<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 September 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 October 30, 1998: 9,219,467
================================================================================
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
Assets 1998 1997
------ ----------- -----------
<S> <C> <C>
Invested assets: (unaudited)
Fixed maturities:
Available-for-sale, at fair value (amortized cost: $883,949 and $566,544) .............. $ 915,845 $ 582,700
Held-to-maturity, at amortized cost (fair value: $162,261 and $184,480) ................ 147,810 172,167
----------- -----------
1,063,655 754,867
Equity securities, at fair value (cost: $16,981 and $2,735) ................................. 17,711 3,735
Mortgage loans, net ......................................................................... 98,868 85,849
Policy loans ................................................................................ 31,765 21,657
Investment real estate, net ................................................................. 3,244 3,394
Other invested assets, net .................................................................. 50,967 32,212
Closed block invested assets ................................................................ 312,282 309,777
----------- -----------
Total invested assets ............................................................................ 1,578,492 1,211,491
Cash and cash equivalents ........................................................................ 21,764 8,608
Accrued investment income ........................................................................ 15,732 12,415
Recoverable from reinsurers ...................................................................... 99,611 82,568
Accounts receivable, net ......................................................................... 15,306 19,805
Deferred policy acquisition costs ................................................................ 147,481 102,696
Property, plant and equipment, net ............................................................... 19,271 19,427
Other assets ..................................................................................... 17,693 11,572
Closed block other assets ........................................................................ 17,157 17,754
Separate account assets .......................................................................... 45,289 32,697
----------- -----------
Total assets ..................................................................................... $ 1,977,796 $ 1,519,033
=========== ===========
Liabilities and Shareholders' Equity
------------------------------------
Future policy benefits ........................................................................... $ 176,229 $ 143,048
Policyholder account balances .................................................................... 794,214 542,038
Policy and contract claims ....................................................................... 64,877 53,607
Other policyholder funds ......................................................................... 41,942 20,754
Unearned premium revenue ......................................................................... 13,596 11,866
Payable to reinsurers ............................................................................ 9,293 6,938
Notes payable .................................................................................... 130,000 40,000
Other liabilities ................................................................................ 56,830 51,284
Closed block liabilities ......................................................................... 385,755 386,606
Discontinued operations, net ..................................................................... 21,911 20,997
Separate account liabilities ..................................................................... 45,289 32,697
----------- -----------
Total liabilities ................................................................................ 1,739,936 1,309,835
----------- -----------
Shareholders' equity:
Common stock $0.01 par value; 30,000,000 shares authorized, 10,315,785 shares
issued at September 30, 1998 and 9,944,383 shares issued at December 31, 1997 ............ 103 99
Additional paid-in capital .................................................................. 201,108 191,123
Treasury stock, at cost (1,096,318 shares at September 30, 1998 and 1,017,524 shares at
December 31, 1997) ....................................................................... (24,991) (22,512)
Retained earnings ........................................................................... 31,306 27,463
Accumulated other comprehensive income ...................................................... 30,334 13,025
----------- -----------
Total shareholders' equity ....................................................................... 237,860 209,198
Commitments and contingencies .................................................................... - -
----------- -----------
Total liabilities and shareholders' equity ....................................................... $ 1,977,796 $ 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 Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Direct and assumed premiums and policyholder assessments ....... $ 110,629 $ 73,116 $ 295,035 $ 206,508
Reinsurance premiums ........................................... (19,574) (13,716) (57,491) (40,495)
----------- ----------- ----------- -----------
Net premiums and policyholder assessments ...................... 91,055 59,400 237,544 166,013
Investment income, net ......................................... 20,892 14,553 54,387 43,212
Realized investment gains ...................................... 985 774 1,501 933
Ceding commissions and other income ............................ 5,631 3,759 16,508 11,282
Contribution from Closed Block ................................. 1,827 1,378 3,434 3,424
----------- ----------- ----------- -----------
Total revenues ................................................. 120,390 79,864 313,374 224,864
----------- ----------- ----------- -----------
Policyholder benefits:
Direct and assumed benefits .................................... 94,256 52,301 236,610 145,284
Reinsurance recoveries ......................................... (20,234) (9,175) (50,132) (26,050)
----------- ----------- ----------- -----------
Net policyholder benefits ...................................... 74,022 43,126 186,478 119,234
----------- ----------- ----------- -----------
Expenses:
Policy acquisition costs ....................................... 22,576 14,199 58,288 41,453
Other insurance operating expense .............................. 19,346 15,176 59,742 45,107
----------- ----------- ----------- -----------
Total expenses ................................................. 41,922 29,375 118,030 86,560
----------- ----------- ----------- -----------
Income from continuing operations before income taxes .......... 4,446 7,363 8,866 19,070
----------- ----------- ----------- -----------
Income tax expense ............................................. 1,556 2,585 3,103 6,747
----------- ----------- ----------- -----------
Net income from continuing operations .......................... 2,890 4,778 5,763 12,323
----------- ----------- ----------- -----------
Net income (loss) from discontinued operations ................. (8) (59) (37) (59)
----------- ----------- ----------- -----------
Net income ..................................................... $ 2,882 $ 4,719 $ 5,726 $ 12,264
=========== =========== =========== ===========
Basic Earnings per share:
Weighted average shares outstanding ....................... 9,219,303 9,197,434 9,011,663 9,592,692
=========== =========== =========== ===========
Net income from continuing operations ..................... $ 0.31 $ 0.52 $ 0.64 $ 1.28
=========== =========== =========== ===========
Net income (loss) from discontinued operations ............ -- $ (0.01) -- $ (0.01)
=========== =========== =========== ===========
Net income ................................................ $ 0.31 $ 0.51 $ 0.64 $ 1.27
=========== =========== =========== ===========
Diluted Earnings per share:
Weighted average shares outstanding ....................... 9,366,388 9,519,258 9,238,871 9,791,723
=========== =========== =========== ===========
Net income from continuing operations ..................... $ 0.31 $ 0.50 $ 0.62 $ 1.26
=========== =========== =========== ===========
Net income (loss) from discontinued operations ............ -- $ (0.01) -- $ (0.01)
=========== =========== =========== ===========
Net income ................................................ $ 0.31 $ 0.49 $ 0.62 $ 1.25
=========== =========== =========== ===========
</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 Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income ................................................................. $ 2,882 $ 4,719 $ 5,726 $12,264
Other comprehensive income, net of tax:
Unrealized appreciation of invested assets ............................ 15,344 8,121 18,810 4,398
Less reclassification adjustment for gains included in net income ..... 985 774 1,501 933
------- ------- ------- -------
14,359 7,347 17,309 3,465
------- ------- ------- -------
Comprehensive income........................................................ $17,241 $12,066 $23,035 $15,729
======= ======= ======= =======
</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>
Nine Months Ended
September 30,
--------------------------------
1998 1997
--------- ---------
<S> <C> <C>
Net cash provided by operating activities ............................................ $ 6,719 $ 3,464
--------- ---------
Cash flows from investing activities:
Purchase of fixed maturities ...................................................... (210,376) (168,911)
Maturities, calls and principal reductions of fixed maturities .................... 248,961 186,196
Purchase of mortgage loans ........................................................ (18,460) (15,286)
Proceeds from repayment of mortgage loans ......................................... 4,577 3,940
Change in closed block invested assets ............................................ 780 (6,111)
Change in short term invested assets .............................................. (11,762) (3,136)
Payment for purchase of Westfield Life Insurance Company, net ..................... (90,863) --
Other, net ........................................................................ (3,185) 2,714
--------- ---------
Net cash (used) by investing activities ......................................... (80,328) (594)
--------- ---------
Cash flows from financing activities:
Deposits to policyholder account balances ......................................... 55,952 54,088
Withdrawals from policyholder account balances .................................... (54,153) (40,521)
Purchase of Treasury Stock ........................................................ (3,150) (14,694)
Shareholder dividends ............................................................. (1,884) (1,791)
Repayment of long term debt ....................................................... (40,000) --
Proceeds from issuance of long term debt .......................................... 130,000 --
--------- ---------
Net cash provided (used) by financing activities ................................ 86,765 (2,918)
--------- ---------
Net increase (decrease) in cash and cash equivalents ................................. 13,156 (48)
Cash and cash equivalents at beginning of period ..................................... 8,608 2,079
--------- ---------
Cash and cash equivalents at end of period ........................................... $ 21,764 $ 2,031
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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 nine month periods ended September 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 September 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 ...................... $153,637 $ 5,360 $ 106 $158,891
Obligations of states and political subdivisions ............. 13,077 1,452 -- 14,529
Debt securities issued by foreign governments ................ 13,905 1,243 -- 15,148
Corporate securities ......................................... 447,300 23,656 6,380 464,576
Mortgage-backed securities ................................... 212,614 6,152 1,115 217,651
Other asset-backed securities ................................ 43,416 1,671 37 45,050
-------- -------- -------- --------
$883,949 $ 39,534 $ 7,638 $915,845
======== ======== ======== ========
Held-to-maturity:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies ...................... $ 5,360 $ 202 -- $ 5,562
Obligations of states and political subdivisions ............. 7,783 829 -- 8,612
Corporate securities ......................................... 132,008 13,624 -- 145,632
Mortgage-backed securities ................................... 2,659 -- 204 2,455
-------- -------- -------- --------
$147,810 $ 14,655 $ 204 $162,261
======== ======== ======== ========
</TABLE>
(3) Closed Block
Summarized condensed financial information of the closed block (in
thousands) is as follows:
<TABLE>
<CAPTION>
September 30, December 31,
Assets 1998 1997
------ ------------- ------------
<S> <C> <C>
Invested assets:
Fixed maturities:
Available-for-sale, at fair value (amortized cost: $204,220 and $202,869) ............... $217,653 $211,248
Held-to-maturity, at amortized cost (fair value: $50,584 and $52,224) ................... 45,994 48,838
------------- ------------
263,647 260,086
Policy loans .................................................................................. 45,942 46,997
Other invested assets, net .................................................................... 2,693 2,694
------------- ------------
Total invested assets .............................................................................. 312,282 309,777
Cash and cash equivalents .......................................................................... 2,075 328
Accrued investment income .......................................................................... 2,798 4,221
Deferred policy acquisition costs .................................................................. 10,915 12,233
Other assets ....................................................................................... 1,369 972
------------- ------------
Total closed block assets .......................................................................... $329,439 $327,531
============= ============
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
September 30, December 31,
Liabilities 1998 1997
----------- ------------- -------------
<S> <C> <C>
Life future policy benefits .......................................................... $299,367 $301,495
Policyholder account balances for annuity contracts .................................. 890 868
Policy and contract claims ........................................................... 494 573
Other policyholder funds ............................................................. 71,810 72,024
Dividends payable to policyholders ................................................... 7,278 7,767
Deferred income taxes ................................................................ 4,701 2,932
Other liabilities .................................................................... 1,215 946
------------- -------------
Total closed block liabilities ....................................................... $385,755 $386,605
============= =============
</TABLE>
Condensed statement of income for the closed block for the three and nine
months ended September 30, 1998 and 1997, respectively (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Insurance premiums and policyholder assessments, net of reinsurance ... $ 4,938 $ 5,159 $ 15,136 $ 15,832
Investment income, net ................................................ 5,512 5,641 16,473 16,652
Realized investment gains (losses) .................................... 32 (97) 663 121
Other income .......................................................... 1 3 5 46
-------- -------- -------- --------
Total revenues ........................................................ 10,483 10,706 32,277 32,651
-------- -------- -------- --------
Policyholder benefits and expenses:
Total policyholder benefits ........................................... 4,899 5,210 16,163 16,272
Policy acquisition costs .............................................. 543 500 1,556 1,614
Other insurance operating expense ..................................... 1,072 966 3,186 3,013
-------- -------- -------- --------
Total benefits and expenses ........................................... 6,514 6,676 20,905 20,899
Dividends to policyholders ............................................ 2,142 2,652 7,938 8,328
-------- -------- -------- --------
Contribution from the closed block .................................... $ 1,827 $ 1,378 $ 3,434 $ 3,424
======== ======== ======== ========
</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, 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.
(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 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.
7
<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 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 Nine Months Ended September 30, 1998 and
1997
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.
The Company's third quarter results included a $675,000 charge, pre-tax,
for reorganization expenses. The one-time expense consisted of employee
separation costs incurred as part of a reorganization made during September,
1998. Employee separation costs include severance payments, health care coverage
and postemployment outplacement services. The reorganization was a result of
continuing efforts to increase efficiencies and decrease operating expenses.
Combined Results of Operations (in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Premiums and policyholder assessments, net .................... $ 95,993 $ 64,559 252,680 $181,845
Investment income, net ........................................ 26,404 20,194 70,860 59,864
Realized investment gains ..................................... 1,017 677 2,164 1,054
Ceding commissions and other income ........................... 5,632 3,762 16,513 11,328
-------- -------- -------- --------
Total revenues ..................................................... 129,046 89,192 342,217 254,091
Benefits and expenses:
Policyholder benefits, net of reinsurance ..................... 78,921 48,336 202,641 135,506
Expenses ...................................................... 43,531 30,841 122,759 91,187
Dividends to policyholders .................................... 2,148 2,652 7,951 8,328
-------- -------- -------- --------
Total policyholder benefits, expenses .............................. 124,600 81,829 333,351 235,021
-------- -------- -------- --------
Income from continuing operations before income taxes .............. 4,446 7,363 8,866 19,070
Income taxes ....................................................... 1,556 2,585 3,103 6,747
-------- -------- -------- --------
Net income from continuing operations .............................. $ 2,890 $ 4,778 5,763 $ 12,323
======== ======== ======== ========
Net income excluding realized gains ................................ $ 2,229 $ 4,337 $ 4,356 11,637
======== ======== ======== ========
</TABLE>
Investment Income, Net. Net investment income increased $6.2 million or 30.8%
and $11.0 million or 18.4% for the three and nine month periods ended September
30, 1998 over 1997. This increase was caused by an increase of $367 million or
30.3% in invested assets from December 31, 1997 to September 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--Employee Benefits Division and Group Special Markets
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 nine months ended September 30, 1998 and
1997.
<TABLE>
<CAPTION>
Group Underwriting Income
Three Months Ended September 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 ................. $ 52,808 $ 34,905 $ 87,713 $ 41,101 $ 22,842 $ 63,943
Ceded to reinsurers ...................... (1,189) (14,336) (15,525) (830) (11,378) (12,208)
-------- -------- -------- -------- -------- --------
Net premiums ............................. 51,619 20,569 72,188 40,271 11,464 51,735
Ceding commissions ....................... 43 5,025 5,068 18 3,614 3,632
-------- -------- -------- -------- -------- --------
Total net premiums and ceding
commissions ......................... 51,662 25,594 77,256 40,289 15,078 55,367
-------- -------- -------- -------- -------- --------
Gross policyholder benefits .............. 41,499 28,059 69,558 28,530 12,786 41,316
Recoveries from reinsurers ............... (961) (14,399) (15,360) (921) (7,275) (8,196)
-------- -------- -------- -------- -------- --------
Net benefits ............................. 40,538 13,660 54,198 27,609 5,511 33,120
Expenses ................................. 17,873 11,784 29,657 15,276 7,677 22,953
-------- -------- -------- -------- -------- --------
Total net benefits and expenses ....... 58,411 25,444 83,855 42,885 13,188 56,073
-------- -------- -------- -------- -------- --------
Underwriting gain (loss) ................. $ (6,749) $ 150 $ (6,599) $ (2,596) $ 1,890 $ (706)
======== ======== ======== ======== ======== ========
<CAPTION>
Group Underwriting Income
Nine Months Ended September 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 ................... $ 152,731 $ 88,606 $ 241,337 $ 113,118 $ 66,291 $ 179,409
Ceded to reinsurers ........................ (3,689) (43,500) (47,189) (2,327) (33,820) (36,147)
--------- --------- --------- --------- --------- ---------
Net premiums ............................... 149,042 45,106 194,148 110,791 32,471 143,262
Ceding commissions ......................... 155 14,485 14,640 18 10,965 10,983
--------- --------- --------- --------- --------- ---------
Total net premiums and ceding
commissions ........................... 149,197 59,591 208,788 110,809 43,436 154,245
--------- --------- --------- --------- --------- ---------
Gross policyholder benefits ................ 114,291 65,659 179,950 75,989 38,086 114,075
Recoveries from reinsurers ................. (2,890) (38,135) (41,025) (335) (22,750) (23,085)
--------- --------- --------- --------- --------- ---------
Net benefits ............................... 111,401 27,524 138,925 75,654 15,336 90,990
Expenses ................................... 56,211 28,904 85,115 43,894 21,943 65,837
--------- --------- --------- --------- --------- ---------
Total net benefits and expenses ......... 167,612 56,428 224,040 119,548 37,279 156,827
--------- --------- --------- --------- --------- ---------
Underwriting gain (loss) ................... $ (18,415) $ 3,163 $ (15,252) $ (8,739) $ 6,157 $ (2,582)
========= ========= ========= ========= ========= =========
</TABLE>
9
<PAGE>
Insurance Operations--Employee Benefits Division
EBD's net earned premiums increased $11.3 million or 28.2% for the three
months and $38.3 million or 34.5% for the nine months ended September 30, 1998
over 1997. 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 $5.6 million or
48.0% and $20.9 million or 71.9% for the three and nine month periods ended
September 30, 1998 over 1997. LTD net earned premiums increased $3.3 million or
39.2% and $8.0 million or 33.1% and life increased $1.3 million or 9.7% and $5.1
million or 12.8% for the third quarter of 1998 and the nine month period ended
September 30, 1998 over 1997, respectively.
EBD net benefits increased $12.9 million or 46.8% and $35.7 million or
47.3% for the third quarter of 1998 and the nine month period ended September
30, 1998 over 1997, respectively. This increase is caused by higher premium
volume in all product lines and an increase in the incidence of large claims in
the life product line. In order to improve dental losses, dental prices have
been increased three times in the last two years and risk appraisal procedures
have been adjusted to improve underwriting experience in the dental line. During
the first nine months of 1998, pricing was increased an average of 5% to 7% for
all group renewals.
EBD expenses increased $2.6 million or 17.0% and $12.3 million or 28.1% for
the third quarter of 1998 and the nine month period ended September 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.
Insurance Operations--Group Special Markets
Effective October 22, 1997 Guarantee Life Insurance entered into an
agreement to coinsure and administer a discontinued block of business consisting
of lines of stop-loss insurance, group term life, and accidental death and
dismemberment from EBPLife. The agreement effectively caused Guarantee Life
Insurance to reinsure one hundred percent of the business, and administer
premium collections and benefit payments for which Guarantee would receive a
nominal administration fee. For the nine months ended September 30, 1998,
EBPLife contributed $7.6 million in net premiums, $5.0 million in net
policyholder benefits and $2.5 million in expenses. Because this business is in
runoff mode, EBPLife is excluded from the operational comparison for Group
Special Markets discussed below.
GSM net premiums increased $1.5 million or 12.9% and $5.0 million or 15.4%
for the three and nine month periods ended September 30, 1998 over the
corresponding periods in 1997. Excess loss net earned premiums increased $1.5
million or 38.3% and $3.2 million or 28.6% for the third quarter of 1998 and the
nine month period ended September 30, 1998 over 1997.
GSM net benefits increased $3.1 million or 56.6% and $7.2 million or 46.7%,
for the third quarter of 1998 and the nine month period ended September 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.
GSM expenses increased $1.6 million or 20.9% and $4.5 million or 20.3% for
the three and nine month periods ended September 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.
Effective September 1, 1998, Guarantee Life entered into a new reinsurance
arrangement with a consortium of reinsurers for its excess loss insurance
program. Under the new arrangement, Guarantee Life will increase its retention
from 30% on the first $250,000 to 30% on the first $300,000 of eligible expenses
per claim with 100% reinsurance coverage on expenses in excess of that amount.
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'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 nine months ended
September 30, 1998 and 1997.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
-------- -------- -------- --------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Revenues:
Premiums and policyholder assessments, net of
reinsurance premiums ...................................... $ 23,805 $ 12,824 $ 58,532 $ 38,583
Investment income, net .................................... 22,589 16,901 59,541 50,439
Realized investment gains (losses) ........................ 911 576 1,640 711
Ceding commissions and other income ...................... 564 130 1,873 345
-------- -------- -------- --------
Total revenues ................................................. 47,869 30,431 121,586 90,078
Policyholder benefits and expenses:
Policyholder benefits, net of reinsurance ................. 24,723 15,217 63,715 44,516
Expenses .................................................. 12,578 7,649 33,845 24,124
Dividends to policyholders ................................ 2,148 2,652 7,951 8,328
-------- -------- -------- --------
Total policyholder benefits, expenses and dividends ............ 39,449 25,518 105,511 76,968
======== ======== ======== ========
Income from continuing operations before income taxes .......... $ 8,420 $ 4,913 16,075 $ 13,110
======== ======== ======== ========
</TABLE>
Net premiums and policyholder assessments increased $11.0 million or 85.6%
and $19.9 million, or 51.7% for the third quarter of 1998 and the nine months
ended September 30 compared to the same periods in 1997. PFG contributed $3.1
million and $9.6 million for the quarter and nine months ended September 30,
1998 while Westfield Life contributed $7.3 million and $9.7 million for the
three and nine months ended September 30, 1998.
Total individual policyholder benefits increased $9.5 million or 62.5% and
$19.2 million or 43.1% for the three and nine month periods ending September 30,
1998 over 1997. The increase for the third quarter is due primarily to the
addition of PFG and Westfield. The increase experienced in the nine months ended
September 30, 1998 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 $2.3 million and $7.8 million for the quarter and
nine months ended September 30, 1998 while Westfield Life's were $6.8 million
and $9.5 million for the three and nine months ended September 30, 1998.
Interest credited on policyholder account balances increased $4.6 million or
65.6% and $7.7 million or 36.7% for the third quarter and nine months ended
September 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 $4.9 million or 64.4% and $9.7 million
or 40.3% for the three and nine month periods ending September 30, 1998 over
1997. This increase relates primarily to insurance operating expenses incurred
by PFG and Westfield Life in the first nine months of 1998.
Policyholder dividends decreased $380 thousand during the first nine months
of 1998 compared to the corresponding period in 1997, reflecting a reduced
dividend scale due to lower earned investment income on related invested assets.
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, AGL, and Westfield Life are subject to restrictions
set forth in the insurance laws and regulations of Nebraska and Pennsylvania.
Under state law, Guarantee Life, AGL and Westfield Life 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
and Westfield Life cannot declare additional dividends in 1998 without
permission from the Nebraska Department of Insurance. AGL cannot declare
additional dividends in 1998 without permission from the Pennsylvania Department
of Insurance. The Holding Company currently anticipates that it will receive
sufficient funding through the receipt of dividends and distributions of excess
capital from its subsidiaries to meet its obligations.
11
<PAGE>
Guarantee Life increased its outstanding long term debt by $90 million to
$130 million during the nine months ended September 30, 1998 due primarily to
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 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. This credit agreement requires the Holding Company to pay a one-time
fee of $825,000 to the administrative agent if an offering of at least $100
million of long-term debt securities has not been consummated by December 1,
1998. The proceeds from the long-term debt offering would be used to repay all
or a portion of the outstanding debt of the Credit Facilities.
At September 30, 1998, Guarantee's long term debt consisted of $90 million
under the Senior Secured Term Loan and $40 million under the Revolving Credit
Facility. On October 5, 1998, Guarantee Life made principal payments of $3.75
million and $5.0 million on the Senior Secured Term Loan and the Revolving
Credit Facility, respectively.
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.
Year 2000 Issues
Guarantee Life recognizes the significance and technological impact that
the Year 2000 (Y2K) challenge will have on organizations world-wide and has
established a comprehensive plan to achieve compliance. Our overall goal is to
ensure that we continue to provide quality products and services with no
interruption to our customers. All of our critical Y2K renovation efforts are
well underway across the company. Our focus is not only on our internal systems,
but also whether or not our key business partners, vendors, and suppliers will
be compliant in the next millennium.
While Y2K-related work had been in process much earlier, formal project
organization and impact assessment activities began in November, 1996. A
separate, dedicated corporate team was put in place in March, 1997 to lead our
compliance efforts and provide guidance and support to our specific Y2K projects
across the company. Using standard project methodology and management processes,
Guarantee Life is taking a phased approach towards Y2K compliance. Five major
phases have been identified for this effort: Impact Assessment, Infrastructure &
Methods, Renovation, Certification and Implementation.
Impact Assessment
During the assessment phase, mission critical applications impacted were
identified and a high-level budget was developed and approved. The total cost of
Y2K compliance is estimated at approximately $3.2 million through 2000. This
represents approximately 7% of the total Information Technology (IT) budget over
this time period. During 1997, approximately $800,000 was incurred on Y2K
projects. Approximately $750,000 has been incurred from January through
September, 1998.
Correction of the Y2K issues is a high priority project and other IT
projects have been deferred due to Y2K efforts. However, the company does not
believe the deferral of other IT projects has had a material effect on financial
condition or results of operations in 1997 or during the nine months ended
September 30, 1998. The Company's IT staff has continued to work on other high
priority projects concurrent with the Y2K project.
Infrastructure
Progress of Guarantee Life's core information technology infrastructure and
application areas is measured for the mainframe, midrange and client/server
environments. Over 250 third party application packages and over 130 custom
applications and external interfaces have been inventoried and are being tracked
for compliance.
Renovation
IT Systems - A renovation strategy was defined for each of our mission
critical applications. In some cases, it was decided to upgrade vendor supplied
software with Y2K-compliant releases. In other cases, decisions were made to
replace
12
<PAGE>
software altogether taking advantage of new functionality. For most in-house
developed applications, modifications are being made to ensure compliance.
Several of our policy administration and claims processing applications
have either been renovated through vendor-supplied upgrades or replaced with Y2K
compliant packages. Most of the system replacements had been planned but were
merely accelerated due to the Y2K issues. In the Individual Division significant
model office testing has been conducted to ensure compliance and the updated
systems have been put into production successfully. End-to-end testing for
remaining mission-critical administration and claims systems in the Group
Divisions is currently in process. The existing mainframe and custom-developed
applications are also being renovated for contingency purposes. All systems will
go through thorough certification testing in 1998 and early 1999.
Our existing general ledger and accounts payable applications were replaced
with a new vendor-supplied Y2K-compliant package in 1997. Our vendor-supplied
Investment systems are compliant. Human Resource administration and payroll
systems are currently being upgraded with a targeted 1998 implementation. Other
smaller, standalone applications will either be renovated or replaced this year.
Each of our major operating platforms has been upgraded. A complete
inventory of data center hardware and software has been completed and assessed.
Test environments are in place on each platform. A separate network lab is
available for testing business software and end user computing applications.
Over 60% of the applications have been tested to-date. In addition, our imaging
and fax software were upgraded successfully in April, 1998. All mission critical
software upgrades will be completed by the end of 1998.
PFG, Inc. core administrative systems were developed to accommodate a four
digit year. The operating system software has been upgraded and will undergo
certification testing in 1998. Other software/hardware components and business
partners' compliance status are currently being validated. Existing Westfield
Life business is administered through a third party administrator, whose primary
system is Y2K compliant. New business will be administered on the Guarantee Life
Individual administrative system at the home office, which was renovated in
June, 1998.
Non-IT Systems - All our major suppliers and vendors providing services
related to our facilities have been contacted. Our telephone switch is currently
Y2K compliant. The voice mail system was upgraded for Y2K compliance in May,
1998. Call accounting software was also upgraded in October, 1998. Our elevators
are not impacted by the year 2000. Our security system was upgraded in 1998. We
believe that our climate control components will function properly in the year
2000. Rollover tests will be conducted in 1998 and 1999 to certify compliance.
We have contacted our phone, gas, water and electric utility companies regarding
their Y2K compliance status. They have all communicated that their renovation
efforts are in progress and will be completed by the year 2000.
Certification
Recognizing that over 50% of the effort on Y2K projects is spent in the
testing phases, Guarantee Life is committed to ensuring that our remediation
efforts go through thorough unit, integration, regression and end-to-end
testing. A testing tool was purchased specifically for this effort. To-date,
rollover tests (i.e. changed the CPU date past 2000) have been performed on our
network servers, AS/400 and HP Unix platforms. Plans have been established in
1998 to continue testing business cycles using significant dates (e.g.
12/31/1999, 2/29/2000) on all of our platforms, including the mainframe
platform.
Completing our Internal Remediation
Our Impact Assessment and Infrastructure & Methods phases are completed.
70% of the Renovation and Certification phases are complete. It is our goal to
complete all mission critical projects by the end of 1998. Additional
certification testing (e.g. of third-party providers' systems), final
workstation upgrades and remaining business partner follow-up and contingency
planning will take place in 1999.
Guarantee Life is actively monitoring the compliance programs of its key
business partners, vendors and suppliers. Over 345 business partners have been
inventoried and are being tracked for compliance. Electronic interfaces to our
key suppliers have been identified and will be verified well before June 1999.
The team is particularly focusing on assessing any Y2K risk associated with our
key administrative and marketing arrangements. In particular, we continue to
work with a major third-party administrator to ensure that they have appropriate
plans.
Risks and Business Contingency Planning
The Company believes that its most reasonably likely worst case Y2K
scenario will include these elements: (1) one or more of the Company's third-
party providers will be unable to provide the services expected, and (2) one or
more parts of the Company's processing software will operate incorrectly. At
this time, we are unable to estimate the potential loss of revenue
13
<PAGE>
due to such a scenario. The Company believes that its testing of its critical
hardware and software will reveal any significant Y2K problems, that such
problems will be capable of remediation, and that the Company's software and
hardware will perform substantially as planned when Year 2000 processing begins.
The Company will continue to evaluate situations where indicators point to
a potential risk of failure despite all efforts to address. In these cases,
contingency plans will be developed identifying alternative strategies. A
primary focus in 1999 will be to incorporate these contingency plans into a
corporate-wide Y2K contingency plan that will tie into our Business Resumption
planning activities as they are so closely related to Y2K contingency efforts.
The Company currently does not have a contingency plan regarding such risks.
The foregoing Y2K discussion contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statement, including without limitation, anticipated costs, the dates by which
the Company expects to substantially complete programming changes, remediation
and testing of systems and the impact of the redeployment of existing staff, are
based on management's best current estimates, which were derived utilizing
numerous assumptions about future events, including the continued availability
of certain resources, representations received from third party service
providers and other factors. However, there can be no guarantee that these
estimates will be achieved, and actual results could differ materially from
those anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to identify and cover all relevant computer systems,
results of Y2K testing, adequate resolution of Y2K issues by businesses or other
third parties who are service providers, suppliers, customers of the Company,
unanticipated system costs, the need to replace hardware, the adequacy of and
ability to implement contingency plans and similar uncertainties. The
"forward-looking statements" made in the foregoing Y2K discussion speak only as
of the date on which such statements are made, and the Company undertakes no
obligation to update any forward-looking statement to reflect events or
circumstances after the date on which such statement is made or to reflect the
occurrence of unanticipated events.
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 derivative. Guarantee Life has not yet determined what
impact Statement 133 will have on its earnings per share.
In October 1998, the FASB issued Statement 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise" which will be effective for
Guarantee Life's December 31, 1999 financial statements. Statement No. 134
requires that after the securitization of mortgage loans held for sale, an
entity engaged in mortgage banking activities classify the resulting
mortgage-backed securities based on it ability and intent to sell or hold those
investments. SFAS No. 134 will not affect net income.
Part II Other Information
ITEMS 1, 2, 3 and 4 are either inapplicable or are answered in the negative
and are omitted pursuant to the instructions to Part 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 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.
14
<PAGE>
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
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 13, 1998 /s/ WILLIAM L. BAUHARD
---------------------------------------------------
William L. Bauhard
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Balance Sheet as of September 30, 1998 (unaudited) and
the Condensed consolidated Statement of income for the three and nine months
ended September 30, 1998 (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-31-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 915,845
<DEBT-CARRYING-VALUE> 147,810
<DEBT-MARKET-VALUE> 162,261
<EQUITIES> 17,711
<MORTGAGE> 98,868
<REAL-ESTATE> 3,244
<TOTAL-INVEST> 1,578,492
<CASH> 21,764
<RECOVER-REINSURE> 99,611
<DEFERRED-ACQUISITION> 147,481
<TOTAL-ASSETS> 1,977,796
<POLICY-LOSSES> 241,106
<UNEARNED-PREMIUMS> 13,596
<POLICY-OTHER> 794,214
<POLICY-HOLDER-FUNDS> 41,942
<NOTES-PAYABLE> 130,000
0
0
<COMMON> 103
<OTHER-SE> 237,757
<TOTAL-LIABILITY-AND-EQUITY> 1,977,796
237,544
<INVESTMENT-INCOME> 54,387
<INVESTMENT-GAINS> 1,501
<OTHER-INCOME> 19,942
<BENEFITS> 186,478
<UNDERWRITING-AMORTIZATION> 58,288
<UNDERWRITING-OTHER> 59,742
<INCOME-PRETAX> 8,866
<INCOME-TAX> 3,103
<INCOME-CONTINUING> 5,763
<DISCONTINUED> (37)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,726
<EPS-PRIMARY> .64
<EPS-DILUTED> .62
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
