Life. These profits arise from the
margin between mortality or morbidity charges and insurance benefits paid, the
margin between actual investment results and the investment income credited to
policies (either directly or indirectly through dividends to policyholders) and
the margin between expense charges and actual expenses. The level of profits
also depends on persistency because business acquisition costs, particularly
agent commissions, are recovered over the life of the policy.
Guarantee Life Insurance is rated "A (Excellent)" by A.M. Best, A.M. Best's
third highest rating of 13 ratings assigned to solvent insurance companies,
which currently range from "A++ (Superior)" to "D (Very Vulnerable)."
Business Strategy
Guarantee Life's management team has developed a business strategy to improve
its long-term competitive position. This strategy capitalizes on Guarantee
Life's history of quality service, its approach to the marketing and
administration of its group insurance business, the improving operations of its
individual insurance business and its high-quality investment portfolio.
Guarantee Life's strategic priorities include:
. Growing the group insurance business and improving its profitability by
increasing sales of group core products and voluntary products, marketed by
Guarantee Life's national sales office distribution system;
. Continuing to improve the marketing performance of Guarantee Life's
individual insurance business while continuing to improve its financial
results by expanding its distribution systems, continuing to introduce
products that are competitive and profitable such as equity indexed products,
and aggressively managing fixed expenses;
. Maintaining investment portfolio liquidity and quality; and
. Seeking acquisition opportunities in the individual and group insurance
businesses that will improve Guarantee Life's profitability.
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Acquisitions
Since 1989, Guarantee Life has acquired four blocks of group insurance
business, a block of annuities, a block of universal life policies, and a small
life insurance company. Guarantee Life intends to continue its strategy of
pursuing similar acquisitions of blocks of insurance business and small
insurance companies and other insurance-related opportunities. Management
believes that such acquisitions will lower unit costs by increasing the number
of policies and the amount of premiums over which fixed expenses are spread.
Segment Information
The following table sets forth, by business segment, certain financial data for
Guarantee Life for the periods indicated.
Selected Consolidated Financial Data by Business Segment
<TABLE>
<CAPTION>
At or for the Years Ended December 31,
- --------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------- -------- ------------- -------- --------
<S> <C> <C> <C> <C> <C>
(In Millions)
Revenues from continuing operations (1):
Group insurance business $ 175.1 $ 182.2 $ 140.1 $ 125.6 $ 124.3
======== ========
Individual insurance business (2) 75.8 112.2 107.4 110.8 102.5
Corporate 1.1 - - - -
-------- -------- -------- -------- --------
Total $ 252.0 $ 294.4 $ 247.5 $ 236.4 $ 226.8
======== ======== ======== ======== ========
Income from continuing operations before
income taxes:
Group insurance business $ 10.1 $ 4.4 $ 14.6 $ 17.1 $ 19.4
Individual insurance business 13.6 15.5 12.8 10.6 6.4
Corporate (1.1) - - - -
-------- -------- -------- -------- --------
Total $ 22.6 $ 19.9 $ 27.4 $ 27.7 $ 25.8
======== ======== ======== ======== ========
Assets (at period end):
Group insurance business $ 224.2 $ 221.8 $ 204.7 $ 187.2 $ 132.6
Individual insurance business 1,026.0 985.7 908.0 920.0 924.0
Corporate 19.1 22.7 - - -
Discontinued Operations 32.4 50.6 75.3 45.6 13.2
-------- -------- -------- -------- --------
Total Consolidated Assets $1,301.7 $1,280.8 $1,188.0 $1,152.8 $1,069.8
======== ======== ======== ======== ========
- -----------
</TABLE>
(1) Includes investment income allocated to each business segment.
(2) The results of the Closed Block subsequent to 12/31/95 are reported on one
line of the Consolidated Statements of Income. Accordingly, the line-by-line
income statements are not comparable for all periods presented. Total assets
include the assets of the Closed Block, therefore amounts are comparable for all
periods presented.
For the year ended December 31, 1996 Guarantee Life collected direct statutory
premiums and deposits from policyholders in 50 states and the District of
Columbia. Excluding premiums attributable to Guarantee Life's discontinued
Special Risk segment and the SMART product which Guarantee Life ceased writing
in October 1995, the states of California (12.5%), Texas (7.5%), Illinois
(6.0%), Michigan (5.5%), and Florida (5.2%) contributed the greatest amounts. No
other state represented more than 5.0% of direct statutory premiums and
deposits.
Group Insurance Business
Guarantee Life's group insurance includes group core products, such as life,
accidental death and dismemberment, short- and long-term disability and dental
insurance and voluntary products, and certain specialty products, such as excess
loss insurance for employers with self-funded medical plans and medical
reimbursement insurance for business executives. In 1996, to more effectively
manage the growth of Guarantee Life's group insurance business, this segment was
separated into two divisions. The employee benefits division manages the core
products distributed through the national sales office distribution system, and
the special markets division manages the specialty products. Core products sold
in conjunction with specialty products through the additional distribution
systems are jointly managed by both divisions. As of December 31, 1996,
Guarantee Life's group insurance business had $21.1 billion of life insurance in
force.
Guarantee Life intends to grow the group insurance business and improve its
profitability by increasing sales of core and voluntary products, marketed
through its national distribution system of sales offices. By emphasizing sales
of core and voluntary products while carefully managing the growth of the
specialty products, Guarantee Life intends to maintain its
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diversification, mitigating the possible adverse impact on its group insurance
business from potential health care reforms and the cyclical nature of the group
health market.
As the group sales office distribution system expands, Guarantee Life will
continue its home office support strategy of providing distributors and
customers direct access to home office personnel. Management believes this
strategy results in (i) better service to distributors and customers through
direct contact with personnel administering their business, (ii) improved
underwriting consistency and control for Guarantee Life through centralization
of underwriting decisions, (iii) increased productivity of regional marketing
personnel by permitting them to focus on marketing Guarantee Life's products
rather than performing administrative functions and (iv) ultimately, lower
distribution costs by avoiding additional layers of management and regional
office support staff.
Marketing
Guarantee Life's group products are marketed primarily to businesses with fewer
than 500 employees. Its group core products are marketed primarily through its
national distribution system of sales offices, which develops group insurance
business through employee benefit firms. Guarantee Life distributes its
specialty products, and to a lesser extent its core products, through additional
distribution systems. A senior vice president located in the home office manages
the employee benefit division's marketing of the group core products through the
national group sales office distribution system. Six regional vice presidents,
who supervise group field operations, operate under his direction, as well as
the voluntary products' vice president. A senior vice president located in the
home office manages the special markets division's marketing of specialty and
core products.
National Distribution System. Guarantee Life has developed group sales offices
in major metropolitan areas of the United States to facilitate the development
of relationships with, and improve the provision of marketing services to,
employee benefit firms and to increase the sales of core products. As of
December 31, 1996, Guarantee Life had 20 group sales offices in major
metropolitan areas in 17 states. This distribution system added over 4,600 new
groups generating $49.2 million of first year annualized premiums during the
year ended December 31, 1996 and 3,750 new groups generating $34.4 million of
first year annualized premiums for the year ended December 31, 1995. The 18.8%
growth in group net earned premiums from core products in 1996 is primarily a
result of the sales growth from existing group offices and continued expansion
of the national distribution system.
The following table sets forth information regarding the group sales offices
for the years indicated.
Group Sales Offices
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------- ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Offices Established (1) Boston Philadelphia Portland Kansas City Cincinnati
Phoenix Detroit Houston Los Angeles Charlotte
Miami Atlanta Chicago Baltimore
Dallas Denver Orlando
Minneapolis San Francisco
Seattle
Total number of offices at period end 20 17 15 9 5
- ----------
</TABLE>
(1) The Cincinnati office opened in December 1991. The Charlotte office moved
in February 1994 from Raleigh, where it was originally established in February
1992.
Guarantee Life selects locations for its group sales offices based on the
availability of qualified personnel, the characteristics of the potential market
and the extent to which such markets are already served by other providers.
Guarantee Life performs a comprehensive review of the marketing performance and
expenses for each group sales office on a monthly basis. In addition to opening
new offices, Guarantee Life also intends to increase the marketing staff at
existing offices.
Additional Distribution Systems. Guarantee Life distributes its group specialty
products, and to a lesser extent its group core products, through additional
distribution systems. These distributors include MGUs, TPAs, Blue Cross and Blue
Shield plans, health maintenance organizations and dental maintenance
organizations. These multiple distribution systems allow the sale of group
products to markets that complement those served by Guarantee Life's group sales
offices.
Guarantee Life markets its specialty group products primarily through MGUs and
TPAs. Guarantee Life's excess loss insurance product is marketed by National
Benefit Resources, Inc. ("NBR"), which accounted for 63.2% of Guarantee Life's
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excess loss insurance premiums during 1996. NBR performs all marketing,
underwriting and administrative services for the excess loss insurance it sells.
The balance of excess loss insurance sales are marketed directly by TPAs and
administered by Guarantee Life. Guarantee Life's Exec-U-Care medical
reimbursement program is marketed exclusively through Seabury and Smith, Inc.,
which performs all marketing, underwriting and administrative services for this
product.
Group Products
Guarantee Life's group core products and specialty products accounted for
$124.3 million, or 80.9%, and $29.3 million, or 19.1%, of group net earned
premiums, respectively, for the year ended December 31, 1996. The following
table sets forth net earned premiums for Guarantee Life's group insurance
products for the past five years.
Group Net Earned Premiums
<TABLE>
<CAPTION>
For the Years Ended December 31,
- -------------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------------- ------ ------
<S> <C> <C> <C> <C> <C>
(In Millions)
Core products $124.3 $104.6 $ 79.5 $66.1 $62.9
Specialty products 29.3 58.5 32.4 25.9 29.2
------ ------ ------ ----- -----
Total group business $153.6 $163.1 $111.9 $92.0 $92.1
====================== ====== ====== ====== ===== =====
</TABLE>
Core Products
Group Life. Group term life provides insurance coverage on the insured for a
specified period and has no accumulation value. Coverage is offered to employees
and their dependents. Group life accounted for $58.4 million, or 47.0%, of net
earned premiums from core products for the year ended December 31, 1996.
Accidental Death and Dismemberment. Group accidental death and dismemberment
insurance provides insurance coverage that is payable after the accidental death
of the insured in an amount based on the face amount of the policy or after a
covered dismemberment of the insured in an amount based on the schedule to the
policy. Accidental death and dismemberment accounted for $8.6 million, or 6.9%,
of net earned premiums from core products for the year ended December 31, 1996.
Short-Term Disability. Short-term disability provides a weekly benefit amount
to insured employees when they are unable to work due to an accident or an
illness. The period that insured employees must remain disabled prior to
becoming eligible for benefit payments ranges from zero to 30 days for
disability due to accident and from three to 30 days for disability due to
sickness. Short-term disability accounted for $13.2 million, or 10.6%, of net
earned premiums from core products for the year ended December 31, 1996.
Long-Term Disability. Long-term disability provides a monthly benefit for
longer periods of time than covered by short-term disability insurance when
insured employees are unable to work due to disability. Employees may receive
total or partial disability benefits. Long-term disability accounted for $22.9
million, or 18.4%, of net earned premiums from core products for the year ended
December 31, 1996.
Dental Insurance. Dental insurance provides partial reimbursement for covered
dental expenses. Plans may cover only preventive and basic care or more
comprehensive care, including major services and orthodontia. Dental insurance
accounted for $21.2 million, or 17.1%, of net earned premiums from core products
for the year ended December 31, 1996.
Voluntary Products. Guarantee Life's voluntary products currently include
life, dependent life, dental, vision, accidental death and dismemberment, short-
term disability, and long-term disability insurance that is paid for by
employees through payroll deductions. In 1996, sales of voluntary products
tripled to $6 million from $2 million in 1995.
Specialty Products
Excess Loss. Excess loss insurance reimburses employers for self-funded
medical plan costs when those costs exceed aggregate limits specified under the
plan or when a single claim exceeds a specified limit. Guarantee Life provides
aggregate and specific excess loss insurance to small- and medium-employer
groups of 50 or more lives with self-funded medical plans. Excess loss accounted
for $19.0 million, or 64.8%, of net earned premiums from specialty products for
the year ended December 31, 1996.
Exec-U-Care. Under the Exec-U-Care program, Guarantee Life supplements an
employer's basic medical plan by reimbursing business executives for many of the
expenses not covered by that plan. Coverage automatically includes a
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prescription drug card and an accidental death and dismemberment benefit. Exec-
U-Care accounted for $5.8 million, or 19.8%, of net earned premiums from
specialty products for the year ended December 31, 1996.
SMART. SMART, a fully insured small group major medical product, was marketed
by Guarantee Life in California and was administered by Harden & Company
Insurance Services, Inc. Guarantee Life ceased writing this product in October
1995, as California legislation limited Guarantee Life's ability to price this
product according to the risks involved, which prevented Guarantee Life from
achieving its profit targets for this product. SMART accounted for $4.5 million,
or 15.4%, of net earned premium from specialty products for the year ended
December 31, 1996.
Product Development and Management
Guarantee Life utilizes product actuaries in its group business product
development process to manage the underwriting, pricing and actuarial functions
for each product line. These actuaries work with a senior underwriter, a claim
specialist and a sales manager who have extensive expertise with the particular
insurance product. The product actuaries are responsible for monitoring
experience, revising or implementing new underwriting guidelines, adjusting
pricing and ensuring such changes are communicated to the underwriters and
regional group offices. After release, sales and pricing assumptions are
monitored to assist in making any necessary adjustments.
Due to the rapid growth in core products, and a strategic assessment of the
small- and medium-sized employer market, management took steps in 1996 to re-
engineer some of the group business' processes to gain efficiencies. A
transformation project has been initiated to better align home office service
teams with designated group sales offices for underwriting, premiums,
enrollment, and customer service. The elimination of redundant data entry and
multiple hand-offs is expected to increase productivity by over 60%. This
process improvement is expected to reduce the turnaround time for new case
issuance to half the industry average of 21 days. Management believes this will
give Guarantee Life a distinct strategic advantage in a highly competitive
market. Initial testing of this new process is under way in the Houston office
and is expected to expand to all group sales offices by the end of 1997.
Insurance Underwriting
Guarantee Life uses underwriting standards to protect the quality of its group
life and health business. Standard rating systems have been developed for each
product based on Guarantee Life's own past experience and relevant industry
experience. Home office underwriters evaluate the risk characteristics of each
prospective insured group. The premium rate quoted to a prospective insured
group is based on standard rating formulae and for larger groups, the group's
past claims experience rate.
Guarantee Life utilizes reinsurance to manage the net exposure in its group
life and health lines of business. The risks that are reinsured vary by product
line. Guarantee Life seeks highly rated reinsurers for its reinsurance treaties.
At December 31, 1996, 86% of its reinsurance recoverables were with reinsurers
rated A (Excellent) or better by A. M. Best. Guarantee Life does not currently
reinsure any of the risks associated with short-term disability or dental
insurance. Guarantee Life reinsures mortality risk in excess of $150,000 on any
single life covered by a group life insurance policy and monthly benefit amounts
in excess of $3,000 per insured life on group long-term disability policies.
Excess loss is reinsured at two levels; all claims below $250,000 are 75%
reinsured on a quota share basis, while claims in excess of $250,000 are 100%
reinsured.
Individual Insurance Business
Guarantee Life's individual insurance products include universal life, term
life and interest-sensitive whole life insurance and annuities. These products
are marketed primarily to individuals with family incomes of $30,000 to $150,000
and small business owners primarily by a career and independent agency force of
approximately 900 licensed insurance agents. As of December 31, 1996, Guarantee
Life's individual insurance business had $7.8 billion of life insurance in force
and approximately 180,000 life and annuity policies in force.
Guarantee Life plans to grow sales of individual life and annuity business
while improving its financial results by continuing to introduce products that
are competitive and profitable, including equity indexed products, improving
retention and productivity of its agents and aggressively managing fixed
expenses.
In 1996, Guarantee Life refined its growth strategy to focus on recruiting and
developing dedicated and independent regional marketing organizations (RMOs)
who, in turn, recruit and support their agents. The marketing organization's
compensation is primarily variable based on sales and allows Guarantee Life to
aggressively grow its sales force without the addition of significant fixed
expenses. Guarantee Life also intends to recruit PPGAs, who deal directly with
the company and are paid only for the business they produce and service.
Existing CGA relationships will continue to be supported because of the service
CGAs provide to policyholders and the quality business they produce.
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Over the last three years, Guarantee Life has replaced its entire individual
life portfolio with new products which are designed to provide better value to
customers and improved profitability. Management believes that this new life
portfolio plus an improved annuity portfolio featuring an equity indexed
deferred annuity, will help increase sales from existing producers and allow
sales management to effectively recruit marketing organizations and agents.
Guarantee Life will continue to aggressively manage fixed expenses and reduce
unit expense rates.
Marketing
Guarantee Life's products are marketed primarily to individuals with family
incomes up to $150,000 and small business owners with fewer than 25 employees
and earnings up to $150,000. Guarantee Life's individual insurance products are
marketed primarily by a career and independent agency force of approximately 900
licensed insurance agents. During 1996, 101 agents produced over 80% of
Guarantee Life's individual insurance business. Most of the individual
insurance agents also sell insurance products offered by other companies.
A senior vice president located in the home office manages Guarantee Life's
agency marketing efforts. Three regional vice presidents divide responsibility
for field relationships. The regional vice presidents are responsible for
recruiting and developing quality RMOs and PPGAs, and supporting existing CGAs.
In 1996, PPGAs, CGAs and RMOs produced 51.3%, 27.8% and 20.9% of individual
first year annualized premiums for life insurance and 52.4%, 43.0% and 4.6% for
annuities, respectively.
Individual Products
Guarantee Life currently offers a portfolio of universal life products,
annuities, traditional life products, and interest-sensitive whole life
products. Life insurance products and annuities accounted for 41.1% and 58.9%,
respectively, of the individual insurance business's first year annualized
premiums for 1996. As part of the strategy to improve the financial and
marketing performance of its individual insurance business, Guarantee Life has
replaced its entire individual life insurance portfolio over the last three
years. These new products are designed to provide better value to customers and
improve profitability relative to the previous generation of products.
Universal Life Products. Universal life provides benefits for the life of the
insured. Within limits established by Guarantee Life, the Internal Revenue Code
and state regulations, policyholders may vary their premiums and the amount of
the death benefit as long as there are sufficient policy funds to cover all
policy charges for the coming period. Over the past three years, Guarantee Life
introduced four new universal life products, which are designed to provide
better value to the consumer and increase profitability for Guarantee Life.
Sales of universal life policies represented 84.6% of first year annualized
premiums for individual life products for the year ended December 31, 1996.
Annuities. Guarantee Life markets single premium fixed annuities, flexible
premium fixed annuities and an equity indexed annuity. For fixed annuities, the
contract accumulates tax-deferred interest and provides for periodic fixed
payments to the annuitant in the future. Flexible premium annuities allow for
flexibility, within certain parameters established by Guarantee Life, in the
payment of periodic annuity premiums. In the third quarter of 1996, Guarantee
Life introduced an equity indexed single premium deferred annuity with credited
rates linked to the growth in the S&P 500 index. Guarantee Life is reinsuring
70% of the risk on this product.
Traditional Life Products. Guarantee Life's traditional life products include
whole life and term life products. Participating whole life generally provides
for level premiums and a level death benefit and requires payments in excess of
the mortality cost in the early years to offset increasing mortality costs in
later years. Guarantee Life introduced interest-sensitive whole life products in
1995 to take the place of participating whole life insurance products, which are
no longer sold after the Demutualization. As part of the Demutualization, all
participating policies are included in the Closed Block.
Guarantee Life also markets term policies that provide life insurance
protection for a specified period. As such, they are mortality-based and have no
accumulation values. Guarantee Life introduced a new term life insurance
portfolio of three products in 1995; two of these policies have a 10-year rate
guarantee and are renewable after one or 10 years, and the other has a 15-year
rate guarantee and is renewable after 15 years. The portfolio was updated and a
20-year product was added in late 1996. Minimum policy size is $50,000, except
for the one year product which is $100,000. These products are being
underwritten using a teledirect underwriting process, whereby an underwriter
under contract with Guarantee Life contacts the insurance applicant by telephone
after receiving a request form. Before a policy is issued, the proposed insured
must satisfactorily complete a blood test and medical examination. Management
believes this enhances the efficiency of the underwriting process since
underwriters take information directly from the proposed insured. Guarantee Life
has substantially reinsured this portfolio during its early stages and, as a
result, this portfolio did not produce significant amounts of net earned
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premium in 1995 or 1996. For the year ended December 31, 1996, term life sales
represented 10.3% of first year annualized premiums for individual life
products.
Interest-Sensitive Whole Life Products. Interest-sensitive whole life products
charge a fixed annual premium and provide guaranteed death benefits and cash
values. Interest-sensitive whole life products may build cash values greater
than that which is guaranteed by crediting higher than guaranteed rates of
interest or charging less than guaranteed costs of insurance. These products,
although similar to universal life products, differ in that a fixed (as opposed
to flexible) premium obligation is undertaken by the policyholder. For the year
ended December 31, 1996, sales of interest-sensitive whole life products
represented 5.3% of first year annualized premiums for individual life products.
The following table sets forth the first year annualized premiums for Guarantee
Life's individual products for the periods indicated.
Sales Activity by Product
First Year Annualized Premiums
<TABLE>
<CAPTION>
For the Years Ended December 31,
- -----------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------------- ------ ------
<S> <C> <C> <C> <C> <C>
(In Millions)
Universal life $ 5.5 $ 4.3 $ 7.0 $ 8.0 $13.7
Traditional life (1) 1.0 1.0 1.4 1.7 3.1
----- ----- ----- ----- -----
Total life(1) 6.5 5.3 8.4 9.7 16.8
Annuities 9.3 8.1 21.5 20.1 18.0
----- ----- ----- ----- -----
Total $15.8 $13.4 $29.9 $29.8 $34.8
===== ===== ===== ===== =====
- ----------
</TABLE>
(1) Prior to 1995, does not include interest-sensitive whole life products,
which were introduced in 1995.
Sales of universal life and traditional life policies decreased in 1993 as a
result of the termination of certain MGAs. These agents, who were paid large
first year commissions and bonuses, tended to sell large policies with poor
persistency. Guarantee Life terminated this MGA program in 1992, consistent with
its objective of reducing the cost structure in its individual insurance
business. Management believes sales of universal life and traditional life
products declined further in 1994 and 1995 principally as a result of changes
arising from the Demutualization, the transition to new products and a lower
field compensation structure. Annuity sales declined substantially in 1995 due
to increased competition from other financial products.
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The following table sets forth information regarding life insurance and
annuities in force at the end of each period presented.
Life Insurance and Annuities in Force
<TABLE>
<CAPTION>
At or for the Years Ended December 31,
------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(Dollars in Millions)
<S> <C> <C> <C> <C> <C>
Life Insurance:
Universal
Number of policies.............. 76,172 56,691 57,361 57,424 56,749
Direct statutory premiums....... $ 36.2 $ 35.0 $ 35.4 $ 34.4 $ 37.8
Face amounts.................... $6,230.8 $5,208.0 $5,276.0 $5,293.0 $5,216.0
GAAP policyholder account
balances....................... $ 257.4 $ 185.2 $ 168.2 $ 151.4 $ 135.9
Traditional
Number of policies.............. 88,563 93,189 98,609 104,473 124,094
Direct statutory premiums....... $ 24.0 $ 24.9 $ 26.2 $ 27.9 $ 27.7
Face amounts.................... $1,814.4 $1,770.0 $1,829.0 $1,922.0 $2,265.0
GAAP future policy benefits..... $ 308.7 $ 307.9 $ 306.6 $ 303.8 $ 301.1
Total Life
Number of policies.............. 164,735 149,880 155,970 161,897 180,843
Direct statutory premiums....... $ 60.2 $ 59.9 $ 61.6 $ 62.3 $ 65.5
Face amounts.................... $8,045.2 $6,978.0 $7,105.0 $7,215.0 $7,481.0
Annuities:
Number of policies.............. 13,910 15,274 16,496 16,689 16,363
Direct statutory premiums....... $ 12.4 $ 13.4 $ 26.8 $ 26.4 $ 26.7
GAAP policyholder account
balances...................... $ 198.7 $ 217.7 $ 212.8 $ 198.4 $ 188.2
GAAP future policy benefits..... $ 12.4 $ 11.6 $ 10.9 $ 10.4 $ 8.8
</TABLE>
Crediting Rates and Policyholder Dividends
Guarantee Life pays dividends, credits interest and determines other
nonguaranteed elements on its individual insurance policies depending on the
type of product. Although certain nonguaranteed elements (such as initial
interest rates on an annuity product) may be fixed for a limited, predetermined
period, Guarantee Life generally determines dividends, resets interest rates and
establishes other nonguaranteed elements based on experience as it emerges and
with regard to competitive factors. Guarantee Life does not maintain separate
accounts of assets for its interest-sensitive products; however, for risk
management and reporting purposes, assets are internally segmented among the
traditional life, universal life, annuities and group insurance product lines.
Policyholder dividends are declared and paid only on those policies included in
the Closed Block, including traditional whole life, some term life and some
older fixed annuity policies. Policyholder dividend scales are established
annually by Guarantee Life, and are based on the performance of an asset
portfolio which has been identified as supporting these policies, the mortality
experience of the policies, expense levels and taxes.
For universal life policies and annuity contracts, credited interest rates are
established on a monthly basis by Guarantee Life's interest rate committee.
Crediting rates are based on the performance of the asset portfolio supporting
these policies and competitive considerations. Mortality charges for universal
life policies are determined based on the mortality experience of the policies
and are reset on a less frequent basis. For annuities, crediting rates are
determined for groups of identified deposits and reflect the timing of the
deposits and the investment performance of the assets backing those deposits.
Guarantee's average crediting rates on universal life contracts were 5.90%,
6.03%, and 5.99% and its average crediting rates on annuities were 5.46%, 5.93%,
and 5.80% for the years ended December 31, 1996, 1995, and 1994, respectively.
For the equity indexed annuity introduced in 1996, participation rates are
established on a weekly basis. The participation rates are applied to increases
in the equity index defined in the contracts to determine the credited interest
rates. The participation rates are set based on various factors, including the
current interest rate environment and competitive considerations.
9
<PAGE>
Product Development
Guarantee Life's individual insurance product development committee, which
includes representatives from all individual insurance business disciplines as
well as investment and legal areas, designs, analyzes and conducts operational
tests of new products. An advisory council, composed of agents and home office
personnel, works with marketing and actuarial personnel to determine the final
design for the product. Assuming a product is approved, a product team puts the
product through extensive model office testing prior to release. After release,
sales and pricing assumptions are monitored and any necessary adjustments are
made to maintain profitability standards.
Insurance Underwriting
Guarantee Life follows detailed, uniform underwriting practices and procedures
in its individual business designed to assess and qualify risks before issuing
coverage to qualified applicants. Guarantee Life has underwriters who evaluate
policy applications on the basis of information provided by the applicant and
others. Management believes that its underwriting standards produce mortality
results consistent with the assumptions used in product pricing, while also
allowing competitive risk selection. Blood testing is required for all
individual insurance policies with face amounts of $100,000 or more at issue
ages of 16 and over, and other tests, such as medical examinations,
electrocardiograms, blood tests, urine tests, treadmill tests, chest x-rays and
inspection reports, are used to evaluate certain individual insurance policy
applications, depending on the size of the policy, the age of the proposed
insured and other factors
For universal life, traditional life and interest-sensitive whole life,
Guarantee Life reinsures mortality risk in excess of $250,000 on any single life
covered by an individual insurance policy. For policies up to $2.25 million,
this reinsurance is ceded automatically on a quota share basis to several
reinsurers. These reinsurers are also the primary providers of facultative
reinsurance for the mortality risks that are not automatically ceded. Guarantee
Life retains a mortality risk less than $250,000 at older ages and on certain
individual underwriting risks. For the term portfolio introduced in 1995, the
reinsurance arrangement is on a first dollar quota share basis, with Guarantee
Life retaining 40% of the mortality risk and three reinsurers sharing the other
60%. Guarantee Life's individual life retention is $100,000 for this business.
Closed Block
The Closed Block is based on a concept common in demutualizations and is
designed to give reasonable assurance to holders of policies included therein
that assets will be available to maintain the dividend scales which were in
effect prior to the Demutualization if the experience underlying such scales
continues.
The Closed Block was established on the date of the IPO. Guarantee Life
allocated assets to the Closed Block in an amount expected to produce cash flows
which, together with anticipated revenues from the Closed Block, are expected to
be sufficient to support the Closed Block, including provision for payment of
claims, certain expenses and taxes, and for the continuation of dividend scales
in effect for the year preceding the IPO, if the experience underlying such
scales (including the portfolio interest rate) continues, and for appropriate
adjustments in such scales if the experience changes. The assets, including the
revenue therefrom, allocated to the Closed Block Business will accrue solely to
the benefit of holders of policies included in the Closed Block until the Closed
Block is no longer in effect. To the extent that over time cash flows from the
assets allocated to the Closed Block and other experience relating to the Closed
Block are, in the aggregate, more or less favorable than assumed in establishing
the Closed Block, total dividends paid to Closed Block policyholders in the
future may be greater than or less than the total dividends that would have been
paid to these policyholders if the dividend scales in effect for 1994 had been
continued. Dividends on policies included in the Closed Block, as in the past,
will be declared at the discretion of Guarantee Life Insurance's Board of
Directors, may vary from time to time (reflecting changes in investment,
mortality, persistency and other experience factors) and are not guaranteed.
Guarantee Life will not be required to support the payment of dividends on
Closed Block policies from its general funds, although it could choose to
provide such support.
If the assets allocated to the Closed Block, the investment cash flows from
those assets and the revenues from the policies included in the Closed Block
prove to be insufficient to pay the benefits guaranteed under the policies
included in the Closed Block, Guarantee Life will be required to make such
payments from its general funds. Since the Closed Block has been funded to
provide for payment of guaranteed benefits, it should not be necessary to use
other general funds to pay guaranteed benefits unless the Closed Block
experiences substantial adverse deviations in investment, mortality, persistency
or other experience factors.
The Closed Block consists of the individual policies for which Guarantee Life
had a dividend scale in effect for 1994, but only to the extent such policies
were in force on the date of the IPO, including any such policy which was in
force as extended term insurance. Policies specified as Closed Block policies
purchased prior to the date of the IPO are included in the Closed Block. The
expenses associated with selling these policies were charged to the Closed
Block. A policy may be within a class
10
<PAGE>
for which there was a dividend scale in effect for 1994, even if it did not
receive a 1994 dividend, and, therefore, the policy is included in the Closed
Block.
Premiums received and policy benefits paid by Guarantee Life on the policies
included in the Closed Block and investment cash flows from the assets allocated
to the Closed Block are added to or withdrawn from the Closed Block. Guarantee
Life charges the Closed Block with federal, state or local taxes relating to the
Closed Block. Guarantee Life also charges the Closed Block for commissions and
other expenses of administering the policies included in the Closed Block.
Dividends on the Closed Block policies are set annually by Guarantee Life
Insurance's Board of Directors in accordance with applicable law and with the
objective of exhausting assets in the Closed Block upon the final required
payment under the last policy in the Closed Block.
The Closed Block will continue in effect until either (i) the last policy in
the Closed Block is no longer in force or (ii) the Closed Block is dissolved.
The Closed Block may not be dissolved without the approval of the Director of
the Nebraska Department of Insurance. If the Closed Block is dissolved, the
assets associated with the Closed Block will become part of Guarantee Life's
general funds. If the Closed Block is not dissolved, the expected life of the
Closed Block is over 75 years. Even if the Director approves the dissolution of
the Closed Block, the policies at the time of dissolution shall remain
obligations of Guarantee Life and dividends on these policies shall be
apportioned by Guarantee Life Insurance's Board of Directors in accordance with
policy provisions and actuarial standards.
Exit From Individual Accident and Health Insurance
Prior to 1993, Guarantee Life marketed disability income insurance and various
forms of individual medical insurance. Guarantee Life exited these lines of
insurance in late 1992 because of the small amount of business being sold and
their lack of profitability to Guarantee Life. Through a 100% coinsurance
agreement, Guarantee Life ceded all of the risks for the policies in these lines
of business to Lone Star Life Insurance Company (Lone Star). Guarantee Life,
however, remains obligated to pay benefits due under these policies in the event
Lone Star does not perform its obligations under the coinsurance agreement.
Pursuant to the coinsurance agreement, assets in an amount equal to these
potential obligations were placed in a custodial account by Lone Star for the
purpose of meeting Guarantee Life's obligations under the related policies in
the event Lone Star does not perform its obligations under the coinsurance
agreement. The market value of the assets in this account as of December 31,
1996 was $11.8 million. These assets are required to be held in the custodial
account through 2002. Management believes that it is unlikely that Guarantee
Life will be required to make any payment on these potential obligations based
on the "B (Adequate)" A.M. Best rating of Lone Star, as well as the quality of
the assets currently in the account.
Discontinued Operations
In November 1994, Guarantee Life made a decision to withdraw from its Special
Risk segment, an alternate workers' compensation program in Alabama, Georgia and
Louisiana. This decision was the result of unanticipated high levels of premium
growth, which impeded Guarantee Life's ability to maintain appropriate
administrative, operational and underwriting standards and required levels of
risk-based capital that were unacceptable to Guarantee Life's management.
Furthermore, the plans of the managing general agent to continue to grow the
Special Risk segment were not consistent with Guarantee Life's strategy. To
facilitate its exit, Guarantee Life entered into a reinsurance arrangement
whereby it cedes 80% of all claims incurred after October 31, 1994. In addition,
Guarantee Life entered into a reinsurance arrangement to limit its exposure to
$10,000 per claim relating to its 20% retention. Guarantee Life retains the
liability for claims incurred on or before October 31, 1994.
Concurrent with the implementation of the reinsurance coverage, Guarantee Life
amended its agreement with the managing general agent which markets this
product, whereby Guarantee Life agreed to write new or renewal business for this
line only until the earlier of replacement by another insurance carrier or
November 1, 1995. Effective November 1, 1995, Guarantee Life ceased writing
Special Risk policies.
Net income from discontinued operations was $295 thousand in 1996 compared to a
loss of $1.7 million in 1995. The improvement was primarily due to the loss
limitations of the reinsurance agreement and the runoff of the business.
Guarantee Life intends to allow the assets and liabilities related to this
business to run off over a period of years as claims are paid, unless an
appropriate sale can be made. Guarantee Life does not believe the disposal of
this segment will result in a significant loss. Guarantee Life believes that,
based on current estimates, approximately 75% of the net liabilities related to
discontinued operations will be extinguished within five years of its ceasing
writing business. These estimates are based on
11
<PAGE>
assumptions developed from industry-wide claim data which Guarantee Life
believes are appropriate for the nature of the business involved; however,
actual runoff patterns may differ from these estimates.
Investment Portfolio
General
Guarantee Life maintains a diversified portfolio of investments,
including fixed maturity securities and mortgage loans. Guarantee Life's
objective is to maintain a high quality, well diversified fixed maturity
securities portfolio that produces a nominal yield and total return that
supports the various product line liabilities. The fixed maturity securities
portfolio consists primarily of investment grade corporate fixed maturity
securities, high quality mortgage-backed securities (MBS) and United States
government and agency obligations.
Although all of its assets support all of its liabilities, Guarantee Life has
developed an asset/liability management approach with separate investment
segments for specific product lines, such as its traditional life insurance
products (which includes the Closed Block as a subset), universal life,
annuities and group insurance products. As part of this approach, Guarantee Life
develops investment policies and objectives for each product line which form the
basis for distinct investment strategies and performance benchmarks to manage
each product's return and liquidity requirements.
Management has a general policy of diversifying assets within each asset
category. Guarantee Life monitors and limits the exposure to individual
borrowers, credit risks, industries or property types and geographic locations.
All investments are subject to suitability and diversification requirements
under Nebraska law and require the approval of an investment committee appointed
by the Board of Directors of Guarantee Life Insurance.
Guarantee Life Insurance's demutualization and the establishment of the Closed
Block significantly affected the presentation of Guarantee Life's consolidated
financial statements. For comparability with prior years' information, the
following tables include Closed Block invested assets combined with similar
assets outside the Closed Block.
The following table summarizes consolidated invested assets by asset category
as of December 31, 1996, 1995, 1994, 1993, and 1992.
CONSOLIDATED INVESTED ASSETS
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- --------------- --------------- --------------- ---------------
Carrying % of Carrying % of Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total Value Total Value Total
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
(Dollars in Millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed maturities:
Public(1) $ 595.3 54.4% $ 580.7 55.0% $540.5 54.8% $496.4 52.3% $440.9 51.0%
Private 318.6 29.1% 317.1 30.0 312.4 31.7 338.7 35.6 306.1 35.4
-------- ----- -------- ----- ------ ----- ------ ----- ------ -----
Subtotal 913.9 83.5% 897.8 85.0 852.9 86.5 835.1 87.9 747.0 86.4
- ------------------------
Equity securities 3.0 0.3% 6.0 0.6 4.9 0.5 6.4 0.7 6.5 0.7
Mortgage loans 70.2 6.4% 61.5 5.8 48.1 4.9 26.1 2.7 19.6 2.3
Policy loans 67.5 6.2% 63.5 6.0 62.9 6.4 63.3 6.7 64.0 7.4
Investment real estate 6.6 0.6% 6.9 0.6 7.2 0.7 7.7 0.8 7.9 0.9
Other invested assets 9.8 0.9% 8.1 0.8 9.1 1.0 11.1 1.2 11.3 1.3
Short-term
investments 23.3 2.1% 12.3 1.2 0.5 0.0 0.3 0.0 8.6 1.0
-------- ----- -------- ----- ------ ----- ------ ----- ------ -----
Total invested
assets 1,094.3 100.0% $1,056.1 100.0% $985.6 100.0% $950.0 100.0% $864.9 100.0%
======== ===== ======== ===== ====== ===== ====== ===== ====== =====
</TABLE>
(1) During 1994, Guarantee Life implemented SFAS 115 and, as a result of
classifying certain of its fixed maturity securities portfolio as
available-for-sale, the carrying value of such securities reflected
unrealized gains of $8.3 million and $23.8 million as of December 31, 1996
and 1995 and unrealized losses of $37.1 million as of December 31, 1994.
Investment Philosophy
Guarantee Life employs conservative investment strategies based on the specific
characteristics of each product line. Performance is measured on both a nominal
yield spread basis and on a total return basis. Total return investment
performance evaluation requires that the risk and expected return of each asset
is evaluated regularly. Guarantee Life uses broad-based market indices to
measure asset performance against customized liability-based benchmarks to
measure the relative
12
<PAGE>
market indices to measure asset performance against customized liability-based
benchmarks to measure the relative performance of its fixed maturity securities.
The current yield of the investment portfolios must be sufficient to satisfy the
interest rate assumptions used in product pricing. In addition, each portfolio
must achieve a satisfactory balance between risk and expected return and support
the investment requirements of the underlying product. This approach allows
Guarantee Life to be more effective in its asset/liability management efforts
since it requires decisions to be based on both the fair value of each asset and
each asset's contribution to investment income. Guarantee Life's portfolio of
invested assets is managed by its employees, except for a substantial portion of
its publicly traded fixed maturity securities which is managed by an external
investment manager pursuant to guidelines adopted by Guarantee Life.
Guarantee Life seeks to manage the relationship between risk and expected
return and is committed to maintaining a prudent balance of the two. Guarantee
Life is exposed to four major sources of investment risk: credit risk, relating
to the uncertainty attached to the timing and amount of principal and interest
payments; interest rate risk, relating to the economic effects of changing
interest rates; real estate risk, relating to changes in property values due to
changing local economic and demographic conditions; and liquidity risk, relating
to holding investments for which there is no active secondary market, such as
private fixed maturity securities and commercial mortgage loans. Guarantee
Life's principal methods for managing credit risk are credit quality analyses of
each issuer, diversification and asset allocation. Guarantee Life's principal
method for managing interest rate risk is asset/liability management. Guarantee
Life's principal methods of managing real estate risk are geographic and
property diversification, annual property analysis and inspections and periodic
analysis of regional and local economic and demographic statistics. Guarantee
Life's principal methods for managing liquidity risk are asset allocation,
maintenance of a portfolio of public fixed maturity securities in an amount
greater than 50% of invested assets, and maintenance of a bank line of credit.
In recent years, Guarantee Life has emphasized investments in fixed maturity
securities which, as of December 31, 1996, comprised 83.5% of the carrying value
of invested assets. Future investment activity will continue to be focused
mainly on investment grade public and private fixed maturity securities, which
comprised 95.4% of fixed maturity securities as of December 31, 1996, and, to a
lesser extent, fixed-rate commercial mortgage loans. During the past four years,
the effective yield on Guarantee Life investment portfolio has declined from
7.8% in 1993 and 1994, to 7.5% in 1996. This decline is primarily due to lower
reinvestment rates for fixed maturity securities purchased in recent periods.
Investment Monitoring and Valuation
As a part of Guarantee Life's investment management process, it regularly
monitors invested assets. Fixed maturity securities are reviewed upon receipt of
the obligor's financial statements, generally quarterly, for financial
performance and compliance with financial covenants. Generally, Guarantee Life
reviews its commercial mortgage loan portfolio and identifies monthly all
commercial mortgage loans where certain objective or subjective characteristics
cause management to conclude such loans require increased management attention.
Detailed property analyses and property inspections are performed annually for
each commercial mortgage loan. Guarantee Life generally requires borrowers to
submit financial statements for annual review.
Guarantee Life has policies and procedures which management believes value
invested assets properly and consistently. Certain fixed maturity securities are
classified as available-for-sale, and therefore are carried at fair value in
Guarantee Life's consolidated financial statements. Public fixed maturity
securities are carried principally at fair value, and investment grade private
fixed maturity securities are carried principally at amortized cost. Below
investment grade private fixed maturity securities are carried principally at
fair value, which is derived by an independent consultant based on actual bids
or credit quality, duration, remaining average life and yield spreads for
similar securities. Mortgage loans on real estate are carried at unpaid
principal balance net of unamortized discounts and valuation allowances. The
valuation allowances on mortgage loans are based on anticipated losses expected
by management.
13
<PAGE>
Fixed Maturity Securities
The following table provides a comparison of the carrying value, fair value and
amortized cost of fixed maturity securities owned by Guarantee Life as of
December 31, 1996.
Fixed Maturity Securities
Carrying Value, Fair Value and Amortized Cost
<TABLE>
<CAPTION>
December 31, 1996
-------------------------------
Carrying Amortized
Value Fair Value Cost
-------- ---------- ---------
(In Millions)
<S> <C> <C> <C>
Public $595.3 $595.3 $584.8
Private 318.6 331.3 320.8
------ ------ ------
Total $913.9 $926.6 $905.6
====== ====== ======
</TABLE>
Guarantee Life's portfolio of investment grade fixed maturity securities is
well diversified by number and type of issuer. As of December 31, 1996,
investment grade fixed maturity securities included the securities of over 427
issuers, with 616 different issues of securities, with no issuer, other than
securities retained in the 1992 securitization of commercial mortgage loans and
obligations of the United States government or its agencies, representing more
than 1.1% of investment grade fixed maturity securities. As of December 31,
1996, none of these investments were classified as a problem investment or had
been restructured.
The following table sets forth the credit quality, by NAIC designation and
S&P's rating equivalents, of fixed maturity securities as of December 31, 1996.
Fixed Maturity Securities by NAIC Designation
<TABLE>
<CAPTION>
December 31, 1996
---------------------------------------------------------------
Public Private Total
-------------------- -------------------- --------------------
NAIC Standard & Poor's Amortized % Amortized % Amortized %
Designation Equivalent Designation Cost of Total Cost of Total Cost of Total
- ------------- ---------------------- --------- --------- --------- --------- --------- ---------
(Dollars in Millions)
<C><S> <C> <C> <C> <C> <C> <C>
1 A- or Higher $485.9 83.1% $174.3 54.3% $660.2 72.9%
2 BBB- to BBB+ 95.7 16.4 108.0 33.7 203.7 22.5
------ ----- ------ ----- ------ -----
Total investment grade 581.6 99.5 282.3 88.0 863.9 95.4
3 BB to BB+ 3.2 0.5 15.8 4.9 19.0 2.1
4 B 0.0 0.0 11.6 3.7 11.6 1.3
5 CCC or lower 0.0 0.0 10.3 3.2 10.3 1.1
6 In or near default 0.0 0.0 0.8 0.2 0.8 0.1
------ ----- ------ ----- ------ -----
Total below investment grade 3.2 0.5 38.5 12.0 41.7 4.6
------ ----- ------ ----- ------ -----
Total $584.8 100.0% $320.8 100.0% $905.6 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
Guarantee Life maintains significant investments in private fixed maturity
securities because of the generally higher nominal yield available relative to
comparably rated public fixed maturity securities, more restrictive financial
and business covenants available in private fixed maturity security loan
agreements and stronger prepayment protection. Although private fixed maturity
securities are not registered with the SEC and generally are less liquid than
public fixed maturity securities, restrictive financial and business covenants
included in private fixed maturity security loan agreements are generally
designed to offset the impact of their increased liquidity risk. Substantially
all of the private fixed maturity securities that Guarantee Life holds are
participations in issues that are also owned by other investors. In addition,
some of the private fixed maturity securities are rated by nationally recognized
rating agencies and substantially all have been assigned a rating designation by
the NAIC Securities Valuation Office. To the extent that such private fixed
maturity securities are not rated by nationally recognized rating agencies,
Guarantee Life assigns a rating for internal monitoring purposes that it
believes generally emulates methodologies employed by nationally recognized
rating agencies.
MBS constitute a core position within Guarantee Life's fixed maturity
securities investments. MBS investments include residential MBS, commercial MBS
and securities retained in the 1992 securitization of Guarantee Life's
commercial mortgage loans. As of December 31, 1996, MBS were $250.1 million, or
27.6% (based on amortized cost), of fixed maturity securities, of which $108.7
million, or 43.5%, of MBS were guaranteed by the U.S. government or an agency of
the U.S. government. Retained securitized bonds were $51.1 million, or 20.4%, of
MBS as of December 31, 1996.
14
<PAGE>
Guarantee Life has established specific investment guidelines for the
management of MBS. All MBS, other than retained subordinate tranches of the
securitized mortgages, must be rated "Aa3/AA-" or higher by one or more
nationally recognized rating agencies when purchased. As of December 31, 1996,
all MBS owned by Guarantee Life, excluding the $29.9 million in amortized cost
of subordinate tranches of the retained securitized mortgages, were so rated.
Guarantee Life limits total MBS investments (excluding the retained senior and
subordinate tranches of the securitized mortgages) to not more than 25% of
invested assets. Guarantee Life has diversification requirements among the three
agency issuers of MBS and limits non-agency "whole loan" MBS and "commercial"
MBS to 20% of total MBS investments. In addition, each type of MBS is limited to
10% of total invested assets.
The objective of Guarantee Life's MBS investments is to provide incremental
return, while maintaining reasonable liquidity and cash flow stability.
Guarantee Life employs a disciplined analytical approach, whereby each MBS is
evaluated to determine its interest rate sensitivity and average life
variability. In general, Guarantee Life seeks investments which provide improved
cash flow stability through either implicit or explicit prepayment protection.
Investments with implicit prepayment protection can take the form of pass-
throughs or CMOs backed by seasoned pools of loans which have already had ample
opportunity to refinance but have failed to do so. Explicit prepayment
protection can take the form of prepayment lockouts, yield maintenance
provisions or prepayment penalties, which are common features of multifamily
MBS, commercial MBS and FHA-insured project loans. Guarantee Life's MBS
investments do not include interest-only securities or principal-only
securities, which are limited by Nebraska law, or other MBS which may exhibit
extreme market value volatility.
Commercial Mortgage Loans
Commercial mortgage loans constituted $69.9 million of Guarantee Life's $70.2
million mortgage loan portfolio. Substantially all commercial mortgage loans
are made on a full or partial recourse basis and consist of fixed-rate first
mortgage loans on completed properties. As of December 31, 1996 there were 98
individual commercial mortgage loans all of which were first mortgage loans, and
all bore a fixed interest rate.
The following table sets forth the distribution, by property type and for the
top five states, of Guarantee Life's commercial mortgage loans based on unpaid
principal balance as of December 31, 1996.
Composition of Commercial Mortgage Loan Portfolio
by Property Type and Top Five States
<TABLE>
<CAPTION>
December 31, 1996
------------------------------
Amount % of Total
------ ----------------------
(Dollars in Millions)
<S> <C> <C>
Property Type
Office $19.2 27.5%
Medical Office 1.4 2.0
Retail 11.5 16.5
Apartment 9.6 13.7
Industrial 23.5 33.6
Other 4.7 6.7
----- -----
Total $69.9 100.0%
===== =====
Top Five States
New Mexico $10.0 14.3%
Indiana 8.2 11.7
Nebraska 7.1 10.2
Arizona 6.7 9.6
Michigan 6.4 9.2
</TABLE>
Substantially all of the commercial mortgage loans were originated by Guarantee
Life through mortgage loan correspondents and were not purchased from third
parties. Guarantee Life's investment policy with regard to the origination of
new commercial mortgage loans involves a review of the economics of the property
being financed, adherence to guidelines that provide for diversification of
Guarantee Life's commercial mortgage loan portfolio by property type and
geographic region and prevailing industry lending practices, including, among
others, an assessment of environmental risk. Current guidelines for new
commercial mortgage loans generally require a loan-to-value ratio of not greater
than 75% at the time of origination. Guarantee Life annually estimates the
current loan-to-value ratios of its commercial mortgage loans based on an
analysis of the operating statements of each mortgaged property.
15
<PAGE>
The commercial mortgage loan portfolio includes both amortizing and balloon
loans. Management defines balloon loans to be commercial mortgage loans for
which the final principal payment is at least twice as large as any other
scheduled payment due thereon. As of December 31, 1996, 86.3% of the commercial
mortgage loan portfolio consisted of commercial mortgage loans that provided for
significant or complete amortization prior to final maturity.
The following table sets forth the maturity and principal repayment schedule
for the commercial mortgage loan portfolio as of December 31, 1996.
Commercial Mortgage Loan Scheduled Principal Repayments
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------
Maturity Payments All Other Annual
Year on Balloon Loans Loan Payments Total % of Total
- ------ ----------------- ------------- ------ ----------
(Dollars in Millions)
<S> <C> <C> <C> <C>
1997 2.1 3.0 5.1 7.3
1998 1.5 3.2 4.7 6.7
1999 0.0 3.5 3.5 5.0
2000 1.0 3.8 4.8 6.9
2001-2019 5.0 46.8 51.8 74.1
---- ----- ----- -----
Total $9.6 $60.3 $69.9 100.0%
==== ===== ===== =====
</TABLE>
The high quality of Guarantee Life's commercial mortgage loan portfolio is
evidenced by its delinquency experience. As of December 31, 1996, Guarantee Life
had no commercial mortgage loans classified as either delinquent or in
foreclosure although $3.3 million, or 4.7%, of Guarantee Life's total mortgage
portfolio was classified as restructured.
In December 1992, Guarantee Life securitized 195 commercial mortgage loans with
a then-outstanding aggregate principal balance of $131.1 million. The primary
purpose of this securitization was to convert the commercial mortgage loans into
cash, which was then reinvested, and fixed maturity securities to enhance
Guarantee Life's liquidity, overall investment quality and long-term economic
value. Guarantee Life contributed these commercial mortgage loans to a Delaware
business trust (GMLC Trust), which transferred the commercial mortgage loans to
another trust (the "REMIC Trust") in exchange for certificates representing four
classes of fixed maturity securities, with an aggregate original principal
balance of $131.1 million, and a residual interest in the REMIC Trust, which is
classified on Guarantee Life's balance sheet as other invested assets. Guarantee
Life owns the sole beneficial interest in GMLC Trust. Payments on the fixed
maturity securities and distributions on the residual interest, if any, are made
from payments received on these commercial mortgage loans. The senior fixed
maturity securities (the "Senior Certificates") were issued in two series. The
Class A-1 series, with an aggregate original principal balance of $77.0 million
entitled to the first scheduled payments of principal, was sold to third-party
investors without recourse to Guarantee Life or GMLC Trust. GMLC Trust retained
the Class A-2 series of the Senior Certificates, with an aggregate original
principal balance of $21.3 million, the remaining $32.8 million of fixed
maturity securities (the "Subordinate Securities") and the residual interest. If
payments received on the commercial mortgage loans are insufficient to make
payments on the fixed maturity securities, any such shortfall will generally be
allocated first to the residual interest and then to the Subordinate Securities,
until the total outstanding balance of the Subordinate Securities is reduced to
zero. If, at any time, the aggregate outstanding principal balance of the Senior
Certificates is greater than the outstanding balance of the commercial mortgage
loans, both series of the Senior Certificates begin to share principal payments
on a pro rata basis.
16
<PAGE>
The following table presents the composition of the securitized commercial
mortgage loans based on unpaid principal balance by property type and for the
top five states as of December 31, 1996.
Composition of Securitized Commercial Mortgage Loans
by Property Type and Top Five States
<TABLE>
<CAPTION>
December 31, 1996
-------------------------------------------------
Amount % of Total
-------- ------------
(Dollars in Millions)
Property Type
<S> <C> <C>
Office $ 8.4 12.3%
Medical Office 11.6 17.0
Retail 14.8 21.6
Apartment 10.8 15.8
Industrial 21.6 31.6
Other 1.2 1.7
----- -----
Total $68.4 100.0%
===== =====
Top Five States
California $17.7 25.9%
Oregon 11.9 17.4
Washington 5.2 7.6
Nebraska 5.0 7.3
Nevada 3.8 5.6
</TABLE>
All of the commercial mortgage loans securitized in 1992 that have subsequently
matured have been paid as scheduled through December 31, 1996. At December 31,
1996, one of the securitized loans, with a balance of $1.8 million, is in
foreclosure. Management does not expect to realize a loss on this loan.
Other Invested Assets
Guarantee Life held $67.5 million of policy loans on individual insurance
products as of December 31, 1996. Of these policy loans, 71.2% were on
traditional life policies and 28.8% were on universal life policies and
annuities. Policy loans are permitted to the extent of a policy's contractual
limits and are fully collateralized by policy cash values. Loan rates are fixed
in the contracts and range from 4.8% to 7.4%. The weighted average policy loan
interest rates were 6.2%, 6.1%, and 6.0%, as of December 31, 1996, 1995 and
1994, respectively. Since all policy loan interest is payable in advance, these
interest rates are lower than the annual effective yields. For universal life
products, the policy loan portion of the account value is credited the
guaranteed rate, 4.0% to 5.5% depending on the product. For traditional
dividend-paying policies, dividends reflect each policy's loan activity.
Guarantee Life held $33.1 million of other invested assets (including $23.3
million of short-term investments) on December 31, 1996. Other invested assets
include the residual interest of $9.6 million in the GMLC Trust and various oil
and gas investments aggregating $1.2 million. Other invested assets are net of a
valuation allowance of $2.1 million.
Competition
Guarantee Life competes with a large number of other insurers, managed care
providers and non-insurance financial services companies, such as banks, broker-
dealers and mutual funds, many of whom have greater financial resources, offer
alternative products and, with respect to other insurers, may have higher
ratings than Guarantee Life Insurance. Competition exists for employer groups,
individual consumers and agents and other distributors of insurance products.
Most currently insured employer groups are underwritten on an annual basis, and
employers may seek competitive quotations from several sources prior to renewal.
National banks, with their pre-existing customer bases for financial services
products, may pose increasing competition in the future to insurers who sell
annuities. Guarantee Life may also face increased competition with respect to
group core products as other group health insurers enter these markets to
diversify their businesses.
Guarantee Life must attract and maintain productive agents and brokers to sell
its insurance and annuity products. Strong competition exists among insurance
companies for agents and brokers with demonstrated ability. Management believes
that
17
<PAGE>
key bases of competition among insurance companies for agents and brokers with
demonstrated ability include the services provided to, and relationships
developed with, these agents and brokers in addition to compensation and product
structure.
Employees
As of December 31, 1996, Guarantee Life had 557 full- and part-time employees.
None of Guarantee Life's employees are covered by a collective bargaining
agreement. Management believes its relations with employees are satisfactory.
Insurance Regulation
State Supervision
Guarantee Life Insurance is subject to extensive regulation and supervision by
each of the 48 states and the District of Columbia in which it holds a
certificate of authority to transact its insurance business. The extent of
state regulation varies, but each of these jurisdictions has laws and
regulations governing standards of solvency, levels of reserves and business
conduct. In addition, statutes and regulations require the licensing of agents,
the approval of policy forms and, for certain lines of insurance, the approval
or filing of rates. State statutes and regulations also prescribe the permitted
types and concentration of investments by insurance companies. Guarantee Life
Insurance and its two insurance subsidiaries are required to file detailed
annual financial statements, as well as numerous jurisdiction-specific financial
data reports, with departments of insurance in each of the 48 states and the
District of Columbia.
Examinations. Nebraska law requires the Nebraska Department of Insurance (the
Department) to conduct periodic financial examinations of each domestic
insurance company and its operations. No material issues were raised by the
Department in connection with its financial examination of Guarantee Life
Insurance for the four-year period ending December 31, 1993. The Department
recently completed its market conduct examination of Guarantee Life Insurance as
of June 30, 1996. No material issues were raised by the Department in its
report.
Dividend Restrictions. The payment of dividends by Guarantee Life Insurance to
the Holding Company 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 the statutory limitation of 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.
Guarantee Life Insurance declared a $10 million dividend to the Holding Company,
with a record date of November 29, 1996.
Regulation of Investments. Guarantee Life Insurance is subject to Nebraska laws
and regulations that require diversification of its investment portfolio and
limit the amount of investments in certain investment categories such as below
investment grade fixed maturity securities, equity real estate and equity
securities. Failure to comply with these laws and regulations would cause
investments exceeding regulatory limitations to be treated as nonadmitted assets
for purposes of measuring statutory surplus. As of December 31, 1996, Guarantee
Life Insurance's investments complied in all material respects with all such
laws and regulations.
Holding Company Regulation. The Holding Company is subject to Nebraska's
Insurance Holding Company System Act, which generally contains certain reporting
requirements as well as restrictions on transactions between an insurer and its
holding company or one or more of either of their affiliates. Under this act,
the Director may, under certain circumstances, prevent transactions between
Guarantee Life Insurance and any of its affiliates, including the Holding
Company, which involve certain sales, purchases, exchanges, loans or extensions
of credit, dividends in excess of certain limits or investments that require the
prior approval of the Director.
The insurance laws and regulations of Nebraska may delay or impede a business
combination involving the Holding Company. Under Nebraska law, through 2000, no
person other than Guarantee Life Insurance shall, without the prior approval of
the Director, directly or indirectly offer to acquire or acquire in any manner
the beneficial ownership of five percent or more of any class of a voting
security issued by Guarantee Life Insurance or the Holding Company. Nebraska law
requires that any proposed tender offer, acquisition or attempted acquisition of
stock that would result in an acquisition of control of an insurance holding
company be approved by the Director prior to the undertaking of any such action.
Federal Initiatives.
Although the federal government generally does not directly regulate the
insurance business, federal initiatives often have an impact on the business in
a variety of ways. Current and proposed federal measures which may significantly
affect the insurance business include employee benefits regulations, controls on
medical care cost, medial entitlement programs such as
18
<PAGE>
Medicare, changes to the insurance industry anti-trust exemption, minimum
solvency requirements and removal of barriers preventing banks from engaging in
the insurance, annuity and mutual fund business.
The federal government has frequently proposed changes to the current health
care delivery system to address both affordability and availability issues. The
ultimate scope and effective date of any health care reform proposals are
unknown at this time and are likely to be modified as they are considered for
enactment by Congress. It is anticipated that these proposals may adversely
affect certain products in group insurance business, mainly excess loss. In
addition to the federal initiatives, a number of states are considering
legislative programs that are intended to affect the accessibility and
affordability of health care. Some states have recently enacted health care
reform legislation. These various state programs (which could be preempted by
any federal program) may also adversely affect group insurance business.
19
<PAGE>
ITEM 2. Properties.
Guarantee Life's headquarters are located at 8801 Indian Hills Drive, Omaha,
Nebraska and consist of 200,000 square feet of office space owned by Guarantee
Life, including a 60,000 square foot office building constructed in 1995. In
addition, Guarantee Life leases the space used by its group sales offices under
short-term leases. Management believes that, with the completion of the
additional office building, its facilities will be adequate for its anticipated
needs in all material respects.
ITEM 3. Legal Proceedings.
Guarantee Life is a defendant in actions arising out of its insurance
operations and is from time to time involved as a party in various governmental
and administrative proceedings. While the outcome of such pending or future
litigation cannot be predicted, as of the date hereof, Guarantee Life does not
believe that any such pending litigation will have a material adverse effect on
Guarantee Life's financial condition or results of operations.
ITEM 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the shareholders of the Holding Company
during the fourth quarter of 1996.
PART II.
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The information required by this Item is incorporated herein by reference from
"Shareholder Information" on page 54 in Guarantee Life's 1996 Annual Report to
Shareholders.
ITEM 6. Selected Financial Data.
The information required by this Item is incorporated herein by reference from
"Summary Consolidated and Operating Data" on page 15 in Guarantee Life's 1996
Annual Report to Shareholders. Net income from continuing operations was $1.48
per share in 1996. Cash dividends declared were $.16 per share in 1996.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The information required by this Item is incorporated herein by reference from
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 16 - 25 in Guarantee Life's 1996 Annual Report to
Shareholders.
ITEM 8. Financial Statements and Supplementary Data.
The information required by this Item is incorporated herein by reference from
pages 26 - 53 in Guarantee Life's 1996 Annual Report to Shareholders.
ITEM 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
PART III.
ITEM 10. Directors and Executive Officers of the Registrant.
The information required by this Item will be set forth in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held May 8, 1997,
incorporated herein by reference.
ITEM 11. Executive Compensation.
The information required by this Item will be set forth in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held May 8, 1997,
incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item will be set forth in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held May 8, 1997,
incorporated herein by reference.
ITEM 13. Certain Relationships and Related Transactions.
The information required by this Item will be set forth in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held May 8, 1997,
incorporated herein by reference.
20
<PAGE>
PART IV.
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)
(1) The following financial statements are incorporated herein by reference
under Item 8, Guarantee Life's 1996 Annual Report to Shareholders, filed as
Exhibit 13:
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
(2) The following financial statement schedules are filed as part of this
Report:
Schedule I Summary of Investments
Schedule II Condensed Financial Information of Registrant
Schedule III Supplementary Insurance Information
Schedule IV Reinsurance
Schedule V Valuation and Qualifying Accounts
All other schedules have been omitted as the required information is
inapplicable, immaterial, or the information is included in the consolidated
financial statements or related notes.
(3) The following exhibits are being filed pursuant to Item 14(c) of Form 10-K.
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****
13 1996 Annual Report to Shareholders
21 Subsidiaries of the Registrant**
23 Consent of KPMG Peat Marwick LLP
24 Powers of Attorney***
27 Financial Data Schedule
- --------------------------------------------------------------------------------
21
<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).
****Incorporated by reference as an exhibit to Registrant's Form 10-Q for the
fiscal quarter ended September 30, 1996 (Commission File No. 0-26788).
(b) One Current Report on Form 8-K was filed during the last fiscal quarter of
the period covered by this Report, in connection with the shareholder rights
plan discussed in footnote (1) to the consolidated financial statements.
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.
By /s/ RICHARD A. SPELLMAN
------------------------------------------
Richard A. Spellman
Senior Vice President, General Counsel &
Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on the 28th day of March, 1997.
<TABLE>
<CAPTION>
Signatures Title
- --------------------------- ---------------------------------------------------
<S> <C>
/s/ ROBERT D. BATES* Chairman of the Board,
- --------------------------- Director, President and Chief Executive Officer
Robert D. Bates (Principal Executive Officer)
/s/ WILLIAM L. BAUHARD Senior Vice President and Chief Financial Officer
- --------------------------- (Principal Financial Officer)
William L. Bauhard
/s/ FREDERICK M. BEKINS* Director
- ---------------------------
Frederick M. Bekins
/s/ CLYDE R. BELL* Director
- ---------------------------
Clyde R. Bell
/s/ JOHN R. COCHRAN*
- --------------------------- Director
John R. Cochran
/s/ EUGENE A. CONLEY*
- --------------------------- Director
Eugene A. Conley
/s/ THEODORE C. COOLEY* Director
- ---------------------------
Theodore C. Cooley
/s/ THOMAS T. HACKING* Director
- ---------------------------
Thomas T. Hacking
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Signatures Title
- --------------------------- ----------------------------------------------
<S> <C>
/s/ JAMES M. McCLYMOND* Director
- ---------------------------
James M. McClymond
/s/ BERNARD W. REZNICEK* Director
- ---------------------------
Bernard W. Reznicek
/s/ ADRIAN J. SCRIBANTE* Director
- ---------------------------
Adrian J. Scribante
/s/ JANICE D. STONEY* Director
- ---------------------------
Janice D. Stoney
/s/ WILLIAM F. WELSH II* Director
- ---------------------------
William F. Welsh II
</TABLE>
*By Richard A. Spellman,
as attorney -in-fact
/s/ RICHARD A. SPELLMAN
---------------------------------------------------
Richard A. Spellman, as attorney-in-fact for the
individuals as indicated
23
<PAGE>
INDEX TO FINANCIAL STATEMENT SCHEDULES
Supplementary Financial Statement Schedules of The Guarantee Life Companies Inc.
Independent Auditors' Report
SCHEDULE I --Summary of Investments
SCHEDULE II --Condensed Financial Information of Registrant
SCHEDULE III --Supplementary Insurance Information
SCHEDULE IV --Reinsurance
SCHEDULE V --Valuation and Qualifying Accounts
All other schedules have been omitted as the required information is
inapplicable, immaterial or the information is included in the consolidated
financial statements or related notes.
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of The Guarantee Life Companies Inc.:
Under date of February 14, 1997, we reported on the consolidated balance sheets
of The Guarantee Life Companies Inc. and subsidiaries (Guarantee Life) as of
December 31, 1996 and December 31, 1995, and the related consolidated statements
of income, shareholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1996, as contained in the 1996 Annual
Report to Shareholders. These consolidated financial statements and our report
thereon are incorporated by reference in the annual report on Form 10-K for the
year 1996. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related consolidated financial
statement schedules as listed in the accompanying index. These financial
statement schedules are the responsibility of Guarantee Life's management. Our
responsibility is to express an opinion on these financial statement schedules
based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, as contained
in the 1996 Annual Report to Shareholders, Guarantee Life adopted Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities, in 1994.
KPMG Peat Marwick LLP
Omaha, Nebraska
February 14, 1997
24
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
SCHEDULE I--SUMMARY OF INVESTMENTS
December 31, 1996
(In Thousands)
<TABLE>
<CAPTION>
Fair Carrying
Type of Investments Cost (1) Value Value
- ---------------------------------------- ----------- ---------- ----------
<S> <C> <C> <C>
Fixed maturities:
U.S. Treasury securities and
obligations of U.S. $ 117,624 $ 119,834 $ 119,229
government corporations and
agencies
Obligations of states and 10,256 10,340 10,336
political subdivisions
Debt maturities issued by foreign 12,439 13,207 13,207
governments
Corporate securities 515,105 534,476 522,420
Mortgage-backed securities 250,184 248,713 248,713
---------- ---------- ----------
Total fixed maturities 905,608 926,570 913,905
---------- ---------- ----------
Equity securities:
Common stocks of banks, trusts and
insurance companies 3,009 2,946 2,946
Mortgage loans 70,156 72,181 70,156
Policy loans 67,539 62,091 67,539
Investment real estate 6,620 12,000 6,620
Other long-term investments 9,838 9,838 9,838
Short-term investments 23,270 23,270 23,270
---------- ---------- ----------
Total investments $1,086,040 $1,108,896 $1,094,274
========== ========== ==========
</TABLE>
(1) Fixed maturities at original cost reduced by repayments and adjusted for
amortization of premiums or accrual of discounts.
Table above includes Closed Block invested assets with cost of $297,190, fair
value of $299,366, and carrying value of $299,807.
Available-for-sale fixed maturities are shown in the consolidated balance
sheet at fair value. Held-to-maturity fixed maturities are shown in the
consolidated balance sheet at amortized cost adjusted for other than temporary
fair value declines.
Common and nonredeemable preferred stocks are shown in the consolidated balance
sheet at fair value.
Mortgage loans are shown in the consolidated balance sheet at unpaid balances
adjusted for discount accruals and allowances for possible losses.
Policy loans are carried at unpaid balances.
Real estate is shown in the consolidated balance sheet at depreciated cost less
allowances for other than temporary declines in value.
Other invested assets are shown in the consolidated balance sheet at amortized
cost less allowances for other than temporary declines in value and allowances
for possible losses.
25
<PAGE>
THE GUARANTEE LIFE COMPANIES INC.
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(In Thousands)
<TABLE>
<CAPTION>
As of and for the period ended
December 31,
Balance Sheet 1996 1995
- ---------------------------------------- --------------- --------------
<S> <C> <C>
Investment in consolidated subsidiaries $179,612 $184,895
Fixed maturities available for sale, at 17,502 -
fair value (amortized cost, $17,512)
Other invested assets 1,294 -
-------- --------
Total invested assets 198,408 184,895
Cash and cash equivalents 181 22,662
Dividends receivable from subsidiary 10,000
Other assets 170 13
-------- --------
Total assets $208,759 $207,570
======== ========
Accrued liabilities $ 471 $ 1,302
Income taxes (384) 6
-------- --------
Total liabilities 87 1,308
Shareholders' equity:
Common stock 99 99
Additional paid-in capital 191,226 191,226
Retained earnings 13,435 11
Unrealized appreciation of
invested securities carried at
fair value, net 3,912 14,926
-------- --------
Total shareholders' equity 208,672 206,262
-------- --------
Total liabilities and shareholders' $208,759 $207,570
equity ======== ========
Income Statement
----------------
Equity in earnings of subsidiaries $ 15,723 $ -
Investment income, net 1,057 17
General and administrative expenses 2,146 -
-------- --------
Income before income taxes 14,634 17
Income tax (benefit)expense (381) 6
-------- --------
Net income $ 15,015 $ 11
======== ========
</TABLE>
26
<PAGE>
THE GUARANTEE LIFE COMPANIES INC.
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(CONTINUED)
(In Thousands)
<TABLE>
<CAPTION>
For the period ended
December 31,
1996 1995
---------- ----------
Cash Flow
---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 15,015 $ 11
Adjustments to reconcile net income to -
net cash provided by operating ========
activities
Equity in earnings of subsidiaries (15,723) -
Change in accrued investment (157) (13)
income
Change in accounts payable 471 -
Change in income taxes payable (390) 6
Other, net 37 -
-------- --------
Net cash provided (used) by operations (747) 4
-------- --------
Cash flows from investing activities:
Contribution to insurance - (12,101)
subsidiary ========
Purchases of fixed maturities (17,547) -
========
Net change in short term (1,294) -
investments --------
Net cash used by investing activities (18,841) (12,101)
-------- --------
Cash flows from financing activities:
Net proceeds from initial public - 33,457
offering
Change in unpaid IPO expenses (1,302) 1,302
Dividends paid to shareholders (1,591) -
-------- --------
Net cash provided by financing (2,893) 34,759
activities -------- --------
Net increase (decrease) in cash and (22,481) 22,662
cash equivalents
Cash and cash equivalents at beginning 22,662 -
of period -------- --------
Cash and cash equivalents at end of $ 181 $ 22,662
period ======== ========
</TABLE>
These condensed financial statements should be read in conjunction with the
consolidated financial statements and the accompanying notes thereto.
27
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION
(In Thousands)
<TABLE>
<CAPTION>
Future
Policy
Benefits,
Revenue
Policyholder
Account Premium
Deferred Balances Other
Policy and Unearned and Net Policy Policy Insurance
Acquisition Claims Premium Policyholder Investment Holder Acquisition Operating
Segment Cost Payable Revenue Assessments Income Benefits Costs Expenses
- ------------------------------- ----------- ------------ -------- ------------ ---------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1996
Group $ - 117,622 569 153,623 9,468 92,568 36,388 35,989
Individual 91,893 888,478 10,110 49,852 65,389 61,075 13,165 17,489
Corporate - - - - 1,057 - - 2,146
------- --------- ------ ------- ------ ------- ------ ------
Total 91,893 1,006,100 10,769 203,475 75,914 153,643 49,553 55,624
======= ========= ====== ======= ====== ======= ====== ======
Year ended December 31, 1995:
Group $ - 119,455 534 163,083 10,217 106,276 38,594 32,934
Individual 85,605 826,511 9,971 45,428 64,381 59,146 8,979 18,051
Corporate - - - - 17 - - -
------- --------- ------ ------- ------ ------- ------ ------
Total 85,605 945,966 10,505 208,511 74,615 165,422 47,573 50,985
======= ========= ====== ======= ====== ======= ====== ======
Year ended December 31, 1994:
Group $ - 110,857 513 111,869 9,450 72,739 33,513 19,279
Individual 90,168 804,801 9,489 46,694 60,969 57,451 7,272 19,238
------- --------- ------ ------- ------ ------- ------ ------
Total 90,168 915,658 10,002 158,563 70,419 130,190 40,785 38,517
======= ========= ====== ======= ====== ======= ====== ======
</TABLE>
The table above includes assets and liabilities allocated to the Closed Block
as of December 31, 1996 and 1995, as well as revenues and expenses for the year
ending December 31, 1996.
28
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
SCHEDULE IV--REINSURANCE
(In Thousands)
<TABLE>
<CAPTION>
Gross Percentage
Amount Ceded Assumed of Amount
Before to Other From Other Net Assumed
Reinsurance Companies Companies Amount to Net
----------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Life insurance in force $29,116,078 $1,530,511 $339,044 $27,924,611 1.21%
=========== ========== ======== =========== ====
Premiums:
Life and annuity(1) (2) 112,345 4,893 781 108,233 0.90%
Accident and Health 135,531 40,915 626 95,242 0.66
----------- ---------- -------- -----------
Total premiums $ 247,876 $ 45,808 $ 1,407 $ 203,475 0.77
=========== ========== ======== =========== ====
Year ended December 31, 1995:
Life insurance in force $25,204,463 $1,268,329 $349,373 $24,285,507 1.44%
=========== ========== ======== =========== ====
Premiums:
Life and annuity(1) $ 101,650 $ 3,815 $ 1,345 $ 99,180 1.36%
Accident and health 152,724 45,410 2,017 109,331 1.84
----------- ---------- -------- -----------
Total premiums $ 254,374 $ 49,225 $ 3,362 $ 208,511 1.61
=========== ========== ======== =========== ====
Year ended December 31, 1994:
Life insurance in force $22,910,242 $1,154,046 $461,166 $22,217,362 2.08%
=========== ========== ======== =========== ====
Premiums:
Life and annuity(1) $ 95,626 $ 5,800 $ 1,830 $ 91,355 2.00%
Accident and health 133,430 67,845 1,322 67,208 1.97
----------- ---------- -------- -----------
Total premiums $ 229,056 $ 73,645 $ 3,152 $ 158,563 1.99
=========== ========== ======== =========== ====
- ---------------
</TABLE>
(1) Includes life insurance premiums and policyholder assessments.
(2) Includes gross amount of $22,113 and ceded amount of $328 attributable to
Closed Block.
The table above includes amounts attributable to the Closed Block.
29
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
<TABLE>
<CAPTION>
Beginning Charged to Ending
Description --------- Operations Deductions Balance
- ------------------------------------ Balance ---------- ---------- -------
---------
<S> <C> <C> <C> <C>
Year ended December 31, 1996:
Allowance for other invested $2,958 - 903 2,055
assets
Allowance for mortgage loans 744 92 30 806
====== ===== ===== =====
Year ended December 31, 1995:
Allowance for other invested $2,636 322 - 2,958
assets
Allowance for mortgage loans 523 221 - 744
====== ===== ===== =====
Year ended December 31, 1994:
Allowance for other invested $ - 2,636 - 2,636
assets
Allowance for bonds 2,118 - 2,118 -
Allowance for mortgage loans 822 141 440 523
====== ===== ===== =====
</TABLE>
30
<PAGE>
1 9 9 6 A n n u a l R e p o r t
[ARTWORK APPEARS HERE]
Building Value
[LOGO OF GUARANTEE LIFE APPEARS HERE]
<PAGE>
- -----------------
Table of Contents---------------------------------------------------------------
- -----------------
VISION
Introduction to Guarantee Life 1
LEADERSHIP
Chairman's Message 2
FOCUS
Guarantee Life and Its Performance 4
OPPORTUNITY, DIVERSITY & STRENGTH
Discussion of Guarantee Life's
Businesses and Operations 10
Financial Review 15
Shareholder Information 54
------------------
1996 Annual Report
------------------
<PAGE>
Our
Our Mission is to safeguard and enhance the financial security of our
customers while building shareholder wealth.
Mission
We are committed to:
Quality insurance products and services which satisfy customer needs
--
Outstanding service which exceeds customer expectations
--
Long-term, mutually beneficial relationships with our distributors
--
Ethical, honest conduct
--
Creating a challenging, rewarding, non-discriminatory workplace
that recognizes the value and diversity of our people while offering
them maximum opportunities
--
Helping to make our communities better places
in which to live and work
--
Ensuring our financial strength to meet future obligations by
professionally managing sales, expenses, assets and risks
<PAGE>
B u i l d i n g R e l a t i o n s h i p s f o r L i f e(R)
--------------------
Building Value
--------------------
[ARTWORK APPEARS HERE]
Vision
Building Value requires vision, leadership, focus, the ability to recognize
and act on opportunity, an appreciation for diversity, as well as operational
and financial strength.
In 1996, The Guarantee Life Companies Inc. displayed these attributes as it
successfully completed its first year as a publicly owned company. Guarantee
Life built value by bringing new benefits to its relationships with customers,
shareholders, distributors and employees; by achieving increased earnings; by
marketing new products and services; and by developing its most important
asset - its people.
Guarantee Life continually examines its vision and focus to maintain the
highest standard of business practices. Guarantee Life's goals recognize that
neither value, nor the focus needed to attain it, are short-term endeavors.
The accomplishments of 1996 are a continuation of Guarantee Life's
96-year-old vision to achieve world-class status through leadership, focus,
opportunity, diversity, and strength.
1
<PAGE>
G u a r a n t e e L i f e 1 9 9 6 A n n u a l R e p o r t
[PHOTOGRAPH OF ROBERT D. BATES APPEARS HERE]
Leadership
Dear Fellow Shareholder:
Just over a year ago, Guarantee Life converted from a mutual to a publicly
owned life insurance company. This step was taken to give the Company greater
financial flexibility in the rapidly changing financial services industry. We
are pleased with our progress and momentum toward building value in this highly
competitive and consolidating environment.
Building value for customers, shareholders, distributors, and employees
should be a priority of every company today. In a time of accelerating change,
Guarantee Life has positioned itself to manage this effort with visionary
leadership, a motivated workforce, customer focus, and the ability to capitalize
on growth opportunities.
The Guarantee Life Companies Inc. is executing a growth strategy that
leverages the core strengths of our three operating areas. This strategy will
not only maximize future growth and profitability, but is delivering tangible
results today:
. Earnings per share from continuing operations, excluding realized capital
gains/losses, increased by 43.2% to $1.50 per share from $1.05 per share in
1995.
. Group insurance core product sales increased 43.0% to $49.2 million compared
to 1995 sales of $34.4 million.
. Sales of group insurance specialty products from our Group Special Markets
Division were $19.4 million, a 18.3% increase over 1995 sales of $16.4 million.
. Individual life insurance product sales increased over 22% to $6.5 million in
first year annualized premiums compared to $5.3 million in 1995.
. Individual annuity sales were $9.3 million, a 14.8% increase over 1995 sales
of $8.1 million. Much of this increase can be attributed to our new equity
indexed annuity product introduced in the third quarter.
2
<PAGE>
B u i l d i n g R e l a t i o n s h i p s f o r L i f e(R)
. The Company purchased a block of universal life insurance which added 21,000
policies to our Individual Insurance Business.
. Our Board of Directors increased the common stock dividend 20% to an annual
rate of $0.24 per share from $0.20 per share.
. Total shareholder return from the initial public offering through December 31,
1996 was 43.6%, compared to a 23.7% increase for the S&P 500 index for that same
period.
These accomplishments are the foundation for building value. To answer the
challenges of the insurance industry as it moves into the next century -
consolidation, competition, regulation, and changing customer needs and
demographics - Guarantee Life has determined an aggressive growth strategy. We
have analyzed and addressed our earnings sources, financial flexibility,
technological enhancements, product diversity, and distribution systems.
----------------------
Future
----------------------
Guarantee Life has moved boldly to position itself for growth. We have three
distinct businesses with different distribution systems and diverse product
offerings in growing markets.
Our Group Insurance Business is operated as two separate divisions. The
Employee Benefits Division, which we started in December 1991, is growing
rapidly. This growth can be attributed to our unique distribution and customer
service strategy. We have established a national distribution system of sales
offices to focus primarily on marketing while most administration and
underwriting is centralized in our home office. The location of our sales
offices in major cities across the country provides substantial market
opportunities and top sales talent for these offices. By year-end, we will
complete the implementation of process and technological improvements that will
reduce new case issuance time to half the industry average of 21 days.
The voluntary (employee-paid) products of our Employee Benefits Division
offer another significant market opportunity for Guarantee Life. Sales of these
products tripled in 1996 to $6 million from $2 million in 1995. We expect
voluntary product demand to remain strong as businesses explore various employee
benefit options to control costs. Our voluntary products are group products with
age-banded rating schedules that allow us to easily adjust rates, if necessary,
to maintain the integrity of our pricing and provide better value to the
customer.
Our other Group Insurance Business, the Special Markets Division, markets
specialty products through Third Party Administrators and Managing Group
Underwriters. The specialty products are excess loss, executive medical
reimbursement, and group life insurance. We intend to grow this business by
utilizing our distribution systems and by acquiring blocks of excess loss
business. Our growth strategy is carefully managed in a market having cyclical
characteristics and exceptional return potential.
Today, our Individual Insurance Business is well positioned to enhance
future value. Guarantee Life is becoming the "company of choice" for agents and
independent producers of regional marketing organizations. In 1996, we increased
our field force by over 37.0%. We have aligned outstanding service with a strong
product portfolio and attractive agent benefits. We are encouraged by the sales
momentum generated by these efforts. We intend to expand our product lines by
developing both equity indexed individual life insurance and annuity products.
We introduced our first equity indexed annuity product in August 1996 and expect
to have our second equity indexed product on the market by the end of 1997.
These products will meet increasing consumer needs to protect principal while
also providing the upside potential linked to the stock market. Because we
understand the life insurance business is volume driven, Guarantee Life intends
to grow this business internally and through selective acquisitions.
Much of this discussion has centered on the immense tasks being
accomplished by our associates in the Company. The success of our effort to
build value is closely linked to Guarantee Life's leadership and its motivated,
well-trained, and dedicated workforce. Our operations' management teams are
highly competent and have proven records of success. None of our accomplishments
this past year would have been possible without the efforts of our home office
and field associates, brokers, agents, distributors, and our Board of Directors.
I would like to thank all of them for their roles and commitment to the Company.
Together, we are dedicated to building value for our customers and you, our
shareholders. As I stated last year, our near-term objective is to achieve a 12%
return on equity as our primary financial objective.
I want to take this opportunity to recognize and publicly thank Gene Conley
who will be retiring from the Board of Directors on May 8, 1997. As my
predecessor, Gene very ably led Guarantee Life for almost 15 years and provided
a strong foundation from which we continue to build value. Gene's wise counsel
will be missed by the Board of Directors.
Sincerely,
/s/ Robert D. Bates
Robert D. Bates
Chairman of the Board,
President and Chief Executive Officer
3
<PAGE>
G u a r a n t e e L i f e 1 9 9 6 A n n u a l R e p o r t
GUARANTEE LIFE
Focus
4
<PAGE>
B u i l d i n g R e l a t i o n s h i p s f o r L i f e(R)
[PHOTOGRAPH APPEARS HERE]
- ---------------------
COMPANY PROFILE
- ---------------------
The stock of The Guarantee Life Companies Inc. trades on the Nasdaq
National Market System under the symbol GUAR. Most of the Company's business is
conducted by its wholly owned subsidiary, Guarantee Life Insurance Company.
Guarantee Life focuses its efforts on three diverse insurance business
operations, evaluating each of them on their own merits, while employing
different, yet complementary, operating strategies. In 1996, the Company
continued to take strategic steps toward better serving customers and operating
within markets that vary significantly.
In both the Group and Individual insurance markets, the Company competes
aggressively, protecting policyholders through a high quality investment
portfolio, a flexible capital position, and a strong balance sheet.
5
<PAGE>
G u a r a n t e e L i f e 1 9 9 6 A n n u a l R e p o r t
----------------------------
Guarantee Life Profile
----------------------------
A Company Built On A Firm Foundation, Fundamental Values, And A Sharp Vision
- --------------------------------------------------------------------------------
Financial Highlights ($ in millions except share data)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
========================================================================================================
<S> <C> <C> <C> <C> <C>
Statement of Income Selected Data
Premiums and policyholder
assessments, net/(1)/ $181.7 $208.6 $158.6 $141.1 $132.7
Total revenues/(1)/ 252.0 294.4 247.5 236.4 226.8
Total policyholder benefits,
expenses, and dividends/(1)/ 229.4 274.5 220.1 208.7 201.0
Income from continuing
operations before income taxes 22.6 19.9 27.4 27.7 25.8
Net income from continuing
operations 14.7 10.8 15.7 18.9 15.3
Earnings per share from continuing
operations/(2)/ $1.50 $1.05 $1.66 $1.74 $1.54
(Pro forma for 1992-95)
========================================================================================================
Balance Sheet Selected Data
Total invested assets $1,094.3 $1,056.1 $ 985.6 $ 950.0 $ 864.9
Total assets 1,301.7 1,280.8 1,188.0 1,152.8 1,069.8
Total liabilities 1,093.0 1,074.5 1,055.1 989.3 926.1
Total shareholders' equity 208.7 206.3 132.9 163.5 143.7
Book value per share/(3)/ $ 20.59 $ 19.23 $ 16.95 $ 16.44 $ 14.45
(Pro forma for 1992-94)
========================================================================================================
Other Selected Data
Revenues by segment:
Group insurance business $ 175.1 $ 182.2 $ 140.1 $ 125.6 $ 124.3
Individual insurance business/(4)/ 116.1 112.2 107.4 110.8 102.5
========================================================================================================
</TABLE>
(1) The results of the Closed Block (individual policies that were in force on
the effective date of the conversion to a stock company and which had a dividend
scale in effect for 1994) for the periods subsequent to December 26, 1995 are
reported on one line in the Consolidated Statements of Earnings. Accordingly,
the line-by-line statements of earnings data are not comparable for all periods
presented. Total assets and total liabilities include the assets and
liabilities of the Closed Block respectively, and therefore amounts are
comparable for all periods presented.
(2) Excluding realized capital gains/losses.
(3) Excluding unrealized appreciation/depreciation on invested assets, e.g.
FAS115.
(4) Including revenues from the Closed Block for 1996.
6
<PAGE>
B u i l d i n g R e l a t i o n s h i p s f o r L i f e(R)
Company History
The Guarantee Life Companies Inc. is an organization with a rich heritage.
In 1901, Guarantee Life Insurance Company began in Nebraska as a mutual
assessment association. The Company became a mutual legal reserve life insurance
company owned by policyholders in 1931 and changed its name to Guarantee Mutual
Life Company. In 1995, Guarantee Life Insurance Company became one of only a few
mutual life insurance companies in the nation, and the first in Nebraska, to
convert into a publicly owned life insurance organization.
Company Statistics
. $1.3 billion in assets
. $208.7 million shareholders' equity
. $28.9 billion of life insurance in force
. "A" (Excellent) rating by A.M. Best
. "A-" rating by Weiss Ratings Inc. (top 3% of all life insurance companies in
the U.S.)
. Licensed in 48 states and the District of Columbia
. 1.4 million Individual and Group customers
. 888 Individual field sales associates
. 21 Group Sales Offices
. 9,944,383 shares outstanding
Total Assets ($ in millions)
[BAR CHART APPEARS HERE]
<TABLE>
<S> <C>
1990 $792.2
1991 $926.9
1992 $1,069.8
1993 $1,152.8
1994 $1,188.0
1995 $1,280.8
1996 $1,301.7
</TABLE>
Guarantee Life's total assets surpassed $1 billion in 1992 and have grown
steadily to $1.3 billion at year-end 1996.
Total Revenues ($ in millions)
[BAR CHART APPEARS HERE]
<TABLE>
<S> <C>
1990 $173.0
1991 $208.9
1992 $226.8
1993 $236.4
1994 $247.5
1995 $294.4
1996 $292.3
</TABLE>
Total revenues, including the Closed Block, have nearly reached $300 million.
Revenues were down slightly in 1996 due to the discontinuation of a medical
product line and the close management of the excess loss product during a down
market cycle.
7
<PAGE>
G u a r a n t e e L i f e 1 9 9 6 A n n u a l R e p o r t
-------------------------------------------------
The Guarantee Life Organization
-------------------------------------------------
--------------------------------
The Guarantee
Life Companies Inc.
--------------------------------
-------------------------
Guarantee Life
Insurance Company
& Subsidiaries
-------------------------
- ------------ ------------ ------------
Group Investment Individual
Insurance Division Insurance
- ------------ ------------ ------------
- ------------ ------------
Employee Special
Benefits Markets
Division Division
- ------------ ------------
================================================================================
Guarantee Life consists of three insurance operations: the Group Insurance
Business, which includes the Employee Benefits Division and the Special Markets
Division; and the Individual Insurance Business. The Investment Division is
managed to support the specific product lines of the Group and Individual
Insurance Businesses.
-----------------------
Company Profile
-----------------------
Net Income From Continuing Operations ($ in millions)
<TABLE>
<S> <C>
1990 $17.4
1991 $20.5
1992 $15.3
1993 $18.9
1994 $15.7
1995 $10.8
1996 $14.7
</TABLE>
Net income was adversely impacted in 1994, 1995, and 1996 by the investment made
in the rapidly growing Employee Benefits Division.
Group Insurance
Business
===================================
Employee Benefits Division
Target Market:
Businesses with fewer than 500 employees
Products:
Group core products including term life, accidental death & dismemberment,
short-term disability, long-term disability, and dental
Voluntary products including term life, accidental death & dismemberment, short-
term disability, long-term disability, dental, and vision
Distribution:
National distribution system of 21 sales offices which market products through
employee benefit firms and brokers
Special Markets Division
Target Market:
Small- and medium-employer groups of 50 or more lives with self-funded medical
plans
Products:
Specialty medical products including excess loss insurance, medical
reimbursement for business executives, and group term life insurance
Distribution:
Managing Group Underwriters (MGUs), Third Party Administrators (TPAs), Blue
Cross/Blue Shield plans, and Health Maintenance Organizations (HMOs)
8
<PAGE>
B u i l d i n g R e l a t i o n s h i p s f o r L i f e(R)
Individual Insurance
Business
===================================
Target Market:
Individuals with a family income of $150,000 or less, and small business owners
Products:
Variety of competitive life and annuity products including universal life,
interest-sensitive whole life, term life, fixed annuities, and equity indexed
annuities
Distribution:
Independent agents including those affiliated with regional marketing
organizations and career agents under a general agency system
Life Insurance In Force ($ in millions)
[BAR CHART APPEARS HERE]
<TABLE>
<S> <C>
1990 $14,671.8
1991 $19,365.9
1992 $20,312.4
1993 $20,686.4
1994 $23,262.4
1995 $25,461.5
1996 $28.889.4
</TABLE>
Total life insurance (Group and Individual) has increased to almost $29 billion.
- --------------------------------------------------------------------------------
The Guarantee Life Companies Inc.
- --------------------------------------------------------------------------------
Monthly Stock Performance 12/19/95 to 12/31/96
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Period Ending
------------------------------------------------------------------------------------------
Index 12/19/95 12/31/95 1/31/96 2/29/96 3/31/96 4/30/96 5/31/96 6/30/96 7/31/96
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
The Guarantee Life Companies Inc. 100.00 121.15 125.00 124.04 118.27 131.73 135.01 135.97 127.29
S&P 500 100.00 100.72 104.15 105.12 106.13 107.69 110.47 110.88 105.96
SNL Life & Health Insurance Index 100.00 102.24 108.83 109.68 107.93 108.76 109.48 111.13 105.51
<CAPTION>
Period Ending
-------------------------------------------------
Index 8/31/96 9/30/96 10/31/96 11/30/96 12/31/96
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
The Guarantee Life Companies Inc. 130.57 153.78 150.88 150.38 143.58
S&P 500 108.22 114.31 117.46 126.25 123.75
SNL Life & Health Insurance Index 112.24 117.25 120.19 128.70 133.29
</TABLE>
Guarantee Life total return was 43.6% since the initial public offering of $13
per share.
------------------------
Building Value
------------------------
Investment Portfolio
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Fixed Maturity 84%
Mortgages 6%
Policy Loans 6%
Other 4%
</TABLE>
1996 Invested Assets = $1,094.3
(millions)
Fixed Maturity Portfolio Rating
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
BBB and Above 95%
Below BB 3%
BB 2%
</TABLE>
Investment Division
At the center of Guarantee Life's Investment Division is a conservative
philosophy. The Company focuses on effectively managing the risks associated
with credit, interest rates, and liquidity. Guarantee Life actively manages its
assets to achieve a favorable relationship between investment returns and risks.
9
<PAGE>
G u a r a n t e e L i f e 1 9 9 6 A n n u a l R e p o r t
[PHOTOGRAPH APPEARS HERE]
Opportunity
- -----------------------------
BUSINESSES & OPERATIONS
- -----------------------------
In 1996, Guarantee Life pursued growth opportunities in all three insurance
operations of the Company. By doing so, Guarantee Life delivered on its
commitment to shareholders and initiated strategies designed to improve its
profitability into 1997 and beyond. The 1996
10
<PAGE>
B u i l d i n g R e l a t i o n s h i p s f o r L i f e(R)
[PHOTOGRAPH APPEARS HERE]
closing stock price was $18.50. Total shareholder return was 18.5% for 1996, and
over 43% since the initial public offering of $13 per share.
Guarantee Life intends to continue building shareholder wealth with its
diverse businesses that complement each other during economic and industry
cycles. The Company also continually seeks new and better ways of doing
business. One opportunity for Guarantee Life's future is its acquisition
strategy. In 1996, Guarantee Life acted on its commitment to grow through
strategic acquisitions with a mid-year purchase of a block of universal life
insurance. This acquisition added 21,000 policies, $45.9 million of invested
assets, and $56.6 million of policyholder reserves to the Individual Insurance
Business.
11
<PAGE>
G u a r a n t e e L i f e 1 9 9 6 A n n u a l R e p o r t
Group Insurance
Business
==========================
Employee Benefits Division
The Employee Benefits Division (EBD) markets group core products for
employees of small- and medium-sized businesses. This is a new business for
Guarantee Life and it is rapidly growing. Sales increased to $49.2 million in
1996, a 43.0% increase over 1995 sales of $34.4 million. The division processed
over 72,000 proposals in 1996, a 62% increase over 1995. This growth is
reflective of the increase in the number of small- and medium-sized businesses,
along with their efforts to provide cost effective benefits to their employees.
The total market for core products is estimated at over $8 billion for
businesses with 100 or fewer employees and at about $14 billion for businesses
with 500 or less employees.
Guarantee Life credits the increased volume to the division's unique growth
strategy and its talented marketing managers. Investment in this operation
continued as the national distribution system expanded to 21 Group Sales Offices
in cities identified as growing economic and business centers. The Boston,
Phoenix, and Miami offices were opened in 1996; and the Nashville office opened
in January 1997. To accommodate this expansion, Guarantee Life staffed the new
offices with proven managers who have responded immediately to the challenges
and are producing results. The EBD plans to open two more Group Sales Offices in
1998.
Group Sales Offices
[MAP OF UNITED STATES SHOWING GROUP SALES OFFICES APPEARS HERE]
Due to the EBD's rapid growth and a strategic assessment of the small- and
medium-sized employer market, management took steps to re-engineer some of the
division's processes to gain efficiencies. A transformation project has been
initiated to better align home office service teams with designated Group Sales
Offices for underwriting, premiums, enrollment, and customer service. The
elimination of redundant data entry and multiple hand-offs is expected to
increase productivity by over 60%. This process improvement should reduce the
turnaround time for new case issuance to half the industry average of 21 days.
Management believes this will give Guarantee Life a distinct strategic advantage
in a highly competitive market. Initial testing
Diversity
12
<PAGE>
B u i l d i n g R e l a t i o n s h i p s f o r L i f e(R)
of this new process is under way in the Houston office and is expected to expand
to all sales offices by the end of 1997.
Increasing sales of voluntary (employee-paid) products also contributed to
EBD's growth. In 1996, sales of these products tripled to $6 million from $2
million in 1995. The Company believes that its increasing customer base of
small- and medium-sized employers is an excellent foundation for continued
growth in voluntary product sales.
Special Markets Division
In the Special Markets Division, Guarantee Life aims to aggressively manage
its specialty products through pricing cycles. This plan is supported by a two-
part growth strategy based on direct sales and acquisitions. Sales, which have
been constrained during a down market cycle, began to increase during the third
quarter of 1996 and continued to grow through the fourth quarter. Product sales
were $19.3 million in 1996, a 18.3% increase over 1995 sales of $16.4 million.
The Special Markets Division is positioned for growth in 1997 due to the
approach it developed in 1996 toward renewal business and new business pricing.
In a market characterized by aggressive pricing, Guarantee Life's disciplined
management of the excess loss business during a down market cycle resulted in
solid profitability. The Company is optimistic about the pricing direction
beginning to occur in the excess loss market and, as the market starts to
improve, Guarantee Life will have already addressed the down-cycle issues.
Therefore, management believes this division is well positioned to grow.
Guarantee Life's distribution systems for speciality products have allowed
the division to grow while keeping fixed administration costs under control. The
division is prepared to compete with the other industry players by continuing to
strengthen its long-time relationship with its MGU.
In a market that could be described as mature, Guarantee Life also plans to
implement a strategy to repackage existing excess loss products. This is an
effort to more effectively market the excess loss business to TPAs on a value-
added basis, rather than as a price sensitive commodity. Test marketing will
occur with three TPAs during the first half of 1997 to determine whether the
repackaging effort will be used universally.
Individual Insurance
Business
========================
Notable achievements in sales growth and producer recruiting were attained
in 1996 by the Individual Insurance Business. Sales for life products increased
over 22% to $6.5 million in 1996. Continued growth will be achieved by
developing primary relationships with regional marketing organizations, which,
in turn, develop relationships with top producers.
- -----------------------------
BUSINESSES & OPERATIONS
- -----------------------------
The Individual Insurance Business is successfully aligning outstanding
service with a strong, customer value product portfolio and attractive agent
benefits. Guarantee Life is fast becoming the "company of choice" for producers
and marketing organizations.
Diversity
13
<PAGE>
G u a r a n t e e L i f e 1 9 9 6 A n n u a l R e p o r t
Quality recruiting in 1996 resulted in an increase of the Company's field force
by 37% to 888 producers. There are several factors driving the field force
expansion: quality products, an attractive compensation package, and access to a
complete line of benefits including group medical insurance and financial
analysis software.
- -----------------------------
BUSINESSES & OPERATIONS
- -----------------------------
According to a 1996 LIMRA International survey (LIMRA is a research firm
focused on life insurance marketing issues), 77% of the survey participants
expressed a preference for buying life insurance face-to-face over any other
purchasing options. These results reaffirm Guarantee Life's agent distribution
strategy that has positioned the Company for increased revenues and market
share. The LIMRA survey also indicates that consumers want the life insurance
purchase process to be simplified. In response to this market need, Guarantee
Life is using a unique teleunderwriting process for term insurance. This
consumer friendly process has helped term insurance sales grow by over 54% in
1996 and has also helped position Guarantee Life for the future.
Individual Insurance Distribution System
[MAP OF UNITED STATES SHOWING INDIVIDUAL INSURANCE DISTRIBUTION SYSTEM
APPEARS HERE]
Predominately due to the successful introduction of Guarantee Life's first
equity indexed annuity product, Premier Index, the Individual Insurance
Business's annuity sales were up 14.8% to $9.3 million in 1996. As an expansion
of this successful product line, the Individual Insurance Business plans to
develop a family of equity indexed products, including the introduction of a new
equity indexed life insurance product by the end of 1997. Over the next several
years, the Company expects an increasing consumer demand for equity indexed
products. These products are popular because consumers have the assurance of
principal protection, along with growth linked to a stock market index. Unlike
many companies that are already committed to variable life annuities and the
expensive infrastructure that accompanies them, Guarantee Life has been able to
enter the equity indexed product business with a modest investment and strong
predictions for excellent sales and profit potential.
Conclusion
Guarantee Life is pleased with the focused execution of strategies within
each business unit. All operating areas ended 1996 with strong sales momentum in
growing markets. The building blocks are in place at Guarantee Life for
continued growth and increased shareholder wealth.
Strength
14
<PAGE>
B u i l d i n g R e l a t i o n s h i p s f o r L i f e(R)
------------------------------
FINANCIAL REVIEW
------------------------------
Summary Consolidated Financial and Operating Data
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At or for the Year Ended December 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(in millions)
<S> <C> <C> <C> <C> <C>
Consolidated Income Statement Data:
Premiums and policyholder assessments, net $ 181.7 $ 208.6 $ 158.6 $ 141.1 $ 132.7
Investment income, net 54.4 74.6 70.4 68.6 68.5
Realized investment gains (losses) 0.1 2.4 (1.2) 2.5 (0.1)
Ceding commissions and other income 12.7 8.8 19.7 24.2 25.7
Contribution from Closed Block (1) 3.1 - - - -
-------- -------- -------- -------- --------
Total revenues 252.0 294.4 247.5 236.4 226.8
Total policyholder benefits, expenses and dividends 229.4 274.5 220.1 208.7 201.0
-------- -------- -------- -------- --------
Income from continuing operations before income
taxes 22.6 19.9 27.4 27.7 25.8
Income tax expense 7.9 9.1 11.7 8.8 10.5
-------- -------- -------- -------- --------
Net income from continuing operations 14.7 10.8 15.7 18.9 15.3
Net income (loss) from discontinued operations(2) 0.3 (1.7) (1.9) 1.8 (1.8)
Extraordinary charge for demutualization
expense, net - 7.7 8.1 1.2 -
-------- -------- -------- -------- --------
Net income $ 15.0 $ 1.4 $ 5.7 $ 19.5 $ 13.5
======== ======== ======== ======== ========
Consolidated Balance Sheet Data:
Total invested assets $1,094.3 $1,056.1 $ 985.6 $ 950.0 $ 864.9
Total assets 1,301.7 1,280.8 1,188.0 1,152.8 1,069.8
Total liabilities 1,093.0 1,074.5 1,055.1 989.3 926.1
Total shareholders' equity(3) 208.7 206.3 132.9 163.5 143.7
Segment Income Statement Data:
Revenues by segment:
Group insurance business $ 175.1 $ 182.2 $ 140.1 $ 125.6 $ 124.3
Individual insurance business 75.8 112.2 107.4 110.8 102.5
Income from continuing operations before
income taxes by segment:
Group insurance business $ 10.1 $ 4.4 $ 14.6 $ 17.1 $ 19.4
Individual insurance business 10.5 15.5 12.8 10.6 6.4
Other Operating Data:
Adjusted net income(4) $ 14.6 $ 10.2 $ 19.3 $ 17.3 $ 17.2
Statutory Data:
Statutory net gain from operations(5) $ 13.3 $ 1.0 $ 7.2 $ 13.1 $ 10.2
Statutory surplus 105.4 102.2 107.0 102.5 79.8
Asset Valuation Reserve 16.7 14.9 14.8 11.9 10.8
</TABLE>
- ----------
(1) The results of the Closed Block subsequent to 12/31/95 are reported on one
line in the Consolidated Statements of Income. Accordingly, the line-by-line
income statements are not comparable for all periods presented. Total assets and
total liabilities include the assets and liabilities of the Closed Block,
respectively, and therefore amounts are comparable for all periods presented.
See Note 7 of Notes to Consolidated Financial Statements.
(2) Guarantee Life decided to withdraw from its Special Risk segment in 1994.
The operations of this segment have been reflected on a net basis and classified
as discontinued operations.
(3) Excluding the unrealized appreciation or depreciation of invested assets,
total shareholders' equity would have been $204.8 million, $191.3 million and
$168.6 million as of December 31, 1996, December 31, 1995 and 1994,
respectively.
(4) Adjusted net income represents net income adjusted to eliminate certain
items which management believes are not indicative of overall operating trends,
including realized gains and losses, net of tax, net income from discontinued
operations, extraordinary charge for demutualization expense, net and mutual
company equity add-on tax.
(5) After demutualization expenses (net) of $7.7 million, $8.1 million and $1.2
million for the years ended December 31, 1995, 1994 and 1993, respectively.
15
<PAGE>
G u a r a n t e e L i f e 1 9 9 6 A n n u a l R e p o r t
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The following analysis of the consolidated financial condition and results
of operations of Guarantee Life should be read in conjunction with the
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. ("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,
represent the financial condition and results of operations of Guarantee Mutual
Life Company and its subsidiaries.
Guarantee Life derives its revenues primarily from premiums, policyholder
assessments and investment income. Premium revenues are derived from the sale of
group life and health insurance to employers and other groups and life insurance
and annuities to individuals. Policyholder assessments are charges to deposit
type products, namely universal life and annuities. Operating costs consist
primarily of policyholder benefits provided, commissions to agents and other
distributors and administrative expenses. Guarantee Life's profitability depends
primarily upon (i) the adequacy of its product pricing, which is a function of
competitive conditions as well as management's ability to adapt to trends in the
level of benefit payments and to manage expenses within pricing assumptions,
(ii) the persistency of its policies and premiums, which determines the
recoverability of the costs incurred in selling a policy, (iii) the performance
of its investment portfolio, and (iv) the impact of legislation, which can
affect Guarantee Life's margins or have a material effect on any market segment.
Group Insurance Business Trends
Historically, Guarantee Life's group insurance business consisted primarily
of (i) specialty medical products marketed through MGUs and TPAs and (ii) core
products marketed primarily in conjunction with Blue Cross plans, excess loss
and certain other medical products. As Guarantee Life evaluated the risks
inherent in potential health care reform and the cyclical nature of the group
health market, management developed a strategy to increase sales of core
products which are less subject to these risks, through a national group office
distribution system. Sales of core products through a national group sales
office distribution system are independent of medical product sales and
distribution systems which are dependent on the health insurance market.
However, the pricing of core products is more competitive when they are sold
independent of a medical product. Management recognizes that this strategy is
likely to produce higher mortality and morbidity experience relative to premium
levels for Guarantee Life's core product line than in historical periods.
However, management believes that over time this strategy of emphasizing core
product sales will result in a stable and substantial block of profitable core
products business which will offset the reduced and cyclical profitability of
the specialty medical products.
16
<PAGE>
B u i l d i n g R e l a t i o n s h i p s f o r L i f e(R)
Guarantee Life's specialty medical products in its group insurance business
are subject to the potential adverse impact of state and federal health care
reform and the cyclical nature of the group health market. California
legislation limited Guarantee Life's ability to price its SMART product
according to the risks involved and prevented Guarantee Life from achieving its
profit targets for this product. Consequently, Guarantee Life ceased writing
this product in October 1995, and implemented an exit strategy for the inforce
business which continued through October 1996, when the final policy terminated.
In addition, management believes that a down market cycle in the group health
insurance industry, which started in late 1994, prevented Guarantee Life from
obtaining appropriate rate increases on its excess loss product and,
consequently, Guarantee Life did not emphasize new growth in its excess loss
product line while those pressures existed. Aggressive underwriting action
significantly improved net benefits which contributed to a significant increase
in underwriting income during 1996. Management believes the market cycle is
improving and pricing is becoming more favorable for renewal and new business.
Sales of specialty products exceeded $19.0 million in first year annualized
premiums for 1996, compared to $16.4 million in 1995.
Earnings for core products have been adversely impacted in 1996 and 1995 by
Guarantee Life's substantial investment in the development and expansion of the
national group sales office distribution system, and the additional support
staff and systems required in the home office to process the higher volumes of
business. Over 72,000 proposals were processed in 1996, a 62% increase from
1995, while core products sales increased to $49.2 million of first year
annualized premiums in 1996 from $34.4 million in 1995. Core products
policyholder benefits have been higher in recent periods due to the rapid growth
in the product line. Management believes that continued growth in sales of core
products will reduce unit costs to desired levels, and risk management actions
will continue to improve mortality and morbidity experience. Management believes
that these steps will ultimately improve the profitability of the group
insurance business.
Individual Insurance Business Trends
Guarantee Life's individual insurance business is subject to many
competitive pressures. Strong competition exists among insurance companies for
agents with demonstrated ability. In recent years, these pressures have resulted
in the development of new life insurance products and new compensation
structures. Over the last five years, in the individual insurance business,
management has focused on lowering policy acquisition costs, refining its
distribution systems and introducing more competitive and profitable products.
During 1996, Guarantee Life has continued to make enhancements to it's product
portfolio, including the introduction of an equity indexed single premium
deferred annuity. Also in 1996, Guarantee Life refined its agency distribution
strategy to focus on independent and dedicated regional marketing organizations
where Guarantee Life can develop a primary relationship. As a result of these
efforts, the number of active field producers increased 37% during 1996.
Sales of universal life and traditional life products increased to $6.5
million of first year annualized premiums for the year ended December 31, 1996
from $5.3 million for the year ended December 31, 1995. Annuity sales increased
to $9.3 million in 1996, from $8.1 million in 1995. Although management expects
that Guarantee Life's ability to attract and retain productive distributors will
continue to be successful, sales of individual insurance and annuity products
and Guarantee Life's financial condition and results of operations could be
materially adversely affected if that is not achieved.
17
<PAGE>
G u a r a n t e e L i f e 1 9 9 6 A n n u a l R e p o r t
Operating Results for the Years Ended December 31, 1996, 1995 and 1994
Consolidated Results of Operations
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 and 1994, the following table presents the results of
operations for the year ended December 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>
Year Ended December 31,
-----------------------------------
1996 1995 1994
------ ------ ------
(in millions)
<S> <C> <C> <C>
Revenues:
Premiums, net of reinsurance $177.4 $186.4 $136.9
Policyholder assessments 26.1 22.2 21.7
Investment income, net 75.9 74.6 70.4
Realized investment gains (losses) 0.1 2.4 (1.2)
Ceding commissions and other income 12.8 8.8 19.7
------ ------ ------
Total revenues 292.3 294.4 247.5
Benefits and expenses:
Policyholder benefits, net of reinsurance 127.2 139.8 106.3
Interest credited to account balances 26.5 25.6 23.9
------ ------ ------
Total policyholder benefits 153.7 165.4 130.2
Expenses 105.2 98.5 79.3
------ ------ ------
Dividends to policyholders 10.8 10.6 10.6
------ ------ ------
Total policyholder benefits and expenses 269.7 274.5 220.1
------ ------ ------
Income from continuing operations before income taxes $ 22.6 $ 19.9 $ 27.4
====== ====== ======
</TABLE>
Insurance Premiums and Policyholder Assessments, Net. Net insurance
premiums and policyholder assessments decreased $5.1 million, or 2.4%, to $203.5
million in 1996 from $208.6 million in 1995. Net premiums for Specialty Products
in the Group business decreased $29.2 million, due mainly to the decision to
stop writing the SMART product in October, 1995. A $19.7 million increase in the
Group Core Products net premium and a $4.3 million increase in the Individual
business partially offset this decrease. Net insurance premiums and policyholder
assessments increased $50.0 million, or 31.5%, to $208.6 million in 1995 from
$158.6 million in 1994. This increase was due to the growth in sales of
Guarantee Life's group products and a decrease in the amount of Group Specialty
Products premiums ceded.
Investment Income, Net. Net investment income increased $1.3 million, or
1.7%, to $75.9 million in 1996 from $74.6 million in 1995. This increase was the
result of an increase in invested assets. Invested assets increased $38 million
to $1,094.3 million as of the end of 1996 from $1,056.1 million as of the end of
1995. This increase includes full investment of the 1995 initial public offering
net proceeds and $45.9 million of net invested assets acquired with a block of
universal life policies on July 31, 1996, which were partially offset by the
amounts required to fund the runoff of the SMART policy liabilities, the amounts
required to fund the runoff of the policy liabilities in the discontinued
operation segment, as well as a $16.5 million reduction in unrealized gains and
losses on invested assets recorded at fair value. The effective yield on
invested assets was 7.5% in 1996, compared to 7.7% in 1995. This decrease is
primarily due to reinvestment rates being lower for fixed maturity securities
purchased in recent periods.
18
<PAGE>
B u i l d i n g R e l a t i o n s h i p s f o r L i f e(R)
Net investment income increased $4.2 million, or 6.0%, to $74.6 million in
1995 from $70.4 million in 1994. This increase was caused mainly by reduced
investment expenses, offset by a slight reduction in effective yield on invested
assets. Invested assets increased $70.5 million or 7.2% in 1995. Significant
increases include a $62.2 million change in unrealized gains and losses on
invested assets recorded at fair value, from a $37.4 million unrealized loss, to
a $24.8 million unrealized gain, as well as $12.1 million of initial public
offering proceeds which were invested in short-term investments at December 31,
1995. The effective yield on invested assets was 7.7% in 1995 compared to 7.8%
in 1994.
Realized Investment Gains (Losses). Net realized investment gains decreased
$2.3 million, to $100 thousand in 1996 from a gain of $2.4 million in 1995. Net
realized investment gains increased $3.6 million, to a net gain of $2.4 million
in 1995 from a net loss of $1.2 million in 1994. Gains and losses occur
primarily as a result of dispositions of Guarantee Life's invested assets as
part of its ongoing investment management activity.
Gains during 1996 included the sale of equity securities as well as a
number of fixed maturity securities which were called at a premium. Losses
included the disposition of several fixed maturity securities experiencing
credit deterioration, as well as recognizing losses for securities with declines
in value Guarantee Life determined were other than temporary.
Dispositions during 1995 included a number of public and private fixed
maturity securities which were called at a premium, and bond sales initiated by
the new bond portfolio manager, as Guarantee Life's portfolio was realigned in
accordance with the asset/liability management approach. Dispositions in 1994
included sales of two private fixed maturity securities of issuers in bankruptcy
and a property acquired during 1994 as a result of a mortgage foreclosure.
Total Policyholder Benefits. Total policyholder benefits decreased $11.7
million, or 7.1%, to $153.7 million in 1996 from $165.4 million in 1995. This
decrease was primarily the result of Specialty Products net benefits decreasing
$23.0 million, due to decreased premium volume, which was partially offset by a
$9.3 million increase in Core Products and a slight increase in the amount of
claims in the individual business.
Total policyholder benefits increased $35.2 million, or 27.0%, to $165.4
million in 1995 from $130.2 million in 1994. This increase was primarily the
result of increased premium volume in the group insurance business, combined
with higher group policyholder benefits and a decrease in the amount of
policyholder benefits ceded. Group policyholder benefits have been higher in
recent periods due to adverse fluctuations in underwriting experience and the
increase resulting from the sale of Core Products independently of medical
products.
Total Expenses. Total expenses increased $6.7 million, or 6.8%, to $105.2
million in 1996 from $98.5 million in 1995. This increase was mainly the result
of a $4.1 million increase in DPAC amortization expense in the individual
insurance business. Expenses in the group insurance business increased by $8.8
million for core products and decreased by $7.9 million for specialty products.
Total expenses increased $19.2 million, or 24.2%, to $98.5 million in 1995 from
$79.3 million in 1994. This increase was the result of increased commissions and
premium taxes due to the growth in group premiums and increased spending in the
group insurance business for increased staffing levels in the home office and
group sales offices, and the new group management information and administration
system. It is expected that, as premium volume continues to increase, the
related variable expenses of commissions and premium taxes will increase.
19
<PAGE>
G u a r a n t e e L i f e 1 9 9 6 A n n u a l R e p o r t
Income Tax Expense. Income tax expense decreased $1.2 million, or 13.2%, to
$7.9 million in 1996 from $9.1 million in 1995. The decrease was due mainly to
the elimination of the equity add-on tax. Income tax expense decreased $2.6
million, or 22.2%, to $9.1 million in 1995 from $11.7 million in 1994. This
decrease primarily resulted from the lower pretax income, as well as a lower
estimate of the equity add-on tax. The equity add-on tax was estimated at $1.0
million in 1995 compared to $2.8 million in 1994.
As a mutual life insurance company, Guarantee Life Insurance was required
to pay, in addition to regular and alternative minimum taxes, an additional tax
commonly referred to as an "equity add-on tax", based on its surplus. In certain
years, the "equity add-on tax" calculations resulted in negative adjustments
which generated potential tax benefits to Guarantee Life Insurance. As a stock
life company, this tax will not impact Guarantee Life.
The IRS has completed the examination of Guarantee Life's federal income
tax returns for the years ended December 31, 1990, 1991 and 1992. Guarantee Life
paid approximately $6.5 million to settle the 1990 and 1991 examinations. The
settlement was principally related to the disallowance of negative adjustments
related to the "equity add-on tax" and had no impact on shareholders' equity as
management had already provided for that amount. Guarantee Life will continue to
contest the IRS' disallowance and will attempt to recover amounts paid based on
future court rulings for mutual life insurers. In January 1996, Guarantee Life
paid $3.9 million to settle the 1992 examination. The settlement did not have a
material impact on the financial position of Guarantee Life as management had
already provided for this settlement. Guarantee Life filed an amended return for
1993, based on the settlements for 1990 through 1992. The IRS is currently
examining Guarantee Life's 1993 federal income tax return, but the examination
has not been finalized. This examination is not expected to have a material
impact on the financial position of Guarantee Life.
Insurance Operations-Group
The following table sets forth certain summarized financial data for
Guarantee Life's group insurance business for the years ended December 31, 1996,
1995 and 1994.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1996 1995 1994
-------- -------- --------
(in millions)
<S> <C> <C> <C>
Revenues:
Premiums, net of reinsurance $153.6 $163.1 $111.9
Investment income, net 9.5 10.2 9.4
Realized investment gains (losses) (0.4) 0.4 (0.3)
Ceding commissions 12.4 8.5 19.0
------ ------ ------
Total revenues 175.1 182.2 140.0
------ ------ ------
Benefits and expenses:
Policyholder benefits, net of reinsurance 92.6 106.3 72.7
Expenses 72.4 71.5 52.7
------ ------ ------
Total benefits and expenses 165.0 177.8 125.4
------ ------ ------
Income from continuing operations before income taxes $ 10.1 $ 4.4 $ 14.6
====== ====== ======
</TABLE>
20
<PAGE>
B u i l d i n g R e l a t i o n s h i p s f o r L i f e(R)
The following table sets forth Guarantee Life's group insurance
underwriting income for the years ended December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
Group Underwriting Income
Year Ended December 31,
------------------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- ----------------------------- ---------------------------
(in millions)
Core Specialty Core Specialty Core Specialty
Products Products Total Products Products Total Products Products Total
-------- -------- ------ -------- -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gross insurance
premiums $126.9 $ 66.2 $193.1 $108.0 $ 98.3 $206.3 $ 85.6 $ 93.8 $179.4
Ceded to reinsurers (2.6) (36.9) (39.5) (3.4) (39.8) (43.2) (6.1) (61.4) (67.5)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net premiums 124.3 29.3 153.6 104.6 58.5 163.1 79.5 32.4 111.9
Ceding
commissions (0.2) 12.6 12.4 0.3 8.2 8.5 1.6 17.4 19.0
------ ------ ------ ------ ------ ------ ------ ------ ------
Total net premiums
and ceding
commissions 124.1 41.9 166.0 104.9 66.7 171.6 81.1 49.8 130.9
------ ------ ------ ------ ------ ------ ------ ------ ------
Gross policyholder
benefits 82.2 41.1 123.3 71.6 70.0 141.6 54.5 61.2 115.7
Recoveries from reinsurers (1.3) (29.4) (30.7) 0.0 (35.3) (35.3) (0.6) (42.4) (43.0)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net benefits 80.9 11.7 92.6 71.6 34.7 106.3 53.9 18.8 72.7
Expenses 47.1 25.3 72.4 38.3 33.2 71.5 25.4 27.3 52.7
------ ------ ------ ------ ------ ------ ------ ------ ------
Total net benefits
and expenses 128.0 37.0 165.0 109.9 67.9 177.8 79.3 46.1 125.4
------ ------ ------ ------ ------ ------ ------ ------ ------
Underwriting income
(loss) $ (3.9) $ 4.9 $ 1.0 $ (5.0) $ (1.2) $ (6.2) $ 1.8 $ 3.7 $ 5.5
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
Total group net premiums decreased $9.5 million, or 5.8%, to $153.6 million
in 1996 from $163.1 million in 1995. This decrease is the net effect of the
$19.7 million growth in core products and the $29.2 million decrease in
specialty products. Total group net premiums increased $51.2 million, or 45.8%,
to $163.1 million in 1995 from $111.9 million in 1994. This increase was due
primarily to growth in the core product premiums generated by the group sales
offices, growth in the specialty product direct premiums, and a decrease in the
amount of premium ceded, especially in the specialty product line.
Core products net premiums increased $19.7 million, or 18.8%, to $124.3
million in 1996 from $104.6 million in 1995. The increase was primarily due to
increased sales of all core products through the existing seventeen group sales
offices and the opening of three additional group sales offices in Boston,
Phoenix, and Miami during 1996. First year annualized premiums for core products
generated from the group sales offices have increased 43.0% in 1996, to $49.2
million, from $34.4 million in 1995. Core products net premiums increased $25.1
million, or 31.6%, to $104.6 million in 1995 from $79.5 million in 1994. This
increase was due primarily to increased sales of all core products in the group
sales offices.
Specialty products net premiums decreased $29.2 million, or 49.9%, to $29.3
million in 1996 from $58.5 million in 1995. This decrease was primarily due to
Guarantee Life's decision to stop writing the SMART major medical product in
1995, causing a $16.7 million reduction in net premiums in 1996. During all 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 $13.0 million in 1996. Specialty products net
premiums increased $26.1 million, or 80.6%, to $58.5 million in 1995 from $32.4
million in 1994. This increase was primarily due to a significant reduction in
ceded premiums for both excess loss and SMART, and increased excess loss
premiums.
21
<PAGE>
G u a r a n t e e L i f e 1 9 9 6 A n n u a l R e p o r t
Core products net benefits increased $9.3 million, or 13.0%, to $80.9
million in 1996 from $71.6 million in 1995. This increase was the net effect of
the increase caused by higher premium in all core products, which was offset by
significant improvements in underwriting experience in all core products. Core
products net benefits increased $17.7 million, or 32.8%, to $71.6 million in
1995 from $53.9 million in 1994. This increase was caused by the 31.6% increase
in core products net premiums and deterioration in underwriting experience in
most core products. These increases were offset by significant improvements in
the LTD product.
Specialty products net benefits decreased $23.0 million, or 66.3%, to $11.7
million in 1996 from $34.7 million in 1995. This decrease was due primarily to
decreased premium volume, as underwriting experience did not change
significantly. Specialty products net benefits increased $15.9 million, or
84.6%, to $34.7 million in 1995 from $18.8 million in 1994. This increase was
caused mainly by the 80.6% increase in net premiums, offset slightly by improved
underwriting experience.
Total group expenses increased $0.9 million, or 1.3%, to $72.4 million in
1996 from $71.5 million in 1995. 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, during the year, 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. Total
group expenses increased $18.8 million, or 35.7%, to $71.5 million in 1995 from
$52.7 million in 1994. This increase was primarily due to an increase in
commissions and premium taxes as a result of premium growth, increased spending
for the group management information and administration system and increased
staffing levels in the home office and group sales offices.
Insurance Operations-Individual
The following table sets forth certain summarized financial data for
Guarantee Life's individual insurance business for the years ended December 31,
1996, 1995 and 1994.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1996 1995 1994
------- ------- -------
(in millions)
<S> <C> <C> <C>
Revenues:
Premiums, net of reinsurance $ 23.7 $ 23.3 $ 25.0
Policyholder assessments 26.1 22.2 21.7
Investment income, net 65.4 64.4 61.0
Realized investment gains (losses) 0.5 2.0 (0.9)
Ceding commissions and other income 0.4 0.3 0.7
------ ------ ------
Total revenues 116.1 112.2 107.5
Benefits and expenses:
Policyholder benefits, net of reinsurance 34.6 33.5 33.6
Interest credited to account balances 26.5 25.6 23.9
------ ------ ------
Total policyholder benefits 61.1 59.1 57.5
Expenses 30.6 27.0 26.6
Dividends to policyholders 10.8 10.6 10.6
------ ------ ------
Total policyholder benefits, expenses and dividends 102.5 96.7 94.7
------ ------ ------
Income from continuing operations before income taxes $ 13.6 $ 15.5 $ 12.8
====== ====== ======
</TABLE>
22
<PAGE>
B u i l d i n g R e l a t i o n s h i p s f o r L i f e(R)
Net premiums increased $0.4 million, or 1.7%, to $23.7 million in 1996
from $23.3 million in 1995. This increase is the net effect of an increase in
premiums on policy riders and a slight decrease in traditional life premium. Net
premiums decreased $1.7 million, or 6.8%, to $23.3 million in 1995 from $25.0
million in 1994 due to the decline in the amount of traditional life insurance
in force as the low level of traditional life insurance sales were insufficient
to replace normal attrition.
Policyholder assessments increased $3.9 million, or 17.6%, to $26.1 million
in 1996 from $22.2 million in 1995. This increase was in the universal life
lines of business, including $2.4 million from a block of universal life
policies acquired in the third quarter.
Total individual policyholder benefits increased $2.0 million or 3.4% to
$61.1 million in 1996 from $59.1 million in 1995. Excluding interest credited to
policyholder account balances, total individual policyholder benefits increased
$1.1 million, or 3.3% to $34.6 million in 1996 from $33.5 million in 1995. This
increase was due to the net effect of a $2.4 million increase in universal life
benefits, offset by a $1.3 million decrease in traditional life lines of
business. Total individual policyholder benefits increased $1.6 million, or
2.8%, to $59.1 million in 1995 from $57.5 million in 1994. Excluding interest
credited to policyholder account balances, total individual policyholder
benefits remained flat in 1995 compared to 1994.
Interest credited to policyholder account balances increased $0.9 million,
or 3.5%, to $26.5 million in 1996 from $25.6 million in 1995. This increase is
the net effect of a $2.1 million increase for universal life, as the increase in
account balances offset lower crediting rates, and a $1.2 million decrease for
annuities. Interest credited on policyholder account balances increased $1.7
million, or 7.1%, to $25.6 million in 1995, from $23.9 million in 1994. This
increase was due mainly to the increased account values, as average crediting
rates increased slightly.
Weighted average interest crediting rates for 1996, 1995 and 1994 were as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Universal life 5.90% 6.03% 5.99%
Annuities 5.46 5.93 5.80
</TABLE>
Total individual expenses increased $3.6 million, or 13.3%, to $30.6
million in 1996 from $27.0 million in 1995. This increase was primarily due to a
$4.1 million increase in DPAC amortization, offset in part by a decrease in
operating expenses. DPAC amortization increased because of the universal life
policies acquired, as well as favorable mortality and interest margins on
existing universal life policies. Total individual expenses increased $0.4
million, or 1.5%, to $27.0 million in 1995 from $26.6 million in 1994,
reflecting a $2.3 million increase in DPAC amortization, as 1994 was unusually
low due to changes in estimates recorded then. This increase was offset by a
slight decrease in commissions as well as a $1.2 million decrease in other
operating expenses.
Policyholder dividends remained flat during 1996 and 1995, 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 stockholders and meet
its obligations, including debt service and operating expenses, primarily
depends upon receiving sufficient funds from its insurance subsidiaries. The
payment of dividends by Guarantee Life Insurance to the Holding Company is
subject to restrictions set forth in the insurance laws and regulations of
Nebraska. The Board of Directors of Guarantee Life Insurance declared a $10
million dividend to the Holding Company, with a record date of November 29,
1996.
23
<PAGE>
G u a r a n t e e L i f e 1 9 9 6 A n n u a l R e p o r t
Guarantee Life has a $30.0 million senior secured revolving line of credit
to be used for general corporate purposes and to fund capital infusions to
subsidiaries and future acquisitions. The credit agreement is effective through
2000. Funding for the credit facility is being provided by ChaseMellon Bank,
Norwest Bank Nebraska, N.A. and State Street Bank and Trust Company.
Life insurance companies such as Guarantee Life Insurance expect to produce
a positive cash flow from operations and scheduled principal repayments from
their investment portfolios. This cash flow is used to fund an investment
portfolio to finance future benefit payments, which represent long-term
obligations calculated using certain assumed interest rates. Since future
benefit payments are primarily long-term obligations, Guarantee Life Insurance's
investments are predominately long-term fixed rate instruments such as fixed
maturity securities and mortgage loans which are expected to provide a
sufficient return to cover these obligations. The nature and quality of the
various types of investments purchased by a life insurance company must comply
with the statutes and regulations imposed by certain of the states in which that
company is licensed.
Historically, Guarantee Life has generated positive cash flow from
continuing operating activities and net deposits to policyholder accounts, and
used these funds to purchase fixed maturity securities or other invested assets.
For the years ended December 31, 1996, 1995, and 1994, Guarantee Life generated
positive cash flow from continuing operating activities and net deposits to
policyholder accounts of $20.4 million, $38.6 million, and $45.9 million
respectively. This decrease is due to net surrenders of traditional annuities.
The principal requirements for liquidity in connection with Guarantee
Life's operations are its contractual obligations to policyholders and
annuitants and its payment of dividends to policyholders. Guarantee Life's
contractual obligations include payments of surrender benefits, contract
withdrawals, claims under outstanding insurance policies and annuities, and
policy loans. The primary sources for meeting these contractual requirements are
investment income and scheduled principal repayments from its total investment
portfolio, and a portion of its premium income. To provide for additional
liquidity to meet normal variations in contract obligations, Guarantee Life
maintains cash and short-term investments and a portfolio of publicly traded
fixed maturity securities.
All of the jurisdictions in which Guarantee Life is admitted to transact
business require life insurance companies doing business within the state to
participate in guaranty associations, which are organized to pay contractual
benefits owed under insurance policies issued by impaired, insolvent or failed
life insurance companies. These associations levy assessments, up to prescribed
limits, on all member insurers in a particular state on the basis of the
proportionate share of the premiums written by member insurers in the lines of
business in which the impaired, insolvent or failed insurer is engaged. Some
states permit member insurers to recover assessments paid through full or
partial premium tax offsets. Assessments levied against Guarantee Life
aggregated $258,000 during 1996. As of December 31, 1996, Guarantee Life
maintains a reserve of $1.5 million for future assessments in respect of
currently impaired, insolvent or failed insurers. While the amount of any future
assessment cannot be predicted with certainty, management believes, based upon a
review of the current significant insolvency proceedings of insurers located in
states in which Guarantee Life does business, that future guaranty assessments
for insurer insolvencies will not have a material adverse effect on Guarantee
Life's liquidity and capital resources.
24
<PAGE>
B u i l d i n g R e l a t i o n s h i p s f o r L i f e(R)
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 earnings
on existing assets and yields available on new investments 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, although the interest rate environment has affected sales of
certain Guarantee Life product lines and may affect surrender and withdrawal
rates. For instance, Guarantee Life's sale of annuities were flat in 1994 and
declined during 1995, during which time Guarantee Life maintained the spread
between crediting rates and earned rates on its annuities and other interest-
sensitive life insurance product portfolio. While sales of traditional fixed
annuities decreased in 1996 as well, total annuity sales increased 14.8%, to
$9.3 million. This increase is a result of Guarantee Life's third quarter
introduction of an equity indexed single premium deferred annuity with credited
rates linked to the growth in the S&P 500 index. The profitability of Guarantee
Life's products, however, is based upon not only interest rate spreads but also
on persistency, mortality, morbidity and expenses.
25
<PAGE>
G u a r a n t e e L i f e 1 9 9 6 A n n u a l R e p o r t
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of The Guarantee Life Companies Inc.:
We have audited the accompanying consolidated balance sheets of The
Guarantee Life Companies Inc. and subsidiaries (Guarantee Life) as of December
31, 1996 and December 31, 1995, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the years in the three-
year period ended December 31, 1996. These consolidated financial statements are
the responsibility of Guarantee Life's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described in Note 1 to the consolidated financial statements, Guarantee
Life converted from a mutual to a stock life insurance company (Demutualization)
in 1995. The accompanying consolidated financial statements for the periods
prior to the Demutualization have been prepared utilizing generally accepted
accounting principles for stock life insurance companies as if Guarantee Life
was a stock life insurance company before the Demutualization. The accounting
policies used in the preparation of these consolidated financial statements are
described in Note 1.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The
Guarantee Life Companies Inc. and subsidiaries as of December 31, 1996 and
December 31, 1995, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1996 in conformity
with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, Guarantee
Life adopted Statement of Financial Accounting Standards No. 115, Accounting for
Certain Investments in Debt and Equity Securities, in 1994.
KPMG Peat Marwick LLP
Omaha, Nebraska
February 14, 1997
26
<PAGE>
B u i l d i n g R e l a t i o n s h i p s f o r L i f e (R)
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(in thousands except per share data)
<TABLE>
<CAPTION>
December 31,
----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Assets
--------------
Invested assets:
Fixed maturities:
Available-for-sale, at fair value (amortized cost: $520,741 and $490,667). $ 526,799 $ 505,832
Held-to-maturity, at amortized cost (fair value: $147,813 and $158,131). 138,584 140,046
----------- -----------
665,383 645,878
Equity securities, at fair value (cost: $3,009 and $5,277). 2,946 5,999
Mortgage loans, net 70,156 61,467
Policy loans 19,482 14,043
Investment real estate, net 6,620 6,864
Other invested assets, net 29,880 17,322
Closed block invested assets 299,807 304,557
----------- -----------
Total invested assets 1,094,274 1,056,130
Cash and cash equivalents 2,079 25,301
Accrued investment income 11,623 11,347
Ceded reinsurance recoverables 61,697 62,876
Accounts receivable, net 8,289 8,907
Deferred policy acquisition costs 77,968 70,168
Property, plant and equipment, net 20,102 20,340
Other assets 3,690 3,472
Closed block other assets 22,020 22,234
----------- -----------
Total assets $ 1,301,742 $ 1,280,775
=========== ===========
Liabilities and Shareholders' Equity
------------------------------------------
Future policy benefits:
Life $ 43,140 $ 37,982
Accident and health 64,007 58,081
Policyholder account balances:
Universal life contracts 257,362 185,171
Annuity contracts 202,735 216,905
Policy and contract claims 50,248 59,641
Other policyholder funds 13,662 12,793
Unearned premium revenue 10,679 10,505
Amounts payable to reinsurers 2,077 7,359
Other liabilities 29,415 47,176
Closed block liabilities 387,383 388,263
Discontinued operations 32,362 50,637
----------- -----------
Total liabilities 1,093,070 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 13,435 11
Unrealized appreciation of invested securities carried at fair
value, net 3,912 14,926
----------- -----------
Total shareholders' equity 208,672 206,262
Commitments and contingencies - -
----------- -----------
Total liabilities and shareholders' equity $ 1,301,742 $ 1,280,775
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
G u a r a n t e e L i f e 1 9 9 6 A n n u a l R e p o r t
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Insurance premiums and policyholder assessments:
Life $ 64,932 $ 80,830 $ 75,762
Accident and health 136,158 154,741 134,752
Policyholder assessments 26,080 22,165 21,694
Ceded to reinsurers (45,480) (49,225) (73,645)
-------- -------- --------
181,690 208,511 158,563
Investment income, net 54,371 74,615 70,419
Realized investment gains (losses) 167 2,448 (1,209)
Ceding commissions 12,664 8,500 19,647
Contribution from closed block 3,071 - -
Other income 36 346 82
-------- -------- --------
Total revenues 251,999 294,420 247,502
-------- -------- --------
Policyholder benefits:
Benefits:
Life 57,655 72,614 67,571
Accident and health 85,759 108,324 88,277
Reinsurance recoveries (36,468) (41,107) (49,515)
-------- -------- --------
106,946 139,831 106,333
Interest credited to policyholder account balances:
Annuity contracts 11,021 12,259 11,571
Universal contracts 12,467 10,328 9,286
Other - 3,004 3,000
-------- -------- --------
Total policyholder benefits 130,434 165,422 130,190
-------- -------- --------
Expenses:
Policy acquisition costs 47,554 47,573 40,785
Other insurance operating expenses 51,365 50,985 38,517
-------- -------- --------
Total expenses 98,919 98,558 79,302
-------- -------- --------
Income from continuing operations before dividends to
policyholders and income taxes 22,646 30,440 38,010
Dividends to policyholders - 10,571 10,608
-------- -------- --------
Income from continuing operations before income taxes 22,646 19,869 27,402
Income tax expense 7,926 9,065 11,717
-------- -------- --------
Net income from continuing operations 14,720 10,804 15,685
Net income (loss) from discontinued operations 295 (1,697) (1,888)
Extraordinary charge for demutualization expense, net - 7,737 8,109
-------- -------- --------
Net income $ 15,015 $ 1,370 $ 5,688
======== ======== ========
Earnings per share:
Weighted average shares outstanding 9,944 n/a n/a
======== ======== ========
Net income from continuing operations $ 1.48 n/a n/a
======== ======== ========
Net income $ 1.51 n/a n/a
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
B u i l d i n g R e l a t i o n s h i p s f o r L i f e(R)
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Common stock, beginning of year $ 99 $ - $ -
Issuance of common stock, 9,944,383 shares - 99 -
------------ ------------ ------------
Common stock, end of year 99 99 -
------------ ------------ ------------
Additional paid in capital, beginning of year 191,226 - -
Issuance of common stock - 191,226 -
------------ ------------ ------------
Additional paid in-capital, end of year 191,226 191,226 -
------------ ------------ ------------
Retained earnings, beginning of year 11 168,611 162,923
Net income before demutualization - 1,359 5,688
Demutualization transaction - (169,970) -
Net income after demutualization 15,015 11 -
Shareholder dividends declared (1,591) - -
------------ ------------ ------------
Retained earnings, end of year 13,435 11 168,611
------------ ------------ ------------
Net unrealized appreciation (depreciation) on invested
assets carried at fair value:
Beginning of year 14,926 (35,765) 578
Effect of adopting SFAS 115, net - - 16,793
Unrealized appreciation (depreciation) of invested assets
carried at fair value, net (11,014) 50,691 (53,136)
------------ ------------ ------------
End of year 3,912 14,926 (35,765)
------------ ------------ ------------
Total shareholders' equity $ 208,672 $ 206,262 $ 132,846
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
G u a r a n t e e L i f e 1 9 9 6 A n n u a l R e p o r t
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income from continuing operations $ 14,720 $ 10,804 $ 15,685
Adjustments to reconcile net income from continuing
operations to net cash provided by continuing operating
activities:
Policyholder assessments (26,080) (19,772) (18,215)
Interest credited to policyholder account balances 23,488 25,591 23,857
Realized investment (gains) losses (167) (2,448) 1,209
Change in
Ceded reinsurance recoverables 1,179 4,961 1,414
Deferred policy acquisition costs 3,438 56 (3,322)
Liabilities for future policy benefits 11,084 3,105 6,565
Policy and contract claims (9,393) 3,930 1,132
Deferred income taxes (1,780) (2,590) (6,083)
Closed block assets and liabilities, net (666) 5,624 -
Other, net 3,504 (6,887) (1,843)
------------ ------------ ------------
Net cash provided by continuing operating activities 19,327 22,374 20,399
------------ ------------ ------------
Net cash provided (used) by discontinued operations (17,980) (26,387) 27,854
------------ ------------ ------------
Net cash provided (used) by operating activities 1,347 (4,013) 48,253
------------ ------------ ------------
Cash flows from investing activities:
Purchase of fixed maturities (235,544) (162,158) (141,849)
Proceeds from sale of fixed maturities:
Available-for-sale 194,471 144,391 25,599
Maturities, calls and principal reductions of fixed maturities 54,531 39,129 69,402
Purchase of mortgage loans (13,542) (15,745) (24,846)
Proceeds from repayment of mortgage loans 4,773 2,206 3,096
Acquisition of block of policies, net of cash acquired (7,691) - -
Change in closed block invested assets, net (1,267) (4,991) -
Other, net (12,899) (18,010) (1,576)
------------ ------------ ------------
Net cash used by investing activities (17,168) (15,178) (70,174)
------------ ------------ ------------
Cash flows from financing activities:
Deposits to policyholder account balances 50,635 48,540 62,408
Withdrawals from policyholder account balances (49,568) (32,321) (36,896)
Shareholder dividends (1,591) - -
Net proceeds from initial public offering 33,457 -
Policyholder cashouts from demutualization (6,877) - -
Extraordinary charge for demutualization expense - (7,737) (8,109)
------------ ------------ ------------
Net cash provided by financing activities (7,401) 41,939 17,403
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (23,222) 22,748 (4,518)
------------ ------------ ------------
Cash and cash equivalents at beginning of year 25,301 2,553 7,071
------------ ------------ ------------
Cash and cash equivalents at end of year $ 2,079 $ 25,301 $ 2,553
============ ============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
30
<PAGE>
B u i l d i n g R e l a t i o n s h i p s f o r L i f e(R)
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
- --------------------------------------------------------------------------------
(1) Summary of Significant Accounting Policies
(a) Organization and Principles of Consolidation
The consolidated financial statements include The Guarantee Life
Companies Inc. (Holding Company) and its direct and indirect wholly-owned
insurance subsidiaries, all of which are collectively referred to hereinafter as
"Guarantee Life". Insurance subsidiaries, all of which are domiciled in
Nebraska, include: Guarantee Life Insurance Company (Guarantee Life Insurance),
Guarantee American Life Company (Guarantee American) and Guarantee Protective
Life Company (Guarantee Protective). All significant intercompany transactions
have been eliminated in consolidation.
On December 6, 1996, Guarantee American was renamed "NGL American Life
Insurance Company" in anticipation of its sale to National Guardian Life
Insurance Company, which sale is scheduled to close on January 1, 1997. The sale
is expected to result in a gain of approximately $800 thousand, and reduce
invested assets by approximately $4.4 million.
During 1996, the Holding Company's Board of Directors adopted a
shareholder rights plan that is intended to ensure fair treatment of
shareholders in the event of any unsolicited offer that might lead to change in
control of Guarantee Life.
According to the plan, shareholders of record on November 29, 1996,
received one right for each share of common stock owned on that date. Each
right, when exercised, will entitle its holder to purchase one one-thousandth of
a share of Series A Junior Participating Cumulative Preferred Stock of the
Holding Company at an exercise price of $80.00.
The plan provides that after a person or group acquires 15% or more of
the Holding Company's voting shares, each of the rights (other than the rights
held by the 15% holder which become void once the holder reaches the 15%
threshold) offers the holder the right to acquire, upon payment of the exercise
price, common stock having a market value equal to twice the exercise price. In
addition, in the event that after a person or group acquires 15% or more of the
Holding Company's voting shares, or the Holding Company is acquired in a merger
or other business combination transaction or 50% or more of Guarantee Life's
assets, cash flow or earnings power are sold or otherwise transferred, each of
the rights (other than the rights held by the 15% holder) offers the holders the
right to acquire, upon payment of the exercise price, that number of shares of
common stock of the acquiring company which at the time of such transaction
would have a market value of two times the exercise price of the right. The plan
also provides that if a person or group acquires at least 15%, but less than
50%, of the Holding Company's voting stock, the Board may exchange each right
(other than those rights held by the 15% holder) for one share of the Holding
Company's common stock.
The rights may be redeemed by the Board of Directors for $0.01 per right
at any time prior to the first public announcement or communication to Guarantee
Life that a person or group has crossed the 15% threshold. The rights will
expire on November 18, 2006, unless earlier redeemed or exchanged by the Holding
Company in accordance with the provisions of the plan.
31
<PAGE>
G u a r a n t e e L i f e 1 9 9 6 A n n u a l R e p o r t
On December 15, 1994, Guarantee Life Insurance's Board of Directors
adopted a plan to convert Guarantee Life Insurance from its mutual form to a
stock life insurance company (demutualization). The Holding Company, a Delaware
corporation, was formed to act as the holding company for the demutualization of
Guarantee Life Insurance. The principal purpose of the demutualization was to
enhance the strategic and financial flexibility by, among other things, creating
opportunities to obtain additional capital from currently unavailable sources
and by creating a corporate structure which will facilitate acquisitions.
Demutualization also provided eligible policyholders with an opportunity to
convert their interests in Guarantee Life Insurance into publicly traded shares
of the Holding Company or other consideration.
The demutualization was approved by policyholders on August 24, 1995. On
December 26, 1995, (the Effective Date) the Holding Company completed an initial
public offering of 2,875,000 shares, representing an approximate 29 percent
ownership interest in Holding Company outstanding common stock. The net proceeds
from the offering, after the underwriting discount and issue costs, totaled
$33.5 million. In connection with the demutualization, 7,069,383 shares were
issued to certain eligible policyholders, other eligible policyholders received
$6.9 million in cash in lieu of common stock, while other eligible policyholders
received $4.5 million of policy credits.
The accompanying consolidated statements of income reflect extraordinary
charges of $7.7 million, and $8.1 million (all net of taxes) for the years ended
December 31, 1995, and 1994, respectively, relating to costs associated with the
demutualization. Certain of the demutualization expenses are not expected to be
deductible for federal income tax purposes as they are related to reorganization
activities.
Closed Block
The plan of conversion contained an arrangement, known as a closed block,
to provide for dividends on policies that were in force on the effective date
and are within the classes of individual policies for which Guarantee Life
Insurance had a dividend scale in effect for 1994. The closed block is designed
to give reasonable assurance to holders of affected policies that assets will be
available to support such policies, including maintaining dividend scales in
effect for 1994 if the experience underlying such scales continues. The assets,
including revenue therefrom, allocated to the closed block will accrue solely to
the benefit of the holders of policies included in the block until the block is
no longer in effect. Guarantee Life will not be required to support the payment
of dividends on closed block policies from its general funds.
The closed block assets and liabilities and results of operations are
presented in the consolidated financial statements as single line items (see
note 7). Unless specifically stated, all disclosures contained herein supporting
the consolidated financial statements exclude the closed block related amounts.
(b) Investments in Fixed Maturities and Equity Securities
Changes in accounting
At January 1, 1994, Guarantee Life adopted Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities (SFAS 115), which expands the use of fair value accounting for
those securities that a company does not have positive intent and ability to
hold to maturity. Implementation of this standard increased consolidated
shareholders' equity by $16.8 million, which reflected the unrealized
appreciation of fixed maturities available-for-sale, net of related deferred
policy acquisition costs and deferred taxes.
Categorization of fixed maturities and equity securities
SFAS 115 requires that debt and equity securities be carried at fair
value unless Guarantee Life has the positive intent and ability to hold these
investments to maturity. Debt and equity securities must be classified into one
of three categories: 1) held-to-maturity, 2) available-for-sale, or 3) trading
securities. Upon adoption, Guarantee Life classified certain debt and all equity
securities as available-for-sale and, accordingly, recorded them at fair value.
Related balance sheet accounts are adjusted as if the unrealized gains had been
realized at the balance sheet date, and the net unrealized gains or losses on
securities are credited or debited directly to shareholders' equity.
32
<PAGE>
B u i l d i n g R e l a t i o n s h i p s f o r L i f e(R)
Effective with the adoption of SFAS 115, management determines the
appropriate classification of fixed maturities and equity securities at the time
of purchase and reevaluates such designation at each balance sheet date. When
changes in conditions cause a fixed maturity investment to be transferred to a
different category, the security is transferred to the new category at its fair
value at the date of transfer. During 1995, Guarantee Life transferred two
securities with amortized cost totalling $3.0 million from the held-to-maturity
category due to deterioration in the issuers credit quality. There was an
unrealized loss of $1.0 million related to these transfers. During 1994,
Guarantee Life transferred one security with amortized cost of $2.7 million from
the held-to-maturity category due to deterioration in the issuers credit
quality. The security was subsequently sold at a minimal loss.
In November 1995, the Financial Accounting Standards Board issued a
Special Report, "A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities". This Special Report allowed
for a reevaluation of the classification of debt and equity securities, and a
one-time transfer between categories. On December 29, 1995, Guarantee Life
transferred 38 securities with amortized cost totalling $58.6 million from
held-to-maturity to available-for-sale, with the corresponding $0.8 million in
unrealized loss being charged to shareholders' equity. These transfers were made
to afford consistent classification for similar investment securities across all
product portfolios.
Available-for-sale fixed maturities and equity securities
Available-for-sale fixed maturities and equity securities (common and
nonredeemable preferred stocks) are carried at fair value. After adjusting
related balance sheet accounts as if the unrealized gains had been realized, the
net adjustment is recorded in net unrealized appreciation (depreciation) on
securities within shareholders' equity. If the fair value of a security
classified as available-for-sale declines below its cost and this decline is
considered to be other than temporary, the security is reduced to its net
realizable value, and the reduction is recorded as a realized loss.
Held-to-maturity fixed maturities
Fixed maturities for which Guarantee Life has both the ability and the
intent to hold to maturity are stated at amortized cost adjusted for other than
temporary fair value decline. Amortized cost reflects actual cost adjusted for
amortization of premium and accretion of discount.
Mortgage loans
Mortgage loans on real estate are stated at unpaid principal balance, net
of unamortized discounts and valuation allowances. The valuation allowances on
mortgage loans are based on losses expected by management to be realized on
transfers of mortgage loans to real estate, on the disposition or settlement of
mortgage loans and on mortgage loans which management believes may not be
collectible in full.
Policy loans, investment real estate and other invested assets
Policy loans are carried at unpaid balances. Investment real estate is
generally stated at depreciated cost, including development costs, less
allowances for other than temporary decline in value. Investment real estate
acquired in satisfaction of debt is valued at the lower of cost or estimated
fair value at date of acquisition and is periodically revalued. Other invested
assets are recorded at amortized cost less allowances for other than temporary
decline in value.
Investment income
Bond premium and discounts are amortized into income using the scientific
yield method over the term of the security. Premiums and discounts on
mortgage-backed securities are amortized using the interest method over the
expected life of each security. In addition, a pro rata portion of premiums and
discounts is recognized when unscheduled principal payments are received and is
included in net investment income. Realized gains and losses on sales of
investments are recognized in net income on the specific identification basis.
Changes in fair values of available-for-sale fixed maturities and equity
securities are reflected as unrealized gains (losses) directly in shareholders'
equity and, accordingly, have no effect on net income.
33
<PAGE>
G u a r a n t e e L i f e 1 9 9 6 A n n u a l R e p o r t
Invested asset impairment and valuation allowances
Invested assets are considered impaired when Guarantee Life determines
that collection of all amounts due under the contractual terms is doubtful.
Guarantee Life adjusts invested assets to their estimated net realizable value
at the point at which it determines an impairment is other than temporary. In
addition, Guarantee Life has established valuation allowances for mortgage loans
and other invested assets. Valuation allowances for other than temporary
impairments in value are netted against the asset categories to which they
apply, and additions to valuation allowances are included in total investment
results.
(c) Deferred Policy Acquisition Costs
Certain commissions, expenses of the policy issue and underwriting
departments and other variable expenses have been deferred. For limited payment
and other traditional life insurance policies, these deferred policy acquisition
costs are being amortized in proportion to the ratio of the expected annual
premium revenue to the expected total premium revenue. Expected premium revenue
was estimated with the same assumptions used for computing liabilities for
future policy benefits for these policies.
For universal life and annuity type contracts, the deferred policy
acquisition costs are amortized over a period of not more than twenty years in
relation to the present value of estimated gross profits arising from estimates
of mortality, interest, expense and surrender experience. The estimates of
expected gross profits are evaluated regularly and are revised if actual
experience or other evidence indicates that revision is appropriate. Upon
revision, total amortization recorded to date is adjusted by a charge or credit
to current earnings. Under SFAS 115, deferred policy acquisition costs are
adjusted for the impact on estimated gross profits of net unrealized gains and
losses on securities.
(d) Recognition of Insurance Premium Revenue and Related Expenses
For limited payment contracts, net premiums are recorded as revenue, and
the difference between the gross premium and the net premium is deferred and
recognized in income in a constant relationship to insurance in force. For other
traditional life policies, premiums are recognized when due, less allowances for
estimated uncollectible balances.
For universal life and annuity policies, contract charges for mortality,
surrender and expense, other than front-end expense charges, are reported as
income when charged to policyholder accounts. Expenses consist primarily of
benefit payments in excess of policyholder account values and interest credited
to policyholder accounts. Profits are recognized over the life of universal life
type contracts through the amortization of deferred policy acquisition costs in
relation to estimated gross profits from mortality, interest, surrender and
expense.
For accident and health policies, premium income is earned pro rata over
the term of the contracts. Premiums paid but not earned are recorded as
liabilities.
34
<PAGE>
B u i l d i n g R e l a t i o n s h i p s f o r L i f e(R)
(e) Future Policy Benefits and Policyholder Account Balances
For traditional life insurance policies, future policy benefits and
dividend liabilities are computed using a net level premium method on the basis
of actuarial assumptions as to mortality, persistency and interest established
at policy issue. Assumptions established at policy issue as to mortality and
persistency are based on industry standards and Guarantee Life's historical
experience which, together with interest and expense assumptions, provide a
margin for adverse deviation. Interest rate assumptions principally range from
2.5% to 4.5%. When the liabilities for future policy benefits plus the present
value of expected future gross premiums are insufficient to provide for expected
future policy benefits and expenses, unrecoverable deferred policy acquisition
costs are written off and thereafter a premium deficiency reserve is established
through a charge to earnings.
Accident and health benefits for active lives are calculated using the
net level premium method and assumptions as to future morbidity, withdrawals and
interest which provide a margin for adverse deviation. Benefit liabilities for
disabled lives are calculated using the present value of benefits method and
experience assumptions as to claim termination, expense and interest which also
provide a margin for adverse deviation.
Policyholders' account balances for universal life and annuity policies
are equal to the policy account value before deduction of any surrender charges.
The policy account value represents an accumulation of gross premium payments
plus credited interest less expense and mortality charges and withdrawals. An
additional liability is established for deferred front-end expense charges on
universal life type policies. These expense charges are recognized in income as
policyholder assessments using the same assumptions as are used to amortize
deferred policy acquisition costs. Weighted average interest crediting rates for
universal life policies were 5.90%, 6.03%, and 5.99%; for annuity policies were
5.46%, 5.93%, and 5.80% for 1996, 1995 and 1994 respectively.
(f) Policy and Contract Claims
Guarantee Life establishes a liability for unpaid claims based on
estimates of the ultimate cost of claims incurred, which is comprised of
aggregate case basis estimates and average claim costs for reported claims and
estimates of incurred but unreported losses based on past experience. Guarantee
Life's policy and contract claims liability includes a provision for both life
and accident and health claims.
The liability for unreported losses is established using various
statistical and actuarial techniques reflecting historical patterns of
development of paid and reported losses adjusted for current trends. The
liability is continually reviewed and updated as new information becomes
available. Resulting adjustments are reflected in income currently. Adjustments
related to claims incurred in prior periods have not been material for all
periods presented in the accompanying consolidated statements of income.
Management believes the liabilities for unpaid claims are adequate to
cover the ultimate liability; however, due to the underlying risks and the high
degree of uncertainty associated with the determination of the liability for
unpaid claims, the amounts which will ultimately be paid to settle these
liabilities cannot be determined precisely and may vary from the estimated
amount included in the consolidated balance sheets.
(g) Property, Plant and Equipment
Property, plant and equipment is presented at cost less accumulated
depreciation. Expenditures resulting in significant betterment or improvement of
the buildings are included in the cost of the building. Maintenance, repairs and
renewals of a minor nature are charged to operations as incurred. Guarantee Life
uses the straight-line method of depreciation based upon the estimated useful
lives of the buildings and improvements.
35
<PAGE>
G u a r a n t e e L i f e 1 9 9 6 A n n u a l R e p o r t
(h) Guaranty Fund Assessments
As a condition of doing business, states and jurisdictions in which
Guarantee Life does business have adopted laws requiring membership in life and
health insurance guaranty funds, which are organized to pay contractual
obligations under insurance policies issued by insolvent and failed life and
health insurers. Member companies are subject to assessments each year based on
life, health or annuity premiums collected in the state. In some states these
assessments may be applied against premium taxes.
In accordance with estimates provided by the National Organization of Life
and Health Guaranty Associations, Guarantee Life has established a liability of
$1.5 million in the accompanying consolidated financial statements for amounts
due for actual and potential insurance company failures in the states where
Guarantee Life writes business. Guarantee Life capitalizes the assessments which
are deductible when they are paid and generally amortizes the payments over not
more than five years. Guaranty fund assessments capitalized are reviewed
quarterly to determine that the unamortized portion of such costs does not
exceed recoverable amounts. At December 31, 1996, Guarantee Life had $1.9
million of unamortized guaranty fund assessments which are included in other
assets.
(i) Pension and Other Post Retirement Benefits
Guarantee Life has a defined benefit pension plan which covers
substantially all of their employees. Current pension costs are funded at the
maximum deductible amount allowed by the Internal Revenue Service (IRS).
Periodic net pension expense is based on the cost of incremental benefits for
employee service during the period, interest on the projected benefit
obligation, actual return on plan assets and amortization of actuarial gains and
losses. In addition to providing pension benefits, Guarantee Life provides life
insurance benefits to retired employees. Substantially all of Guarantee Life's
employees may become eligible for the life benefits. Guarantee Life recognizes
the cost of these post retirement benefits as they are earned by the employees
and accrues for the expected cost of providing those benefits to employees and
their beneficiaries during the years the employees render service.
(j) Federal Income Taxes
Guarantee Life intends to file a consolidated federal income tax return.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(k) Fair Value of Financial Instruments
Fair values for fixed securities are based on quoted market prices, where
available. For securities not actively traded, fair values are estimated using
values obtained from independent pricing services or, in the case of private
placements, are estimated by discounting expected future cash flows using a
current market rate applicable to the yield, credit quality and maturity of the
investments. Prepayments are assumed to occur at the same rate as in previous
periods when interest rates were at levels similar to current levels. The fair
values for equity securities are based on quoted market prices and are
recognized in the consolidated balance sheets.
The fair values for mortgage loans and policy loans are estimated using
discounted cash flow analyses and using interest rates currently being offered
for similar loans to borrowers with similar credit ratings. Loans with similar
characteristics are aggregated for purposes of the calculations. Prepayments are
assumed to occur at the same rate as in previous periods when interest rates
were at levels similar to current levels. The fair value of investment real
estate is based on market values for comparable local real estate. The fair
values of Guarantee Life's other invested assets are based on current market
prices and discounted expected future cash flows for related investments.
36
<PAGE>
B u i l d i n g R e l a t i o n s h i p s f o r L i f e(R)
Fair values for Guarantee Life's liabilities under investment type
insurance contracts (that is those contracts without significant mortality
risks) are estimated using discounted cash flow calculations, based on interest
rates currently being offered for similar contracts with maturities consistent
with those remaining for the contracts being valued. The intangible value of
long-term relationships with policyholders is not taken into account in
estimating fair values disclosed. Fair values for Guarantee Life's insurance
contracts other than investment type contracts are not required to be disclosed.
However, the fair values of liabilities under all insurance contracts are taken
into consideration in Guarantee Life's overall management of interest rate risk,
which minimizes exposure to changing interest rates through the matching of
investment maturities with amounts due under insurance contracts.
(l) Cash Equivalents
For purposes of the consolidated statements of cash flows, Guarantee Life
considers cash equivalents to be all highly liquid debt instruments with
original maturities of three months or less when purchased. The carrying amounts
reported in the consolidated balance sheets for these instruments approximates
their fair value.
(m) Earnings Per Share
Per share data is based on the weighted average number of shares of common
stock, which was 9,944,383 in 1996.
(n) Discontinued Operations
In 1994, Guarantee Life decided to withdraw from the alternate workers'
compensation benefit program segment. The operations of this segment have been
reflected on a net basis and classified as discontinued operations in the
accompanying consolidated financial statements. See also note 16.
(o) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(p) Reclassifications
Certain reclassifications have been made to the prior consolidated
financial statements to conform with the most current presentation.
37
<PAGE>
G u a r a n t e e L i f e 1 9 9 6 A n n u a l R e p o r t
(2) Investments
Fixed maturities at December 31, 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 $ 72,802 $ 1,193 $ 54 $ 73,941
Obligations of states and political subdivisions 10,128 114 34 10,208
Debt securities issued by foreign governments 5,894 391 - 6,285
Corporate securities 244,151 8,787 2,459 250,479
Mortgage-backed securities 187,766 2,056 3,936 185,886
-------- --------- --------- --------
$520,741 $ 12,541 $ 6,483 $526,799
======== ========= ========= ========
Held-to-maturity:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $ 2,494 $ - $ 18 $ 2,476
Corporate securities 136,090 9,858 611 145,337
-------- --------- --------- --------
$138,584 $ 9,858 $ 629 $147,813
======== ========= ========= ========
</TABLE>
Guarantee Life manages its credit risk associated with fixed maturities by
diversifying its portfolio. At December 31, 1996, Guarantee Life held no
corporate debt securities or foreign government debt securities of a single
issuer which had a carrying value in excess of 5% of shareholders' equity.
At December 31, 1996 Guarantee Life held $109.2 million of mortgage-backed
securities issued by U.S. Government agencies and $48.7 million of mortgage-
backed securities issued by Guarantee Life. At December 31, 1996, Guarantee Life
held no other mortgage-backed securities of a single issuer which had a carrying
value in excess of 5% of policyholders' equity. Guarantee Life's non-income
earning investments in fixed maturities are not material.
Fixed maturities at December 31, 1995 (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 $ 48,075 $ 1,182 $ 972 $ 48,285
Obligations of states and political subdivisions 782 91 - 873
Debt securities issued by foreign governments 8,041 579 - 8,620
Corporate securities 229,399 16,357 3,501 242,255
Mortgage-backed securities 204,370 5,673 4,244 205,799
-------- --------- --------- --------
$490,667 $ 23,882 $ 8,717 $505,832
======== ========= ========= ========
Held-to-maturity:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $ 3,950 $ 760 $ - $ 4,710
Corporate securities 136,096 17,935 610 $153,421
-------- --------- --------- --------
$140,046 $ 18,695 $ 610 $158,131
======== ========= ========= ========
</TABLE>
38
<PAGE>
B u i l d i n g R e l a t i o n s h i p s f o r L i f e (R)
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties. The carrying value, amortized cost and estimated fair
value of fixed maturities by contractual maturity (in thousands) are as follows:
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------
Carrying Amortized Estimated
Value Cost Fair Value
---------- --------- ----------
<S> <C> <C> <C>
Due in one year or less $ 31,332 $ 31,097 $ 31,094
Due after one year through five years 139,616 136,370 142,456
Due after five years through ten years 168,354 165,688 171,841
Due after ten years 140,195 138,404 143,335
-------- -------- --------
479,497 471,559 488,726
Mortgage-backed securities 185,886 187,766 185,886
-------- -------- --------
$665,383 $659,325 $674,612
======== ======== ========
</TABLE>
Guarantee Life had fixed maturities, mortgage loans, preferred stocks and
common stocks with carrying values aggregating $10.2 million as of December 31,
1996 on deposit with regulatory authorities.
A summary of realized investment gains (losses) (in thousands) is as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Fixed maturities:
Gross gains $ 1,899 $ 3,944 $ 643
Gross losses (2,669) (1,174) (1,243)
Equity securities 1,002 23 (8)
Other investments (3) 143 (310)
Change in investment valuation allowances (62) (488) (291)
------- ------- -------
Realized investment gains (losses) $ 167 $ 2,448 $(1,209)
======= ======= =======
</TABLE>
A summary of consolidated net investment income (in thousands) is as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Fixed maturities $50,844 $70,330 $71,095
Equity securities 434 690 577
Mortgage loans 5,607 4,543 3,486
Policy loans 1,171 3,676 3,708
Investment real estate 1,930 1,797 1,817
Other 3,175 4,505 2,335
------- ------- -------
63,161 85,541 83,018
Less investment expenses (5,865) (6,941) (7,907)
------- ------- -------
Net investment income from invested assets 57,296 78,600 75,111
Less discontinued operations (note 16) (2,925) (3,985) (4,692)
------- ------- -------
Net investment income $54,371 $74,615 $70,419
======= ======= =======
</TABLE>
Investment expenses include depreciation and depletion of $0.9 million,
$0.9 million, and $1.7 million in 1996, 1995 and 1994, respectively.
39
<PAGE>
G u a r a n t e e L i f e 1 9 9 6 A n n u a l R e p o r t
The effect of implementing SFAS 115 as of January 1, 1994 was an increase
in the carrying value of fixed maturities of $27.0 million, a decrease in
deferred policy acquisition costs of $1.1 million, a net increase in deferred
income tax liabilities of $9.1 million and an increase in shareholders' equity
of $16.8 million, which resulted from changing the carrying value of certain
fixed maturities from amortized cost to fair value and related adjustments. The
implementation had no effect on net income.
A summary of the components of the net unrealized appreciation
(depreciation) on invested assets, including closed block, carried at fair value
(in thousands) is as follows:
<TABLE>
<CAPTION>
December 31,
-------------------
1996 1995
-------- --------
<S> <C> <C>
Unrealized appreciation (depreciation):
Fixed maturities available-for-sale $ 8,297 $ 23,798
Equity securities (63) 960
Deferred policy acquisition costs (2,215) (1,795)
Deferred income taxes (2,107) (8,037)
-------- --------
Net unrealized appreciation $ 3,912 $ 14,926
======== ========
</TABLE>
(3) Mortgage Loans
Investments in mortgage loans consist almost entirely of commercial
mortgage loans all of which are made on a full or partial recourse basis and
consist primarily of fixed-rate first mortgages on completed properties. The
following table sets forth additions, reductions from payments and other charges
and foreclosures related to the mortgage loan portfolio (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------
1996 1995
-------- --------
<S> <C> <C>
Commercial loans:
Beginning balance $ 61,087 $ 47,233
Additions 13,542 15,745
Payments and other charges (3,842) (1,891)
-------- --------
Ending balance 70,787 61,087
Other mortgage loans 138 1,069
Valuation allowance (769) (689)
-------- --------
$ 70,156 $ 61,467
======== ========
</TABLE>
Guarantee Life manages its credit risk associated with these loans by
diversifying its mortgage portfolio by property type and geographic location. As
of December 31, 1996, there were 98 individual commercial mortgage loans
collateralized by office buildings, retail properties, industrial properties,
apartment buildings and medical clinics. As of December 31, 1996, Guarantee Life
had no single mortgage loan outstanding which had a carrying value in excess of
5% of shareholders' equity. As of December 31, 1996, all commercial mortgage
loans bore a fixed interest rate and Guarantee Life had no material loans over
60 days past due. Guarantee Life had outstanding commitments to fund mortgage
loans totaling $1.6 million as of December 31, 1996.
40
<PAGE>
B u i l d i n g R e l a t i o n s h i p s f o r L i f e (R)
Securitization and Sale
In December 1992, Guarantee Life sold $131.0 million of mortgage loans to a
trust formed to effect the sale of collateralized mortgage obligations. In
exchange, Guarantee Life received cash of approximately $78.0 million and
securities backed by mortgage loans. No gain was recognized on these
transactions as the excess projected future cash flow was expected to be offset
by principal prepayments and principal defaults. The composition of Guarantee
Life's related carrying values were as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------
1996 1995
------- -------
<S> <C> <C>
Mortgage Pass-Through Certificates carried at fair value as fixed maturities $48,660 $49,271
Residual interest payments carried at present value of estimated
future cash flows and classified as other invested assets 7,575 8,053
------- -------
Carrying value in accompanying consolidated financial statements $56,235 $57,324
======= =======
</TABLE>
(4) Deferred Policy Acquisition Costs
A summary of the policy acquisition costs deferred and amortized (in
thousands) is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of period $70,168 $90,168 $85,260
Policy acquisition costs deferred 44,116 46,392 44,107
Policy acquisition costs amortized (47,554) (47,573) (40,785)
Policy acquisition costs acquired in purchase 11,658 - -
Policy acquisition costs reclassified to closed block other assets - (15,437) -
------- ------- -------
78,338 73,550 88,582
------- ------- -------
Deferred policy acquisition costs relating to change in
unrealized gain (loss) on fixed maturities
available-for-sale (420) (3,382) 1,586
------- ------- -------
Total reflected in consolidated balance sheet $77,968 $70,168 $90,168
======= ======= =======
</TABLE>
During the years ended December 31, 1995 and 1994 policy acquisition costs
amortization decreased approximately $1.0 million and $3.3 million respectively,
due to changes in estimates based on actual experience. There was no significant
change in estimates for 1996. Commissions represent over 90% of policy
acquisition costs deferred.
(5) Reinsurance
In the ordinary course of business, Guarantee Life assumes business from
and cedes business to other insurers under a variety of contracts. The existence
of ceded reinsurance constitutes a means by which Guarantee Life has
underwritten a portion of its business.
Guarantee Life's retention limit on its life insurance business was
generally $250,000 on a life risk in 1996. Certain reinsurers have agreed to
reinsure automatically all amounts on any one life in excess of the retention
amount not to exceed eight times Guarantee Life's retention in 1996. Amounts in
excess of the automatic acceptance limits of Guarantee Life's retention may be
applied for facultatively. As of December 31, 1996 and 1995, the amount of ceded
life insurance in force was approximately $1.5 billion and $1.2 billion,
respectively.
41
<PAGE>
G u a r a n t e e L i f e 1 9 9 6 A n n u a l R e p o r t
Guarantee Life cedes 100% of its individual accident and health business.
Guarantee Life's retention level on group accident and health business varies by
product.
Guarantee Life generally strives to diversify its credit risks related to
reinsurance ceded; however, certain concentrations of credit risk related to
reinsurance recoverables (including unearned premiums) exist with the insurance
organizations listed in the table below (in thousands):
<TABLE>
<CAPTION>
December 31,
1996
------------
<S> <C>
Mercantile and General Reinsurance Company $ 28,748
Lincoln National Life Insurance Company 21,929
Phoenix Home Life Mutual Insurance Company 19,414
Life Reassurance Corporation of America 15,277
Lone Star Life Insurance Company 11,230
UNUM Life Insurance Company of America 10,379
John Hancock Mutual Life Insurance Company 7,563
North American Life Assurance Company 6,071
RGA Reinsurance Company 4,116
Crown Life Insurance Company 4,142
Others 7,187
--------
Total before discontinued operations 136,056
--------
Less discontinued operations (note 16) 74,359
--------
Total reflected in accompanying consolidated balance sheet $ 61,697
========
</TABLE>
This underwriting activity subjects Guarantee Life to certain risks. To the
extent that reinsurers who are underwriting Guarantee Life's business become
unable to meet their contractual obligations, Guarantee Life retains the primary
obligation to its direct policyholders because the existence of this reinsurance
does not discharge Guarantee Life from its obligation to its policyholders.
Guarantee Life has policies and procedures to approve reinsurers prior to
entering into an agreement and also to monitor financial stability on a
continuous basis. As of December 31, 1996 and December 31, 1995 Guarantee Life
had no overdue reinsurance balances. As of December 31, 1996 Guarantee Life held
funds and other collateral of $11.8 million related to the above recoverables.
As of December 31, 1996, over 90% of the reinsurance recoverables relate to
accident and health business.
(6) Property, Plant and Equipment
A summary of property, plant and equipment (in thousands) is as follows:
<TABLE>
<CAPTION>
December 31,
-------------------
1996 1995
-------- --------
<S> <C> <C>
Home office building $ 20,505 $ 19,028
Plant and equipment 14,447 14,413
Less accumulated depreciation (14,850) (13,101)
-------- --------
$ 20,102 $ 20,340
======== ========
</TABLE>
42
<PAGE>
B u i l d i n g R e l a t i o n s h i p s f o r L i f e (R)
(7) Closed Block
Summarized financial information of the closed block (in thousands) is as
follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1995
-------- ---------
Assets (in thousands)
------
<S> <C> <C>
Invested assets:
Fixed maturities:
Available-for-sale, at fair value (amortized cost
$190,504 and $184,699) $193,121 $193,332
Held-to-maturity, at amortized cost (fair value:
$48,837 and $65,875) 55,401 58,570
-------- --------
248,522 251,902
Policy loans 48,057 49,465
Other invested assets, net 3,228 3,190
-------- --------
Total invested assets 299,807 304,557
Cash and cash equivalents 1,480 974
Accrued investment income 4,428 4,265
Ceded reinsurance recoverables 1,237 1,364
Accounts receivable, net 950 194
Deferred policy acquisition costs 13,925 15,437
-------- --------
Total closed block assets $321,827 $326,791
======== ========
Liabilities
-----------
Life future policy benefits $301,568 $301,269
Policyholder account balances for annuity contracts 894 832
Policy and contract claims 298 586
Other policyholder funds 72,186 72,706
Dividends payable to policyholders 7,646 7,539
Deferred income taxes 916 2,557
Other liabilities 3,875 2,774
-------- --------
Total closed block liabilities $387,383 $388,263
======== ========
</TABLE>
Condensed statement of income for the closed block (in thousands) is as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996
--------
<S> <C>
Revenues:
Insurance premiums and policyholder assessments, net of reinsurance $ 21,785
Investment income, net 21,543
Realized investment gains (losses) (68)
Other income 93
---------
Total revenues 43,353
---------
Policyholder benefits and expenses:
Total policyholder benefits 23,209
Policy acquisition costs 1,999
Other insurance operating expense 4,259
---------
Total benefits and expenses 29,467
---------
Dividends to policyholders 10,815
---------
Contribution from Closed Block $ 3,071
=========
</TABLE>
43
<PAGE>
G u a r a n t e e L i f e 1 9 9 6 A n n u a l R e p o r t
The closed block will include only those revenues, benefits, expenses and
dividends considered in funding it. The pre-tax income of the closed block will
be reported as a single line item of total revenues from continuing operations
in Guarantee Life's consolidated statements of income. Income tax expense
applicable to the closed block, which was funded, will be reflected as a
component of income tax expense.
The excess of closed block liabilities over closed block assets as of
December 31, 1996 and 1995 represents the total estimated future contribution
from the closed block expected to emerge from operations in the closed block
after income taxes. The contribution from the closed block will be recognized in
income over the period the policies and contracts in it 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 would be recognized in income. The excess of the
actual cumulative contribution over such expected cumulative contribution would
be paid to closed block policyholders as additional policyholder dividends. If
over such period, the actual cumulative contribution is less than expected, only
such actual contribution would be recognized in income. However, dividends could
be changed in the future, which would increase future actual contributions until
the actual cumulative contributions equal the expected cumulative contributions.
Therefore, management believes that over time the actual cumulative
contributions from the closed block will approximately equal the expected
cumulative contributions due to the effect of dividend changes.
(8) Liability for Unpaid Accident and Health Claims and Claims Adjustment
Expenses
The change in the liability for unpaid group accident and health claims
and claim adjustment expenses is summarized (in thousands) as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
Balance at January 1 $ 97,355 $ 91,355 $ 90,126
Less reinsurance recoverables (41,305) (46,249) (49,237)
--------- -------- --------
Net balance at January 1 56,050 45,106 40,889
Incurred related to:
Current year 72,192 76,616 46,543
Prior years (18,392) (6,717) (5,581)
--------- -------- --------
Total incurred 53,800 69,899 40,962
Paid related to:
Current year 38,262 42,046 22,999
Prior years 14,306 16,909 13,746
--------- -------- --------
Total paid 52,568 58,955 36,745
--------- -------- --------
Balance at December 31 57,282 56,050 45,106
Plus reinsurance recoverables 36,764 41,305 46,249
--------- -------- --------
Balance at December 31 $ 94,046 $ 97,355 $ 91,355
========= ======== ========
</TABLE>
The liability for unpaid accident and health claims and claim adjustment
expenses is included in policy and contract claims and future policy benefits:
accident and health, on the consolidated balance sheets.
44
<PAGE>
B u i l d i n g R e l a t i o n s h i p s f o r L i f e (R)
(9) Federal Income Taxes
The actual federal income tax expense attributable to income from
continuing operations differs from the amounts computed by applying the U.S.
federal income tax rate of 35 percent to income from continuing operations
before income taxes as a result of the following (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1996 1995 1994
--------- --------- --------
<S> <C> <C> <C>
Computed "expected" tax expense $ 7,926 $ 6,954 $ 9,591
Increase (reduction) in income taxes resulting from:
Tax imposed on mutual company surplus - 1,039 2,800
Change in beginning-of-year valuation allowance - - -
Other, net - 1,072 (674)
--------- --------- ---------
Total $ 7,926 $ 9,065 $ 11,717
</TABLE>
Total income tax expense (benefit), substantially all of which is
federal, is attributable to income from continuing operations and consists of
(in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1996 1995 1994
--------- -------- ----------
<S> <C> <C> <C>
Current $ 9,706 $ 11,655 $ 17,800
Deferred (1,780) (2,590) (6,083)
--------- -------- ----------
Total $ 7,926 $ 9,065 $ 11,717
========= ======== ==========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1995
<S> <C> <C>
Deferred tax assets:
Policy liabilities $ 22,056 $ 23,904
Other 9,143 5,569
-------- --------
Net deferred tax assets 31,199 29,473
Deferred tax liabilities:
Deferred policy acquisition costs 25,493 26,271
Unrealized gain on investments available for sale 2,107 8,037
Other 3,280 795
-------- --------
Total gross deferred tax liabilities 30,880 35,103
-------- --------
Net deferred tax liabilities (assets) $ (319) $ 5,630
======== ========
</TABLE>
As discussed in note 1, Guarantee Life carries its invested securities
classified as available-for-sale at fair value. For federal income tax purposes,
Guarantee Life believes it is not a dealer with respect to these investment
securities and, therefore, recognizes gains and losses on such investment
securities only when they are sold.
As of January 1, 1994, Guarantee Life's unrealized gain on invested
securities available-for-sale relating to the adoption of SFAS 115 was reduced
by a related deferred tax liability. The increase in the deferred tax liability
was recorded directly to shareholders' equity.
45
<PAGE>
G u a r a n t e e L i f e 1 9 9 6 A n n u a l R e p o r t
As of December 31, 1996, Guarantee Life does not believe any valuation
allowance with respect to the gross deferred tax assets is necessary as it is
more likely than not that these deferred tax assets will be realized due to the
expected reversal of existing temporary differences attributable to gross
deferred tax liabilities and the carryback potential of prior year income taxes
paid.
Guarantee Protective, which joins in the filing of the consolidated
federal income tax return of Guarantee Life, has a Net Operating Loss (NOL)
carryover as of December 31, 1996 of approximately $591 thousand. Because the
acquisition of Guarantee Protective by Guarantee Life constituted an ownership
change as defined by Section 382 of the Internal Revenue Code, the maximum
amount of Guarantee Protective taxable income which may be offset by the NOL
carryover in any one tax year is approximately $457,000. During 1996, 1995 and
1994, Guarantee Life utilized the full $457,000.
Prior to 1984, a portion of Guarantee Protective's current income was not
subject to current income tax but was accumulated for income tax purposes in a
memorandum account designated as "policyholders' surplus." The total of the life
companies' balances in their respective "policyholders' surplus" accounts at
December 31, 1983 was frozen by the Tax Reform Act of 1984 and, accordingly,
there have been no additions to the accounts after that date. Certain triggering
events will cause a recapture of all or part of the "policyholders' surplus"
account. Any amounts recaptured must be included in taxable income and may not
be offset by any existing NOL carryovers. As of December 31, 1996, the balance
of Guarantee Protective's "policyholders' surplus" account was approximately
$2.4 million. In addition, the accumulated amount of income subject to current
taxation, less certain adjustments, is set aside in another special memorandum
tax account called a "shareholders' surplus" account. Dividends paid by
Guarantee Protective in excess of the balance in the "shareholders' surplus"
account cannot be paid without a portion of the "policyholders' surplus"
becoming taxable. The balance of Guarantee Protective's "shareholders' surplus"
account was $476 thousand as of December 31, 1996.
As a mutual life insurance company, Guarantee Life Insurance was required
to pay, in addition to regular and alternative minimum taxes, an additional tax
commonly referred to as an "equity add-on tax," based on its surplus. The amount
of this "equity add-on tax" was determined annually and calculated by comparing
the earnings rate of mutual life insurance companies versus certain stock life
insurance companies.
In February 1995, the IRS completed its examination of the 1990 and 1991
federal income tax returns of Guarantee Life. In February 1995, Guarantee Life
paid approximately $6.5 million to settle the 1990 and 1991 examinations. The
settlement was principally related to the disallowance of negative adjustments
and had no impact on net income or shareholders' equity as Guarantee Life had
already provided for such amounts. Guarantee Life will continue to contest the
IRS' disallowance and will attempt to recover amounts paid based on future court
rulings for mutual life insurers.
In December 1995, the IRS completed its examination of the 1992 federal
income tax return of Guarantee Life. In January 1996, Guarantee Life paid
approximately $3.9 million to settle the examination. The settlement did not
have a material impact on the financial position of Guarantee Life.
The IRS has commenced an examination of the 1993 federal income tax
return of Guarantee Life. Guarantee Life has filed an amended return for 1993,
based on the settlements of the 1990 through 1992 examinations. This examination
by the IRS is not expected to have a material impact on the financial position
of Guarantee Life.
During the years ended December 31, 1996, 1995 and 1994, Guarantee Life's
cash payments for federal income taxes were $15.2 million, $5.2 million, and
$14.1 million, respectively.
46
<PAGE>
B u i l d i n g R e l a t i o n s h i p s f o r L i f e (R)
(10) Employee Benefit Plans
Pension Plans
Guarantee Life Insurance has a noncontributory defined benefit pension
plan (qualified plan) covering substantially all home office employees. Benefits
are based on the employee's average annual compensation during the 60
consecutive months which will produce the highest average for the employee. It
is Guarantee Life Insurance's policy to fund pension costs in accordance with
the requirements of the Employee Retirement Income Security Act of 1974 and,
based on such standards, no funding was required for each of the years
presented. Substantially all of the plan assets are invested in the general and
separate investment accounts of two life insurance companies.
Net pension cost related to the qualified plan included the following
components (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1996 1995 1994
--------- -------- --------
<S> <C>
Service cost-benefits earned during the year $ 1,438 $ 1,007 $ 1,091
Interest cost on projected benefit obligations 1,689 1,552 1,457
Actual loss (return) on plan assets (4,274) (4,735) 435
Net amortization and deferral 1,574 2,294 (2,899)
-------- --------- --------
Net pension cost $ 427 $ 118 $ 84
======== ========= ========
</TABLE>
The funded status of the qualified plan is reconciled to prepaid
(accrued) pension cost included in the accompanying consolidated balance sheets
as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1995
--------- --------
<S> <C> <C>
Plan assets at fair value $ 33,322 $ 30,302
Accumulated benefit obligations:
Vested (21,192) (19,728)
Nonvested (521) (599)
-------- -------
(21,713) (20,327)
Effect of projected future compensation levels on past service (3,555) (3,110)
-------- -------
Projected benefit obligation for service rendered to date (25,268) (23,437)
Plan assets in excess of projected benefit obligation 8,054 6,865
Unrecognized net loss from past experience different from that assumed and
effects of changes in assumptions (7,190) (5,398)
Unrecognized net obligation/asset at transition (1,054) (1,230)
-------- --------
Prepaid (accrued) pension cost $ (190) $ 237
======== ========
</TABLE>
The assumptions used in determining pension information were as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Discount rate assumed 7.50% 7.25% 8.0%
Rate of compensation progression 5.5 5.5 5.5
Expected return on assets 8.0 8.0 8.0
</TABLE>
Guarantee Life maintains two nonqualified pension plans to provide equal
retirement benefits for employees whose benefits would otherwise be restricted
due to Internal Revenue Code restrictions or the deferral of compensation. As of
December 31, 1996, Guarantee Life's unfunded liability for these plans was
approximately $1.2 million.
47
<PAGE>
G u a r a n t e e L i f e 1 9 9 6 A n n u a l R e p o r t
Retiree Benefit Plans
In addition to providing pension benefits, Guarantee Life provides
certain life insurance benefits for retired employees. Substantially all
employees may become eligible for those benefits if they reach normal retirement
age while working for Guarantee Life. The benefits are determined at retirement
and are based upon retirement age, length of service and amount of group term
life insurance in force at retirement, subject to a maximum amount of $50,000.
Guarantee Life has established a liability in the amount of $1.5 million as of
December 31, 1996 and 1995. The liability is based upon the present value
(including mortality and persistency) of the amount required to fund the
obligation. Guarantee Life recognizes the cost of providing these benefits as
earned. Guarantee Life does not have a plan for retiree medical benefits. No
significant medical benefits have been paid for retirees for the years
presented.
Incentive Compensation, Deferred Compensation, Phantom Stock and 401(k)
Plans
Guarantee Life maintains the 1994 Long Term Incentive Plan (Incentive
Plan), which includes incentive and nonqualified stock options, performance
shares and, under limited circumstances, restricted stock to officers and key
employees of Guarantee Life. The maximum number of shares of common stock that
may be issued under the Incentive Plan is 745,828. The options vest in annual
increments of 25% beginning on the second anniversary of the grant date.
Guarantee Life also maintains the Directors Stock Incentive Plan (Directors
Plan) which includes nonqualified stock options for the members of the Board of
Directors of the Holding Company. The maximum number of shares of common stock
that may be issued under the Directors Plan is 90,000. The options vest six
months after grant date. Under both plans, the exercise price of each option
equals the market price of the Holding Company's stock on the date of grant, and
an option's maximum term is ten years.
Guarantee Life applies APB Opinion No. 25 and related Interpretations in
accounting for the Incentive Plan and the Directors Plan. Accordingly, no
compensation cost has been recognized for the two plans. Had compensation cost
been determined consistent with FASB Statement No. 123, Guarantee Life's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions used for the grants: dividend yield of 1.4%; expected volatility of
27%; risk-free interest rate of 5.14%; and expected lives of six years for the
Incentive Plan options and two years for the Directors Plan options.
<TABLE>
<CAPTION>
Year Ended
December 31, 1996
-----------------
<S> <C>
Net income (in thousands)
As reported $ 15,015
=========
Pro forma $ 14,648
=========
Earnings per share
As reported $1.51
=====
Pro forma $1.47
=====
</TABLE>
A summary of the status of Guarantee Life's stock option plans as of
December 31, 1996 and 1995, and changes for the years ended is presented below:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1996 1995
--------- ----------
<S> <S> <C>
Outstanding, beginning of year 469,851 -
Granted 52,670 469,851
Exercised - -
Forfeited (9,643) -
--------- ----------
Outstanding, end of year 512,878 469,851
========= ==========
Options exercisable at year-end 30,000 -
========= ==========
</TABLE>
48
<PAGE>
B u i l d i n g R e l a t i o n s h i p s f o r L i f e(R)
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- ------------------------------
Range of Number Weighted Avg Weighted Avg Number Weighted Avg
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices at 12/31/96 Contractual Life Price at 12/31/96 Price
- --------------- ------------- ---------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
$13.00 to 16.50 464,908 8.98 13.03 - -
$17.00 to 19.50 47,970 9.50 17.51 30,000 $17.13
------- ---- ----- ------ ------
$13.00 to 19.50 512,878 9.03 13.45 30,000 $17.13
======= ==== ===== ====== ======
</TABLE>
Guarantee Life maintains the Guarantee Life Insurance Company Incentive
Compensation Plan (Incentive Compensation Plan) which provides short-term
incentives to eligible employees based upon financial and other performance
measures. As of December 31, 1996, 1995, and 1994, benefits in the amount of
$1.2 million, had been expensed and accrued for the years then ended. Certain
amounts awarded under the Incentive Compensation Plan may be deferred under the
Management Deferred Plan. During 1996, the Incentive Compensation Plan was
amended to require certain senior management to use a minimum of 10% of their
award to purchase shares of Holding Company stock. Guarantee Life plans to
provide the required shares by purchasing stock in the open market, by issuing
new shares or by issuing from treasury shares.
Guarantee Life maintains the Guarantee Life Insurance Company Phantom Stock
Plan (Phantom Stock Plan) for certain management employees. The amounts awarded
under the Phantom Stock Plan are based on long term improvements in Guarantee
Life's capital performance. At December 31, 1996 and 1995, the accrued benefits
of the plan included in other liabilities was $752 thousand and $514 thousand,
respectively. As of December 31, 1996, 25,300 phantom shares with a value of
$474,000 were vested. On the effective date of the demutualization, Guarantee
Life ceased granting awards under the Phantom Stock Plan, but prior awards will
be allowed to accrue under the terms of the plan.
Guarantee Life maintains the Guarantee Life Insurance Company Deferred
Compensation Plan (Management Deferred Plan) and Guarantee Life Insurance
Company Board of Directors Deferred Compensation Plan (Director Deferred Plan)
that allow management and directors to defer compensation. Amounts deferred
under the plans are credited with interest at a rate equal to that received by
employees for a Guarantee Life Insurance IRA. As of December 31, 1996, and 1995,
compensation in the amount of $1,123,000 and $971,000, respectively, was accrued
in these plans which fully funded the amounts due to participants.
Guarantee Life maintains the Guarantee Life Insurance Company Thrift
Savings Plan 401(k) Plan for eligible salaried employees. Guarantee Life matches
employee contributions up to 3% of salary. All employee contributions are vested
immediately and all Company contributions are vested after five years. Guarantee
Life charged $474,000, $372,000, and $311,000 to expense relating to this plan
in 1996, 1995, and 1994, respectively. As of December 31, 1996 and 1995, the
401(k) Plan held approximately $5.9 million in a Guarantee Life Insurance Group
Accumulation Contract. These deposits are held by Guarantee Life in a pooled
account. The account is credited with actual earnings on the underlying
investments with a minimum guaranteed annual return of 2.5%.
49
<PAGE>
G u a r a n t e e L i f e 1 9 9 6 A n n u a l R e p o r t
(11) Fair Value Information
The carrying value and estimated fair value of Guarantee Life's invested
assets and investment type insurance contracts (without material mortality risk)
were as follows (in thousands):
<TABLE>
<CAPTION>
As of December 31,
------------------------------------------------
1996 1995
---------------------- ----------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Assets:
Fixed maturities $665,383 $674,612 $645,878 $663,963
Equity securities 2,946 2,946 5,999 5,999
Mortgage loans 70,156 72,181 61,467 65,819
Policy loans 19,482 17,910 14,043 12,779
Investment real estate 6,620 12,000 6,864 11,000
Other invested assets 29,880 29,880 17,322 17,322
======== ======== ======== ========
Liabilities:
Annuity contracts $202,735 $197,239 $216,905 $210,530
Other policyholder funds 13,662 13,662 12,793 12,793
======== ======== ======== ========
</TABLE>
(12) Participating Policies and Dividends to Policyholders
Over 75% of Guarantee Life's business in force relate to participating
policies; however, Guarantee Life has historically not paid dividends or
allocated income to all participating policyholders. As discussed in note 1,
such policies were subject to inclusion in the conversion of policyholder
interests into publicly traded shares or other consideration through the
demutualization.
Guarantee Life has maintained a book of individual life policies which are
participating policies and entitle the policyholders to receive dividends based
on actual interest, mortality, morbidity and expense experience for the related
policies. These dividends are distributed to the policyholders through an annual
dividend using current dividend scales which are approved by the Board of
Directors. As discussed in notes 1 and 7, these policies are now included in the
closed block.
(13) Regulatory Matters
A reconciliation of statutory net income determined for Guarantee Life
Insurance under statutory accounting practices to that reflected herein (in
thousands and including closed block and discontinued operations) is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Net gain from operations as reported to
regulatory authorities $12,204 $ 142 $ 5,278
Change in deferred acquisition costs (6,260) (2,121) 3,731
Deferred Federal income taxes 1,780 2,590 6,083
Differences in statutory and GAAP reserves 1,589 (188) (5,502)
Unearned ceding commission 1,116 596 (2,130)
Other, net 4,586 351 (1,772)
------- ------ -------
Net income as reported herein $15,015 $1,370 $ 5,688
======= ====== =======
</TABLE>
50
<PAGE>
B u i l d i n g R e l a t i o n s h i p s f o r L i f e(R)
A reconciliation of statutory surplus for Guarantee Life Insurance
determined under statutory accounting practices to shareholders' equity
reflected herein (in thousands and including closed block and discontinued
operations):
<TABLE>
<CAPTION>
As of December 31,
-------------------
1996 1995
-------- --------
<S> <C> <C>
Statutory surplus as reported to regulatory authorities $105,477 $102,239
Deferred policy acquisition costs 84,284 87,396
Deferred Federal income taxes (597) (8,187)
Asset valuation and interest maintenance reserves 20,107 19,140
Fixed maturities available-for-sale unrealized appreciation 8,297 23,798
Insurance reserves (45,266) (46,855)
Shareholders' equity in Holding Company 29,067 21,367
Other, net 7,303 7,364
-------- --------
Shareholders' equity as reported herein $208,672 $206,262
======== ========
</TABLE>
Under the NAIC solvency monitoring program known as Risk-Based Capital
(RBC), Guarantee Life's insurance subsidiaries are required to measure its
solvency against certain parameters. As of December 31, 1996, Guarantee Life
Insurance and its subsidiaries exceeded the established minimums in the RBC
program. In addition, Guarantee Life Insurance and its subsidiaries exceeded the
minimum statutory capital and surplus requirements of their state of domicile.
The Holding Company's ability to pay dividends to its stockholders and meet
its obligations, including debt service and operating expenses, primarily
depends upon receiving sufficient funds from its insurance subsidiaries. The
payment of dividends by Guarantee Life Insurance is subject to restrictions set
forth in the insurance laws and regulations of Nebraska. Under Nebraska law,
Guarantee Life Insurance may pay, within a twelve month period, 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 the
greater of (i) 10% of Guarantee Life Insurance's statutory 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. The Board of
Directors of Guarantee Life Insurance declared a $10 million dividend to the
Holding Company, with a record date of November 29, 1996.
(14) Segment Data
Group Insurance Business
The group insurance products include life, accidental death and
dismemberment, short- and long-term disability and dental insurance and a
portfolio of voluntary employee-pay-all products, and certain specialty
products, such as excess loss insurance for employers with self-funded medical
plans and medical reimbursement insurance for business executives. Guarantee
Life's group insurance products are marketed primarily to businesses with fewer
than 500 employees and are distributed through employee benefit firms and
through various alternate distribution systems, such as MGUs and TPAs.
Individual Insurance Business
The individual insurance products include universal life, term life and
interest-sensitive whole life insurance and annuities. These products are
marketed primarily to individuals and small business owners. Guarantee Life
markets its individual insurance products primarily through a career and
independent agency force. Most of the individual insurance agents also sell
insurance products offered by other companies.
51
<PAGE>
G u a r a n t e e L i f e 1 9 9 6 A n n u a l R e p o r t
The following tables present information about Guarantee Life's operations
by business segment (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Revenues from continuing operations:
Group $ 175,110 $ 182,207 $ 140,128
Individual 75,832 112,196 107,374
Corporate 1,057 17 -
---------- ---------- ----------
Total $ 251,999 $ 294,420 $ 247,502
========== ========== ==========
Income from continuing operations before income taxes:
Group 10,165 4,403 14,596
Individual 13,570 15,449 12,806
Corporate (1,089) 17 -
---------- ---------- ----------
Total $ 22,646 $ 19,869 $ 27,402
========== ========== ==========
Identifiable assets:
Group 224,184 221,739 204,623
Individual 1,026,049 985,724 908,012
Corporate 19,147 22,675 -
Discontinued operations 32,362 50,637 75,326
---------- ---------- ----------
Total $1,301,742 $1,280,775 $1,187,961
========== ========== ==========
</TABLE>
(15) Commitments and Contingencies
Guarantee Life is party to certain claims and legal actions arising during
the ordinary course of business. In the opinion of management, after consulting
with legal counsel, these matters will not have a material adverse effect on the
operations or financial condition of Guarantee Life.
At December 31, 1996, Guarantee Life had a $30.0 million senior secured
revolving line of credit to be used for general corporate purposes and to fund
capital infusions to subsidiaries and future acquisitions. The credit agreement
is effective through 2000. Funding for the credit facility is being provided by
ChaseMellon Bank, Norwest Bank Nebraska, N.A. and State Street Bank and Trust
Company. No amounts were outstanding related to this credit facility at December
31, 1996.
Guarantee Life has commitments under noncancelable operating leases for
facilities principally used by regional and district offices. Rental expense and
associated future minimum lease payments required under these leases are
insignificant.
(16) Discontinued Operations
In November 1994, Guarantee Life made a decision to withdraw from its
alternative workers' compensation benefit program segment. To facilitate its
exit, Guarantee Life entered into a reinsurance arrangement whereby it cedes 80%
of all claims incurred after October 31, 1994. In addition, Guarantee Life has
entered into a reinsurance arrangement to limit its exposure to $10,000 per
claim relating to its 20% retention.
Concurrent with the implementation of the reinsurance coverage, Guarantee
Life amended its agreement with the managing general agent which marketed this
product for Guarantee Life, whereby Guarantee Life agreed to write new or
renewal business for this line only until the earlier replacement by another
insurance carrier or November 1, 1995. In September 1995, a replacement carrier
began issuing policies in Louisiana and Georgia. Effective November 1, 1995,
Guarantee Life ceased writing Special Risk Policies.
52
<PAGE>
B u i l d i n g R e l a t i o n s h i p s f o r L i f e(R)
Guarantee Life intends to allow the liabilities related to this business to
run off, unless an appropriate sale can be made. Guarantee Life does not believe
the disposal of this segment will result in a loss which would be significant.
Any gain resulting from a potential disposition would be recognized when
realized using the installment method of accounting.
The composition of the assets (liabilities) classified as discontinued are as
follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Ceded reinsurance recoverables $ 74,359 $ 68,598
Accounts receivable - 5,749
Deferred policy acquisition costs - 1,791
Policy and contract claims (107,461) (109,286)
Unearned premium revenue - (7,164)
Amounts payable to reinsurers 740 (10,325)
-------- --------
Net liabilities relating to discontinued operations $(32,362) $(50,637)
======== ========
</TABLE>
The results of operations for the discontinued segment are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Insurance premiums $ 12,494 $ 69,831 $ 88,405
Premiums ceded to reinsurers (8,287) (57,759) (20,239)
-------- -------- --------
Net premiums 4,207 12,072 68,166
Investment income, net and realized investment gains 2,899 4,057 4,692
Ceding commissions 1,455 19,076 6,319
-------- -------- --------
Total revenues 8,561 35,205 79,177
Policyholder benefits 33,586 71,095 65,436
Reinsurance recoveries (29,524) (58,839) (12,058)
-------- -------- --------
Net policyholder benefits 4,062 12,256 53,378
Policy acquisition costs and other operating expense 4,045 25,560 28,704
-------- -------- --------
Income (loss) before income taxes 454 (2,611) (2,905)
Income tax expense (benefit) 159 (914) (1,017)
-------- -------- --------
Net income (loss) from discontinued operations $ 295 $ (1,697) $ (1,888)
======== ======== ========
</TABLE>
(17) Quarterly Results (unaudited)
<TABLE>
<CAPTION>
(in thousands, except per share data)
1996
---------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $60,086 $63,029 $62,893 $65,991
======= ======= ======= =======
Net income $ 2,206 $ 3,793 $ 4,959 $ 4,057
======= ======= ======= =======
Net income per share $ .22 $ .38 $ .50 $ .41
======= ======= ======= =======
</TABLE>
53
<PAGE>
G u a r a n t e e L i f e 1 9 9 6 A n n u a l R e p o r t
SHAREHOLDER INFORMATION
Stock Listing
NASDAQ National Market System. Symbol: GUAR
The common stock of The Guarantee Life Companies Inc. was listed on the NASDAQ
National Market System on December 20, 1995.
Stock Transfer Agent and Registrar
ChaseMellon Shareholder Services, L.L.C.
P.O. Box 590
Ridgefield Park, New Jersey 07660-0570
1-800-298-6807
Annual Meeting
The Annual Meeting of the Shareholders will be held on May 8, 1997, at 10 a.m.,
at Joslyn Art Museum, 2200 Dodge Street, Omaha, Nebraska.
Form 10-K
A copy of the most recent annual report on Form 10-K, as filed with the
Securities and Exchange Commission, will be provided free of charge upon request
to shareholders. Written requests should be directed to Investor Relations, The
Guarantee Life Companies Inc., Guarantee Centre, 8801 Indian Hills Drive, Omaha,
Nebraska 68114-4066.
<TABLE>
<CAPTION>
Common Stock and Dividend Information
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1996 High Low Close Dividends Declared
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter $17.000 $15.375 $15.375 -
Second Quarter $18.125 $15.750 $17.625 $0.05
Third Quarter $19.875 $15.750 $19.875 $0.05
Fourth Quarter $20.000 $18.000 $18.500 $0.06
- ----------------------------------------------------------------------------
1995
- ----------------------------------------------------------------------------
Fourth Quarter $16.063 $15.250 $15.750 -
- ----------------------------------------------------------------------------
</TABLE>
On February 28, 1997, there were 81,360 shareholders of record and the closing
price was $21.125.
It is Company policy to provide equal opportunity in employment for all persons;
to prohibit discrimination in employment because of race, color, religion,
gender, age, marital status, disability, or national origin; and to promote the
full realization of equal employment opportunity through continuing affirmative
action endeavors.
54
<PAGE>
Board Of Directors
- --------------------------------------------------------------------------------
The Guarantee Life Companies Inc. and Guarantee Life Insurance Company
Robert D. Bates
Chairman of the Board, President
and Chief Executive Officer
The Guarantee Life Companies Inc.
Frederick M. Bekins
Chairman
Bekins Van & Storage Company
C. R. "Bob" Bell
President
Greater Omaha Chamber of Commerce
John R. Cochran
President and Chief Executive Officer
FirstMerit Corporation
Eugene A. Conley
Chairman of the Board (Retired)
Guarantee Life Insurance Company
Theodore C. Cooley
Executive Vice President
The Guarantee Life Companies Inc.
Thomas T. Hacking
President
Hacking & Co.
James M. McClymond
Consultant
Thermal Technology, Inc.
Bernard W. Reznicek
National Director - Utility Marketing
Central States Indemnity Company
of Omaha
A. J. Scribante
Chairman of the Board and
Chief Executive Officer
VITAL LEARNING Corporation
Janice D. Stoney
Executive Vice President (Retired)
U S WEST Communications
William F. Welsh II
President and Chief Executive Officer
American Information Systems Inc.
Executive Officers
- --------------------------------------------------------------------------------
Michael G. Allen
Senior Vice President - Employee Benefits Division
Robert D. Bates
Chairman of the Board, President and Chief Executive Officer
William L. Bauhard
Senior Vice President and Chief Financial Officer
David L. Bomberger
Senior Vice President - Investment Division and Treasurer
Alan D. Brinkman/1/
Vice President - Financial Actuarial Services
John E. Burch
Vice President and Controller
Theodore C. Cooley
Executive Vice President - Individual Division
Richard C. Easton/1/
Senior Vice President - Marketing
Employee Benefits Division
J. D. "Wayne" Gardner/1/
Senior Vice President - Marketing
Individual Division
William R. Lane/1/
Vice President - Group Finance
Donald G. Liedtke
Senior Vice President and Chief Information Officer
Paul D. Ochsner
Senior Vice President - Strategic Development
Mary G. Rahal/1/
Senior Vice President - Human Resources and Administration
Gary H. Rittenhouse
Senior Vice President - Strategic Initiatives and Group Special Markets
Richard A. Spellman
Senior Vice President, General
Counsel and Secretary
1 Designates executive officers of insurance subsidiary only
<PAGE>
[LOGO OF GUARANTEE LIFE APPEARS HERE]
Building Relationships For Life(R)
Guarantee Centre
8801 Indian Hills Drive
Omaha, Nebraska 68114-4066
402-361-7300
http://www.guar.com
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS'
The Board of Directors
The Guarantee Life Companies Inc:
We consent to incorporation by reference in Registration Statement Nos. 333-
17863 and 333-22461 on Form S-8 of The Guarantee Life Companies Inc. of our
reports dated February 14, 1997 relating to the consolidated balance sheets of
The Guarantee Life Companies Inc. and subsidiaries (Guarantee Life) as of
December 31, 1996 and December 31, 1995, and the related consolidated statements
of income, shareholders' equity and cash flows and related schedules for each of
the years in the three-year period ended December 31, 1996, which reports are
included or incorporated by reference in the December 31, 1996 Annual Report on
Form 10-K of The Guarantee Life Companies Inc.
Our report refers to Guarantee Life's adoption of Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investment in Debt and
---------------------------------------------
Equity Securities, in 1994.
- -----------------
KPMG Peat Marwick LLP
Omaha, Nebraska
March 27, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet as of December 31, 1996 and the Consolidated
Statement of Income for the year ended December 31, 1996 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 526,799
<DEBT-CARRYING-VALUE> 138,584
<DEBT-MARKET-VALUE> 147,813
<EQUITIES> 2,946
<MORTGAGE> 70,156
<REAL-ESTATE> 6,620
<TOTAL-INVEST> 1,094,274
<CASH> 2,079
<RECOVER-REINSURE> 61,697
<DEFERRED-ACQUISITION> 77,968
<TOTAL-ASSETS> 1,301,742
<POLICY-LOSSES> 157,395
<UNEARNED-PREMIUMS> 10,679
<POLICY-OTHER> 460,097
<POLICY-HOLDER-FUNDS> 13,662
<NOTES-PAYABLE> 0
0
0
<COMMON> 99
<OTHER-SE> 208,573
<TOTAL-LIABILITY-AND-EQUITY> 1,301,742
181,690
<INVESTMENT-INCOME> 54,371
<INVESTMENT-GAINS> 167
<OTHER-INCOME> 15,771
<BENEFITS> 106,946
<UNDERWRITING-AMORTIZATION> 47,554
<UNDERWRITING-OTHER> 51,365
<INCOME-PRETAX> 22,646
<INCOME-TAX> 7,926
<INCOME-CONTINUING> 14,720
<DISCONTINUED> 295
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,015
<EPS-PRIMARY> 1.51
<EPS-DILUTED> 1.51
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
