<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 June 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 August 4, 1997: 9,197,434
================================================================================
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
----------- ------------
1997 1996
----------- ------------
(unaudited)
<S> <C> <C>
Assets
------
Invested assets:
Fixed maturities:
Available-for-sale, at fair value (amortized cost: $489,520 and $520,741).... $ 493,894 $ 526,799
Held-to-maturity, at amortized cost (fair value: $148,736 and $147,813)....... 139,708 138,584
---------- ----------
633,602 665,383
Equity securities, at fair value (cost: $3,158 and $3,158)....................... 2,411 2,946
Mortgage loans, net............................................................... 78,629 70,156
Policy loans...................................................................... 19,822 19,482
Investment real estate, net....................................................... 3,433 6,620
Other invested assets, net........................................................ 47,935 29,880
Closed block invested assets...................................................... 305,792 299,807
---------- ----------
Total invested assets.................................................................. 1,091,624 1,094,274
Cash and cash equivalents.............................................................. 2,024 2,079
Accrued investment income.............................................................. 12,011 11,623
Recoverable from reinsurers............................................................ 65,122 65,177
Accounts receivable, net............................................................... 12,538 8,289
Deferred policy acquisition costs...................................................... 77,583 77,968
Property, plant and equipment, net..................................................... 19,872 20,102
Other assets........................................................................... 3,662 3,690
Closed block other assets.............................................................. 18,913 22,020
---------- ----------
Total assets........................................................................... $1,303,349 $1,305,222
========== ==========
Liabilities and Shareholders' Equity
----------------------------------------
Future policy benefits:
Life.............................................................................. $ 45,560 $ 43,140
Accident and health............................................................... 69,262 64,007
Policyholder account balances:
Universal life contracts.......................................................... 264,781 257,362
Annuity contracts................................................................. 203,674 202,735
Policy and contract claims............................................................. 47,148 50,248
Other policyholder funds............................................................... 12,330 13,662
Unearned premium revenue............................................................... 10,777 10,679
Payable to reinsurers.................................................................. 4,380 5,557
Other liabilities...................................................................... 38,039 29,415
Closed block liabilities............................................................... 387,863 387,383
Discontinued operations, net........................................................... 23,132 32,362
---------- ----------
Total liabilities...................................................................... 1,106,946 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................................................................. 19,833 13,435
Net unrealized investment gain.................................................... 30 3,912
---------- ----------
Total shareholders' equity............................................................. 196,403 208,672
Commitments and contingencies.......................................................... - -
---------- ----------
Total liabilities and shareholders' equity............................................. $1,303,349 $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 Six Months Ended
June 30, June 30,
------------------------ -----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Insurance:
Life.................................................... $ 19,410 $ 16,342 $ 36,646 $ 31,466
Accident and health..................................... 43,797 34,931 82,080 69,105
Policyholder assessments................................ 7,547 5,926 14,665 11,765
Reinsurance premiums.................................... (14,590) (12,489) (26,778) (23,122)
---------- ---------- ---------- ----------
56,164 44,710 106,613 89,214
Investment income, net...................................... 14,733 13,530 28,659 26,481
Realized investment gains................................... 15 101 158 185
Contribution from closed block.............................. 1,079 1,403 2,044 1,432
Ceding commissions and other revenue........................ 3,765 3,285 7,523 5,803
---------- ---------- ---------- ----------
Total revenues.............................................. 75,776 63,029 144,997 123,115
---------- ---------- ---------- ----------
Policyholder benefits:
Life........................................................ 14,340 13,803 28,299 27,520
Accident and health......................................... 27,908 19,691 52,065 41,586
Reinsurance recoveries...................................... (9,368) (7,561) (16,874) (15,202)
---------- ---------- ---------- ----------
32,880 25,933 63,490 53,904
Interest credited to policyholder accounts.................. 6,305 5,519 12,617 11,214
---------- ---------- ---------- ----------
Total policyholder benefits................................. 39,185 31,452 76,107 65,118
---------- ---------- ---------- ----------
Expenses:
Policy acquisition costs.................................... 14,913 11,762 27,257 22,944
Other insurance operating expense........................... 14,863 13,119 29,929 25,164
---------- ---------- ---------- ----------
Total expenses.............................................. 29,776 24,881 57,186 48,108
---------- ---------- ---------- ----------
Income from continuing operations before income taxes....... 6,815 6,696 11,704 9,889
---------- ---------- ---------- ----------
Income tax expense.......................................... 2,421 2,344 4,162 3,461
---------- ---------- ---------- ----------
Net income from continuing operations....................... 4,394 4,352 7,542 6,428
---------- ---------- ---------- ----------
Net (loss) from discontinued operations..................... (48) (559) - (429)
---------- ---------- ---------- ----------
Net income.................................................. $ 4,346 $ 3,793 $ 7,542 $ 5,999
========== ========== ========== ==========
Primary earnings per common share:
Weighted average common shares outstanding.............. 9,660,527 9,944,383 9,793,597 9,944,383
========== ========== ========== ==========
Net income from continuing operations................... $ 0.46 $ 0.44 $ 0.77 $ 0.65
========== ========== ========== ==========
Net income.............................................. $ 0.45 $ 0.38 $ 0.77 $ 0.60
========== ========== ========== ==========
Fully diluted earnings per common share:
Weighted average common shares.......................... 9,960,527 - - -
========== ========== ========== ==========
Net income from continuing operations................... $ 0.44 - - -
========== ========== ========== ==========
Net income.............................................. $ 0.44 - - -
========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
Net cash provided (used) by operating activities.......................................... $ 8,079 $ (11,904)
--------- ---------
Cash flows from investing activities:
Purchase of fixed maturities........................................................... (91,588) (90,308)
Sales, maturities, calls and principal reductions of fixed maturities.................. 123,369 91,530
Purchase of mortgage loans............................................................. (11,186) (4,620)
Proceeds from repayment of mortgage loans.............................................. 2,120 1,935
Change in closed block invested assets................................................. (8,972) 2,734
Other, net............................................................................. (15,522) (4,612)
--------- ---------
Net cash (used) by investing activities.............................................. (1,778) (3,341)
--------- ---------
Cash flows from financing activities:
Deposits to policyholder account balances.............................................. 37,847 21,426
Withdrawals from policyholder account balances......................................... (28,361) (23,327)
Purchase of Treasury Stock............................................................. (14,694) -
Shareholder dividends.................................................................. (1,147) (497)
Policy cashouts in connection with demutualization and IPO............................. - (6,877)
--------- ---------
Net cash (used) by financing activities.............................................. (6,355) (9,275)
--------- ---------
Net (decrease) in cash and cash equivalents............................................... (55) (24,520)
Cash and cash equivalents at beginning of period.......................................... 2,079 25,301
--------- ---------
Cash and cash equivalents at end of period................................................ $ 2,024 $ 781
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 six month periods ended June 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 June 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........... $ 61,444 $ 682 $ 240 $ 61,886
Obligations of states and political subdivisions.. 10,127 34 58 10,103
Debt securities issued by foreign governments..... 5,901 339 - 6,240
Corporate securities.............................. 249,442 7,719 2,302 254,859
Mortgage-backed securities........................ 162,606 2,676 4,476 160,806
-------- -------- -------- ---------
$489,520 $ 11,450 7,076 493,894
======== ======== ======== =========
Held-to-maturity:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies........... 3,120 8 40 3,088
Corporate securities.............................. 136,588 9,317 257 145,648
-------- --------- --------- --------
$139,708 $ 6,992 $ 297 $148,736
======== ========= ========= ========
</TABLE>
(3) Closed Block
Summarized condensed financial information of the closed block (in thousands) is
as follows:
<TABLE>
<CAPTION>
June 30, December 31,
Assets 1997 1996
------ -------------- ------------
<S> <C> <C>
Invested assets:
Fixed maturities:
Available-for-sale, at fair value (amortized cost: $196,842 and
$190,504)........................................................ $199,829 $193,121
Held-to-maturity, at amortized cost (fair value: $57,183 and $58,837) 55,196 55,401
-------- --------
255,025 248,522
Policy loans............................................................. 47,539 48,057
Other invested assets, net............................................... 3,228 3,228
-------- --------
Total invested assets......................................................... 305,792 299,807
Cash and cash equivalents..................................................... 49 1,480
Accrued investment income..................................................... 4,102 4,428
Ceded reinsurance recoverables................................................ 1,206 1,237
Accounts receivable, net...................................................... 496 950
Deferred policy acquisition costs............................................. 13,060 13,925
-------- --------
Total closed block assets..................................................... $324,705 $321,827
======== ========
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Liabilities
-----------
<S> <C> <C>
Life future policy benefits................................................... $301,581 $301,568
Policyholder account balances for annuity contracts........................... 908 894
Policy and contract claims.................................................... 492 298
Other policyholder funds...................................................... 73,453 72,186
Dividends payable to policyholders............................................ 7,704 7,646
Other liabilities............................................................. 3,725 4,791
-------- --------
Total closed block liabilities................................................ $387,863 $387,383
======== ========
</TABLE>
Condensed statement of income for the closed block for the three and six months
ended June 30, (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1997 1996 1997 1996
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Insurance premiums and policyholder assessments,
net of reinsurance......................................... $ 5,142 $ 5,428 $ 10,673 $ 11,155
Investment income, net........................................ 5,291 5,662 11,011 11,146
Realized investment gains (losses) ........................... 280 (44) 218 (15)
Other income.................................................. 21 5 42 7
--------- --------- ---------- ----------
Total revenues................................................ 10,754 11,051 21,944 22,293
--------- --------- ---------- ----------
Policyholder benefits and expenses:
Total policyholder benefits................................... 5,264 5,585 11,062 12,412
Policy acquisition costs...................................... 606 511 1,114 1,028
Other insurance operating expense............................. 1,077 920 2,048 1,907
--------- --------- ---------- ----------
Total benefits and expenses................................... 6,947 7,016 14,224 15,347
Dividends to policyholders.................................... 2,708 2,632 5,676 5,514
--------- --------- ---------- ----------
Contribution from the closed block............................ $ 1,079 $ 1,403 $ 2,044 $ 1,432
========= ========= ========== ==========
</TABLE>
The closed block includes only those revenues, benefits, expenses and
dividends resulting from the policies which were included in the closed
block on December 26, 1995, the effective date of Guarantee Life Insurance
Company's conversion to a stock life insurance company. The pre-tax income
of the closed block is reported as a single line item, Contribution from
closed block, in Guarantee Life's condensed consolidated statements of
income. Income tax expense applicable to the closed block is reflected as a
component of income tax expense.
The excess of closed block liabilities over closed block assets as of June
30, 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
Fully diluted earnings per common share 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 Six Months Ended June 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 Six Months Ended
June 30, June 30,
-------- --------
1997 1996 1997 1996
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Revenues:
Premiums and policyholder assessments, net............. $61,306 $50,138 $117,286 $100,369
Investment income, net................................. 20,044 19,192 39,670 37,627
Realized investment gains.............................. 295 57 376 170
Ceding commissions and other income.................... 3,786 3,290 7,565 5,810
--------- --------- --------- ---------
Total revenues.............................................. 85,431 72,677 164,897 143,976
Policyholder benefits and expenses:
Gross benefits......................................... 46,721 38,264 89,893 79,947
Ceded to reinsurers.................................... (9,327) (7,501) (16,843) (15,148)
Interest credited to account balances.................. 7,055 6,274 14,119 12,731
--------- --------- --------- ---------
Total policyholder benefits............................ 44,449 37,037 87,169 77,530
Expenses............................................... 31,459 26,312 60,348 51,043
Dividends to policyholders............................. 2,708 2,632 5,676 5,514
--------- --------- --------- ---------
Total policyholder benefits, expenses and dividends......... 78,616 65,981 153,193 134,087
--------- --------- --------- ---------
Income from continuing operations before income taxes....... 6,815 6,696 11,704 9,889
Income taxes................................................ 2,421 2,344 4,162 3,461
--------- --------- --------- ---------
Net income from continuing operations....................... $ 4,394 $ 4,352 $ 7,542 $ 6,428
========= ========= ========= =========
</TABLE>
Investment Income, Net. Net investment income increased $852 thousand, or
4.4% for the second quarter of 1997 over 1996, and $2.0 million or 5.4% for the
six months ended June 30. This increase was caused mainly by an increase in the
average invested asset base, which increased $40.7 million, or 3.9% in 1997.
The investment yield was 8.2% 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 six months ended June, 1997 and 1996.
<TABLE>
<CAPTION>
Group Underwriting Income
Three Months Ended June 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.................. $44,050 $17,456 $61,506 $ 31,713 $ 17,613 $49,326
Reinsurance premiums...................... (1,072) (11,962) (13,034) (743) (10,232) (10,975)
------- ------- ------- -------- -------- -------
Net premiums.............................. 42,978 5,494 48,472 30,970 7,381 38,351
Ceding commissions........................ - 3,625 3,625 - 3,175 3,175
------- ------- ------- -------- -------- -------
Total net premiums and ceding
commissions.......................... 42,978 9,119 52,097 30,970 10,556 41,526
------- ------- ------- -------- -------- -------
Gross policyholder benefits............... 29,052 9,571 38,623 20,881 9,228 30,109
Reinsurance recoveries.................... (1,037) (7,547) (8,584) (70) (6,908) (6,978)
------- ------- ------- -------- -------- -------
Net benefits.............................. 28,015 2,024 30,039 20,811 2,320 23,131
Policy acquisition costs and expenses..... 16,361 5,900 22,261 11,523 6,762 18,285
------- ------- ------- -------- -------- -------
Total net benefits and expenses........ 44,376 7,924 52,300 32,334 9,082 41,416
------- ------- ------- -------- -------- -------
Underwriting gain (loss) ................. $(1,398) $ 1,195 $ (203) $ (1,364) $ 1,474 $ 110
======= ======= ======= ======== ======== =======
<CAPTION>
Group Underwriting Income
Six Months Ended June 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.................. $82,576 $32,889 $115,465 $61,019 $36,135 $97,154
Reinsurance premiums...................... (1,599) (22,339) (23,938) (1,139) (19,160) (20,299)
------- ------- -------- ------- ------- -------
Net premiums.............................. 80,977 10,550 91,527 59,880 16,975 76,855
Ceding commissions........................ 68 7,282 7,350 (176) 5,787 5,611
------- ------- -------- ------- ------- -------
Total net premiums and ceding
commissions.......................... 81,045 17,832 98,877 59,704 22,762 82,466
------- ------- -------- ------- ------- -------
Gross policyholder benefits............... 53,392 19,365 72,757 39,274 22,015 61,289
Reinsurance recoveries.................... 277 (15,164) (14,887) 48 (13,638) (13,590)
------- ------- -------- ------- ------- -------
Net benefits.............................. 53,669 4,201 57,870 39,322 8,377 47,699
Policy acquisition costs and expenses..... 32,049 10,836 42,885 22,188 13,417 35,605
------- ------- -------- ------- ------- -------
Total net benefits and expenses........ 85,718 15,037 100,755 61,510 21,794 83,304
------- ------- -------- ------- ------- -------
Underwriting gain (loss) ................. $(4,673) $ 2,795 $ (1,878) $(1,806) $ 968 $ (838)
======= ======= ======== ======= ======= =======
</TABLE>
Core products net premiums increased $12.0 million, or 38.8% for the second
quarter of 1997 over 1996, and $21.1 million or 35.7% for the six months ended
June 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 decreased $1.9 million, or 25.6% for the
second quarter of 1997 over 1996, and $6.4 million, or 37.9% for the six months
ended June 30. This decrease was primarily due to Guarantee Life's decision to
stop writing the SMART product during the first quarter of 1996.
Core products net benefits increased $7.2 million, or 34.6% for the second
quarter of 1997 over 1996 and $14.3 million, or 36.5% for the six months ended
June 30. This increase is caused entirely by higher premium volume in all
product lines and is partially offset by improved underwriting experience in the
life and LTD product lines during the second quarter.
Specialty products net benefits decreased $300 thousand, or 12.8% for the
second quarter of 1997 over 1996 and $4.2 million or 49.9% for the six months
ended June 30, mainly due to the lower volume of net premiums discussed earlier.
8
<PAGE>
Total group expenses increased $4.0 million, or 21.7% for the second
quarter of 1997 over 1996 and $7.3 million or 20.5% for the six months ended
June 30. This increase was due partly to the 26.4% and 19.1% three and six month
increases in total group net premium, which directly impacts commissions, taxes,
licenses, and fees. The increase also included increases in other general
operating expenses, due in part to expansion of the group 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 six months ended June 30,
1997 and 1996.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1997 1996 1997 1996
---------- ---------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Revenues:
Premiums and policyholder assessments, net of
reinsurance premiums.................................. $ 12,834 $ 11,787 $25,759 $23,514
Investment income, net................................... 16,652 16,438 33,538 32,382
Realized investment gains................................ 312 133 135 908
Ceding commissions and other income...................... 123 116 215 200
-------- -------- ------- -------
Total revenues................................................ 29,921 28,474 59,647 57,004
Policyholder benefits and expenses:
Gross benefits........................................... 8,098 8,155 17,136 18,658
Reinsurance recoveries................................... (743) (523) (1,956) (1,558)
Interest credited to account balances.................... 7,055 6,274 14,119 12,731
-------- -------- ------- -------
Total policyholder benefits.............................. 14,410 13,906 29,299 29,831
Policy acquisition costs and expenses.................... 8,774 7,675 16,476 14,084
Dividends to policyholders............................... 2,708 2,632 5,676 5,514
-------- -------- ------- -------
Total policyholder benefits, expenses and dividends........... 25,892 24,213 51,451 49,429
-------- -------- ------- -------
Income from continuing operations before income taxes......... $ 4,029 $ 4,261 $ 8,196 $ 7,575
======== ======== ======= =======
</TABLE>
Net premiums and policyholder assessments increased $1.0 million, or 8.9%
for the second quarter of 1997 over 1996 and $2.2 million, or 9.6% for the six
months ended June 30. This increase is attributable to the block of universal
life policies acquired during the third quarter of 1996.
Total individual policyholder benefits increased $500 thousand, or 3.6%,
for the second quarter of 1997 over 1996 and decreased $500 thousand or 1.8% for
the six months ended June 30. Excluding interest credited to policyholder
account balances, total individual policyholder benefits decreased $300 thousand
for the second quarter of 1997 over 1996 and $1.9 million for the six months
ended June 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 $781 thousand, or 12.4% for the
second quarter of 1997 over 1996 and $1.4 million or 10.9% for the six months
ended June 30. This increase was due to increased account values, as average
crediting rates did not change significantly.
Total individual expenses increased $1.1 million, or 14.3% for the second
quarter of 1997 over 1996 and $2.4 million, or 17.0% for the six months ended
June 30, in 1997, including $888 thousand additional DAC amortization for the
quarter and $1.4 million year to date. The remaining increase is due to
additional divisional operating expenses.
Policyholder dividends increased only slightly during 1997, reflecting an
unchanged dividend scale applied to increasing policy account values.
9
<PAGE>
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 six months ended June, 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.
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.
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.
Part II Other Information
ITEMS 1,2,3 and 5 are either inapplicable or are answered in the negative
and are omitted pursuant to the instructions to Part II.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
10
<PAGE>
The Company's Annual Meeting of Shareholders (the "Annual Meeting") was
held on May 8, 1997. The results of the matters voted upon at the Annual Meeting
are shown below.
Election of Directors. The following directors were re-elected:
---------------------
<TABLE>
<CAPTION>
Withhold
Authority To
Vote For
Nominee
-------
Director For Term
-------- --- ----
<S> <C> <C> <C>
John R. Cochran 5,720,328 208,219 3 years
James M. McClymond 5,727,203 201,344 3 years
William F. Welsh II 5,726,097 202,450 3 years
</TABLE>
Directors whose terms of office continued after the Annual Meeting:
Robert D. Bates
Frederick M. Bekins
C.R. Bob Bell
Theodore C. Cooley
Thomas T. Hacking
Bernard W. Reznicek
A.J. Scribante
Janice D. Stoney
Ratification of Independent Auditors. The appointment of KPMG Peat
------------------------------------
Marwick LLP as the Company's independent auditors for 1997 was ratified
with 5,795,809 votes for, 30,272 votes against and 102,446
abstentions/broker non-votes.
Amendment of the Company's 1994 Long Term Incentive Plan. The proposal
--------------------------------------------------------
to increase the number of shares of common stock issuable under the
1994 Long Term Incentive Plan from 745,828 shares to 1,345,828 shares
was approved with 4,253,660 votes for, 597,022 votes against and
219,799 abstentions/broker non-votes.
ITEM 6 Exhibits and Reports on Form 8-K
(a) The following exhibits are being filed pursuant to Item 6(a) of Form 10-Q.
10 Amendment No. 3 to The Guarantee Life Companies Inc. 1994 Long
Term Incentive Plan
27 Financial Data Schedule
(b) No Current Reports on Form 8-K have been filed during the fiscal quarter of
the period covered by this Report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE GUARANTEE LIFE COMPANIES INC.
Date: August 13, 1997 /s/ WILLIAM L. BAUHARD
-------------------------------------------------
William L. Bauhard
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
11
<PAGE>
Exhibit 10
AMENDMENT NO. 3
TO
THE GUARANTEE LIFE COMPANIES INC.
1994 LONG TERM INCENTIVE PLAN
RESOLVED, that The Guarantee Life Companies Inc. 1994 Long Term Incentive
Plan (the "Plan") adopted on December 15, 1994, by the Board of Directors of The
Guarantee Life Companies Inc. (the "Company"), adopted on December 15, 1994, by
Guarantee Mutual Life Company, as the sole shareholder of the Company, and
amended on April 6, 1995, and November 14, 1996, by the Board of Directors of
the Company be, and it hereby is, amended as follows: Section 4.1 is amended to
increase the total number of Shares available for grant under the Plan to
1,345,828, effective upon approval of the increase by shareholders of the
Company; and further, that the increase be submitted to the shareholders of the
Company for consideration and approval at the Annual Meeting of Shareholders to
be held May 8, 1997.
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Balance Sheet as of June 30, 1997 (unaudited) and the
Condensed consolidated Statement of Income for the three and six months ended
June 30, 1997 (unaudited) and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 493,894
<DEBT-CARRYING-VALUE> 139,708
<DEBT-MARKET-VALUE> 148,736
<EQUITIES> 2,411
<MORTGAGE> 78,629
<REAL-ESTATE> 3,433
<TOTAL-INVEST> 1,091,624
<CASH> 2,360
<RECOVER-REINSURE> 65,122
<DEFERRED-ACQUISITION> 77,583
<TOTAL-ASSETS> 1,303,349
<POLICY-LOSSES> 161,970
<UNEARNED-PREMIUMS> 10,777
<POLICY-OTHER> 468,455
<POLICY-HOLDER-FUNDS> 12,330
<NOTES-PAYABLE> 0
0
0
<COMMON> 99
<OTHER-SE> 196,304
<TOTAL-LIABILITY-AND-EQUITY> 1,303,349
106,613
<INVESTMENT-INCOME> 28,659
<INVESTMENT-GAINS> 158
<OTHER-INCOME> 9,567
<BENEFITS> 76,107
<UNDERWRITING-AMORTIZATION> 27,257
<UNDERWRITING-OTHER> 29,929
<INCOME-PRETAX> 11,704
<INCOME-TAX> 4,162
<INCOME-CONTINUING> 7,542
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,542
<EPS-PRIMARY> .77
<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>
