<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------------------------------------
FORM 10-Q
--------------------------------------------
(Mark One)
[ X ]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
or
[ _ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1998 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 July 29, 1998: 9,219,342
================================================================================
<PAGE>
Part I FINANCIAL INFORMATION
Item 1. Financial Statements
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
Assets 1998 1997
------ ----------------- --------------
(unaudited)
<S> <C> <C>
Invested assets:
Fixed maturities:
Available-for-sale, at fair value (amortized cost: $883,276 and $566,544) ... $ 903,944 $ 582,700
Held-to-maturity, at amortized cost (fair value: $175,954 and $184,480) ..... 163,492 172,167
----------------- --------------
$ 1,067,436 754,867
Equity securities, at fair value (cost: $16,152 and $2,735) ...................... 17,016 3,735
Mortgage loans, net .............................................................. 91,798 85,849
Policy loans ..................................................................... 30,653 21,657
Investment real estate, net ...................................................... 3,322 3,394
Other invested assets, net ....................................................... 24,081 32,212
Closed block invested assets ..................................................... 311,423 309,777
----------------- --------------
Total invested assets ................................................................. 1,545,729 1,211,491
Cash and cash equivalents ............................................................. 18,325 8,608
Accrued investment income ............................................................. 14,483 12,415
Recoverable from reinsurers ........................................................... 93,741 82,568
Accounts receivable, net .............................................................. 17,847 19,805
Deferred policy acquisition costs ..................................................... 141,490 102,696
Property, plant and equipment, net .................................................... 18,935 19,427
Other assets .......................................................................... 18,498 11,572
Closed block other assets ............................................................. 18,314 17,754
Separate account assets ............................................................... 44,809 32,697
----------------- --------------
Total assets .......................................................................... $ 1,932,171 $ 1,519,033
================= ==============
Liabilities and Shareholders' Equity
------------------------------------
Future policy benefits ................................................................ $ 167,286 $ 143,048
Policyholder account balances ......................................................... 794,478 542,038
Policy and contract claims ............................................................ 63,478 53,607
Other policyholder funds .............................................................. 36,781 20,754
Unearned premium revenue .............................................................. 13,582 11,866
Payable to reinsurers ................................................................. 9,857 6,938
Notes payable ......................................................................... 125,000 40,000
Other liabilities ..................................................................... 49,376 51,284
Closed block liabilities .............................................................. 385,020 386,606
Discontinued operations, net .......................................................... 21,656 20,997
Separate account liabilities .......................................................... 44,809 32,697
----------------- --------------
Total liabilities ..................................................................... 1,711,323 1,309,835
----------------- --------------
Shareholders' equity:
Common stock $0.01 par value; 30,000,000 shares authorized, 10,315,785 shares
issued at June 30, 1998 and 9,944,383 shares issued at December 31, 1997 ...... 103 99
Additional paid-in capital ....................................................... 201,111 191,123
Treasury stock, at cost (1,096,817 shares at June 30, 1998 and 1,017,524 shares at
December 31, 1997) ........................................................ (25,001) (22,512)
Retained earnings ................................................................ 28,660 27,463
Net unrealized investment gain ................................................... 15,975 13,025
----------------- --------------
Total shareholders' equity ............................................................ 220,848 209,198
Commitments and contingencies ......................................................... -- --
----------------- --------------
Total liabilities and shareholders' equity ............................................ $ 1,932,171 $ 1,519,033
================= ==============
</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,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Direct and assumed premiums and policyholder assessments $ 96,445 $ 70,754 $ 184,650 $ 133,391
Reinsurance premiums ................................... (20,468) (14,590) (38,093) (26,778)
------------- ------------- ------------- -------------
Net premiums and policyholder assessments .............. 75,977 56,164 146,557 106,613
Investment income, net ................................. 17,351 14,753 33,491 28,659
Realized investment gains .............................. 409 15 528 158
Ceding commissions and other income .................... 5,772 3,765 10,813 7,523
Contribution from Closed Block ......................... 405 1,079 1,607 2,044
------------- ------------- ------------- -------------
Total revenues ......................................... 99,914 75,776 192,996 144,997
------------- ------------- ------------- -------------
Policyholder benefits:
Direct and assumed benefits ............................ 75,322 48,553 142,344 92,981
Reinsurance recoveries ................................. (16,866) (9,368) (29,899) (16,874)
------------- ------------- ------------- -------------
Net policyholder benefits .............................. 58,456 39,185 112,445 76,107
------------- ------------- ------------- -------------
Expenses:
Policy acquisition costs ............................... 17,742 14,913 35,711 27,257
Other insurance operating expense ...................... 19,854 14,863 40,425 29,929
------------- ------------- ------------- -------------
Total expenses ......................................... 37,596 29,776 76,136 57,186
------------- ------------- ------------- -------------
Income from continuing operations before income taxes .. 3,862 6,815 4,415 11,704
------------- ------------- ------------- -------------
Income tax expense ..................................... 1,352 2,421 1,545 4,162
------------- ------------- ------------- -------------
Net income from continuing operations .................. 2,510 4,394 2,870 7,542
------------- ------------- ------------- -------------
Net income (loss) from discontinued operations ......... (27) (48) (29) --
------------- ------------- ------------- -------------
Net income ............................................. $ 2,483 $ 4,346 $ 2,841 $ 7,542
============= ============= ============= =============
Basic Earnings per share:
Weighted average shares outstanding ............... 8,958,436 9,660,527 8,906,122 9,793,597
============= ============= ============= =============
Net income from continuing operations ............. $ 0.28 $ 0.46 $ 0.32 $ 0.77
============= ============= ============= =============
Net income (loss) from discontinued operations .... -- $ (0.01) -- --
============= ============= ============= =============
Net income ........................................ $ 0.28 $ 0.45 $ 0.32 $ 0.77
============= ============= ============= =============
Diluted Earnings per share:
Weighted average shares outstanding ............... 9,259,900 9,825,235 9,204,097 9,953,387
============= ============= ============= =============
Net income from continuing operations ............. $ 0.27 $ 0.45 $ 0.31 $ 0.76
============= ============= ============= =============
Net income (loss) from discontinued operations .... -- $ (0.01) -- --
============= ============= ============= =============
Net income ........................................ $ 0.27 $ 0.44 $ 0.31 $ 0.76
============= ============= ============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income .............................................................. $ 2,483 $ 4,346 $ 2,841 $ 7,542
Other comprehensive income, net of tax:
Unrealized appreciation (depreciation) of invested assets............. 5,039 6,192 3,478 (3,724)
Less reclassification adjustment for gains (losses)
included in net income .............................................. 409 15 528 158
------------ ------------ ------------ ------------
4,630 6,177 2,950 (3,882)
------------ ------------ ------------ ------------
Comprehensive income .................................................... $ 7,113 $10,523 $ 5,791 $ 3,660
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------
1998 1997
----------- ------------
<S> <C> <C>
Net cash provided (used) by operating activities .................... ($8,921) $8,079
----------- ------------
Cash flows from investing activities:
Purchase of fixed maturities ..................................... (122,857) (91,588)
Maturities, calls and principal reductions of fixed .............. 146,414 123,369
maturities
Purchase of mortgage loans ....................................... (10,250) (11,186)
Proceeds from repayment of mortgage loans ........................ 4,267 2,120
Change in closed block invested assets ........................... (1,253) (8,972)
Change in short term invested assets ............................. 15,124 (17,098)
Payment for purchase of Westfield Life Insurance Company, net (90,863) --
Other, net ....................................................... (1,473) 1,576
----------- ------------
Net cash provided (used) by investing activities ............... (60,891) (1,779)
----------- ------------
Cash flows from financing activities:
Deposits to policyholder account balances ........................ 32,620 37,847
Withdrawals from policyholder account balances ................... (33,703) (28,361)
Purchase of Treasury Stock ....................................... (3,150) (14,694)
Shareholder dividends ............................................ (1,238) (1,147)
Repayment of long term debt ...................................... (40,000) --
Proceeds from issuance of long term debt ......................... 125,000 --
----------- ------------
Net cash (used) provided by financing activities .............. 79,529 (6,355)
----------- ------------
Net increase (decrease) in cash and cash equivalents ................ 9,717 (55)
Cash and cash equivalents at beginning of period .................... 8,608 2,079
----------- ------------
Cash and cash equivalents at end of period .......................... $18,325 $2,024
=========== ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
(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, 1998
are not necessarily indicative of the results that may be expected for the
year ending December 31, 1998. These financial statements and notes thereto
should be read in conjunction with the audited consolidated financial
statements for the fiscal year ended December 31, 1997, contained in
Guarantee Life's annual report on Form 10-K for the year ended December 31,
1997.
(2) Investments
Fixed maturities at June 30, 1998 (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........... $146,249 $1,459 $80 $147,628
Obligations of states and political subdivisions.. 13,601 608 6 14,203
Debt securities issued by foreign governments..... 13,917 1,031 1 14,947
Corporate securities.............................. 432,351 15,580 1,869 446,062
Mortgage-backed securities........................ 232,805 5,333 1,923 236,215
Other asset-backed securities..................... 44,353 621 85 44,889
-------------- -------------- --------------- --------------
$883,276 $24,632 $3,964 $903,944
============== ============== =============== ==============
Held-to-maturity:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies........... $9,989 $109 $10 $10,088
Obligations of states and political subdivisions.. 7,466 27 1 7,492
Corporate securities.............................. 143,375 12,357 8 155,724
Mortgage-backed securities........................ 2,662 - 12 2,650
-------------- -------------- --------------- --------------
$163,492 $12,493 $31 $175,954
============== ============== =============== ==============
</TABLE>
(3) Closed Block
Summarized condensed financial information of the closed block (in thousands) is
as follows:
<TABLE>
<CAPTION>
June 30, December 31,
Assets 1998 1997
------ -------------- --------------
<S> <C> <C>
Invested assets:
Fixed maturities:
Available-for-sale, at fair value (amortized cost: $206,933 and $202,869) $215,707 $211,248
Held-to-maturity, at amortized cost (fair value: $50,705 and $52,224)......... 47,088 48,838
-------------- --------------
262,795 260,086
Policy loans........................................................................ 45,935 46,997
Other invested assets, net.......................................................... 2,693 2,694
-------------- --------------
Total invested assets.................................................................... 311,423 309,777
Cash and cash equivalents................................................................ 3,080 328
Accrued investment income................................................................ 2,460 4,221
Deferred policy acquisition costs........................................................ 11,385 12,233
Other assets............................................................................. 1,389 972
-------------- --------------
Total closed block assets................................................................ $329,737 $327,531
============== ==============
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
June 30, December 31,
Liabilities 1998 1997
----------- -------------- --------------
<S> <C> <C>
Life future policy benefits............................................................... $300,166 $301,495
Policyholder account balances for annuity contracts....................................... 873 868
Policy and contract claims................................................................ 545 573
Other policyholder funds.................................................................. 72,232 72,024
Dividends payable to policyholders........................................................ 7,805 7,767
Deferred income taxes..................................................................... 3,071 2,932
Other liabilities......................................................................... 328 946
-------------- --------------
Total closed block liabilities............................................................ $385,020 $386,605
============== ==============
</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,
1998 1997 1998 1997
------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues:
Insurance premiums and policyholder assessments, net of reinsurance... $4,962 $5,142 $10,198 $10,673
Investment income, net................................................ 5,328 5,291 10,961 11,011
Realized investment gains (losses) ................................... 620 280 631 218
Other income.......................................................... 2 21 4 42
------------- ----------- ----------- ------------
Total revenues........................................................ 10,912 10,734 21,794 21,944
------------- ----------- ----------- ------------
Policyholder benefits and expenses:
Total policyholder benefits........................................... 5,158 5,264 11,264 11,062
Policy acquisition costs.............................................. 574 606 1,013 1,114
Other insurance operating expense..................................... 2,007 1,077 2,114 2,048
------------- ----------- ----------- ------------
Total benefits and expenses........................................... 7,739 6,947 14,391 14,224
Dividends to policyholders............................................ 2,768 2,708 5,796 5,676
------------- ----------- ----------- ------------
Contribution from the closed block.................................... $405 $1,079 $1,607 $ 2,044
============= =========== =========== ============
</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,
1998 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
Basic earnings per share of common stock have been computed on the basis of the
weighted average number of shares of common stock outstanding. Diluted earnings
per share is based on the weighted average number of shares and common stock
equivalents outstanding. The Company's common stock equivalents relate to common
stock options.
(5) Restricted common shares
Effective May 31, 1998, The Guarantee Life Companies Inc. acquired Westfield
Life Insurance Company. As partial consideration, 371,402 shares of previously
authorized, but unissued, common stock were issued. These shares have a
restriction on transfer and are restricted from sale for a period of two years.
They are also restricted for five years from sale to any party who owns two
percent or more of Guarantee Life's issued and outstanding common stock at the
time of transfer or
7
<PAGE>
who would own two percent or more after transfer. These shares also have
restricted voting rights. For a period of five years all restricted shares of
common stock will be voted in concurrence with the recommendation of the Board
of Directors of Guarantee Life in matters submitted to the shareholders of
Guarantee Life for vote or consent.
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 of Guarantee Life should be read in conjunction with the condensed
consolidated financial statements and the notes thereto included herein.
Forward-looking Statements
This 10-Q report contains certain forward-looking statements. All
forward-looking statements are inherently uncertain as they are based on various
management expectations and assumptions concerning future events and they are
subject to numerous known and unknown risks and uncertainties which could cause
actual results to differ materially from those projected. 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, 1997. 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, 1998 and 1997
As part of the conversion to a stock life insurance company in 1995,
Guarantee Life Insurance Company 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.
<TABLE>
<CAPTION>
Combined Results of Operations
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Premiums and policyholder assessments, net ..... $ 80,939 $ 61,306 $156,755 $117,286
Investment income, net ......................... 22,679 20,044 44,452 39,670
Realized investment gains ...................... 1,029 295 1,159 376
Ceding commissions and other income ............ 5,774 3,786 10,817 7,565
-------- -------- -------- --------
Total revenues ...................................... 110,421 85,431 213,183 164,897
Benefits and expenses:
Policyholder benefits, net of reinsurance ...... 63,614 44,449 123,709 87,169
Expenses ....................................... 40,170 31,459 79,256 60,348
Dividends to policyholders ..................... 2,775 2,708 5,803 5,676
-------- -------- -------- --------
Total policyholder benefits, expenses ............... 106,559 78,616 208,768 153,193
-------- -------- -------- --------
Income from continuing operations before income taxes
3,862 6,815 4,415 11,704
Income taxes ........................................ 1,352 2,421 1,545 4,162
-------- -------- -------- --------
Net income from continuing operations .............. $ 2,510 $ 4,394 $ 2,870 $ 7,542
======== ======== ======== ========
Net income excluding realized gains ................. $ 1,841 $ 4,202 $ 2,116 $ 7,298
======== ======== ======== ========
</TABLE>
Investment Income, Net. Net investment income increased $2.6 million or 13.2%
and $4.8 million or 12.1% for the three and six month periods ended June 30,
1998 over 1997. This increase was caused by an increase of $334 million or 27.6%
in invested assets from December 31, 1997 to June 30, 1998. The increase in
invested assets is primarily due to the acquisition of Westfield Life Insurance
Company on May 31, 1998.
8
<PAGE>
Insurance Operations--Group
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information," which established standards for reporting
information about operating segments. Generally, SFAS 131 required that
financial information be reported on the basis that is used internally for
evaluating performance. Guarantee Life adopted SFAS 131 effective January 1,
1998, and comparative information for 1997 has been restated. Under 131,
Guarantee Life defined the Group Insurance Business divisions, Employee Benefits
Division (EBD) and Group Special Markets (GSM), as segments and will report
their operations separately.
EBD provides group non-medical (core products) including term life,
accidental death and dismemberment, short-term disability, long-term disability,
and dental; and voluntary (worksite marketed) core products. The Group Special
Markets Division provides specialty medical products (specialty products)
including excess loss insurance, medical reimbursement insurance for business
executives, and core products.
The following table sets forth Guarantee Life's group insurance
underwriting income for the three and six months ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
Group Underwriting Income
Three Months Ended June 30,
------------------------------------------------------------------------------------
1998 1997
--------------------------------------- ---------------------------------------
(In thousands)
Employee Group Employee Group
Benefits Special Benefits Special
Division Markets Total Division Markets Total
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Gross insurance premiums ......... $ 50,728 $ 28,496 $ 79,224 $ 38,171 $ 23,335 $ 61,506
Ceded to reinsurers .............. (1,359) (15,635) (16,994) (1,105) (11,929) (13,034)
--------- --------- --------- --------- --------- ---------
Net premiums ..................... 49,369 12,861 62,230 37,066 11,406 48,472
Ceding commissions ............... 66 4,952 5,018 -- 3,625 3,625
--------- --------- --------- --------- --------- ---------
Total net premiums and ceding
commissions ................. 49,435 17,813 67,248 37,066 15,031 52,097
--------- --------- --------- --------- --------- ---------
Gross policyholder benefits ...... 38,257 19,609 57,866 25,556 13,067 38,623
Recoveries from reinsurers ....... (1,755) (12,719) (14,474) (782) (7,802) (8,584)
--------- --------- --------- --------- --------- ---------
Net benefits ..................... 36,502 6,890 43,392 24,774 5,265 30,039
Expenses ......................... 18,290 8,830 27,120 14,836 7,425 22,261
--------- --------- --------- --------- --------- ---------
Total net benefits and expenses 54,792 15,720 70,512 39,610 12,690 52,300
--------- --------- --------- --------- --------- ---------
Underwriting gain (loss) ......... $ (5,357) $ 2,093 $ (3,264) $ (2,544) $ 2,341 $ (203)
========= ========= ========= ========= ========= =========
<CAPTION>
Group Underwriting Income
Three Months Ended June 30,
------------------------------------------------------------------------------------
1998 1997
--------------------------------------- ---------------------------------------
(In thousands)
Employee Group Employee Group
Benefits Special Benefits Special
Division Markets Total Division Markets Total
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Gross insurance premiums ......... $ 99,921 $ 53,701 $ 153,622 $ 72,018 $ 43,449 $ 115,467
Ceded to reinsurers .............. (2,489) (29,164) (31,653) (1,497) (22,442) (23,939)
--------- --------- --------- --------- --------- ---------
Net premiums ..................... 97,432 24,537 121,969 70,521 21,007 91,528
Ceding commissions ............... 104 9,460 9,564 -- 7,351 7,351
--------- --------- --------- --------- --------- ---------
Total net premiums and ceding
commissions ................. 97,536 33,997 131,533 70,521 28,358 98,879
--------- --------- --------- --------- --------- ---------
Gross policyholder benefits ...... 72,781 37,600 110,381 47,459 25,300 72,759
Recoveries from reinsurers ....... (1,929) (23,736) (25,665) 586 (15,474) (14,888)
--------- --------- --------- --------- --------- ---------
Net benefits ..................... 70,852 13,864 84,716 48,045 9,826 57,871
Expenses ......................... 38,336 17,120 55,456 28,618 14,266 42,884
--------- --------- --------- --------- --------- ---------
Total net benefits and expenses 109,188 30,984 140,172 76,663 24,092 100,755
--------- --------- --------- --------- --------- ---------
Underwriting gain (loss) ......... $(11,652) $3,013 $(8,639) $(6,142) $4,266 $(1,876)
========= ========= ========= ========= ========= =========
</TABLE>
9
<PAGE>
Employee Benefits Division's net earned premiums increased $12.3 million or
33.2% for the second quarter of 1998 over 1997 and $26.9 million or 38.2% for
the six months ended June 30. All EBD product lines experienced increased net
earned premiums over 1997. The greatest increases in net earned premiums
occurred in the dental, LTD and life product lines. Dental net earned premiums
increased $7.3 million or 78.6% and $15.3 million or 88.2% for the three and six
month periods ended June 30, 1998 over 1997. LTD net earned premiums increased
$1.9 million or 22.1% and $4.7 million or 29.9% and life increased $1.8 million
or 13.9% and $3.7 million or 14.4% for the second quarter of 1998 and the six
month period ended June 30, 1998 over 1997, respectively.
Group Special Markets Division's net premiums increased $1.5 million or
12.8% and $3.5 million or 16.8% for the three and six month periods ended June
30, 1998 over the corresponding periods in 1997. Excess Loss net earned premiums
increased $912 thousand or 23.7% and $1.8 million or 23.7% for the second
quarter of 1998 and the six month period ended June 30, 1998 over 1997.
EBD net benefits increased $11.7 million or 47.3% and $22.8 million or
47.5% for the second quarter of 1998 and the six month period ended June 30,
1998 over 1997, respectively. This increase is caused by higher premium volume
in all product lines and higher loss ratios in the LTD and dental lines. The
higher loss ratrio experienced in LTD was due primarily to a one time adjustment
for a reinsured block of business. LTD loss ratios are expected to return to
historical levels in future periods. The dental loss ratio increased due
primarily to an adjustment resulting from an actuarial claims study. Management
believes this adjustment will result in more favorable loss ratios levels in
future periods. Dental prices have been increased three times in the last twelve
months and risk appraisal procedures have been adjusted to improve underwriting
experience in the dental line. During the first six months of 1998, pricing was
increased an average of 5% to 7% for all group renewals.
GSM net benefits increased $1.6 million or 30.9% and $4.0 million or 41.1%,
for the second quarter of 1998 and the six month period ended June 30, 1998 over
1997, respectively. This increase is due to higher premium volume in all product
lines and higher loss ratios in the excess loss line. Excess loss pricing and
risk management actions were taken during 1997 to improve underwriting
experience.
Employee Benefits Division expenses increased $3.5 million or 23.3% and
$9.7 million or 34.0% for the second quarter of 1998 and the six month period
ended June 30, 1998 over 1997, respectively . This increase was due partly to
the increase in 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
Employee Benefits Division.
Group Special Markets expenses increased $1.4 million or 18.9% and $2.9
million or 20.0% for the three and six month periods ended June 30, 1998 over
the corresponding periods in 1997. This increase was due primarily to the
increase in premium which directly impacts commissions, taxes, licenses, and
fees.
Insurance Operations--Individual
On December 23, 1997 Guarantee Life acquired PFG, Inc. PFG's wholly owned
subsidiaries include AGL Life Assurance Company (AGL) and "Philadelphia
Financial Group" which consists of Philadelphia Financial Group, Inc., PFG
Distribution Company, Philadelphia Financial Group Agency of Ohio, Inc., PFG
Insurance Agency of Texas, Inc., and Philadelphia Financial Insurance Agency of
Massachusetts, Inc.
Effective May 31, 1998, The Guarantee Life Companies Inc. acquired Westfield
Life Insurance Company from Ohio Farmers Insurance Company. Westfield Life was
acquired for a purchase price of $100 million in cash and Guarantee Life
restricted stock. The acquisition increases Guarantee Life's Individual sales
force by approximately 500 producing agents and adds nearly 87,000 policies,
$280 million in policy reserves and $55 million in revenues to Guarantee Life's
Individual insurance business. Guarantee Life accounted for its acquisition of
Westfield Life Insurance Company using the purchase method. Westfield's results
of operations are included in Guarantee Life's consolidated results beginning
June 1, 1998.
10
<PAGE>
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,
1998 and 1997.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
----------- ---------- ----------- ----------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Revenues:
Premiums and policyholder assessments, net of
reinsurance premiums .................................... $18,709 $12,834 $34,786 $25,759
Investment income, net ................................. 19,160 16,652 36,952 33,538
Realized investment gains (losses) ..................... 962 312 740 135
Ceding commissions and other income ..................... 756 123 1,253 215
----------- ----------- ------------ -----------
Total revenues .............................................. 39,587 29,921 73,731 59,647
Policyholder benefits and expenses:
Policyholder benefits, net of reinsurance ............... 20,221 14,410 38,992 29,299
Expenses ................................................ 11,272 8,774 21,296 16,476
Dividends to policyholders .............................. 2,775 2,708 5,803 5,676
----------- ----------- ------------ -----------
Total policyholder benefits, expenses and dividends .......... 34,268 25,892 66,091 51,451
----------- ----------- ------------ -----------
Income from continuing operations before income taxes ........ $ 5,319 $ 4,029 $ 7,640 $ 8,196
=========== =========== ============ ===========
</TABLE>
Net premiums and policyholder assessments increased $5.9 million or 45.8%
and $9.0 million, or 35.0% for the second quarter of 1998 and the six months
ended June 30 compared to the same periods in 1997. PFG contributed $5.1 million
and $9.9 million for the quarter and six months ended June 30, 1998 while
Westfield Life contributed $2.4 million for the three and six months ended June
30, 1998.
Total individual policyholder benefits increased $5.8 million or 40.3% and
$9.7 million or 33.1% for the three and six month periods ending June 30, 1998
over 1997. This increase is due to higher than expected mortality in the
traditional and universal lines as well as the inclusion of PFG and Westfield in
1998. PFG's policyholder benefits were $2.6 million and $5.6 million for the
quarter and six months ended June 30, 1998 while Westfield Life's were $2.6
million for the three and six months ended June 30, 1998. Interest credited on
policyholder account balances increased $1.8 million or 25.6% and $3.2 million
or 22.5% for the second quarter and six months ended June 30, 1998 over 1997.
This increase was due primarily to the inclusion of PFG and Westfield . Average
crediting rates did not change significantly during these periods.
Total individual expenses increased $2.5 million or 28.5% and $4.8 million
or 29.3% for the three and six month periods ending June 30, 1998 over 1997.
This increase relates primarily to operating expenses incurred by PFG and
Westfield Life in the first six months of 1998.
Policyholder dividends increased only slightly during the first six months
of 1998, 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 stockholders and meet
its obligations, including debt service and operating expenses, depends
primarily upon receiving sufficient funds from its subsidiaries. The payment of
dividends by Guarantee Life Insurance, AGL, and Westfield Life Insurance Company
are subject to restrictions set forth in the insurance laws and regulations of
Nebraska, Pennsylvania and Ohio. Under state law, Guarantee Life Insurance, AGL
and Westfield 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 state departments to pay a dividend if such dividend would exceed the
greater of (i) 10% of statutory capital and surplus as of the preceding year end
and (ii) the net gain from operations for the previous calendar year. State law
gives the broad discretion to disapprove requests for dividends in excess of
these limits. Guarantee Life Insurance cannot declare additional dividends in
1998 without permission from the Nebraska Department of Insurance. AGL may pay
$2.4 million in 1998 without obtaining approval from the Pennsylvania Department
of Insurance. Westfield Life Insurance cannot declare additional dividends in
1998 without permission from the Ohio Department of Insurance.
Guarantee Life increased its outstanding long term debt $85 million to $125
million in conjunction with the acquisition of Westfield Life Insurance Company
effective May 31, 1998. Guarantee Life replaced its previous $50 million credit
agreement with Senior Secured Credit Facilities in an aggregate principal amount
of $140 million. The Facilities consist of a six-year
11
<PAGE>
Senior Secured Term Loan up to $90 million and a Senior Secured Revolving Credit
Facility with a term of five years up to $50 million.
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.
Historically, Guarantee Life has generated positive cash flow from
operating activities and used these funds to purchase fixed maturity securities
or other invested assets. The Company experienced negative cashflow from
operations during the six months ended June 30, 1998 due primarily to lower
earnings and higher loss ratios.
Changes in interest rates have not had a significant impact on Guarantee
Life's net income in the three and six months ended June 30, 1998.
Year 2000 Issues
Guarantee Life is working to complete programming efforts for the Year 2000
related projects during 1998, with final certification testing occurring in
1999. Guarantee Life's focus is not only on its internal systems, but also upon
the compliance of its key business partners, vendors and other suppliers.
Management believes that the redeployment of Company resources will not
adversely impact new product or software development. Through June 30, 1998,
approximately $1.4 million was incurred on Year 2000 projects. The total cost of
Year 2000 compliance is estimated to total approximately $3.8 million through
1999.
New Accounting Pronouncements
In February 1998, the FASB issued Statement 132, "Employers' Disclosures
about Pensions and Other Post-retirement Benefits" which will be implemented in
Guarantee Life's December 31, 1998 financial statements. SFAS No. 132 will not
affect net income. SFAS No. 132 standardizes the disclosure requirements for
pensions and other post-retirement benefits to the extent practicable, requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis, and eliminates certain
disclosures that are no longer as useful as they were when SFAS No. 87, 88 and
106 were issued.
In June 1998, the FASB issued Statement 133, "Accounting for Derivative
Instruments and Hedging Activities" which will be implemented on January 1,
2000, and included in Guarantee Life's December 31, 2000 financial statements.
Statement No. 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities and measure them at fair value. The
accounting for changes in the fair value of a derivative will be determined by
the intended use of the deriviative. Guarantee Life has not yet determined what
impact Statement 133 will have on its earnings per share.
Part II Other Information
ITEMS 1and 3 are either inapplicable or are answered in the negative and
are omitted pursuant to the instructions to Part II.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In conjunction with the purchase of Westfield Life Insurance Company
effective May 31, 1998, Guarantee Life Insurance issued 371,402 shares of
previously authorized but unissued shares of common stock. These securities have
not been registered under the Securities Act of 1933 or any state securities
laws.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders (the "Annual Meeting") was
held on May 14, 1998. One matter was voted upon at the Annual Meeting, and the
results are shown below.
Election of Directors. The following directors were re-elected:
---------------------
Withhold
Authority to
Vote For
Director For Nominee Term
-------- --- ------- ----
Robert D. Bates 5,273,973 40,274 3 years
Theodore C. Cooley 5,279,388 34,859 3 years
12
<PAGE>
Bernard W. Reznicek 5,280,381 33,866 3 years
Janice D. Stoney 5,273,462 40,785 3 years
Directors whose terms of office continued after the Annual Meeting:
C. R. Bob Bell
John R. Cochran
Lee M. Gammill, Jr.
Thomas T. Hacking
James M. McClymond
A. J. Scribante
William F. Welsh II
ITEM 5 OTHER INFORMATION
The proxy for the 1999 annual meeting of shareholders will confer on
the proxy holders discretionary authority to vote on any matter proposed by any
shareholder for consideration at the meeting if the Company did not receive
written notice of the matter from the proponent on or before April 9, 1999. The
notice must be submitted in writing and mailed by certified mail to the
Secretary of The Guarantee Life Companies Inc., Guarantee Centre, 8801 Indian
Hills Drive, Omaha, Nebraska 68114.
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.
2 Stock Purchase Agreement among The Guarantee Life Companies Inc.,
Ohio Farmers Insurance Company and Westfield Life Insurance
Company dated as of March 19, 1998
10 Credit Agreement by and between The Guarantee Life Companies
Inc., Guarantee Life Insurance Company, The Chase Manhattan Bank,
Credit Lyonnais New York Branch, Deutsch Bank AG, New York and/or
Cayman Island Branches, FirstMerit Bank, N.A., First National
Bank of Chicago, First National Bank of Omaha, First Union
National Bank, Fleet National Bank, Norwest Bank Nebraska, N.A.,
State Street Bank and Trust Company and SunTrust Bank dated as of
May 28, 1998.
27 Financial Data Schedule
---------------------------------------------------
(1) Incorporated by reference to Registrant's Form 8-K dated March
19, 1998 (Commission File 0-26788).
(2) Incorporated by reference as an exhibit to Registrant's Form 8-K
filed June 12, 1998 (Commission File 0-26788).
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 14, 1998 /s/ WILLIAM L. BAUHARD
---------------------------------
William L. Bauhard
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1998 (UNAUDITED) AND THE
CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 1998 (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-31-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 903,944
<DEBT-CARRYING-VALUE> 163,492
<DEBT-MARKET-VALUE> 175,954
<EQUITIES> 17,016
<MORTGAGE> 91,798
<REAL-ESTATE> 3,322
<TOTAL-INVEST> 1,545,729
<CASH> 18,325
<RECOVER-REINSURE> 93,741
<DEFERRED-ACQUISITION> 141,490
<TOTAL-ASSETS> 1,932,171
<POLICY-LOSSES> 230,764
<UNEARNED-PREMIUMS> 13,582
<POLICY-OTHER> 794,478
<POLICY-HOLDER-FUNDS> 36,781
<NOTES-PAYABLE> 125,000
0
0
<COMMON> 103
<OTHER-SE> 220,745
<TOTAL-LIABILITY-AND-EQUITY> 1,932,171
146,557
<INVESTMENT-INCOME> 33,491
<INVESTMENT-GAINS> 528
<OTHER-INCOME> 12,420
<BENEFITS> 112,445
<UNDERWRITING-AMORTIZATION> 35,711
<UNDERWRITING-OTHER> 40,425
<INCOME-PRETAX> 4,415
<INCOME-TAX> 1,545
<INCOME-CONTINUING> 2,870
<DISCONTINUED> (29)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,841
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
