<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-------------------
FORM 10-Q
-------------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1997 Commission File Number 0-26788
THE GUARANTEE LIFE COMPANIES INC.
(Exact Name of the Registrant as Specified in its Charter)
Delaware 47-0785066
(State of Incorporation) (I.R.S. Employer Identification Number)
8801 Indian Hills Drive, Omaha, Nebraska 68114
(Address of Principal Executive Offices)
Registrant's telephone number: (402) 361-7300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No [_]
Shares of common stock outstanding as of October 27, 1997: 9,197,434
================================================================================
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30 December 31,
------------ -----------
Assets 1997 1996
------ ----------- ----------
<S> <C> <C>
Invested assets: (unaudited)
Fixed maturities:
Available-for-sale, at fair value (amortized cost: $489,836 and $520,741)........... $ 503,717 $ 526,799
Held-to-maturity, at amortized cost (fair value: $169,582 and $147,813)............. 157,622 138,584
---------- ----------
661,339 665,383
Equity securities, at fair value (cost: $3,158 and $3,158)............................ 2,486 2,946
Mortgage loans, net.................................................................... 80,873 70,156
Policy loans........................................................................... 19,654 19,482
Investment real estate, net............................................................ 3,424 6,620
Other invested assets, net............................................................. 33,016 29,880
Closed block invested assets........................................................... 310,909 299,807
---------- ----------
Total invested assets....................................................................... 1,111,701 1,094,274
Cash and cash equivalents................................................................... 2,031 2,079
Accrued investment income................................................................... 11,441 11,623
Recoverable from reinsurers................................................................. 67,684 65,177
Accounts receivable, net.................................................................... 14,021 8,289
Deferred policy acquisition costs........................................................... 74,794 77,968
Property, plant and equipment, net.......................................................... 19,621 20,102
Other assets................................................................................ 3,819 3,690
Closed block other assets................................................................... 19,546 22,020
---------- ----------
Total assets................................................................................ $1,324,658 $1,305,222
========== ==========
Liabilities and Shareholders' Equity
------------------------------------
Future policy benefits:
Life................................................................................... $ 46,947 $ 43,140
Accident and health.................................................................... 70,760 64,007
Policyholder account balances:
Universal life contracts............................................................... 268,692 257,362
Annuity contracts...................................................................... 203,348 202,735
Policy and contract claims.................................................................. 48,868 50,248
Other policyholder funds.................................................................... 13,451 13,662
Unearned premium revenue.................................................................... 11,004 10,679
Payable to reinsurers....................................................................... 7,064 5,557
Other liabilities........................................................................... 45,953 29,415
Closed block liabilities.................................................................... 385,360 387,383
Discontinued operations, net................................................................ 15,987 32,362
---------- ----------
Total liabilities........................................................................... 1,117,434 1,096,550
Shareholders' equity:
Common stock $0.01 par value; 30,000,000 shares authorized,
9,944,383 shares issued............................................................... 99 99
Additional paid-in capital............................................................. 191,135 191,226
Treasury stock, at cost (746,949 shares)............................................... (14,694) -
Retained earnings...................................................................... 23,307 13,435
Net unrealized investment gain......................................................... 7,377 3,912
---------- ----------
Total shareholders' equity.................................................................. 207,224 208,672
Commitments and contingencies............................................................... - -
---------- ----------
Total liabilities and shareholders' equity.................................................. $1,324,658 $1,305,222
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Insurance:
Life.............................................................. $ 19,527 $ 16,700 $ 56,172 $ 48,165
Accident and health............................................... 45,981 32,737 128,063 101,840
Policyholder assessments.......................................... 7,608 7,048 22,273 18,814
Reinsurance premiums.............................................. (13,716) (11,878) (40,495) (34,999)
---------- ---------- ---------- ----------
59,400 44,607 166,013 133,820
Investment Income, net................................................ 14,553 13,682 43,212 40,162
Realized investment gains............................................. 774 (212) 933 (26)
Contribution from closed block........................................ 1,378 980 3,424 2,412
Ceding commissions and other revenue.................................. 3,759 3,836 11,282 9,639
---------- ---------- ---------- ----------
Total revenues........................................................ 79,864 62,893 224,864 186,007
---------- ---------- ---------- ----------
Policyholder benefits:
Life.................................................................. 17,973 13,438 46,273 40,958
Accident and health................................................... 28,138 20,757 80,204 62,346
Reinsurance recoveries................................................ (9,175) (10,410) (26,050) (25,612)
---------- ---------- ---------- ----------
36,936 23,785 100,427 77,692
Interest credited to policyholder accounts............................ 6,190 6,098 18,807 17,310
---------- ---------- ---------- ----------
Total policyholder benefits........................................... 43,126 29,883 119,234 95,002
---------- ---------- ---------- ----------
Expenses:
Policy acquisition costs.............................................. 14,199 12,337 41,453 35,280
Other insurance operating expense..................................... 15,176 13,078 45,107 38,240
---------- ---------- ---------- ----------
Total expenses........................................................ 29,375 25,415 86,560 73,520
---------- ---------- ---------- ----------
Income from continuing operations before income taxes................. 7,363 7,595 19,070 17,485
---------- ---------- ---------- ----------
Income tax expense.................................................... 2,585 2,658 6,747 6,120
---------- ---------- ---------- ----------
Net income from continuing operations................................. 4,778 4,937 12,323 11,365
---------- ---------- ---------- ----------
Net (loss) from discontinued operations............................... (59) 22 (59) (408)
---------- ---------- ---------- ----------
Net income............................................................ $ 4,719 $ 4,959 $ 12,264 $ 10,957
========== ========== ========== ==========
Earnings per common and common equivalent share:
Weighted average common shares outstanding........................ 9,520,844 9,944,383 9,810,779 9,944,383
========== ========== ========== ==========
Net income from continuing operations............................. $ 0.50 $ 0.50 $ 1.26 $ 1.14
========== ========== ========== ==========
Net income........................................................ $ 0.50 $ 0.50 $ 1.25 $ 1.10
========== ========== ========== ==========
Earnings per common share assuming full dilution:
Weighted average common shares outstanding........................ 9,520,844 9,944,383 9,810,779 9,944,383
========== ========== ========== ==========
Net income from continuing operations............................. $ 0.50 $ 0.50 $ 1.26 $ 1.14
========== ========== ========== ==========
Net income........................................................ $ 0.50 $ 0.50 $ 1.25 $ 1.10
========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
September 30,
-------------
1997 1996
--------- ---------
<S> <C> <C>
Net cash provided (used) by operating activities............................. $ 3,464 $ (6,136)
--------- ---------
Cash flows from investing activities:
Purchase of fixed maturities.............................................. (168,911) (163,380)
Sales, maturities, calls and principal reductions of fixed maturities..... 186,196 171,447
Purchase of mortgage loans................................................ (15,286) (9,960)
Proceeds from repayment of mortgage loans................................. 3,940 2,920
Change in closed block invested assets.................................... (6,111) (1,226)
Other, net................................................................ (422) (3,358)
--------- ---------
Net cash (used) by investing activities............................ (594) (3,557)
--------- ---------
Cash flows from financing activities:
Deposits to policyholder account balances................................. 54,088 34,165
Withdrawals from policyholder account balances............................ (40,521) (33,893)
Purchase of Treasury Stock................................................ (14,694) -
Shareholder dividends..................................................... (1,791) (994)
Policy cashouts in connection with demutualization and IPO................ - (6,877)
--------- ---------
Net cash (used) by financing activities............................ (2,918) (7,599)
Net (decrease) in cash and cash equivalents.................................. (48) (17,292)
--------- ---------
Cash and cash equivalents at beginning of period............................. $ 2,079 $ 25,301
========= =========
Cash and cash equivalents at end of period................................... $ 2,031 $ 8,009
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997 and 1996
(1) Summary of Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements
include The Guarantee Life Companies Inc. and its direct and indirect
wholly-owned insurance subsidiaries. These financial statements have been
prepared in conformity with generally accepted accounting principles for
interim financial information and reflect all adjustments (consisting only
of normal recurring items) which are, in the opinion of management,
necessary to present fairly the financial position and results of
operations for the periods presented.
Operating results for the three and nine month periods ended September 30,
1997 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1997. These financial statements and notes
thereto should be read in conjunction with the audited consolidated
financial statements for the fiscal year ended December 31, 1996, contained
in Guarantee Life's annual report on Form 10-K for the year ended December
31, 1996.
(2) Investments
Fixed maturities at September 30, 1997 (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..................... $ 50,157 $ 1,632 $ 27 $ 51,762
Obligations of states and political subdivisions.......... 10,126 309 - 10,435
Debt securities issued by foreign governments............. 5,905 538 - 6,443
Corporate securities...................................... 253,285 11,302 1,055 263,532
Mortgage-backed securities................................ 170,363 4,130 2,948 171,545
-------- ------- ------------- --------
$489,836 $17,911 $ 4,030 $503,717
======== ======= ============= ========
Held-to-maturity:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies..................... $ 3,116 $ 20 - $ 3,136
Corporate securities...................................... 154,506 12,006 66 166,446
-------- ------- ------------- --------
$157,622 $12,026 $ 66 $169,582
======== ======= ============= ========
</TABLE>
(3) Closed Block
Summarized condensed financial information of the closed block (in thousands) is
as follows:
<TABLE>
<CAPTION>
September 30, December 31,
Assets 1997 1996
------ ------------- -------------
<S> <C> <C>
Invested assets:
Fixed maturities:
Available-for-sale, at fair value (amortized cost: $199,005 and
$190,504)................................................................... $206,611 $193,121
Held-to-maturity, at amortized cost (fair value: $53,900 and $58,837)....... 50,938 55,401
------------- --------
257,549 248,522
Policy loans.................................................................. 47,293 48,057
Other invested assets, net.................................................... 6,067 3,228
------------- --------
Total invested assets........................................................... 310,909 299,807
Cash and cash equivalents....................................................... 516 1,480
Accrued investment income....................................................... 4,987 4,428
Ceded reinsurance recoverables.................................................. 1,222 1,237
Accounts receivable, net........................................................ 140 950
Deferred policy acquisition costs............................................... 12,681 13,925
------------- --------
Total closed block assets....................................................... $330,455 $321,827
============= ========
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Liabilities
-----------
<S> <C> <C>
Life future policy benefits.......................................................... $301,651 $301,568
Policyholder account balances for annuity contracts.................................. 883 894
Policy and contract claims........................................................... 589 298
Other policyholder funds............................................................. 72,017 72,186
Dividends payable to policyholders................................................... 7,734 7,646
Deferred income taxes................................................................ (2,662) 916
Other liabilities.................................................................... 5,148 3,875
-------- --------
Total closed block liabilities....................................................... $385,360 $387,383
======== ========
</TABLE>
Condensed statement of income for the closed block for the three and nine months
ended September 30 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -----------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Insurance premiums and policyholder assessments,
net of reinsurance....................................... $ 5,159 $ 5,498 $15,832 $16,653
Investment income, net.................................... 5,641 5,290 16,652 16,436
Realized investment gains (losses)........................ (97) 69 121 53
Other income.............................................. 3 1 46 10
------- ------- ------- -------
Total revenues............................................ 10,706 10,858 32,651 33,152
------- ------- ------- -------
Policyholder benefits and expenses:
Total policyholder benefits............................... 5,210 5,627 16,272 18,039
Policy acquisition costs.................................. 500 465 1,614 1,493
Other insurance operating expense......................... 966 1,156 3,013 3,064
------- ------- ------- -------
Total benefits and expenses............................... 6,676 7,248 20,899 22,596
Dividends to policyholders................................ 2,652 2,630 8,328 8,144
------- ------- ------- -------
Contribution from the closed block........................ $ 1,378 $ 980 $ 3,424 $ 2,412
======= ======= ======= =======
</TABLE>
The closed block includes only those revenues, benefits, expenses and dividends
resulting from the policies which were included in the closed block on December
26, 1995, the effective date of Guarantee Life Insurance Company's conversion to
a stock life insurance company. The pre-tax income of the closed block is
reported as a single line item, Contribution from closed block, in Guarantee
Life's condensed consolidated statements of income. Income tax expense
applicable to the closed block is reflected as a component of income tax
expense.
The excess of closed block liabilities over closed block assets as of September
30, 1997 represents the estimated future contribution from closed block, which
will be recognized in Guarantee Life's statements of income over the period the
underlying policies and contracts remain in force.
If, over the period the closed block remains in existence, the actual cumulative
contribution is greater than the expected cumulative contribution, only such
expected contribution will be recognized in Guarantee Life's statements of
income. The excess will be paid to closed block policyholders as additional
policyholder dividends. Alternatively, if the actual cumulative contribution is
less than the expected cumulative contribution, only such actual contribution
will be recognized in Guarantee Life's statements of income. However, dividends
will be changed in the future, to increase actual contributions until the actual
cumulative contributions equal the expected cumulative contributions.
(4) Earnings per common share
Earnings per common share assuming full dilution reflect the maximum dilution
that would have resulted from the exercise of stock options.
(5) Reclassifications
Certain reclassifications have been made to the prior consolidated financial
statements to conform with the most current presentation.
6
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following analysis of the consolidated financial condition and results of
operations should be read in conjunction with the condensed consolidated
financial statements and the notes thereto included herein.
This 10-Q report contains certain forward-looking statements and information
relating to Guarantee Life that are based on the beliefs of management as well
as assumptions made by and information currently available to management. Such
statements reflect the current view of Guarantee Life with respect to future
events and are subject to certain risks, uncertainties and assumptions,
including the business factors described in Guarantee Life's annual report on
Form 10-K for the year ended December 31, 1996. Should one or more of such
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
believed, estimated or expected.
Operating Results for the Three and Nine Months Ended September 30, 1997 and
1996
As part of the conversion to a stock life insurance company in 1995, Guarantee
Life Insurance established a Closed Block to provide for dividends on certain
policies that were in force on December 26, 1995 (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 consolidated statements of
income. The following table presents the consolidated results of operations
combined with the results of operations of the Closed Block. Management's
discussion and analysis addresses the combined results of operations unless
noted otherwise.
Combined Results of Operations
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1997 1996 1997 1996
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
(In thousands)
Revenues:
Premiums and policyholder assessments, net................. $64,559 $ 50,105 $181,845 $150,473
Investment income, net..................................... 20,194 18,972 59,864 56,598
Realized investment gains.................................. 677 (143) 1,054 27
Ceding commissions and other income........................ 3,762 3,837 11,328 9,649
------- -------- -------- --------
Total revenues....................................................... 89,192 72,771 254,091 216,747
Policyholder benefits and expenses:
Gross benefits............................................. 50,566 38,982 140,461 118,932
Ceded to reinsurers........................................ (9,191) (10,329) (26,035) (25,478)
Interest credited to account balances...................... 6,961 6,857 21,080 19,587
------- -------- -------- --------
Total policyholder benefits................................ 48,336 35,510 135,506 113,041
Expenses................................................... 30,841 27,036 91,187 78,077
Dividends to policyholders................................. 2,652 2,630 8,328 8,144
------- -------- -------- --------
Total policyholder benefits, expenses and dividends.................. 81,829 65,176 235,021 199,262
------- -------- -------- --------
Income from continuing operations before income taxes................ 7,363 7,595 19,070 17,485
Income taxes......................................................... 2,585 2,658 6,747 6,120
------- -------- -------- --------
Net income from continuing operations................................ $ 4,778 $ 4,937 $ 12,323 $ 11,365
======= ======== ======== ========
</TABLE>
Investment Income, Net. Net investment income increased $1.2 million, or 6.4%
for the third quarter of 1997 over 1996, and $3.3 million or 5.8% for the nine
months ended September 30. This increase was caused mainly by an increase in
the average invested asset base, which increased $45.6 million, or 4.4% in 1997.
The investment yield was 8.0% in 1997 and 1996.
7
<PAGE>
Insurance Operations--Group
The following table sets forth Guarantee Life's group insurance underwriting
income for the three and nine months ended September, 1997 and 1996.
<TABLE>
<CAPTION>
Group Underwriting Income
Three Months Ended September 30,
-------------------------------------------------------------------
1997 1996
-------------------------------- ---------------------------------
(In thousands)
Core Specialty Core Specialty
Products Products Total Products Products Total
--------- ---------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Gross insurance premiums.............. $ 47,040 $ 16,903 $ 63,943 $ 32,055 $ 14,948 $ 47,003
Reinsurance premiums.................. (877) (11,331) (12,208) (674) (9,825) (10,499)
-------- -------- -------- --------- -------- --------
Net premiums.......................... 46,163 5,572 51,735 31,381 5,123 36,504
Ceding commissions.................... - 3,591 3,591 - 3,687 3,687
-------- -------- -------- --------- -------- --------
Total net premiums and ceding
commissions........................ 46,163 9,163 55,326 31,381 8,810 40,191
-------- -------- -------- --------- -------- --------
Gross policyholder benefits........... 32,116 9,199 41,315 19,821 9,145 28,966
Reinsurance recoveries................ (1,373) (6,823) (8,196) (529) (8,916) (9,445)
-------- -------- -------- --------- -------- --------
Net benefits.......................... 30,743 2,376 33,119 19,292 229 19,521
Policy acquisition costs and expenses. 17,310 5,643 22,953 11,966 6,374 18,340
-------- -------- -------- --------- -------- --------
Total net benefits and expenses.. 48,053 8,019 56,072 31,258 6,603 37,861
-------- -------- -------- --------- -------- --------
Underwriting gain (loss).............. $ (1,890) $ 1,144 $ (746) $ 123 $ 2,207 $ 2,330
======== ======== ======== ========= ======== ========
<CAPTION>
Group Underwriting Income
Nine Months Ended September 30,
------------------------------------------------------------------
1997 1996
------------------------------- --------------------------------
(In thousands)
Core Specialty Core Specialty
Products Products Total Products Products Total
-------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Gross insurance premiums.............. $129,616 $ 49,793 $179,409 $ 93,072 $ 51,082 $144,154
Reinsurance premiums.................. (2,476) (33,671) (36,147) (1,813) (28,984) (30,797)
-------- -------- -------- --------- -------- --------
Net premiums.......................... 127,140 16,122 143,262 91,259 22,098 113,357
Ceding commissions.................... 110 10,873 10,983 (176) 9,475 9,299
-------- -------- -------- --------- -------- --------
Total net premiums and ceding
commissions................. 127,250 26,995 154,245 91,083 31,573 122,656
-------- -------- -------- --------- -------- --------
Gross policyholder benefits........... 85,510 28,564 114,074 59,097 31,161 90,258
Reinsurance recoveries................ (1,096) (21,988) (23,084) (481) (22,555) (23,036)
-------- -------- -------- --------- -------- --------
Net benefits.......................... 84,414 6,576 90,990 58,616 8,606 67,222
Policy acquisition costs and expenses. 49,358 16,479 65,837 34,150 19,793 53,943
-------- -------- -------- --------- -------- --------
Total net benefits and expenses.. 133,772 23,055 156,827 92,766 28,399 121,165
-------- -------- -------- --------- -------- --------
Underwriting gain (loss).............. $ (6,522) $ 3,940 $ (2,582) ($ 1,683) $ 3,174 $ 1,491
======== ======== ======== ========= ======== ========
</TABLE>
Core products net premiums increased $14.8 million, or 47.1% for the third
quarter of 1997 over 1996, and $35.9 million or 39.3% for the nine months ended
September 30. These increases are due primarily to increased sales of all core
products through Guarantee Life's national distribution system of sales offices.
Specialty products net premiums increased $449 thousand, or 8.8% for the
third quarter of 1997 over 1996, and decreased $6.0 million, or 27.0% for the
nine months ended September 30. The increase for the quarter was due to increase
in sales of excess loss insurance. The decrease year to date was primarily due
to Guarantee Life's decision to stop writing the SMART product during 1996 and a
higher excess loss lapse ratio.
Core products net benefits increased $11.5 million, or 59.3% for the third
quarter of 1997 over 1996 and $25.8 million, or 44.0% for the nine months ended
September 30. This increase is caused by higher premium volume in all product
lines and poorer underwriting experience in the life and dental lines which is
partially offset by improved underwriting experience in the LTD product line
during the third quarter.
8
<PAGE>
Specialty products net benefits increased $2.1 million, for the third quarter
of 1997 over 1996 and decreased $2.0 million or 23.6% for the nine months ended
September 30, mainly due to the lower volume of net premiums discussed earlier
and a third quarter 1996 reinsurance recoverable adjustment.
Total group expenses increased $4.6 million, or 25.2% for the third quarter of
1997 over 1996 and $11.9 million or 22.0% for the nine months ended September
30. This increase was due partly to the increase in total group gross premium
which directly impacts commissions, taxes, licenses, and fees. The increase is
also due to higher general operating expenses associated with processing new
business and the expansion of the group insurance operations, including
additional national sales offices opened in 1996 and 1997.
Insurance Operations--Individual
The following table sets forth the results of operations for Guarantee Life's
individual insurance business for the three and nine months ended September 30,
1997 and 1996.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1997 1996 1997 1996
----------- -------- --------- --------
<S> <C> <C> <C> <C>
(In thousands)
Revenues:
Premiums and policyholder assessments, net of
reinsurance premiums................................. $12,824 $13,601 $38,583 $37,116
Investment income, net................................... 16,901 16,295 50,439 48,676
Realized investment gains................................ 576 147 711 1,056
Ceding commissions and other income...................... 130 150 345 350
------- ------- ------- -------
Total revenues................................................ 30,431 30,193 90,078 87,198
Policyholder benefits and expenses:
Gross benefits........................................... 9,251 10,016 26,387 28,674
Reinsurance recoveries................................... (995) (884) (2,951) (2,442)
Interest credited to account balances.................... 6,961 6,857 21,080 19,587
------- ------- ------- -------
Total policyholder benefits.............................. 15,217 15,989 44,516 45,819
Policy acquisition costs and expenses.................... 7,649 8,345 24,124 22,429
Dividends to policyholders............................... 2,652 2,630 8,328 8,144
------- ------- ------- -------
Total policyholder benefits, expenses and dividends........... 25,518 26,964 76,968 76,392
------- ------- ------- -------
Income from continuing operations before income taxes......... $ 4,913 $ 3,229 $13,110 $10,806
======= ======= ======= =======
</TABLE>
Net premiums and policyholder assessments decreased $777 thousand, or 5.7% for
the third quarter of 1997 over 1996 and increased $1.5 million, or 4.0% for the
nine months ended September 30. The decrease for the quarter relates primarily
to a decrease in traditional premium. The nine month increase is attributable
to the block of universal life policies acquired during the third quarter of
1996.
Total individual policyholder benefits decreased $772 thousand, or 4.8%, for
the third quarter of 1997 over 1996 and decreased $1.3 million or 2.8% for the
nine months ended September 30. Excluding interest credited to policyholder
account balances, total individual policyholder benefits decreased $876 thousand
for the third quarter of 1997 over 1996 and $2.8 million for the nine months
ended September 30, due mainly to a significant improvement in mortality in the
universal life product, as well as a decrease in reserves for traditional life
products. These favorable variances more than offset the increase in benefits
attributable to the acquired block of universal life policies. Interest
credited on policyholder account balances increased $1.5 million or 7.6% for the
nine months ended September 30. This increase was due to increased account
values, as average crediting rates did not change significantly.
Total individual expenses decreased $696 thousand, or 8.3% for the third
quarter of 1997 over 1996 and increased $1.7 million, or 7.6% for the nine
months ended September 30. The quarterly decrease relates to lower DAC
amortization and lower commissions. The nine month increase is due to $1.0
million additional DAC amortization and $797 thousand increase in divisional
operating expenses.
9
<PAGE>
Policyholder dividends increased only slightly during 1997, reflecting an
unchanged dividend scale applied to increasing policy account values.
Liquidity and Capital Resources
The Holding Company's ability to pay dividends to its shareholders and meet
its obligations, including debt service, if any, and operating expenses,
primarily depends upon its level of net investment income and receiving
sufficient funds from its insurance subsidiaries. The payment of dividends by
Guarantee Life Insurance is regulated under Nebraska law, which states Guarantee
Life Insurance may pay dividends only from the earned surplus arising from its
business and must receive the prior approval of the Director of Insurance to pay
a dividend, if such dividend would exceed certain limitations. Nebraska law
gives the Director of Insurance broad discretion to disapprove requests for
dividends in excess of these limits.
Historically, Guarantee Life has generated positive cash flow from operating
activities and net deposits to policyholder accounts, and used these funds to
purchase fixed maturity securities or other invested assets.
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 insurance competitors,
certificates of deposit, mutual funds, and similar instruments) may become more
attractive to potential purchasers of Guarantee Life's products until Guarantee
Life increases the rate credited to holders of its universal life and annuity
products. Guarantee Life constantly monitors interest rates with respect to a
spectrum of durations and sells policies and annuities that permit flexible
responses to interest rate changes as part of its management of interest rate
spreads.
Changes in interest rates have not had a significant impact on Guarantee
Life's net income in the three or nine months ended September 30, 1997.
New Accounting Pronouncements
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement 128, "Earnings Per Share," which is intended to simplify the
computation and presentation of earnings per share ("EPS"). Statement 128
supersedes Accounting Principles Board ("APB") Opinion No. 15, "Earnings Per
Share." Statement 128 will eliminate the concept of "primary" EPS and require
dual presentation of "basic" and "diluted" EPS. Diluted EPS under Statement 128
is similar to "fully diluted" EPS as defined by APB 15. Guarantee Life is
required to adopt Statement 128 effective December 31, 1997. The Company
believes the adoption of Statement 128 will not have a significant effect on
Guarantee Life's reported earnings per share.
In March 1997, the FASB issued Statement 129, "Disclosures of Information
About Capital Structure," which clarifies disclosure requirements related to the
type, and nature, of securities contained in an entity's capital structure.
Guarantee Life is required to adopt Statement 129 effective December 31, 1997.
The Company believes the adoption of Statement 129 will not have a significant
effect on its capital structure disclosure.
In June 1997, the FASB issued Statement 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and display of comprehensive income
and its components in a financial statement with the same prominence as other
financial statements. Comprehensive income is defined as net income adjusted
for changes in shareholders' equity resulting from events other than net income
or transactions related to an entity's capital instruments. Guarantee Life is
required to adopt Statement 130 effective January 1, 1998, with reclassification
of financial statements for earlier years required. Guarantee Life has not yet
determined what impact Statement 130 may have on its reported comprehensive
income.
In June 1997, the FASB issued Statement 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes standards for reporting
information about operating segments. Generally, Statement 131 requires that
financial information be reported on the basis that is used internally for
evaluating performance. Guarantee Life is required to adopt Statement 131
effective January 1, 1998, and comparative information for earlier years must be
restated. Guarantee Life has not yet determined what impact Statement 131 may
have on its current segment reporting structure.
10
<PAGE>
Part II Other Information
ITEMS 1,2,3, 4 and 5 are either inapplicable or are answered in the negative
and are omitted pursuant to the instructions to Part II.
ITEM 6 Exhibits and Reports on Form 8-K
(a) The following exhibits are being filed pursuant to Item 6(a) of Form 10-Q.
27 Financial Data Schedule
(b) A report on Form 8-K dated October 17, 1997, was filed with the Commission
to report under Item 5, the signing of a definitive agreement to acquire PFG,
Inc.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE GUARANTEE LIFE COMPANIES INC.
Date: November 5, 1997 /s/ WILLIAM L. BAUHARD
-----------------------------------
William L. Bauhard
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Balance Sheet as of September 30, 1997 (unaudited) and
the Condensed Consolidated Statement of Income for the three and Nine Months
Ended September 30, 1997 (unaudited) and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 503,717
<DEBT-CARRYING-VALUE> 157,622
<DEBT-MARKET-VALUE> 169,439
<EQUITIES> 2,486
<MORTGAGE> 80,873
<REAL-ESTATE> 3,424
<TOTAL-INVEST> 1,111,701
<CASH> 2,031
<RECOVER-REINSURE> 67,684
<DEFERRED-ACQUISITION> 74,794
<TOTAL-ASSETS> 1,324,658
<POLICY-LOSSES> 166,575
<UNEARNED-PREMIUMS> 11,004
<POLICY-OTHER> 471,696
<POLICY-HOLDER-FUNDS> 13,451
<NOTES-PAYABLE> 0
0
0
<COMMON> 99
<OTHER-SE> 207,125
<TOTAL-LIABILITY-AND-EQUITY> 1,324,658
166,013
<INVESTMENT-INCOME> 43,212
<INVESTMENT-GAINS> 933
<OTHER-INCOME> 14,706
<BENEFITS> 119,234
<UNDERWRITING-AMORTIZATION> 41,453
<UNDERWRITING-OTHER> 45,107
<INCOME-PRETAX> 190,70
<INCOME-TAX> 6,747
<INCOME-CONTINUING> 12,323
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,264
<EPS-PRIMARY> 1.26
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
