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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 Commission File Number 0-26788
THE GUARANTEE LIFE COMPANIES INC.
(Exact Name of the Registrant as Specified in its Charter)
Delaware 47-0785066
(State of Incorporation) (I.R.S. Employer Identification Number)
8801 Indian Hills Drive, Omaha, Nebraska 68114
(Address of Principal Executive Offices)
Registrant's telephone number: (402) 361-7300
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
- ------------------- ----------------
NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
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Common Stock, $0.01 Par Value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K. [X]
As of March 17, 1998, 8,838,101 shares of Common Stock were outstanding. The
aggregate market value of such shares held by nonaffiliates was approximately
$243,047,778.
Select materials from the Proxy Statement for the Annual Meeting of
Shareholders, scheduled for May 14, 1998, have been incorporated by reference
into Part III of this Form 10-K.
Select materials from the 1997 Annual Report to Shareholders have been
incorporated by reference into Parts II and IV of this Form 10-K.
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PART I.
ITEM 1. Business.
Forward-looking Statements
This analysis contains numerous 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. Due to the
uncertainties inherent in forward-looking statements, readers are urged not to
place undue reliance on these statements.
General
On December 26, 1995, Guarantee Mutual Life Company was converted to a
stock life insurance company ("Demutualization"), renamed Guarantee Life
Insurance Company, and became a wholly-owned subsidiary of The Guarantee Life
Companies Inc. ("Holding Company"). For this discussion, "Guarantee Life" will
refer to the operations of the consolidated companies, and "Guarantee Life
Insurance" will refer to Guarantee Life Insurance Company.
Guarantee Life Insurance was organized in Nebraska in 1901 as a mutual
assessment association and became a mutual legal reserve life insurance company
in 1931. The Holding Company, a Delaware corporation, was formed on November 28,
1994, in anticipation of and for the purpose of facilitating the
Demutualization.
Guarantee Life operates in two business segments, the group insurance
business and the individual insurance business, providing group life and health
insurance to employers and other groups and providing life insurance and
annuities for individuals. Guarantee Life operates its group insurance business
through two divisions, the Employee Benefits Division ("EBD") and the Group
Special Markets Division ("GSM"). EBD markets group non-medical coverages,
including term life, long-term and short-term disability, dental and vision,
("Core Products") primarily through regional group sales offices. GSM markets
specialty medical products ("Specialty Products"), such as excess loss, medical
reimbursement insurance for business executives, and related Core Products
through additional distribution systems such as Third Party Administrators
("TPAs"), Managing General Underwriters ("MGUs") and Blue Cross/Blue Shield
organizations. Guarantee Life's individual insurance business is conducted
through the Individual Division. In 1997, Guarantee Life's principal business
operations were conducted by Guarantee Life Insurance, which is authorized to
transact life and health insurance in 48 states and the District of Columbia.
Guarantee Life manages five basic risks: mortality, morbidity, investment
yield, persistency and expense. Product pricing is generally determined by
reference to actuarial calculations and statistical assumptions principally
relating to mortality, morbidity and persistency, investment yield assumptions,
estimates of expenses and management's judgment as to market and competitive
conditions. The premiums and deposits received, together with assumed investment
earnings, are designed to cover policy benefits, expenses and policyholder
dividends and return a profit to Guarantee Life. These profits arise from the
margin between mortality or morbidity charges and insurance benefits paid, the
margin between actual investment results and the investment income credited to
policies (either directly or indirectly through dividends to policyholders) and
the margin between expense charges and actual expenses. The level of profits
also depends on persistency because business acquisition costs, particularly
agent commissions, are recovered over the life of the policy.
On December 23, 1997, Guarantee Life completed its acquisition of PFG,
Inc., and its subsidiaries ("PFG"), in a transaction valued at $37.3 million
which was accounted for as a purchase. PFG, Inc.'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.
AGL, formerly American Guardian Life Assurance Company, was organized in
1960. AGL's business is focused on the sale of term insurance through brokers.
It is licensed in 45 states and the District of Columbia. AGL will be managed as
part of Guarantee Life's individual insurance business.
Philadelphia Financial Group, Inc. was established in 1995 to provide
marketing services and products to the financial institutions marketplace, and
PFG Distribution Co. is a broker-dealer for variable life and annuity products.
Philadelphia Financial Group Inc.'s business is focused on the sale of AGL's
private placement variable life and annuity products for the
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high net worth marketplace. Philadelphia Financial Group, Inc. and PFG
Distribution Co. will be operated as independent subsidiaries and managed as
part of Guarantee Life's individual insurance business.
On December 31, 1997, Guarantee Life completed a coinsurance agreement to
acquire a block of excess loss policies from EBPLife Insurance Company. As the
policies renew, the Company intends to re-write selected risks on Guarantee Life
Insurance policy forms.
Guarantee Life Insurance is rated "A (Excellent)" by A.M. Best, A.M. Best's
third highest rating. AGL is rated "B++ (Very Good)" by A. M. Best, its fifth
highest rating. A.M. Best assigns ratings to solvent insurance companies, which
currently range from "A++ (Superior)" to "D (Vulnerable)" and include 13 rating
categories.
Business Strategy
Guarantee Life's management team has developed a business strategy to
improve its long-term competitive position. This strategy capitalizes on
Guarantee Life's history of quality service, its approach to the marketing and
administration of its group insurance businesses, the improving operations of
its individual insurance business and its high-quality investment portfolio.
Guarantee Life's strategic priorities include:
. Growing the Employee Benefits Division and improving its
profitability by increasing sales of Core Products, while
constraining expense growth, thereby reducing unit costs.
Management's focus is on the national sales office distribution
system, direct access service, a market focus on providing low cost,
basic programs to small and medium-sized employers, and on managing
the operational infrastructure to efficiently handle a large volume
of new and inforce business in a standardized, cost-effective
manner;
. Increasing its presence in the excess loss markets through the
Group Special Markets Division. Growth through acquisition will
continue to be an important business strategy for this division;
. Improving the marketing performance of the individual insurance
business while continuing to improve its financial results by
expanding its distribution systems, introducing new products that
are both competitive and profitable, and aggressively managing fixed
expenses. Growth through acquisition will continue to be an
important strategy for this business; and
. Maintaining high quality, adequately liquid investment portfolios.
Acquisitions
Since 1989, Guarantee Life has acquired six blocks of group insurance
business, a block of annuities, a block of universal life policies, a small life
insurance company in 1992 and PFG in 1997. Guarantee Life intends to continue
its strategy of pursuing similar acquisitions of blocks of insurance business
and small insurance companies and other insurance-related opportunities.
Management believes that acquisitions will lower unit costs by increasing the
number of policies and the amount of premiums over which fixed expenses are
spread.
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Segment Information
The following table sets forth, by business segment, certain financial
data for Guarantee Life for the periods indicated.
Selected Consolidated Financial Data by Business Segment
<TABLE>
<CAPTION>
At or for the Years Ended December 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(In Millions)
<S> <C> <C> <C> <C> <C>
Revenues from continuing operations (1):
Group insurance business........................ $ 228.2 $ 175.1 $ 182.2 $ 140.1 $ 125.6
Individual insurance business (2)............... 82.2 75.8 112.2 107.4 110.8
Corporate....................................... (0.1) 1.1 - - -
--------- --------- --------- --------- ---------
Total........................................... $ 310.3 $ 252.0 $ 294.4 $ 247.5 $ 236.4
========= ========= ========= ========= =========
Income from continuing operations before
income taxes:
Group insurance business........................ $9.3 $ 10.1 $ 4.4 $ 14.6 $ 17.1
Individual insurance business................... 18.2 13.6 15.5 12.8 10.6
Corporate....................................... (1.8) (1.1) - - -
--------- --------- --------- --------- ---------
Total........................................... $25.7 $ 22.6 $ 19.9 $ 27.4 $ 27.7
========= ========= ========= ========= =========
Assets (at period end):
Group insurance business........................ $255.7 $ 224.2 $ 221.8 $ 204.7 $ 187.2
Individual insurance business................... 1,187.4 1,029.5 985.7 908.0 920.0
Corporate....................................... 54.9 19.1 22.7 - -
Discontinued Operations......................... 21.0 32.4 50.6 75.3 45.6
--------- --------- --------- --------- ---------
Total Consolidated Assets....................... $1,519.0 $1,305.2 $1,280.8 $1,188.0 $1,152.8
========= ========= ========= ========= =========
</TABLE>
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(1) Includes investment income allocated to each business segment.
(2) The results of the closed block subsequent to December 31, 1995 are reported
on one line of the Consolidated Statements of Income. Accordingly, the
line-by-line income statements are not comparable for all periods presented.
Total assets include the assets of the closed block, therefore amounts are
comparable for all periods presented.
Group Insurance Business
Guarantee Life's group insurance includes Core Products, including term
life, accidental death and dismemberment, short- and long-term disability,
dental and vision insurance, and Specialty Products, including excess loss
insurance for employers with self-funded medical plans and medical reimbursement
insurance for business executives. In 1996, to more effectively manage the
growth of Guarantee Life's group insurance business, this segment was separated
into two divisions. The Employee Benefits Division manages the Core Products
distributed through the national sales office distribution system, and the Group
Special Markets Division manages the Specialty Products and Core Products
distributed through its MGU's, TPA's, Blue Cross/Blue Shield plans and managed
care organizations. As of December 31, 1997, Guarantee Life's group insurance
business had $24.7 billion of life insurance in force.
Guarantee Life intends to grow the group insurance business and improve its
profitability by increasing sales of Core Products, marketed through its
national distribution system of sales offices. By emphasizing sales of Core
Products while carefully managing the growth of the Specialty Products,
Guarantee Life intends to maintain its diversification, mitigating the possible
adverse impact on its group insurance business from potential health care
reforms and the cyclical nature of the group health market.
As the national sales office distribution system expands, Guarantee Life
will continue its home office support strategy of providing distributors and
customers direct access to home office personnel. Management believes this
strategy results in (i) better service to distributors and customers through
direct contact with personnel administering their business, (ii) improved
underwriting consistency and control for Guarantee Life through centralization
of underwriting decisions, (iii) increased productivity of regional marketing
personnel by permitting them to focus on marketing Guarantee Life's products
rather than performing administrative functions and (iv) ultimately, lower
distribution costs by avoiding additional layers of management and regional
office support staff.
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Marketing
Guarantee Life's group products are marketed primarily to businesses with
up to 500 employees. Its Core Products are marketed primarily through its
national sales offices distribution system, which develops group insurance
business through employee benefit firms and brokers. Guarantee Life distributes
its Specialty Products, and to a lesser extent its Core Products, through
additional distribution systems. A senior vice president located in the home
office manages the employee benefit division's marketing of the Core Products
through the national sales office distribution system. Six regional vice
presidents, who supervise group field operations, operate under his direction,
as well as the Voluntary Products' vice president. A senior vice president
located in the home office manages the Group Special Markets Division's
marketing of Specialty and Core Products.
National Distribution System. Guarantee Life has developed group sales
offices in major metropolitan areas of the United States to facilitate the
development of relationships with, and improve the provision of marketing
services to, employee benefit firms and brokers and to increase the sales of
Core Products. As of December 31, 1997, Guarantee Life had 21 group sales
offices in major metropolitan areas in 18 states. This distribution system
generated $75.0 million of first year annualized premiums during the year ended
December 31, 1997 and $49.2 million of first year annualized premiums for the
year ended December 31, 1996. The 43.0% growth in group net earned premiums from
Core Products in 1997 is primarily a result of the sales growth from existing
group offices and continued expansion of the national distribution system.
The following table sets forth information regarding when the group sales
offices were established.
<TABLE>
<CAPTION>
Group Sales Offices
1997 1996 1995 1994 1993 1992
------------- ----------- -------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Nashville Boston Philadelphia Portland Kansas City Cincinnati
Phoenix Detroit Houston Los Angeles Charlotte
Miami Atlanta Chicago Baltimore
Dallas Denver Orlando
Minneapolis San Francisco
Seattle
Total number of 21 20 17 15 9 5
offices at period
end
- ----------
</TABLE>
Guarantee Life selects locations for its group sales offices based on the
availability of qualified personnel, the characteristics of the potential market
and the extent to which such markets are already served by other providers.
Guarantee Life performs a comprehensive review of the marketing performance and
expenses for each group sales office on a monthly basis. In addition to opening
new offices, Guarantee Life also intends to increase the marketing staff at
existing offices.
Additional Distribution Systems. Guarantee Life distributes its Specialty
Products, and to a lesser extent its Core Products, through additional
distribution systems. These distributors include MGUs, TPAs, Blue Cross and Blue
Shield plans and health maintenance organizations. These multiple distribution
systems allow the sale of Group Products to markets that complement those served
by Guarantee Life's group sales offices.
Guarantee Life markets its Specialty Products primarily through MGUs and
TPAs. Guarantee Life's excess loss insurance product is marketed by National
Benefit Resources, Inc. ("NBR"), which accounted for 64.1% of Guarantee Life's
excess loss insurance premiums during 1997. NBR performs all marketing,
underwriting and administrative services for the excess loss insurance it sells.
The balance of excess loss insurance sales are marketed directly by TPAs and
administered by Guarantee Life. Guarantee Life's Exec-U-Care medical
reimbursement program is marketed exclusively through Seabury and Smith, Inc.,
which performs all marketing, underwriting and administrative services for this
product.
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Group Products
Guarantee Life's Core Products and Specialty Products accounted for $177.8
million, or 88.9%, and $22.2 million, or 11.1%, of group net earned premiums,
respectively, for the year ended December 31, 1997. The following table sets
forth net earned premiums for Guarantee Life's group insurance products for the
past five years.
<TABLE>
<CAPTION>
Group Net Earned Premiums
For the Years Ended December 31,
---------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- --------- -------- ---------
(In Millions)
<S> <C> <C> <C> <C> <C>
Core products...................................... $ 177.8 $ 124.3 $ 104.6 $ 79.5 $ 66.1
Specialty products................................. 22.2 29.3 58.5 32.4 25.9
-------- -------- --------- -------- ---------
Total group business............................... $ 200.0 $ 153.6 $ 163.1 $ 111.9 $ 92.0
======== ======== ========= ======== =========
</TABLE>
Core Products
Group Life. Group term life provides insurance coverage on the insured for
a specified period and has no accumulation value. Coverage is offered to
employees and their dependents. Group life accounted for $71.0 million, or
39.9%, of net earned premiums from Core Products for the year ended December 31,
1997.
Accidental Death and Dismemberment. Group accidental death and
dismemberment insurance provides insurance coverage that is payable after the
accidental death of the insured in an amount based on the face amount of the
policy or after a covered dismemberment of the insured in an amount based on the
schedule to the policy. Accidental death and dismemberment accounted for $9.9
million, or 5.6%, of net earned premiums from Core Products for the year ended
December 31, 1997.
Short-Term Disability. Short-term disability provides a weekly benefit
amount to insured employees when they are unable to work due to an accident or
an illness. The period that insured employees must remain disabled prior to
becoming eligible for benefit payments ranges from zero to 30 days for
disability due to accident and from three to 30 days for disability due to
sickness. Short-term disability accounted for $19.1 million, or 10.7%, of net
earned premiums from Core Products for the year ended December 31, 1997.
Long-Term Disability. Long-term disability provides a monthly benefit for
longer periods of time than covered by short-term disability insurance when
insured employees are unable to work due to disability. Employees may receive
total or partial disability benefits. Long-term disability accounted for $35.1
million, or 19.7%, of net earned premiums from Core Products for the year ended
December 31, 1997.
Dental Insurance. Dental insurance provides partial reimbursement for
covered dental expenses. Plans may cover only preventive and basic care or more
comprehensive care, including major services and orthodontia. Dental insurance
accounted for $42.7 million, or 24.0%, of net earned premiums from Core Products
for the year ended December 31, 1997.
Voluntary Products. Guarantee Life's voluntary products currently include
term life, dependent life, dental, vision, accidental death and dismemberment,
short-term disability, and long-term disability insurance that is paid for by
employees through payroll deductions. In 1997, sales of voluntary products
increased to $10.1 million from $6.0 million in 1996.
Specialty Products
Excess Loss. Excess loss insurance reimburses employers for self-funded
medical plan costs when those costs exceed aggregate limits specified under the
plan or when a single claim exceeds a specified limit. Guarantee Life provides
aggregate and specific excess loss insurance to small and medium-employer groups
of 50 or more lives with self-funded medical plans. Excess loss accounted for
$15.7 million, or 70.7%, of net earned premiums from Specialty Products for the
year ended December 31, 1997.
Exec-U-Care. Under the Exec-U-Care program, Guarantee Life supplements an
employer's basic medical plan by reimbursing business executives for many of the
expenses not covered by that plan. Coverage automatically includes a
prescription drug card and an accidental death and dismemberment benefit.
Exec-U-Care accounted for $6.1 million, or 27.5%, of net earned premiums from
Specialty Products for the year ended December 31, 1997.
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Product Development and Management
Guarantee Life's product actuaries in its group business set underwriting
guidelines and manage the pricing and actuarial functions for each product line.
The product actuaries are responsible for monitoring experience, revising or
implementing new underwriting guidelines, adjusting pricing and ensuring such
changes are communicated to the underwriters and regional group offices. After
release, sales and pricing assumptions are monitored to assist in making any
necessary adjustments.
Due to the rapid growth in Core Products, and a strategic assessment of the
small and medium-sized employer market, management took steps in 1996 to
re-engineer some of the group business' processes to gain efficiencies. A
transformation project was initiated to better align home office service teams
with designated group sales offices for underwriting, premiums, enrollment, and
customer service. The elimination of redundant data entry and multiple hand-offs
is expected to increase productivity by over 60% when all new processes are
fully implemented. Management believes this will give Guarantee Life the ability
to significantly lower units costs and gain strategic service advantages. During
1997, the regional alignment of teams was completed, quoting processes
streamlined and specifications for other processes and systems established. A
delay in the technological implementation of the new quoting system planned for
the third quarter 1997 postponed the expected productivity increases until 1998.
In 1998, new quoting technology is expected to further streamline the quoting
and new case issue process, and the initial rollout of in-force processes will
also improve efficiency.
Insurance Underwriting
Guarantee Life uses underwriting standards to protect the quality of its
group life and health business. Standard rating systems have been developed for
each product based on Guarantee Life's own past experience and relevant industry
experience. Home office underwriters or expert systems evaluate the risk
characteristics of prospective insured groups. The premium rate quoted to a
prospective insured group is based on standard rating formulae adjusted within
limits using pre-approved discounting flexibility, and for larger groups, the
group's past claims experience rate.
Individual Insurance Business
Guarantee Life's individual insurance products include universal life, term
life and interest-sensitive whole life insurance and annuities. These products
are marketed primarily to individuals with family incomes of up to $150,000 and
small business owners primarily by an independent agency force of approximately
1,325 licensed insurance agents. As of December 31, 1997, Guarantee Life's
individual insurance business had $12.9 billion of life insurance in force and
approximately 208,000 life and annuity policies in force.
Guarantee Life plans to grow sales of individual life and annuity business
while improving its financial results by continuing to introduce products that
are competitive and profitable, including equity indexed products, improving
retention and productivity of its agents and aggressively managing fixed
expenses.
Over the last few years, Guarantee Life has replaced its entire individual
life portfolio with new products which are designed to provide better value to
customers and improved profitability. Management believes that this new life
portfolio plus an improved annuity portfolio featuring an equity indexed
deferred annuity, will help increase sales from existing producers and allow
sales management to effectively recruit marketing organizations and agents.
Guarantee Life will continue to aggressively manage fixed expenses and reduce
unit expense rates.
Marketing
Guarantee Life's products are marketed primarily to individuals with family
incomes up to $150,000 and small business owners with fewer than 25 employees
and earnings up to $150,000. Guarantee Life's individual insurance products are
marketed primarily by an independent agency force of approximately 1,325
licensed insurance agents. During 1997, the top 100 agents produced nearly 90%
of Guarantee Life's individual insurance business. Most of the individual
insurance agents also sell insurance products offered by other companies.
A vice president located in the home office manages Guarantee Life's agency
marketing efforts. Three regional vice presidents divide responsibility for
field relationships. The regional vice presidents are responsible for recruiting
and developing quality RMOs and PPGAs.
Individual Products
Guarantee Life currently offers a portfolio of universal life products,
annuities, traditional life products, and interest-sensitive whole life
products. Life insurance products and annuities accounted for 17.9% and 82.1%,
respectively, of the individual insurance business's first year annualized
premiums for 1997. As part of the strategy to improve the financial and
marketing performance of its individual insurance business, Guarantee Life has
replaced its entire individual life insurance
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portfolio over the last few years. These new products are designed to provide
better value to customers and improve profitability relative to the previous
generation of products.
Universal Life Products. Universal life provides benefits for the life of
the insured. Within limits established by Guarantee Life, the Internal Revenue
Code and state regulations, policyholders may vary their premiums and the amount
of the death benefit as long as there are sufficient policy funds to cover all
policy charges for the coming period. Over the past four years, Guarantee Life
introduced five new universal life products, which are designed to provide
better value to the consumer and increase profitability for Guarantee Life.
Sales of universal life policies represented 81.9% of first year annualized
premiums for individual life products for the year ended December 31, 1997.
Annuities. Guarantee Life markets single premium fixed annuities, flexible
premium fixed annuities and an equity indexed annuity. For fixed annuities, the
contract accumulates tax-deferred interest and provides for periodic fixed
payments to the annuitant in the future. Flexible premium annuities allow for
flexibility, within certain parameters established by Guarantee Life, in the
payment of periodic annuity premiums. In the third quarter of 1996, Guarantee
Life introduced an equity indexed single premium deferred annuity with credited
rates linked to the growth in the S&P 500 index which accounted for over 80% of
annuity sales in 1997. Guarantee Life is reinsuring 70% of the risk on this
product. Sales of the indexed annuity slowed significantly during the fourth
quarter, 1997 due to reduced participation rates.
Traditional Life Products. Guarantee Life's traditional life products
include whole life and term life products. Participating whole life generally
provides for level premiums and a level death benefit and requires payments in
excess of the mortality cost in the early years to offset increasing mortality
costs in later years. Guarantee Life introduced interest-sensitive whole life
products in 1995 to take the place of participating whole life insurance
products, which are no longer sold after the Demutualization. As part of the
Demutualization, all participating policies are included in the closed block.
Guarantee Life also markets term policies that provide life insurance
protection for a specified period. As such, they are mortality-based and have no
accumulation values. Guarantee Life introduced a new term life insurance
portfolio of three products in 1995; two of these policies have a 10-year rate
guarantee and are renewable after one or 10 years, and the other has a 15-year
rate guarantee and is renewable after 15 years. The portfolio was updated and a
20-year product was added in late 1996. The portfolio was updated again in 1997.
Minimum policy size is $50,000, except for the one year product which is
$100,000. The underwriting of these products begins with a teledirect process,
utilizing medical professionals under contract with Guarantee Life, who contact
the insurance applicant by telephone after receiving a request form. Before a
policy is issued, the proposed insured must satisfactorily complete a blood test
and medical examination. An underwriter makes the final decision whether to
accept the risk. Management believes this process enhances the efficiency and
quality of the underwriting process. The teledirect application process also
enhances the efficiency of the agent, who can devote more time to selling rather
than filling out applications. Guarantee Life substantially reinsured this
portfolio and, as a result, this portfolio did not produce significant amounts
of net earned premium in the three years ended December 31, 1997. For the year
ended December 31, 1997, term life sales represented 13.1% of first year
annualized premiums for individual life products.
Interest-Sensitive Whole Life Products. Interest-sensitive whole life
products charge a fixed annual premium and provide guaranteed death benefits and
cash values. Interest-sensitive whole life products may build cash values
greater than that which is guaranteed by crediting higher than guaranteed rates
of interest or charging less than guaranteed costs of insurance. These products,
although similar to universal life products, differ in that a fixed (as opposed
to flexible) premium obligation is undertaken by the policyholder. For the year
ended December 31, 1997, sales of interest-sensitive whole life products
represented 5.0% of first year annualized premiums for individual life products.
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The following table sets forth the first year annualized premiums for
Guarantee Life's individual products for the periods indicated.
Sales Activity by Product
First Year Annualized Premiums
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In Millions)
<S> <C> <C> <C> <C> <C>
Universal life..................................... $ 5.8 $ 5.5 $ 4.3 $ 7.0 $ 8.0
Traditional life (1)............................... 1.2 1.0 1.0 1.4 1.7
--------- --------- --------- --------- ---------
Total life(1)...................................... 7.0 6.5 5.3 8.4 9.7
Annuities (2)...................................... 25.2 9.3 8.1 21.5 20.1
--------- --------- --------- --------- ---------
Total......................................... $ 32.2 $ 15.8 $ 13.4 $ 29.9 $ 29.8
========= ========= ========= ========= =========
</TABLE>
- ----------
(1) Prior to 1995, does not include interest-sensitive whole life products,
which were introduced in 1995.
(2) The increase in annuity sales was primarily due to the equity indexed
annuity product introduced in August, 1996.
Management believes sales of universal life and traditional life products
declined in 1994 and 1995 principally as a result of changes arising from the
Demutualization, the transition to new products and a lower field compensation
structure. Annuity sales declined substantially in 1995 due to increased
competition from other financial products.
Crediting Rates and Policyholder Dividends
Guarantee Life pays dividends, credits interest and determines other
nonguaranteed elements on its individual insurance policies depending on the
type of product. Although certain nonguaranteed elements (such as initial
interest rates on an annuity product) may be fixed for a limited, predetermined
period, Guarantee Life generally determines dividends, resets interest rates and
establishes other nonguaranteed elements based on experience as it emerges and
with regard to competitive factors. Guarantee Life Insurance does not maintain
separate accounts of assets for its interest-sensitive products; however, for
risk management and reporting purposes, assets are internally segmented among
the traditional life, universal life, annuities and group insurance product
lines. AGL maintains separate accounts for its variable universal life and
annuity product lines.
Policyholder dividends are declared and paid only on those policies
included in the closed block, including traditional whole life, some term life
and some older fixed annuity policies. Policyholder dividend scales are
established annually by Guarantee Life, and are based on the performance of an
asset portfolio which has been identified as supporting these policies, the
mortality experience of the policies, expense levels and taxes.
For universal life policies and annuity contracts, credited interest rates
are established on a monthly basis by Guarantee Life's interest rate committee.
Crediting rates are based on the performance of the asset portfolio supporting
these policies and competitive considerations. Mortality charges for universal
life policies are determined based on the mortality experience of the policies
and are reset on a less frequent basis. For annuities, crediting rates are
determined for groups of identified deposits and reflect the timing of the
deposits and the investment performance of the assets backing those deposits.
Guarantee's average crediting rates on universal life contracts were 5.68%,
5.90% and 6.03% and its average crediting rates on annuities were 5.38%, 5.46%
and 5.93% for the years ended December 31, 1997, 1996 and 1995, respectively.
For the equity indexed annuity introduced in 1996, participation rates are
established on a weekly basis. The participation rates are applied to increases
in the equity index defined in the contracts to determine the credited interest
rates. The participation rates are set based on various factors, including the
current interest rate environment and competitive considerations.
Product Development
Guarantee Life's individual insurance product development committee, which
includes representatives from all individual insurance business disciplines as
well as investment and legal areas, designs, analyzes and conducts operational
tests of new products. An advisory council, composed of agents and home office
personnel, works with marketing and actuarial personnel to determine the final
design for the product. Assuming a product is approved, a product team puts the
product through extensive model office testing prior to release. After release,
sales and pricing assumptions are monitored and any necessary adjustments are
made to maintain profitability standards.
9
<PAGE>
Insurance Underwriting
Guarantee Life follows detailed, uniform underwriting practices and
procedures in its individual business designed to assess and qualify risks
before issuing coverage to qualified applicants. Guarantee Life has underwriters
who evaluate policy applications on the basis of information provided by the
applicant and others. Management believes that its underwriting standards
produce mortality results consistent with the assumptions used in product
pricing, while also allowing competitive risk selection. Blood testing is
required for all individual insurance policies with face amounts of $100,000 or
more at issue ages of 16 and over, and other tests, such as medical
examinations, electrocardiograms, blood tests, urine tests, treadmill tests,
chest x-rays and inspection reports, are used to evaluate certain individual
insurance policy applications, depending on the size of the policy, the age of
the proposed insured and other factors.
Closed Block
The closed block was established on the date of the Demutualization and is
designed to give reasonable assurance to holders of policies included therein
that assets will be available to maintain the dividend scales which were in
effect prior to the Demutualization if the experience underlying such scales
continues.. Guarantee Life allocated assets to the closed block in an amount
expected to produce cash flows which, together with anticipated revenues from
the closed block, are expected to be sufficient to support the closed block,
including provision for payment of claims, certain expenses and taxes, and for
the continuation of dividend scales in effect for the year preceding the
Demutualization, if the experience underlying such scales (including the
portfolio interest rate) continues, and for appropriate adjustments in such
scales if the experience changes. The assets, including the revenue therefrom,
allocated to the closed block business will accrue solely to the benefit of
holders of policies included in the closed block until the closed block is no
longer in effect. To the extent that over time cash flows from the assets
allocated to the closed block and other experience relating to the closed block
are, in the aggregate, more or less favorable than assumed in establishing the
closed block, total dividends paid to closed block policyholders in the future
may be greater than or less than the total dividends that would have been paid
to these policyholders if the dividend scales in effect for 1994 had been
continued. Dividends on policies included in the closed block, as in the past,
will be declared at the discretion of Guarantee Life Insurance's Board of
Directors, may vary from time to time (reflecting changes in investment,
mortality, persistency and other experience factors) and are not guaranteed.
Guarantee Life will not be required to support the payment of dividends on
closed block policies from its general funds, although it could choose to
provide such support.
If the assets allocated to the closed block, the investment cash flows from
those assets and the revenues from the policies included in the closed block
prove to be insufficient to pay the benefits guaranteed under the policies
included in the closed block, Guarantee Life will be required to make such
payments from its general funds. Since the closed block has been funded to
provide for payment of guaranteed benefits, it should not be necessary to use
other general funds to pay guaranteed benefits unless the closed block
experiences substantial adverse deviations in investment, mortality, persistency
or other experience factors.
Premiums received and policy benefits paid by Guarantee Life on the
policies included in the closed block and investment cash flows from the assets
allocated to the closed block are added to or withdrawn from the closed block.
Guarantee Life charges the closed block with federal, state or local taxes
relating to the closed block. Guarantee Life also charges the closed block for
commissions and other expenses of administering the policies included in the
closed block.
Dividends on the closed block policies are set annually by Guarantee Life
Insurance's Board of Directors in accordance with applicable law and with the
objective of exhausting assets in the closed block upon the final required
payment under the last policy in the closed block.
The closed block will continue in effect until either (i) the last policy
in the closed block is no longer in force or (ii) the closed block is dissolved.
The closed block may not be dissolved without the approval of the Director of
the Nebraska Department of Insurance. If the closed block is dissolved, the
assets associated with the closed block will become part of Guarantee Life's
general funds. If the closed block is not dissolved, the expected life of the
closed block is over 75 years. Even if the Director approves the dissolution of
the closed block, the policies at the time of dissolution shall remain
obligations of Guarantee Life and dividends on these policies shall be
apportioned by Guarantee Life Insurance's Board of Directors in accordance with
policy provisions and actuarial standards.
Discontinued Operations
In November 1994, Guarantee Life made a decision to withdraw from its
Special Risk segment, an alternate workers' compensation program in Alabama,
Georgia and Louisiana. This decision was the result of unanticipated high levels
of premium growth, which impeded Guarantee Life's ability to maintain
appropriate administrative, operational and underwriting standards and required
levels of risk-based capital that were unacceptable to Guarantee Life's
management. Furthermore, the plans of the managing general agent to continue to
grow the Special Risk segment were not consistent with Guarantee Life's
10
<PAGE>
strategy. To facilitate its exit, Guarantee Life entered into a reinsurance
arrangement whereby it cedes 80% of all claims incurred after October 31, 1994.
In addition, Guarantee Life entered into a reinsurance arrangement to limit its
exposure to $10,000 per claim relating to its 20% retention. Guarantee Life
retains the liability for claims incurred on or before October 31, 1994.
Effective November 1, 1995, Guarantee Life ceased writing Special Risk policies.
Guarantee Life intends to allow the assets and liabilities related to this
business to run off over a period of years as claims are paid, unless an
appropriate sale of this block of business can be made. Guarantee Life does not
believe the disposal of this segment will result in a significant loss.
Guarantee Life believes that, based on current estimates, approximately 75% of
the net liabilities related to discontinued operations will be extinguished
within five years of its ceasing writing business. These estimates are based on
assumptions developed from industry-wide claim data which Guarantee Life
believes are appropriate for the nature of the business involved; however,
actual runoff patterns may differ from these estimates.
Investment Portfolio
General
Guarantee Life maintains a diversified portfolio of investments, including
fixed maturity securities and mortgage loans. Guarantee Life's objective is to
maintain high quality, well diversified fixed maturity securities portfolios
that produce nominal yields and total returns that supports the various product
line liabilities. The fixed maturity securities portfolio consists primarily of
investment grade corporate fixed maturity securities, high quality
mortgage-backed securities (MBS), high quality asset-backed securities (ABS) and
United States government and agency obligations.
Although all of its assets support all of its liabilities, Guarantee Life
has developed an asset/liability management approach with separate investment
segments for specific product lines, such as its traditional life insurance
products (which includes the closed block as a subset), universal life,
annuities and group insurance products. As part of this approach, Guarantee Life
develops investment policies and objectives for each product line which form the
basis for distinct investment strategies and performance benchmarks to manage
each product's return and liquidity requirements.
Management has a general policy of diversifying assets within each asset
category. Guarantee Life monitors and limits the exposure to individual
borrowers, credit risks, industries or property types and geographic locations.
All investments are subject to suitability and diversification requirements
under Nebraska and Pennsylvania law, respectively, and require the approval of
the respective Boards of Directors, or a sub-committee of the Boards.
Guarantee Life Insurance's demutualization and the establishment of the
closed block significantly affected the presentation of Guarantee Life's
consolidated financial statements. For comparability with prior years'
information, the following tables include closed block invested assets combined
with similar assets outside the closed block.
The following table summarizes consolidated invested assets by asset
category as of December 31, 1997, 1996, 1995, 1994, and 1993.
<TABLE>
<CAPTION>
CONSOLIDATED INVESTED ASSETS
December 31,
-------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------- --------------- --------------- --------------- ----------------
Carrying % of Carrying % of Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total Value Total Value Total
-------- ----- -------- ----- -------- ----- ------- ----- -------- -----
(Dollars in Millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed maturities:
Public(1).......... $663.1 54.7 $ 595.3 54.4 $ 580.7 55.0 $540.5 54.8 $496.4 52.3
Private............ 351.9 29.1 318.6 29.1 317.1 30.0 312.4 31.7 338.7 35.6
------- ---- ----- ---- ----- ---- ----- ---- ----- ----
Subtotal......... 1,015.0 83.8 913.9 83.5 897.8 85.0 852.9 86.5 835.1 87.9
Equity securities..... 3.7 0.3 3.0 0.3 6.0 0.6 4.9 0.5 6.4 0.7
Mortgage loans........ 85.8 7.1 70.2 6.4 61.5 5.8 48.1 4.9 26.1 2.7
Policy loans.......... 68.7 5.7 67.5 6.2 63.5 6.0 62.9 6.4 63.3 6.7
Investment real estate 3.4 0.2 6.6 0.6 6.9 0.6 7.2 0.7 7.7 0.8
Other invested assets. 11.6 1.0 9.8 0.9 8.1 0.8 9.1 1.0 11.1 1.2
Short-term
investments........ 23.3 1.9 23.3 2.1% 12.3 1.2 0.5 0.0 0.3 0.0
-------- ------ -------- ----- -------- ----- ------ ----- ------ -----
Total invested
assets......... $1,211.5 100.0% $1,094.3 100.0% $1,056.1 100.0% $985.6 100.0% $950.0 100.0%
======== ====== ======== ===== ======== ===== ====== ===== ====== =====
</TABLE>
- --------------
(1) During 1994, Guarantee Life implemented SFAS 115 and, as a result of
classifying certain of its fixed maturity securities portfolio as
available-for-sale, the carrying value of such securities reflected
unrealized gains of $24.5 million, $8.7
11
<PAGE>
million and $23.8 million as of December 31, 1997, 1996 and 1995 and
unrealized losses of $36.5 million as of December 31, 1994.
Investment Philosophy
Guarantee Life employs conservative investment strategies based on the
specific characteristics of each product line. Performance is measured on both a
nominal yield spread basis and on a total return basis. Total return investment
performance evaluation requires that the risk and expected return of each asset
is evaluated regularly. Guarantee Life uses broad-based market indices and
customized liability-based benchmarks to measure the relative performance of its
fixed maturity securities. The current yield of the investment portfolios must
be sufficient to satisfy the interest rate assumptions used in product pricing.
In addition, each portfolio must achieve a satisfactory balance between risk and
expected return and support the investment requirements of the underlying
product. This approach allows Guarantee Life to be more effective in its
asset/liability management efforts since it requires decisions to be based on
both the fair value of each asset and each asset's contribution to investment
income. Guarantee Life's portfolio of invested assets is managed by its
employees, except for its publicly traded Mortgage-backed and Asset-backed
securities which are managed by an external investment manager pursuant to
guidelines adopted by Guarantee Life.
Guarantee Life seeks to manage the relationship between risk and expected
return and is committed to maintaining a prudent balance of the two. Guarantee
Life is exposed to four major sources of investment risk: credit risk, relating
to the uncertainty attached to the timing and amount of principal and interest
payments; interest rate risk, relating to the economic effects of changing
interest rates; real estate risk, relating to changes in property values due to
changing local economic and demographic conditions; and liquidity risk, relating
to holding investments for which there is no active secondary market, such as
private fixed maturity securities and commercial mortgage loans. Guarantee
Life's principal methods for managing credit risk are credit quality analyses of
each issuer, diversification and asset allocation. Guarantee Life's principal
method for managing interest rate risk is asset/liability management. Guarantee
Life's principal methods of managing real estate risk are geographic and
property diversification, annual property analysis and inspections and periodic
analysis of regional and local economic and demographic statistics. Guarantee
Life's principal methods for managing liquidity risk are asset allocation,
maintenance of a portfolio of public fixed maturity securities in an amount
greater than 50% of invested assets.
In recent years, Guarantee Life has emphasized investments in fixed
maturity securities which, as of December 31, 1997, comprised 83.8% of the
carrying value of invested assets. Future investment activity will continue to
be focused mainly on investment grade public and private fixed maturity
securities, which comprised 96.6% of fixed maturity securities as of December
31, 1997, and, to a lesser extent, fixed-rate commercial mortgage loans. During
the past three years, the effective yield on Guarantee Life investment portfolio
was 7.7% in 1995, 7.4% in 1996 and 7.4% in 1997. This decline is primarily due
to lower reinvestment rates for fixed maturity securities purchased in recent
periods.
Investment Monitoring and Valuation
As a part of Guarantee Life's investment management process, it regularly
monitors invested assets. Fixed maturity securities are reviewed upon receipt of
the obligor's financial statements, generally quarterly, for financial
performance and compliance with financial covenants. Generally, Guarantee Life
reviews its commercial mortgage loan portfolio and identifies monthly all
commercial mortgage loans where certain objective or subjective characteristics
cause management to conclude such loans require increased management attention.
Detailed property analyses and property inspections are performed annually for
each commercial mortgage loan. Guarantee Life generally requires borrowers to
submit financial statements for annual review.
Guarantee Life has policies and procedures which management believes value
invested assets properly and consistently. Certain fixed maturity securities are
classified as available-for-sale, and therefore are carried at fair value in
Guarantee Life's consolidated financial statements. Public fixed maturity
securities are carried principally at fair value, and investment grade private
fixed maturity securities are carried principally at amortized cost. Below
investment grade private fixed maturity securities are carried principally at
fair value. Fair value for all fixed maturity securities is determined by
independent valuation procedures. Mortgage loans on real estate are carried at
unpaid principal balance net of unamortized discounts and valuation allowances.
The valuation allowances on mortgage loans are based on anticipated losses
expected by management.
12
<PAGE>
Fixed Maturity Securities
The following table provides a comparison of the carrying value, fair value
and amortized cost of fixed maturity securities owned by Guarantee Life as of
December 31, 1997.
<TABLE>
<CAPTION>
Fixed Maturity Securities
Carrying Value, Fair Value and Amortized Cost
December 31, 1997
---------------------------------------------------
Carrying Amortized
Value Fair Value Cost
---------- ------------- ----------
(In Millions)
<S> <C> <C> <C>
Public.................. $663,074 $663,074 $641,225
Private................. 351,879 367,578 349,193
---------- ---------- --------
Total.............. $1,014,953 $1,030,652 $990,418
========== ========== ========
</TABLE>
Guarantee Life's portfolio of investment grade fixed maturity securities is
well diversified by number and type of issuer. As of December 31, 1997,
investment grade fixed maturity securities included the securities of over 315
issuers, with 662 different issues of securities, with no issuer, other than
securities retained in the 1992 securitization of commercial mortgage loans and
obligations of the United States government or its agencies, representing more
than 1.1% of investment grade fixed maturity securities. As of December 31,
1997, none of these investments were classified as a problem investment or had
been restructured.
The following table sets forth the credit quality, by NAIC designation and
S&P's rating equivalents, of fixed maturity securities as of December 31, 1997.
<TABLE>
<CAPTION>
Fixed Maturity Securities by NAIC Designation
December 31, 1997
-----------------------------------------------------------------
Public Private Total
------------------- ------------------- -------------------
NAIC Standard & Poor's Amortized % Amortized % Amortized %
Designation Equivalent Designation Cost of Total Cost of Total Cost of Total
----------- ----------------------------------- --------- -------- --------- ---------- --------- --------
(Dollars in Millions)
<S> <C> <C> <C> <C> <C> <C> <C>
1 A- or Higher...................... $509.2 79.4% $179.8 51.5% $689.0 69.6%
2 BBB- to BBB+...................... 128.7 20.1% 139.2 39.9% 267.9 27.0%
------ ----- ------ ----- ------ -----
Total investment grade.......... 637.9 99.5% 319.0 91.4% 956.9 96.6%
3 BB to BB+......................... 3.0 0.5% 10.5 3.0% 13.5 1.4%
4 B ................................ - - 10.3 2.9% 10.3 1.0%
5 CCC or lower...................... - - 9.3 2.7% 9.3 1.0%
6 In or near default................ 0.3 0.0% 0.1 0.0% 0.4 0.0%
------ ----- ------ ----- ------ -----
Total below investment grade.... 3.3 0.5% 30.2 8.6% 33.5 3.4%
------ ----- ------ ----- ------ -----
Total............................. $641.2 100.0% $349.2 100.0% $990.4 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
Guarantee Life maintains significant investments in private fixed maturity
securities because of the generally higher nominal yield available relative to
comparably rated public fixed maturity securities, more restrictive financial
and business covenants available in private fixed maturity security loan
agreements and stronger prepayment protection. Although private fixed maturity
securities are not registered with the SEC and generally are less liquid than
public fixed maturity securities, restrictive financial and business covenants
included in private fixed maturity security loan agreements are generally
designed to offset the impact of their increased liquidity risk. Substantially
all of the private fixed maturity securities that Guarantee Life holds are
participations in issues that are also owned by other investors. In addition,
some of the private fixed maturity securities are rated by nationally recognized
rating agencies and substantially all have been assigned a rating designation by
the NAIC Securities Valuation Office. To the extent that such private fixed
maturity securities are not rated by nationally recognized rating agencies,
Guarantee Life assigns a rating for internal monitoring purposes that it
believes generally emulates methodologies employed by nationally recognized
rating agencies.
MBS constitute a core position within Guarantee Life's fixed maturity
securities investments. MBS investments include residential MBS, commercial MBS
and securities retained in the 1992 securitization of Guarantee Life's
commercial mortgage loans. As of December 31, 1997, MBS were $261.8 million, or
26.4% (based on amortized cost), of fixed maturity securities,
13
<PAGE>
of which $86.6 million, or 33.1%, of MBS were guaranteed by the U.S. government
or an agency of the U.S. government. Retained securitized bonds were $37.3
million, or 14.2%, of MBS as of December 31, 1997.
Guarantee Life has established specific investment guidelines for the
management of MBS. All MBS, other than retained subordinate tranches of the
securitized mortgages, must be rated "Baa3/BBB-" or higher by one or more
nationally recognized rating agencies when purchased. As of December 31, 1997,
all MBS owned by Guarantee Life, excluding the $29.3 million in amortized cost
of subordinate tranches of the retained securitized mortgages, were so rated.
Guarantee Life limits total MBS investments (excluding the retained senior and
subordinate tranches of the securitized mortgages) to not more than 25% of
invested assets. Guarantee Life has diversification requirements among the three
agency issuers of MBS and limits non-agency "whole loan" MBS and "commercial"
MBS to 20% of total MBS investments. In addition, each type of MBS is limited to
10% of total invested assets.
The objective of Guarantee Life's MBS investments is to provide incremental
return, while maintaining reasonable liquidity and cash flow stability.
Guarantee Life's external investment manager employs a disciplined analytical
approach, whereby each MBS is evaluated to determine its interest rate
sensitivity and average life variability. In general, Guarantee Life's
investment policies and guidelines seek investments which provide improved cash
flow stability through either implicit or explicit prepayment protection.
Investments with implicit prepayment protection can take the form of
pass-throughs or CMOs backed by seasoned pools of loans which have already had
ample opportunity to refinance but have failed to do so. Explicit prepayment
protection can take the form of prepayment lockouts, yield maintenance
provisions or prepayment penalties, which are common features of multifamily
MBS, commercial MBS and FHA-insured project loans. Guarantee Life's MBS
investments do not include interest-only securities which are limited by
Nebraska law, principal-only securities or other MBS which may exhibit extreme
market value volatility.
Commercial Mortgage Loans
As of December 31, 1997, commercial mortgage loans constituted $86.2
million of Guarantee Life's $87.1 million mortgage loan portfolio. Substantially
all commercial mortgage loans are fixed-rate first mortgage loans on completed
properties. As of December 31, 1997 there were 85 individual commercial mortgage
loans all of which were first mortgage loans, and all bore a fixed interest
rate.
The following table sets forth the distribution, by property type and for
the top five states, of Guarantee Life's commercial mortgage loans based on
unpaid principal balance as of December 31, 1997.
Composition of Commercial Mortgage Loan Portfolio
by Property Type and Top Five States
December 31, 1997
---------------------------
Amount % of Total
------ ----------
(Dollars in Millions)
Property Type
Office................................ $24.2 28.1%
Medical Office........................ 2.5 2.9%
Retail................................ 10.6 12.3%
Apartment............................. 10.6 12.3%
Industrial............................ 33.8 39.2%
Other................................. 4.5 5.2%
----- -----
Total............................... $86.2 100.0%
===== =====
Top Five States
Nebraska.............................. $10.3 11.9%
Indiana............................... 9.2 10.7%
California............................ 8.5 9.9%
Michigan.............................. 7.3 8.5%
Arizona............................... 7.1 8.2%
Substantially all of the commercial mortgage loans were originated by
Guarantee Life through mortgage loan correspondents and were not purchased from
third parties. Guarantee Life's investment policy with regard to the origination
of new commercial mortgage loans involves a review of the economics of the
property being financed, adherence to guidelines that provide for
diversification of Guarantee Life's commercial mortgage loan portfolio by
property type and geographic region
14
<PAGE>
and prevailing industry lending practices, including, among others, an
assessment of environmental risk. Current guidelines for new commercial mortgage
loans generally require a loan-to-value ratio of not greater than 75% at the
time of origination. Guarantee Life annually estimates the current loan-to-value
ratios of its commercial mortgage loans based on an analysis of the operating
statements of each mortgaged property.
The commercial mortgage loan portfolio includes both amortizing and balloon
loans. Management defines balloon loans to be commercial mortgage loans for
which the final principal payment is at least twice as large as any other
scheduled payment due thereon. As of December 31, 1997, 86.6% of the commercial
mortgage loan portfolio consisted of commercial mortgage loans that provided for
significant or complete amortization prior to final maturity.
The following table sets forth the maturity and principal repayment
schedule for the commercial mortgage loan portfolio as of December 31, 1997.
<TABLE>
<CAPTION>
Commercial Mortgage Loan Scheduled Principal Repayments
December 31, 1997
-----------------------------------------------------------------
Maturity Payments All Other Annual
Year on Balloon Loans Loan Payments Total % of Total
---- ----------------- ------------- ------ ----------
(Dollars in Millions)
<S> <C> <C> <C> <C>
1997................... $1.4 $3.8 $5.2 6.0%
1998................... - 4.2 4.2 4.9%
1999................... 1.0 4.6 5.6 6.5%
2000................... 0.5 5.8 6.3 7.3%
2001-2019.............. 8.6 56.3 64.9 75.3%
--- ---- ---- ----
Total.................. $11.5 $74.7 $86.2 100.0%
===== ===== ===== =====
</TABLE>
The high quality of Guarantee Life's commercial mortgage loan portfolio is
evidenced by its delinquency experience. As of December 31, 1997, Guarantee Life
had no commercial mortgage loans classified as either delinquent or in
foreclosure, although $1.4 million, or 1.6%, of Guarantee Life's total mortgage
portfolio was classified as restructured.
Other Invested Assets
Guarantee Life held $68.7 million of policy loans on individual insurance
products as of December 31, 1997. Policy loans are permitted to the extent of a
policy's contractual limits and are fully collateralized by policy cash values.
Loan rates are fixed in the contracts and range from 4.8% to 7.4%. The weighted
average policy loan interest rates were 6.2%, 6.2%, and 6.1%, as of December 31,
1997, 1996 and 1995, respectively. Since all policy loan interest is payable in
advance, these interest rates are lower than the annual effective yields. For
universal life products, the policy loan portion of the account value is
credited the guaranteed rate, 4.0% to 5.5% depending on the product. For
traditional dividend-paying policies, dividends reflect each policy's loan
activity.
Guarantee Life held $34.9 million of other invested assets (including $23.3
million of short-term investments) on December 31, 1997. Other invested assets
include the residual interest of $8.2 million in the GMLC Trust. Other invested
assets are net of a valuation allowance of $2.6 million.
Competition
Guarantee Life competes with a large number of other insurers, managed care
providers and non-insurance financial services companies, such as banks,
broker-dealers and mutual funds, many of whom have greater financial resources,
offer alternative products and, with respect to other insurers, may have higher
ratings than Guarantee Life Insurance and AGL Life. Competition exists for
employer groups, individual consumers and agents and other distributors of
insurance products. Most currently insured employer groups are underwritten on
an annual basis, and employers may seek competitive quotations from several
sources prior to renewal. National banks, with their pre-existing customer bases
for financial services products, may pose increasing competition in the future
to insurers who sell annuities. Guarantee Life may also face increased
competition with respect to Core Products as other group health insurers enter
these markets to diversify their businesses.
Guarantee Life must attract and maintain productive agents and brokers to
sell its insurance and annuity products. Strong competition exists among
insurance companies for agents and brokers with demonstrated ability. Management
believes that key bases of competition among insurance companies for agents and
brokers with demonstrated ability include the services provided to, and
relationships developed with, these agents and brokers in addition to
compensation and product structure.
15
<PAGE>
Employees
As of December 31, 1997, Guarantee Life had 633 full- and part-time
employees. None of Guarantee Life's employees are covered by a collective
bargaining agreement. Management believes its relations with employees are
satisfactory.
Insurance Regulation
State Supervision
Guarantee Life's insurance subsidiaries are subject to extensive regulation
and supervision by each of the 48 states and the District of Columbia in which
they hold a certificate of authority to transact insurance business. The extent
of state regulation varies, but each of these jurisdictions has laws and
regulations governing standards of solvency, levels of reserves and business
conduct. In addition, statutes and regulations require the licensing of agents,
the approval of policy forms and, for certain lines of insurance, the approval
or filing of rates. State statutes and regulations also prescribe the permitted
types and concentration of investments by insurance companies. Guarantee Life's
insurance subsidiaries are required to file detailed annual financial
statements, as well as numerous jurisdiction-specific financial data reports,
with departments of insurance in each of the 48 states and the District of
Columbia.
Examinations. Nebraska law requires the Nebraska Department of Insurance to
conduct periodic financial examinations of each domestic insurance company and
its operations. No material issues were raised during the most recent financial
examination of Guarantee Life Insurance for the four-year period ending December
31, 1993. No material issues were raised during the market conduct examination
of Guarantee Life Insurance as of June 30, 1996. The Nebraska Department of
Insurance is currently conducting its financial examination of Guarantee Life
Insurance and Guarantee Protective for the three year period ending December 31,
1996.
Pennsylvania law requires the Pennsylvania Department of Insurance to
conduct periodic financial examinations of each domestic insurance company and
its operations. No material issues were raised during the most recent financial
examination of AGL for the three-year period ending December 31, 1995.
Regulation of Investments. Guarantee Life Insurance is subject to Nebraska
laws and regulations that require diversification of its investment portfolio
and limit the amount of investments in certain investment categories such as
below investment grade fixed maturity securities, equity real estate and equity
securities. Failure to comply with these laws and regulations would cause
investments exceeding regulatory limitations to be treated as nonadmitted assets
for purposes of measuring statutory surplus. As of December 31, 1997, Guarantee
Life Insurance's investments complied in all material respects with all such
laws and regulations.
AGL is subject to Pennsylvania laws and regulations that require
diversification of its investment portfolio and limit the amount of investments
in certain investment categories such as below investment grade fixed maturity
securities, equity real estate and equity securities. Failure to comply with
these laws and regulations would cause investments exceeding regulatory
limitations to be treated as nonadmitted assets for purposes of measuring
statutory surplus. As of December 31, 1997, AGL's investments complied in all
material respects with all such laws and regulations.
Holding Company Regulation. The Holding Company is subject to Nebraska's
Insurance Holding Company System Act, which generally contains certain reporting
requirements as well as restrictions on transactions between an insurer and its
holding company or one or more of either of their affiliates. Under this act,
the Director may, under certain circumstances, prevent transactions between
Guarantee Life Insurance and any of its affiliates, including the Holding
Company, which involve certain sales, purchases, exchanges, loans or extensions
of credit, dividends in excess of certain limits or investments that require the
prior approval of the Director.
The insurance laws and regulations of Nebraska may delay or impede a
business combination involving the Holding Company. Under Nebraska law, through
2000, no person other than Guarantee Life Insurance shall, without the prior
approval of the Director, directly or indirectly offer to acquire or acquire in
any manner the beneficial ownership of five percent or more of any class of a
voting security issued by Guarantee Life Insurance or the Holding Company.
Nebraska law requires that any proposed tender offer, acquisition or attempted
acquisition of stock that would result in an acquisition of control of an
insurance holding company be approved by the Director prior to the undertaking
of any such action.
16
<PAGE>
Federal Initiatives
Although the federal government generally does not directly regulate the
insurance business, federal initiatives often have an impact on the business in
a variety of ways. Current and proposed federal measures which may significantly
affect the insurance business include employee benefits regulations, controls on
medical care cost, medical entitlement programs such as Medicare, changes to the
insurance industry anti-trust exemption, minimum solvency requirements and
removal of barriers preventing banks from engaging in the insurance, annuity and
mutual fund business.
17
<PAGE>
ITEM 2. Properties.
Guarantee Life's headquarters are located at 8801 Indian Hills Drive,
Omaha, Nebraska and consist of 200,000 square feet of office space owned by
Guarantee Life, including a 60,000 square foot office building constructed in
1995. In addition, Guarantee Life leases the space used by PFG and group sales
offices under short-term leases. Management believes that its facilities will be
adequate for its anticipated needs in all material respects.
ITEM 3. Legal Proceedings.
Guarantee Life is a defendant in actions arising out of its insurance
operations and is from time to time involved as a party in various governmental
and administrative proceedings. While the outcome of such pending or future
litigation cannot be predicted, as of the date hereof, Guarantee Life does not
believe that any such pending litigation will have a material adverse effect on
Guarantee Life's financial condition or results of operations.
ITEM 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the shareholders of the Holding
Company during the fourth quarter of 1997.
PART II.
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The information required by this Item is incorporated herein by reference
from "Management's Discussion and Analysis of Financial Condition and Results of
Operations" on page 29, and "Shareholder Information" on page 60 in Guarantee
Life's 1997 Annual Report to Shareholders.
ITEM 6. Selected Financial Data.
The information required by this Item is incorporated herein by reference
from "Summary Consolidated Financial and Operating Data" on page 19, and from
"Consolidated Statements of Income" on page 32, in Guarantee Life's 1997 Annual
Report to Shareholders.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The information required by this Item is incorporated herein by reference
from "Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 20-29 in Guarantee Life's 1997 Annual Report to
Shareholders.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information required by this Item is not applicable to the Holding
Company prior to its annual report on Form 10-K for the fiscal year ended
December 31, 1998.
ITEM 8. Financial Statements and Supplementary Data.
The information required by this Item is incorporated herein by reference
from pages 30-59 in Guarantee Life's 1997 Annual Report to Shareholders.
ITEM 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
PART III.
ITEM 10. Directors and Executive Officers of the Registrant.
The information required by this Item will be set forth in the Company's
Proxy Statement for the Annual Meeting of Shareholders to be held May 14, 1998,
incorporated herein by reference.
ITEM 11. Executive Compensation.
The information required by this Item will be set forth in the Company's
Proxy Statement for the Annual Meeting of Shareholders to be held May 14, 1998,
incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
18
<PAGE>
The information required by this Item will be set forth in the Company's
Proxy Statement for the Annual Meeting of Shareholders to be held May 14, 1998,
incorporated herein by reference.
ITEM 13. Certain Relationships and Related Transactions.
The information required by this Item will be set forth in the Company's
Proxy Statement for the Annual Meeting of Shareholders to be held May 14, 1998,
incorporated herein by reference.
PART IV.
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)
(1) The following financial statements are incorporated herein by
reference under Item 8, Guarantee Life's 1997 Annual Report to
Shareholders, filed as Exhibit 13:
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
(2) The following financial statement schedules are filed as part of
this Report:
Schedule I - Summary of Investments
Schedule II - Condensed Financial Information of
Registrant
Schedule III - Supplementary Insurance Information
Schedule IV - Reinsurance
Schedule V - Valuation and Qualifying Accounts
All other schedules have been omitted as the required information
is inapplicable, immaterial, or the information is included in the
consolidated financial statements or related notes.
(3) The following exhibits are being filed pursuant to Item 14(c) of
Form 10-K. Exhibit numbers refer to the paragraph numbers under
Item 601 of Regulation S-K:
2(a) Plan of Conversion of Guarantee Mutual Life Company(2)
2(b) Amendment No. 1 to Plan of Conversion(2)
3(a) Amended and Restated Certificate of Incorporation of The
Guarantee Life Companies Inc.(3)
3(b) Amended and Restated Bylaws of The Guarantee Life Companies
Inc.
4(a) Form of Certificate of The Guarantee Life Companies Inc.
Common Stock, par value $0.01 per share(2)
4(b) Rights Agreement(8)
10(a) The Guarantee Life Companies Inc.'s 1994 Long Term Incentive
Plan(2)
10(b) The Guarantee Life Companies Inc. and Guarantee Mutual Life
Company Executive Severance Plan(2)
10(c) Guarantee Mutual Life Company Retirement Plan(2)
10(d) Guarantee Mutual Life Company Supplemental Retirement Plan(2)
10(e) Guarantee Mutual Life Company Equalizer Plan(2)
10(f) Employment Agreement with Robert D. Bates, as amended and
restated effective January 1, 1997(5)
10(g) Severance Agreement with Theodore C. Cooley(2)
10(h) Guarantee Mutual Life Company Phantom Stock Plan as Amended
and Restated(2)
10(i) Amendment No. 1 to The Guarantee Life Companies Inc.'s 1994
Long Term Incentive Plan(2)
10(j) Amendment No. 2 to The Guarantee Life Companies Inc.'s 1994
Long-Term Incentive Plan(5)
10(k) Amendment No. 3 to The Guarantee Life Companies Inc.'s 1994
Long-Term Incentive Plan(6)
10(l) The Guarantee Life Companies Inc. Directors Stock Incentive
Plan(1)
10(m) Amendment No. 1 to The Guarantee Life Companies Inc. Directors
Stock Incentive Plan(4)
10(n) Revised Exhibit A to The Guarantee Life Companies Inc. and
Guarantee Life Insurance Company Executive Severance Plan(4)
10(o) Merger Agreement among The Guarantee Life Companies Inc.,
Guarantee Subsidiary, Inc. and PFG, Inc., dated as of October
17, 1997(7)
13 1997 Annual Report to Shareholders 21 Subsidiaries of the
Registrant
23 Consent of KPMG Peat Marwick LLP
19
<PAGE>
24(a) Powers of Attorney(3)
24(b) Power of Attorney of Director Gammill
27 Financial Data Schedule
-------------------------------------
(1) Incorporated by reference as an exhibit to Registrant's Form 10-Q
for the fiscal quarter ended June 30, 1996 (Commission File No. 0-
26788).
(2) Incorporated by reference as an exhibit to Registrant's
Registration Statement on Form S-1, Registration No. 33-92992.
(3) Incorporated by reference as an exhibit to Registrant's Form 10-K
for the fiscal year ended December 31, 1995 (Commission File No. 0-
26788).
(4) Incorporated by reference as an exhibit to Registrant's Form 10-Q
for the fiscal quarter ended September 30, 1996 (Commission File No. 0-
26788).
(5) Incorporated by reference as an exhibit to Registrant's Form 10-Q
for the fiscal quarter ended March 31, 1997 (Commission File No. 0-
26788).
(6) Incorporated by reference as an exhibit to Registrant's Form 10-Q
for the fiscal quarter ended June 30, 1997 (Commission File No.
0-26788). (7) Incorporated by reference as an exhibit to Registrant's
Form 8-K filed December 23, 1997 (Commission File No.
0-26788).
(8) Incorporated by reference as an exhibit to Registrant's Form 8-K
filed November 25, 1996 (Commission File 0-26788).
(b) The following Current Reports on Form 8-K were filed during the last fiscal
quarter of the period covered by this Report:
<TABLE>
<CAPTION>
Item Reported Financial Statements Filed Date of Report
------------- -------------------------- --------------
<S> <C> <C>
Item 5 - Other Events None October 17, 1997
Item 2 - Acquisition or Disposition of Assets None December 23, 1997
</TABLE>
20
<PAGE>
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 dated this 18th day of
March, 1998.
THE GUARANTEE LIFE COMPANIES INC.
By /s/ RICHARD A. SPELLMAN
----------------------------------
Richard A. Spellman
Senior Vice President, General
Counsel & Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on the 18th day of March, 1998.
<TABLE>
<CAPTION>
Signatures Title
---------- -----
<S> <C>
/s/ ROBERT D. BATES* Chairman of the Board,
- ----------------------------------- Director, President and Chief Executive Officer
Robert D. Bates (Principal Executive Officer)
/s/ WILLIAM L. BAUHARD Senior Vice President and Chief Financial Officer
- ----------------------------------- (Principal Financial & Accounting Officer)
William L. Bauhard
/s/ C.R. "Bob" BELL* Director
- -----------------------------------
C. R. "Bob" Bell
/s/ JOHN R. COCHRAN* Director
- -----------------------------------
John R. Cochran
/s/ THEODORE C. COOLEY Executive Vice President
- ----------------------------------- Director
Theodore C. Cooley
/s/ LEE M. GAMMILL, JR.* Director
- -----------------------------------
Lee M. Gammill, Jr.
/s/ THOMAS T. HACKING* Director
- -----------------------------------
Thomas T. Hacking
/s/ JAMES M. McCLYMOND* Director
- -----------------------------------
James M. McClymond
/s/ BERNARD W. REZNICEK* Director
- -----------------------------------
Bernard W. Reznicek
/s/ ADRIAN J. SCRIBANTE* Director
- -----------------------------------
Adrian J. Scribante
</TABLE>
21
<PAGE>
/s/ JANICE D. STONEY* Director
- -----------------------------------
Janice D. Stoney
/s/ WILLIAM F. WELSH II* Director
- -----------------------------------
William F. Welsh II
*By Richard A. Spellman, as attorney-in-fact
/s/ RICHARD A. SPELLMAN
-------------------------------------------
Richard A. Spellman, as attorney-in-fact
for the individuals as indicated
22
<PAGE>
INDEX TO FINANCIAL STATEMENT SCHEDULES
Supplementary Financial Statement Schedules of The Guarantee Life Companies Inc.
Independent Auditors' Report
SCHEDULE I --Summary of Investments
SCHEDULE II --Condensed Financial Information of Registrant
SCHEDULE III --Supplementary Insurance Information
SCHEDULE IV --Reinsurance
SCHEDULE V --Valuation and Qualifying Accounts..
All other schedules have been omitted as the required information is
inapplicable, immaterial or the information is included in the consolidated
financial statements or related notes.
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of The Guarantee Life Companies Inc.:
Under date of February 13, 1998, we reported on the consolidated balance
sheets of The Guarantee Life Companies Inc. and subsidiaries (Guarantee Life) as
of December 31, 1997 and 1996, and the related consolidated statements of
income, comprehensive income, shareholders' equity and cash flows for each of
the years in the three-year period ended December 31, 1997, as contained in the
1997 Annual Report to Shareholders. These consolidated financial statements and
our report thereon are incorporated by reference in the annual report on Form
10-K for the year 1997. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement schedules as listed in the accompanying index. These
financial statement schedules are the responsibility of Guarantee Life's
management. Our responsibility is to express an opinion on these financial
statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Omaha, Nebraska
February 13, 1998
23
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
SCHEDULE I--SUMMARY OF INVESTMENTS
December 31, 1997
(In Thousands)
<TABLE>
<CAPTION>
Fair Carrying
Type of Investments Cost(1) Value Value
------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Fixed maturities:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies............. $ 131,697 $ 133,306 $ 133,204
Obligations of states and political subdivisions..... 21,986 22,437 22,435
Debt maturities issued by foreign governments........ 5,909 6,695 6,696
Corporate securities................................. 569,055 603,098 587,503
Mortgage-backed securities........................... 261,772 265,115 265,115
---------- ---------- ----------
Total fixed maturities............................... $ 990,419 $1,030,651 $1,014,953
---------- ---------- ----------
Equity securities:
Common stocks of banks, trusts and insurance
companies........................................ 3,735 3,721 3,735
Mortgage loans............................................ 87,113 91,160 85,849
Policy loans.............................................. 68,655 63,431 68,655
Investment real estate.................................... 3,394 7,800 3,394
Other long-term investments............................... 11,648 11,648 11,648
Short-term investments.................................... 23,258 23,258 23,258
---------- ---------- ----------
Total investments......................................... $1,118,222 $1,231,669 $1,211,492
========== ========== ==========
</TABLE>
(1) Fixed maturities at original cost reduced by repayments and adjusted for
amortization of premiums or accrual of discounts.
Table above includes closed block invested assets with cost of $301.4
million, fair value of $309.5 million, and carrying value of $309.8 million.
Available-for-sale fixed maturities are shown in the consolidated balance
sheet at fair value. Held-to-maturity fixed maturities are shown in the
consolidated balance sheet at amortized cost adjusted for other than temporary
fair value declines.
Common and nonredeemable preferred stocks are shown in the consolidated
balance sheet at fair value.
Mortgage loans are shown in the consolidated balance sheet at unpaid
balances adjusted for discount accruals and allowances for possible losses.
Policy loans are carried at unpaid balances.
Real estate is shown in the consolidated balance sheet at depreciated cost
less allowances for other than temporary declines in value.
Other invested assets are shown in the consolidated balance sheet at
amortized cost less allowances for other than temporary declines in value and
allowances for possible losses.
24
<PAGE>
THE GUARANTEE LIFE COMPANIES INC.
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(In Thousands)
<TABLE>
<CAPTION>
As of and for the period ended
December 31,
Balance Sheet 1997 1996
------------- --------- ---------
<S> <C> <C>
Investment in consolidated subsidiaries ............................................. $ 219,818 $ 179,612
Fixed maturities available for sale, at fair value (amortized cost, $0 and $17,512) . 17,502
Other invested assets ............................................................... 2,248 1,294
--------- ---------
Total invested assets .......................................................... 222,066 198,408
Cash and cash equivalents ........................................................... 523 181
Dividends receivable from subsidiary ................................................ 15,000 10,000
Other assets ........................................................................ 1,799 170
--------- ---------
Total assets ........................................................................ 239,388 $ 208,759
========= =========
Notes Payable ....................................................................... $ 30,000 $ --
Accrued liabilities ................................................................. 1,216 471
Income taxes ........................................................................ (1,026) (384)
--------- ---------
Total liabilities ................................................................... 30,190 87
Shareholders' equity:
Common stock ................................................................... $ 99 $ 99
Additional paid-in capital ..................................................... 191,123 191,226
Retained earnings .............................................................. 27,463 13,435
Treasury stock, end of year .................................................... (22,512) --
Unrealized appreciation of invested securities carried at fair value, net ...... 13,025 3,912
--------- ---------
Total shareholders' equity .......................................................... 209,198 208,672
--------- ---------
Total liabilities and shareholders' equity .......................................... 239,388 208,759
========= =========
</TABLE>
Income Statement
----------------
For the period ended
December 31,
1997 1996 1995
---- ---- ----
Equity in earnings of subsidiaries....... $ 17,642 $ 15,723 --
Investment income, net .................. (69) 1,057 17
General and administrative expenses...... 1,744 2,146 --
-------- -------- -------
Income before income taxes .............. 15,799 14,634 17
Income tax (benefit) expense ............ (645) (381) 6
-------- -------- -------
Net income .............................. $ 16,444 $ 15,015 $ 11
======== ======== =======
25
<PAGE>
THE GUARANTEE LIFE COMPANIES INC.
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(CONTINUED)
(In Thousands)
<TABLE>
<CAPTION>
For the period ended
December 31,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash Flow
---------
Cash flows from operating activities:
Net income ................................................ $ 16,444 $ 15,015 $ 11
Adjustments to reconcile net income to net cash provided by
operating activities
Equity in earnings of subsidiaries ................... (17,642) (15,723) --
Other, net ........................................... (524) (39) (7)
-------- -------- --------
Net cash provided (used) by operations .................... (1,722) (747) 4
-------- -------- --------
Cash flows from investing activities:
Dividend from (contribution to) insurance subsidiary . 10,000 -- (12,101)
Purchases (sales) of fixed maturities ................ 17,494 (17,547) --
Purchase of PFG, Inc ................................. (28,457) -- --
Net change in short term investments ................. (954) (1,294) --
-------- -------- --------
Net cash used by investing activities ..................... (1,917) (18,841) (12,101)
-------- -------- --------
Cash flows from financing activities:
Net proceeds from initial public offering ............ -- -- 33,457
Net proceeds from issuance of note payable ........... 30,000 -- --
Purchase of treasury stock ........................... (23,603) -- --
Change in unpaid IPO expenses ........................ -- (1,302) 1,302
Dividends paid to shareholders ....................... (2,416) (1,591) --
-------- -------- --------
Net cash provided by financing activities ................. 3,981 (2,893) 34,759
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ...... 342 (22,481) 22,662
Cash and cash equivalents at beginning of period .......... 181 22,662 --
-------- -------- --------
Cash and cash equivalents at end of period ................ $ 523 $ 181 $ 22,662
======== ======== ========
</TABLE>
These condensed financial statements should be read in conjunction with the
consolidated financial statements and the accompanying notes thereto.
26
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION
(In Thousands)
<TABLE>
<CAPTION>
Future
Policy
Benefits,
Policyholder
Account Premium
Deferred Balances Revenue Other
Policy and Unearned and Net Policy Policy Insurance
Acquisition Claims Premium Policyholder Investment Holder Acquisition Operating
Segment Cost Payable Revenue Assessments Income Benefits Costs Expenses
------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Group .................. $ 536 $ 125,141 $ 766 $ 200,002 $ 12,680 $ 128,419 $ 45,391 $ 45,015
Individual ............. 114,393 1,009,267 11,100 51,859 67,732 59,809 13,956 17,806
Corporate .............. -- -- -- -- (69) -- -- 1,774
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total ............. 114,929 1,134,408 11,866 251,861 80,343 188,228 59,347 64,595
========== ========== ========== ========== ========== ========== ========== ==========
Year ended December 31, 1996
Group .................. $ -- 117,622 569 153,623 9,468 92,568 36,388 35,989
Individual ............. 91,893 888,478 10,110 49,852 65,389 61,075 13,165 17,489
Corporate .............. -- -- -- -- 1,057 -- -- 2,146
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total .............. 91,893 1,006,100 10,679 203,475 75,914 153,643 49,553 55,624
========== ========== ========== ========== ========== ========== ========== ==========
Year ended December 31, 1995:
Group .................. $ -- 119,455 534 163,083 10,217 106,276 38,594 32,934
Individual ............. 85,605 826,511 9,971 45,428 64,381 59,146 8,979 18,051
Corporate .............. -- -- -- -- 17 -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total .............. 85,605 945,966 10,505 208,511 74,615 165,422 47,573 50,985
========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
The table above includes assets and liabilities allocated to the closed
block, as well as revenues and expenses for the years ending December 31, 1997
and 1996.
27
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
SCHEDULE IV--REINSURANCE
(In Thousands)
<TABLE>
<CAPTION>
Gross Percentage
Amount Ceded Assumed of Amount
Before to Other From Other Net Assumed
Reinsurance Companies Companies Amount to Net
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
Life insurance in force .......... $37,504,746 $ 4,073,045 $ 888,007 $34,319,708 2.59%
=========== =========== =========== =========== ====
Premiums:
Life and annuity(1) (2)...... 178,590 5,065 1,110 174,635 0.99%
Accident and Health ......... 127,634 50,704 296 77,226 5.72%
----------- ----------- ----------- ----------- ----
Total premiums .............. $ 306,224 $ 55,769 $ 1,406 $ 251,861 3.41%
=========== =========== =========== =========== ====
Year ended December 31, 1996:
Life insurance in force .......... $29,116,078 $ 1,530,511 $ 339,044 $27,924,611 1.21%
=========== =========== =========== =========== ====
Premiums:
Life and annuity(1) ......... 112,345 4,893 781 108,233 0.72%
Accident and health ......... 135,531 40,915 626 95,242 0.66
----------- ----------- ----------- ----------- ----
Total premiums .............. $ 247,876 $ 45,808 $ 1,407 $ 203,475 0.69
=========== =========== =========== =========== ====
Year ended December 31, 1995:
Life insurance in force .......... $25,204,463 $ 1,268,329 $ 349,373 $24,285,507 1.44%
=========== =========== =========== =========== ====
Premiums:
Life and annuity(1) ......... $ 101,650 $ 3,815 $ 1,345 $ 99,180 1.36%
Accident and health ......... 152,724 45,410 2,017 109,331 1.84
----------- ----------- ----------- ----------- ----
Total premiums .............. $ 254,374 $ 49,225 $ 3,362 $ 208,511 1.61
=========== =========== =========== =========== ====
</TABLE>
- -----------
(1) Includes life insurance premiums and policyholder assessments.
(2) Includes gross amount of $21,194 and ceded amount of $261 attributable to
closed block.
The table above includes amounts attributable to the closed block.
28
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
<TABLE>
<CAPTION>
Beginning Charged to Ending
Description Balance Operations Deductions Balance
----------- --------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Year ended December 31, 1997:
Allowance for other invested assets.... $2,055 $ 500 -- $2,555
Allowance for mortgage loans........... 806 588 130 1,264
====== ====== ====== ======
Year ended December 31, 1996:
Allowance for other invested assets.... $2,958 -- $ 903 $2,055
Allowance for mortgage loans........... 744 92 30 806
====== ====== ====== ======
Year ended December 31, 1995:
Allowance for other invested assets.... $2,636 $ 322 -- $2,958
Allowance for mortgage loans........... 523 221 -- 744
====== ====== ====== ======
</TABLE>
29
<PAGE>
Exhibit 3(b)
Amended and Restated Bylaws of
The Guarantee Life Companies Inc.
================================================================================
AMENDED AND RESTATED
BYLAWS OF
THE GUARANTEE LIFE COMPANIES INC.
As Amended and Restated on December 26, 1995
Amended February 20, 1997
================================================================================
<PAGE>
AMENDED AND RESTATED BYLAWS OF
THE GUARANTEE LIFE COMPANIES INC.
TABLE OF CONTENTS
Page
----
ARTICLE I
STOCKHOLDERS
Section 1.1. Time and Place of Meetings.................................... 1
Section 1.2. Annual Meetings............................................... 1
Section 1.3. Special Meetings.............................................. 1
Section 1.4. Notice of Meetings............................................ 1
Section 1.5. Quorum and Adjournment........................................ 2
Section 1.6. Voting........................................................ 2
Section 1.7. Stockholder Proposals and Nominations of Directors............ 3
Section 1.8. Inspectors of Elections....................................... 3
Section 1.9. Opening and Closing of Polls.................................. 4
ARTICLE II
DIRECTORS
Section 2.1. General Powers................................................ 5
Section 2.2. Number and Term of Office..................................... 5
Section 2.3. Vacancies..................................................... 5
Section 2.4. Regular Meetings.............................................. 6
Section 2.5. Special Meetings.............................................. 6
Section 2.6. Quorum........................................................ 6
Section 2.7. Written Action................................................ 6
Section 2.8. Participation in Meetings by Conference Telephone............. 6
Section 2.9. Committees.................................................... 6
Section 2.10. Compensation................................................. 7
Section 2.11. Regulations; Manner of Acting................................ 7
<PAGE>
ARTICLE III
NOTICES
Section 3.1. Generally..................................................... 8
Section 3.2. Waivers....................................................... 8
ARTICLE IV
OFFICERS
Section 4.1. Generally..................................................... 8
Section 4.2. Compensation.................................................. 8
Section 4.3. Election...................................................... 8
Section 4.4. Authority and Duties.......................................... 9
Section 4.5. Removal and Resignation; Vacancies............................ 9
Section 4.6. Chairman...................................................... 9
Section 4.7. President..................................................... 9
Section 4.8. Execution of Documents and Action With Respect to
Securities of Other Corporations.......................... 9
Section 4.9. Vice President................................................ 9
Section 4.10. Secretary and Assistant Secretaries.......................... 10
Section 4.11. Treasurer and Assistant Treasurers........................... 10
ARTICLE V
INDEMNIFICATION
Section 5.1. Right to Indemnification...................................... 11
Section 5.2. Right of Indemnitee To Bring Suit............................. 11
Section 5.3. Nonexclusivity of Rights...................................... 12
Section 5.4. Insurance..................................................... 12
Section 5.5. Indemnification of Agents of the Corporation.................. 12
Section 5.6. Indemnification Contracts..................................... 12
Section 5.7. Effect of Amendment........................................... 13
ARTICLE VI
STOCK
Section 6.1. Certificates.................................................. 13
Section 6.2. Transfer...................................................... 13
Section 6.3. Lost, Stolen or Destroyed Certificates........................ 13
Section 6.4. Record Date................................................... 14
<PAGE>
ARTICLE VII
GENERAL PROVISIONS
Section 7.1. Fiscal Year................................................... 14
Section 7.2. Corporate Seal................................................ 14
Section 7.3. Reliance Upon Books, Reports and Records...................... 14
Section 7.4. Time Periods.................................................. 15
Section 7.5. Dividends..................................................... 15
ARTICLE VIII
AMENDMENT OF BYLAWS......................................................... 15
<PAGE>
AMENDED AND RESTATED BYLAWS OF
THE GUARANTEE LIFE COMPANIES INC.
ARTICLE I
STOCKHOLDERS
Section 1.1. Time and Place of Meetings. All meetings of the stockholders
for the election of directors or for any other purpose shall be held at such
time and place, within or without the State of Nebraska, as may be designated by
the Board of Directors, or by the Chairman of the Board, the President or the
Secretary in the absence of a designation by the Board of Directors, and stated
in the notice of the meeting or in a duly executed waiver of notice thereof.
[Sections 211(a), (b).]/1/
Section 1.2. Annual Meetings. An annual meeting of the stockholders
commencing with the year 1996 shall be held on the second Thursday in May if not
a legal holiday and, if a legal holiday, then on the next business day
following, at 10:00 a.m., or at such other date and time as shall be designated
from time to time by the Board of Directors, at which meeting the stockholders
shall elect by a plurality vote the directors to succeed those whose terms
expire at that meeting and shall transact such other business as may properly be
brought before the meeting.
Section 1.3. Special Meetings. Special meetings of the stockholders, for
any purpose or purposes, unless otherwise prescribed by statute or by the
Restated Certificate of Incorporation, may only be called by (i) the chairman of
the board, (ii) the Board of Directors pursuant to a resolution adopted by a
majority of the total number of authorized directors, (iii) the president or
(iv) at the request of the holders of not less than 25% of the combined voting
power of the then outstanding stock of the Corporation entitled to vote
generally in the election of directors. [Section 211(d).]
Section 1.4. Notice of Meetings. Written notice of every meeting of the
stockholders, stating the place, date and hour of the meeting and, in the case
of a special meeting, the purpose or purposes for which the meeting is called,
shall be given not less than 10 nor more than 60 days before the date of the
meeting to each stockholder entitled to vote at such meeting, except as
otherwise provided herein or by law. When a meeting is adjourned to another
place, date or time, written notice need not be given of the adjourned meeting
if the place, date and time thereof are announced at the meeting at which the
adjournment is taken; provided, however, that if the adjournment is for more
than 30 days, or if after the adjournment a new record date is fixed for the
adjourned meeting, written notice of the place, date and time of the adjourned
meeting shall
- --------
/1/ Citations are to the General Corporation Law of the State of Delaware as in
effect on December 26, 1995 and are inserted for reference only, and do not
constitute a part of the bylaws.
<PAGE>
be given in conformity herewith. At any adjourned meeting, any business may be
transacted which might have been transacted at the original meeting. [Section
222.]
Section 1.5. Quorum and Adjournment. The holders of a majority of the stock
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business except as otherwise provided by law
or by the Restated Certificate of Incorporation. If, however, such quorum shall
not be present or represented at any meeting of the stockholders, the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum shall be present or
represented; provided, however, that if the adjournment is for more than 30
days, or if after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting, conforming to the requirements of
Section 1.4 of Article I hereof, shall be given to each stockholder of record
entitled to vote at such meeting. At any adjourned meeting at which a quorum is
present, any business may be transacted that might have been transacted on the
original date of the meeting. [Sections 216, 222(c).]
Section 1.6. Voting. Except as otherwise provided by law or by the Restated
Certificate of Incorporation, each stockholder shall be entitled at every
meeting of the stockholders to one vote for each share of stock having voting
power standing in the name of such stockholder on the books of the Corporation
on the record date for the meeting and such votes may be cast in person or by
proxy, but no such proxy shall be voted or acted upon after three years from its
date.
A stockholder may authorize another person or persons to act for him as
proxy in writing, including facsimile, or by transmitting or authorizing the
transmission of a telegram, cablegram, or other means of electronic transmission
to the person who will be the holder of the proxy or to a proxy solicitation
firm, proxy support service organization or like agent duly authorized by the
person who will be the holder of the proxy to receive such transmission, proved
that any such telegram, cablegram or other means of electronic transmission must
either set forth or be submitted with information from which it can be
determined that the telegram, cablegram or other electronic transmission was
authorized by the stockholder. If it is determined that such telegrams,
cablegrams or other electronic transmissions are valid, the inspectors shall
specify the information upon which they relied. Any copy, facsimile
telecommunication or other reliable reproduction of the writing or transmission
created pursuant to this paragraph may be substituted or used in lieu of the
original writing or transmission for any and all purposes for which the original
writing or transmission could be used, provided that such copy, facsimile
telecommunication or other reproduction shall be a complete reproduction of the
entire original writing or transmission.
A stockholder may revoke any proxy which is not irrevocable by attending
the meeting and voting in person or by filing an instrument in writing revoking
the proxy or another duly executed proxy bearing a later date with the Secretary
of the Corporation. No vote of the stockholders need be taken by written ballot
unless otherwise required by law. When a quorum is present at any meeting, the
vote of the holders of a majority of the stock which has
2
<PAGE>
voting power present in person or represented by proxy shall decide any question
properly brought before such meeting, unless the question is one upon which, by
express provision of law, the Restated Certificate of Incorporation or these
Bylaws, a different vote is required, in which case such express provision shall
govern and control the decision of such question. [Sections 212, 216.] (Adopted
February 20, 1997.)
Section 1.7. Stockholder Proposals and Nominations of Directors.
Nominations for election to the Board of Directors of the Corporation at a
meeting of the stockholders may be made by the Board of Directors, or on behalf
of the Board of Directors by a Nominating Committee appointed by the Board of
Directors, or by any stockholder of the Corporation entitled to vote for the
election of directors at such meeting. Any nominations, other than those made by
or on behalf of the Board of Directors and any proposal by any stockholder to
transact any corporate business at an annual or special stockholders' meeting,
shall be made by notice in writing and mailed by certified mail to the secretary
of the Corporation and (i) in the case of an annual meeting, received no later
than 35 days prior to the date of the annual meeting; provided, however, that,
if less than 35 days' notice of a meeting of stockholders is given to the
stockholders, such notice of proposed business or nomination by such stockholder
shall have been made or delivered to the secretary of the Corporation not later
than the close of business on the seventh day following the day on which the
notice of a meeting was mailed, and (ii) in the case of a special meeting of
stockholders, received not later than the close of business on the tenth day
following the day on which notice of the date of the meeting was mailed or
public disclosure of the date of the meeting was made, whichever occurs first. A
notice of nominations by stockholders shall set forth as to each proposed
nominee who is not an incumbent director (i) the name, age, business address
and, if known, residence address of each nominee proposed in such notice, (ii)
the principal occupation or employment of each such nominee, (iii) the number of
shares of stock of the Corporation which are beneficially owned by each such
nominee and the nominating stockholder and (iv) any other information concerning
the nominee that must be disclosed regarding nominees in proxy solicitations
pursuant to Section 14(a) of the Securities Exchange Act of 1934, as amended,
and the rules under such section.
The chairman of the board, or in his absence the president or any vice
president, may, if the facts warrant, determine and declare to the meeting of
stockholders that a nomination was not made in accordance with the foregoing
procedure and that the defective nomination shall be disregarded.
Section 1.8. Inspectors of Elections. Preceding any meeting of the
stockholders, the Board of Directors shall appoint one or more persons to act as
Inspectors of Elections and may designate one or more alternate inspectors. In
the event no inspector or alternate is able to act, the person presiding at the
meeting shall appoint one or more inspectors to act at the meeting. Each
inspector, before entering upon the discharge of the duties of an inspector,
shall take and sign an oath faithfully to execute the duties of inspector with
strict impartiality and according to the best of his or her ability. The
inspector shall:
(a) ascertain the number of shares outstanding and the voting power
of each;
<PAGE>
(b) determine the shares represented at a meeting and the validity of
proxies and ballots;
(c) count all votes and ballots;
(d) determine and retain for a reasonable period a record of the
disposition of any challenges made to any determination by the inspectors;
and
(e) certify his or her determination of the number of shares
represented at the meeting and his or her count of all votes and ballots.
The inspector may appoint or retain other persons or entities to assist in
the performance of the duties of inspector.
When determining the shares represented and the validity of proxies and
ballots, the inspector shall be limited to an examination of the proxies, any
envelopes submitted with those proxies, ballots and the regular books and
records of the Corporation. The inspector may consider reliable information for
the limited purpose of reconciling proxies and ballots submitted by or on behalf
of banks, brokers or their nominees or a similar person which represent more
votes than the holder of a proxy is authorized by the record owner to cast or
more votes than the stockholder holds of record. If the inspector considers
other reliable information as outlined in this section, the inspector, at the
time of his or her certification pursuant to (e) of this section, shall specify
the precise information considered, the person or persons from whom the
information was obtained, when this information was obtained, the means by which
the information was obtained and the basis for the inspector's belief that such
information is accurate and reliable. [Sections 231(a), (b), (d).]
Section 1.9. Opening and Closing of Polls. The date and time for the
opening and the closing of the polls for each matter to be voted upon at a
meeting of stockholders shall be announced at the meeting. The inspector of the
election shall be prohibited from accepting any ballots, proxies or votes or any
revocations thereof or changes thereto after the closing of the polls, unless
the Court of Chancery upon application by a stockholder shall determine
otherwise. [Section 231(c).]
<PAGE>
ARTICLE II
DIRECTORS
Section 2.1. General Powers. The business and affairs of the Corporation
shall be managed by or under the direction of its Board of Directors, which may
exercise all such powers of the Corporation and do all such lawful acts and
things as are not by law or by the Restated Certificate of Incorporation
directed or required to be exercised or done by the stockholders. [Section
141(a).]
Section 2.2. Number and Term of Office. (a) The Board of Directors shall be
divided into three classes, designated Classes I, II and III, which shall be as
nearly equal in number as possible. Directors of Class I shall be elected to
hold office for a term expiring at the annual meeting of stockholders to be held
in 1996, directors of Class II shall be elected to hold office for a term
expiring at the annual meeting of stockholders to be held in 1997 and directors
of Class III shall be elected to hold office for a term expiring at the annual
meeting of stockholders to be held in 1998. At each annual meeting of
stockholders following such initial classification and election, the respective
successors of each class shall be elected for three-year terms. The holders of a
majority of the shares then entitled to vote if an election of directors were
held may remove any director or the entire Board of Directors, but only for
cause.
(b) The number of directors shall be fixed from time to time by resolution
of the Board of Directors or as provided in the Restated Certificate of
Incorporation. In case of any increase in the number of directors in advance of
an annual meeting of stockholders, each additional director shall be elected by
the directors then in office, although less than a quorum, to hold office until
the next election of the class for which such director shall have been chosen
(as provided in the last sentence of this subsection (b)) or until his successor
shall have been duly chosen. No decrease in the number of directors shall
shorten the term of any incumbent director. Any newly created or eliminated
directorships resulting from an increase or decrease shall be apportioned by the
Board among the three classes of directors so as to maintain such classes as
nearly equal as possible. [Sections 141(b), (d), (l).]
Section 2.3. Vacancies. Vacancies in the Board of Directors resulting from
death, resignation, retirement, disqualification, removal from office or other
cause, and newly created directorships resulting from any increase in the
authorized number of directors, may be filled only by the affirmative vote of a
majority of the remaining directors, though less than a quorum of the Board of
Directors and directors so chosen shall hold office for a term expiring at the
annual meeting of stockholders at which the term of office of the class of which
they have been elected expires and until such directors' successors shall have
been duly elected or qualified. [Section 223.]
<PAGE>
Section 2.4. Regular Meetings. Regular meetings of the Board of Directors
may be held without notice immediately after the annual meeting of the
stockholders and at such other times and places as shall from time to time be
determined by the Board of Directors. [Section 141(g).]
Section 2.5. Special Meetings. Special meetings of the Board of Directors
may be called by the chairman of the board or the president or any vice
president on one day's written notice to each director by whom such notice is
not waived, given either personally or by courier, mail, facsimile transmission
or telegram and shall be called by the president or the secretary in like manner
and on like notice on the written request of any two directors. [Section
141(g).]
Section 2.6. Quorum. At all meetings of the Board of Directors, a majority
of the total number of directors then in office shall constitute a quorum for
the transaction of business and the act of a majority of the directors present
at any meeting at which there is a quorum shall be the act of the Board of
Directors. If a quorum shall not be present at any meeting of the Board of
Directors, the directors present thereat may adjourn the meeting from time to
time to another place, time or date, without notice other than announcement at
the meeting, until a quorum shall be present. [Section 141(b).]
Section 2.7. Written Action. Any action required or permitted to be taken
at any meeting of the Board of Directors or of any committee thereof may be
taken without a meeting if all members of the Board or such committee, as the
case may be, consent thereto in writing and the writing or writings are filed
with the minutes or proceedings of the Board or such committee. [Section
141(f).]
Section 2.8. Participation in Meetings by Conference Telephone. Members of
the Board of Directors or any committee designated by the Board of Directors may
participate in a meeting of the Board of Directors, or any such committee, by
means of conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other and such
participation in a meeting shall constitute presence in person at the meeting.
[Section 141(i).]
Section 2.9. Committees. The Board of Directors may, by resolution passed
by a majority of the entire Board, designate one or more committees, each
committee to consist of one or more of the directors of the Corporation and each
to have such lawfully delegable powers and duties as the Board may confer. Each
such committee shall serve at the pleasure of the Board of Directors. The Board
may designate one or more directors as alternate members of any committee, who
may replace any absent or disqualified member at any meeting of the committee.
Except as otherwise provided by law, any such committee, to the extent provided
in the resolution of the Board of Directors, shall have and may exercise all the
powers and authority of the Board of Directors in the management of the business
and affairs of the Corporation and may authorize the seal of the Corporation to
be affixed to all papers which may require it. Any committee or committees so
designated by the Board shall have such name or names as may be determined from
time to time by resolution adopted by the Board of Directors. Unless otherwise
prescribed by the Board of Directors, a majority of the members of the committee
shall constitute
<PAGE>
a quorum for the transaction of business and the act of a majority of the
members present at a meeting at which there is a quorum shall be the act of such
committee. Each committee shall prescribe its own rules for calling and holding
meetings and its method of procedure, subject to any rules prescribed by the
Board of Directors, and shall keep a written record of all actions taken by it.
No such committee shall have the power or authority:
(a) to amend the Restated Certificate of Incorporation (except that a
committee may, to the extent authorized in the resolution or resolutions
providing for the issuance of shares of stock adopted by the Board of
Directors as provided in Section 151(a) of the General Corporation Law of
the State of Delaware, fix the designations and any of the preferences or
rights of such shares relating to dividends, redemption, dissolution, any
distribution of assets of the Corporation or the conversion into, or the
exchange of such shares for, shares of any other class or classes or any
other series of the same or any other class or classes of stock of the
Corporation or fix the number of shares of any series of stock or authorize
the increase or decrease of the shares of any series);
(b) to adopt an agreement of merger or consolidation under Section
251 or Section 252 of the General Corporation Law of the State of Delaware;
(c) to recommend to the stockholders the sale, lease or exchange of
all or substantially all of the Corporation's property and assets;
(d) to recommend to the stockholders a dissolution of the Corporation
or a revocation of a dissolution; or
(e) to amend the Bylaws of the Corporation.
Unless the resolution, Bylaws or Restated Certificate of Incorporation expressly
so provides, no such committee shall have the power or authority to declare a
dividend, to authorize the issuance of stock or to adopt a certificate of
ownership and merger pursuant to the General Corporation Law of the State of
Delaware. [Section 141(c).]
Section 2.10. Compensation. The Board of Directors may establish such
compensation for, and reimbursement of the expenses of, directors for attendance
at meetings of the Board of Directors or committees, or for other services by
directors to the Corporation, as the Board of Directors may determine. [Section
141(h).]
Section 2.11. Regulations; Manner of Acting. To the extent consistent with
applicable law, the Restated Certificate of Incorporation and these Bylaws, the
Board of Directors may adopt such special rules and regulations for the conduct
of their meetings and for the management of the property, affairs and business
of the Corporation as the Board of Directors may deem appropriate. The directors
shall act only as a Board and the individual directors shall have no power as
such.
<PAGE>
ARTICLE III
NOTICES
Section 3.1. Generally. Whenever by law or under the provisions of the
Restated Certificate of Incorporation or these Bylaws, notice is required to be
given to any director or stockholder, it shall not be construed to mean personal
notice, but such notice may be given in writing, by mail, addressed to such
director or stockholder, at his address as it appears on the records of the
Corporation, with postage thereon prepaid, and such notice shall be deemed to be
given at the time when the same shall be deposited in the United States mail.
Notice to directors may also be given by facsimile transmission, telegram or
telephone. [Section 222(b).]
Section 3.2. Waivers. Whenever any notice is required to be given by law
or under the provisions of the Restated Certificate of Incorporation or these
Bylaws, a waiver thereof in writing, signed by the person or persons entitled to
such notice, whether before or after the time of the event for which notice is
to be given, shall be deemed equivalent to such notice. Attendance of a person
at a meeting shall constitute a waiver of notice of such meeting, except when
the person attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. [Section 229.]
ARTICLE IV
OFFICERS
Section 4.1. Generally. The officers of the Corporation shall be elected
by the Board of Directors and shall consist of a president, secretary and
treasurer. The Board of Directors may also choose any or all of the following: a
chairman of the Board of Directors, one or more vice presidents and one or more
assistant secretaries and assistant treasurers, a chief financial officer or any
other officers deemed necessary by the Board of Directors. Any number of offices
may be held by the same person. [Section 142(a).]
Section 4.2. Compensation. The compensation of all officers and agents of
the Corporation who are also directors of the Corporation shall be fixed by the
Board of Directors. The Board of Directors may delegate the power to fix the
compensation of other officers and agents of the Corporation to an officer of
the Corporation.
Section 4.3. Election. The officers of the Corporation shall hold office
until their successors are elected and qualified. Any officer elected or
appointed by the Board of Directors may be removed at any time by the
affirmative vote of a majority of the directors. Any vacancy occurring in any
office of the Corporation may be filled by the Board of Directors. [Section
142(b).]
<PAGE>
Section 4.4. Authority and Duties. Each of the officers of the
Corporation shall have such authority and shall perform such duties as are
customarily incident to their respective offices, or as may be specified from
time to time by the Board of Directors in a resolution which is not inconsistent
with these Bylaws. [Section 142(a).]
Section 4.5. Removal and Resignation; Vacancies. Any officer may be
removed for or without cause at any time by the Board of Directors. Any officer
may resign at any time by delivering a written notice of resignation, signed by
such officer, to the Board of Directors or the president. Unless otherwise
specified therein, such resignation shall take effect upon delivery. Any vacancy
occurring in any office of the Corporation by death, resignation, removal or
otherwise shall be filled by the Board of Directors. [Sections 142(b), (e).]
Section 4.6. Chairman. The chairman of the Board of Directors shall
preside at all meetings of the stockholders and of the Board of Directors and
shall have such other duties and responsibilities as may be assigned to him or
her by the Board of Directors. The chairman may delegate to any qualified person
authority to chair any meeting of the stockholders, either on a temporary or a
permanent basis. [Section 142(a).]
Section 4.7. President. The president shall be responsible for the active
management and direction of the business and affairs of the Corporation and,
subject to any duties given by the Board of Directors to any chairman, shall be
the Chief Executive Officer of the Corporation. In case of the inability or
failure of the chairman to perform the duties of that office, the president
shall perform the duties of the chairman, unless otherwise determined by the
Board of Directors. [Section 142(a).]
Section 4.8. Execution of Documents and Action With Respect to Securities
of Other Corporations. The president shall have and is hereby given full power
and authority, except as otherwise required by law or directed by the Board of
Directors, (a) to execute, on behalf of the Corporation, all duly authorized
contracts, agreements, deeds, conveyances or other obligations of the
Corporation, applications, consents, proxies and other powers of attorney and
other documents and instruments and (b) to vote and otherwise act on behalf of
the Corporation, in person or by proxy, at any meeting of stockholders (or with
respect to any action of such stockholders) of any other corporation in which
the Corporation may hold securities and otherwise to exercise any and all rights
and powers which the Corporation may possess by reason of its ownership of
securities of such other corporation. In addition, the president may delegate to
other officers, employees and agents of the Corporation the power and authority
to take any action which the president is authorized to take under this Section
4.8 of this Article IV, with such limitations as the president may specify; such
authority so delegated by the president shall not be redelegated by the person
to whom such execution authority has been delegated. [Section 142(a).]
Section 4.9. Vice President. Each vice president, however titled, shall
perform such duties and services and shall have such authority and
responsibilities as shall be assigned to or required from time to time by the
Board of Directors or the President. [Section 142(a).]
<PAGE>
Section 4.10. Secretary and Assistant Secretaries. (a) The Secretary
shall attend all meetings of the stockholders and all meetings of the Board of
Directors and record all proceedings of the meetings of the stockholders and of
the Board of Directors and shall perform like duties for the standing committees
when requested by the Board of Directors or the president. The secretary shall
give, or cause to be given, notice of all meetings of the stockholders and
meetings of the Board of Directors. The secretary shall perform such duties as
may be prescribed by the Board of Directors or the president. The secretary
shall have charge of the seal of the Corporation and authority to affix the seal
to any instrument. The secretary or any assistant secretary may attest to the
corporate seal by handwritten or facsimile signature. The secretary shall keep
and account for all books, documents, papers and records of the Corporation
except those for which some other officer or agent has been designated or is
otherwise properly accountable. The secretary shall have authority to sign stock
certificates.
(b) Assistant secretaries, in the order of their seniority, shall assist
the secretary and, if the secretary is unavailable or fails to act, perform the
duties and exercise the authorities of the secretary. [Section 142(a).]
Section 4.11. Treasurer and Assistant Treasurers. (a) The treasurer shall
have the custody of the funds and securities belonging to the Corporation and
shall deposit all moneys and other valuable effects in the name and to the
credit of the Corporation in such depositories as may be designated by the
treasurer with the prior approval of the Board of Directors or the president.
The treasurer shall disburse the funds and pledge the credit of the Corporation
as may be directed by the Board of Directors and shall render to the Board of
Directors and the president, as and when required by them, or any of them, an
account of all transactions by the treasurer.
(b) Assistant treasurers, in the order of their seniority, shall assist
the treasurer and, if the treasurer is unable or fails to act, perform the
duties and exercise the powers of the treasurer. [Section 142(a).]
<PAGE>
ARTICLE V
INDEMNIFICATION
Section 5.1. Right to Indemnification. Each person who was or is made a
party or is threatened to be made a party to or is otherwise involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), by reason of the fact that he or she
is or was a director or officer of the Corporation or is or was serving at the
request of the Corporation as a director, officer or employee of another
corporation (including Guarantee Life Insurance Company) or of a partnership,
joint venture, trust or other enterprise, including service with respect to
employee benefit plans (hereinafter an "indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as a director, officer or
employee or in any other capacity while serving as a director, officer or
employee, shall be indemnified and held harmless by the Corporation to the
fullest extent authorized by the General Corporation Law of the State of
Delaware, as the same exists or may hereafter be amended (but, in the case of
any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than such law permitted
the Corporation to provide prior to such amendment), against all expense,
liability and loss (including attorneys' fees, judgments, fines, ERISA excise
taxes or penalties and amounts paid in settlement) reasonably incurred or
suffered by such indemnitee in connection therewith and such indemnification
shall continue as to an indemnitee who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the indemnitee's heirs,
executors and administrators; provided, however, that, except as provided in
Section 5.2 of this Article V with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee only
if such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation. The right to indemnification conferred in this Section 5.1 of
this Article V shall be a contract right and shall include the right to be paid
by the Corporation the expenses incurred in defending any such proceeding in
advance of its final disposition (hereinafter an "advancement of expenses"); and
provided, further, that, if the General Corporation Law of the State of Delaware
requires it, an advancement of expenses incurred by an indemnitee in his or her
capacity as a director or officer (and not in any other capacity in which
service was or is rendered by such indemnitee, including, without limitation,
service to an employee benefit plan) shall be made only upon delivery to the
Corporation of an undertaking, by or on behalf of such indemnitee, to repay all
amounts so advanced if it shall ultimately be determined by final judicial
decision from which there is no further right to appeal that such indemnitee is
not entitled to be indemnified for such expenses under this Article V or
otherwise (hereinafter an "undertaking").
Section 5.2. Right of Indemnitee To Bring Suit. If a claim under Section
5.1 of this Article V is not paid in full by the Corporation within 60 days
after a written claim has been received by the Corporation, except in the case
of a claim for an advancement of expenses, in which case the applicable period
shall be 20 days, the indemnitee may at any time thereafter bring suit against
the Corporation to recover the unpaid amount of the claim. If successful in
<PAGE>
whole or part in any such suit or in a suit brought by the Corporation to
recover an advancement of expenses pursuant to the terms of an undertaking, the
indemnitee shall be entitled to be paid also the expense of prosecuting or
defending such suit. In (i) any suit brought by the indemnitee to enforce a
right to indemnification hereunder (but not in a suit brought by the indemnitee
to enforce a right to an advancement of expenses) it shall be a defense that,
and (ii) any suit by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the Corporation shall be entitled to
recover such expenses upon a final adjudication that, the indemnitee has not met
the applicable standard of conduct set forth in the General Corporation Law of
the State of Delaware. Neither the failure of the Corporation (including its
Board of Directors, independent legal counsel or its stockholders) to have made
a determination prior to the commencement of such suit that indemnification of
the indemnitee is proper in the circumstances because the indemnitee has met the
applicable standard of conduct set forth in the General Corporation Law of the
State of Delaware, nor an actual determination by the Corporation (including its
Board of Directors, independent legal counsel or its stockholders) that the
indemnitee has not met such applicable standard of conduct, shall create a
presumption that the indemnitee has not met the applicable standard of conduct
or, in the case of such a suit brought by indemnitee, be a defense to such suit.
In any suit brought by the indemnitee to enforce a right hereunder, or by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking, the burden of proving that the indemnitee is not entitled to be
indemnified or to such advancement of expenses under this Article V or otherwise
shall be on the Corporation.
Section 5.3. Nonexclusivity of Rights. The rights of indemnification and
to the advancement of expenses conferred in this Article V shall not be
exclusive of any other right which any person may have or hereafter acquire
under any statute, provision of the Restated Certificate of Incorporation,
bylaw, contract, agreement, vote of stockholders or disinterested directors or
otherwise.
Section 5.4. Insurance. The Corporation may maintain insurance, at its
expense, to protect itself and any indemnitee against any expense, liability or
loss, whether or not the Corporation would have the power to indemnify such
person against such expense, liability or loss under the General Corporation Law
of the State of Delaware.
Section 5.5. Indemnification of Agents of the Corporation. The
Corporation may, to the extent authorized from time to time by the Board of
Directors, grant rights to indemnification and to the advancement of expenses to
any employee or agent of the Corporation to the fullest extent of the provisions
of this Article V or as otherwise permitted under the General Corporation Law of
the State of Delaware with respect to the indemnification and advancement of
expenses of directors and officers of the Corporation.
Section 5.6. Indemnification Contracts. The Board of Directors is
authorized to enter into a contract with any director, officer, employee or
agent of the Corporation or any person serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, including employee benefit
<PAGE>
plans, providing for indemnification rights equivalent to or, if the Board of
Directors so determines, greater than those provided for in this Article V.
Section 5.7. Effect of Amendment. Any amendment, repeal or modification
of any provision of this Article V by the stockholders or the directors of the
Corporation shall not adversely affect any right or protection of a director or
officer of the Corporation existing at the time of such amendment, repeal or
modification. [Section 145.]
ARTICLE VI
STOCK
Section 6.1. Certificates. Certificates representing shares of stock of
the Corporation shall be in such form as shall be determined by the Board of
Directors, subject to applicable legal requirements. Such certificates shall be
numbered and their issuance recorded in the books of the Corporation, and such
certificates shall exhibit the holder's name and the number of shares and shall
be signed by, or in the name of the Corporation by, the president and the
secretary or an assistant secretary or the controller or an assistant controller
of the Corporation. Any or all of the signatures and the seal of the
Corporation, if any, upon such certificates may be facsimiles, engraved or
printed. [Section 158.]
Section 6.2. Transfer. Upon surrender to the Corporation or the transfer
agent of the Corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the Corporation to issue, or to cause its
transfer agent to issue, a new certificate to the person entitled thereto,
cancel the old certificate and record the transaction upon its books. [Section
151.]
Section 6.3. Lost, Stolen or Destroyed Certificates. The Secretary may
direct a new certificate or certificates to be issued in place of any
certificate or certificates theretofore issued by the Corporation alleged to
have been lost, stolen or destroyed upon the making of an affidavit of that
fact, satisfactory to the secretary, by the person claiming the certificate of
stock to be lost, stolen or destroyed. As a condition precedent to the issuance
of a new certificate or certificates, the secretary may require the owner of
such lost, stolen or destroyed certificate or certificates to give the
Corporation a bond in such sum and with such surety or sureties as the secretary
may direct as indemnity against any claims that may be made against the
Corporation with respect to the certificate alleged to have been lost, stolen or
destroyed or the issuance of the new certificate. [Section 167.]
<PAGE>
Section 6.4. Record Date. (a) In order that the Corporation may determine
the stockholders entitled to notice of or to vote at any meeting of stockholders
or any adjournment thereof, the Board of Directors may fix a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted by the Board of Directors, and which record date shall
not be more than 60 or less than 10 days before the date of such meeting. If no
record date is fixed by the Board of Directors, the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day next preceding the day on which notice is
given or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held. A determination of stockholders
of record entitled to notice of or to vote at a meeting of stockholders shall
apply to any adjournment of the meeting; provided, however, that the Board of
Directors may fix a new record date for the adjourned meeting.
(b) In order that the Corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the stockholders entitled to exercise any rights in respect of
any change, conversion or exchange of stock or for the purpose of any other
lawful action, the Board of Directors may fix a record date, which record date
shall not precede the date upon which the resolution fixing the record date is
adopted, and which record date shall be not more than 60 days prior to such
action. If no record date is fixed, the record date for determining stockholders
for any such purpose shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating thereto. [Section 213.]
ARTICLE VII
GENERAL PROVISIONS
Section 7.1. Fiscal Year. The fiscal year of the Corporation shall be the
calendar year or such other annual period as shall be fixed from time to time by
the Board of Directors.
Section 7.2. Corporate Seal. The Board of Directors may adopt a corporate
seal and use the same by causing it or a facsimile thereof to be impressed or
affixed or reproduced or otherwise.
Section 7.3. Reliance Upon Books, Reports and Records. Each director,
each member of a committee designated by the Board of Directors and each officer
of the Corporation shall, in the performance of his or her duties, be fully
protected in relying in good faith upon the records of the Corporation and upon
such information, opinions, reports or statements presented to the Corporation
by any of the Corporation's officers or employees or committees of the Board of
Directors or by any other person as to matters the director, committee member or
officer believes are within such other person's professional or expert
competence and who has been selected with reasonable care by or on behalf of the
Corporation. [Section 141(e).]
<PAGE>
Section 7.4. Time Periods. In applying any provision of these Bylaws
which requires that an act be done or not be done a specified number of days
prior to an event or that an act be done during a period of a specified number
of days prior to an event, calendar days shall be used, the day of the doing of
the act shall be excluded and the day of the event shall be included.
Section 7.5. Dividends. The Board of Directors may from time to time
declare and the Corporation may pay dividends upon its outstanding shares of
capital stock, in the manner and upon the terms and conditions provided by law
and the Restated Certificate of Incorporation. [Section 173.]
ARTICLE VIII
AMENDMENT OF BYLAWS
In furtherance and not in limitation of the powers conferred upon it by
law, the Board of Directors is expressly authorized to adopt, repeal, alter or
amend the Bylaws of the Corporation by the vote of a majority of the entire
Board of Directors. In addition to any requirements of law and any provision of
the Restated Certificate of Incorporation, the stockholders of the Corporation
may adopt, repeal, alter or amend any provision of the Bylaws upon the
affirmative vote of the holders of 75% or more of the combined voting power of
the then outstanding stock of the Corporation entitled to vote generally in the
election of directors. [Section 109(a).]
<PAGE>
[ARTWORK APPEARS HERE]
- ------------------
STAYING THE COURSE
- ------------------
ANNUAL REPORT 1997
[LOGO OF THE GUARANTEE LIFE COMPANIES INC. APPEARS HERE]
<PAGE>
Table Of Contents
[ARTWORK APPEARS HERE]
1997 Annual Report
Staying The Course
Mission Statement
Introduction 1
Visualizing The Course
Chairman's Letter to Shareholders 2
Mapping Our Progress
Guarantee Life Profile 5
Focused On The Course
Business and Operations 12
Financial Review 19
Shareholder Information 60
Board of Directors and
Executive Officers 61
This document contains numerous 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. Due to the uncertainties
inherent in forward-looking statements, readers are urged not to place undue
reliance on these statements.
<PAGE>
Staying The Course
Our Mission is to safeguard and enhance the financial security of our
customers while building shareholder wealth.
We are committed to:
Quality insurance products and services which satisfy customer needs
- --------------------------------------------------------------------------------
Outstanding service which exceeds customer expectations
- --------------------------------------------------------------------------------
Long-term, mutually beneficial relationships with our distributors
- --------------------------------------------------------------------------------
Ethical, honest conduct
- --------------------------------------------------------------------------------
Creating a challenging, rewarding, non-discriminatory workplace that recognizes
the value and diversity of our people while offering them maximum opportunities
- --------------------------------------------------------------------------------
Helping to make our communities better places in which to live and work
- --------------------------------------------------------------------------------
Ensuring our financial strength to meet future obligations by professionally
managing sales, expenses, assets and risks
[ARTWORK APPEARS HERE]
A surveyor uses a transit to measure angles, judge distance, and determine
where the ground should be leveled to fix boundaries. Like a surveyor, Guarantee
Life is Staying the Course by measuring opportunities in the rapidly changing
financial services industry, judging alternatives, and determining the
appropriate plan to achieve success on the road to becoming a world-class
company.
Guarantee Life is focused on the future to provide the best products and
customer service, become a market leader in each business unit, make the right
acquisitions, build shareholder value, and succeed by Staying the Course.
1
<PAGE>
Visualizing The Course
Dear Fellow Shareholder:
Staying the Course requires vision and the ability to focus on the critical
elements necessary to attain your goals. We are on course in a highly
competitive and rapidly changing industry, and I am pleased to share with you
the progress Guarantee Life made during 1997.
All three of our distinct business units, with their different distribution
systems, continue to experience solid growth in expanding markets. We are very
pleased with our 19.4% increase in revenues and 14.1% increase in earnings per
share for 1997. We expect to achieve optimum profitability from the continued
growth of each business unit, along with expansion from financial and strategic
acquisitions.
Our vision is to be a market leader in each of our businesses and to focus on
growth, profitability, customer satisfaction, and market presence. We search
for and analyze opportunities to "change the rules of engagement" as a way to
differentiate ourselves from the competition. We are focused on our vision to
enhance shareholder wealth in the years ahead.
[PHOTO APPEARS HERE]
In 1997, our Individual Insurance Business increased sales by 8.7% to $7.0
million in first year annualized premiums versus $6.5 million in 1996. Annuity
product sales increased to $25.2 million in first year annualized premiums,
compared to $9.3 million for 1996, due to the introduction of an equity indexed
annuity product in August 1996. Additionally, we are pleased with the 1997
acquisition of PFG, Inc., and the administration, service technology, and
distribution it adds to Guarantee Life in the Northeast. Through future
acquisitions and product development, we expect the growth in our Individual
Insurance Business to continue.
Our Group Insurance Business is operated through two divisions, Employee
Benefits and Group Special Markets. Sales of core products by the Employee
Benefits Division for 1997 were $75.0 million in first year annualized premiums,
a 52.4% increase over $49.2 million in sales for 1996. As anticipated, the
resources we have invested in this area since 1992 are beginning to pay off.
Productivity has, and is continuing to improve. We expect that in 1998, the
growth of our in-force business in Employee Benefits will be at a higher rate
than our new business, allowing us to gain the critical mass necessary to
support our new business growth within the Division. This will be a turning
point that will take Employee Benefits from a transition period to a profitable
operation. In conjunction with these efforts, this Division remains focused on
continuing to improve its technology and processes for superior customer service
and increased operating efficiency.
Within Employee Benefits, the sales of voluntary products through worksite
marketing in 1997 increased to $10.1 million in first year annualized premiums,
compared to $6.2 million for 1996. We are encouraged by the performance of our
voluntary products. This remains an excellent opportunity for Guarantee Life as
more, smaller employers wish to supplement company-paid benefit plans with
optional voluntary products paid for by the employee through payroll deduction.
We have the capability to become a market leader in this rapidly growing
segment.
Sales for Group Special Markets in 1997 increased by 50.7% to $31.8 million in
first year annualized premiums, compared to $21.1 in 1996. Guarantee Life is
strengthening our association with nationally recognized distribution companies,
enhancing our current products, developing new products for new markets, and
continuing to build relationships with customers.
2
<PAGE>
We are entering a growth segment of this cyclical business and expect to grow
through our established distribution, as well as through block acquisitions,
similar to the one completed in 1997 with the EBPLife Insurance block of excess
loss business.
Despite the very active acquisition market, which is causing the higher
pricing multiples, we remain disciplined in our approach. Guarantee Life will
not pursue an acquisition opportunity unless it creates value from a strategic,
operational, and financial perspective for shareholders. An acquisition must be
accretive to our earnings in its first full year. Since our demutualization in
December 1995, we have successfully completed three acquisitions and enhanced
shareholder value with each transaction.
The difference between mediocrity and excellence in an organization is often
the result of individual star players coming together as a great team. With
this in mind, we have introduced the Total Rewards compensation program in 1998
to align great teamwork with our corporate strategies. Total Rewards emphasizes
pay for performance with incentive awards based on a return on equity target
established for the Company at the beginning of the year. The higher the
profitability, the greater the amount of money deposited into an incentive pool
for our employees. The incentive payments will be based on each area's
performance against specific, weighted objectives regarding financial,
operational, and service results. Also included in the Total Rewards program is
a Profit Sharing Plan for all employees. Again, a company return on equity
target is set and a contribution will be granted to each employee's thrift
savings plan if the Company meets or exceeds the target. We believe these steps
to align our employees with the vision, values, and objectives of the Company
will be a strong benefit to our employees, customers, and shareholders.
We continue our efforts to reduce expenses. Process improvement and cost
reduction programs have been initiated throughout the Company and involve all
employees. As a key component of our management plan, we will continue efforts
to provide exemplary services while reducing operating unit expenses. Our near-
term goal is to achieve a 12% return on equity. Through growth, profitability,
customer satisfaction, and market presence, we expect to emerge as a market
leader.
Guarantee Life's success continues to build on our 1997 accomplishments. We
are focused on enhancing shareholder value, as we demonstrated by initiating
three voluntary stock buybacks in 1997 to help small shareholders sell their
stock and reduce the Company's expenses associated with maintaining a large
shareholder base.
Our ability to stay the course exists because of the dedication of our
workforce. I would like to thank our home office and field associates, brokers,
agents, distributors, and our Board of Directors for their commitment to
Guarantee Life and its future.
Our strategies to Staying the Course are developing balanced and growing
revenue and earnings streams. As our past investments in the future begin to
bear fruit, we expect you, our shareholders, to continue being well rewarded.
Thank you for Staying the Course with us.
Sincerely,
/s/ R.D. Bates
Robert D. Bates
Chairman of the Board,
President and Chief Executive Officer
[ARTWORK APPEARS HERE]
A sextant determines the navigational position by using latitude and longitude
coordinates. For Guarantee Life, it represents the constant vigilance necessary
to match opportunities for the future with the ever-changing elements in today's
financial services environment.
3
<PAGE>
[ARTWORK APPEARS HERE]
- --------------------
MAPPING OUR PROGRESS
- --------------------
<PAGE>
Guarantee Life Profile
Company History In 1901, Guarantee Life Insurance Company began in Nebraska
as a mutual assessment association. The Company became a mutual legal reserve
life insurance company owned by policyholders in 1931 and changed its name to
Guarantee Mutual Life Company. In 1995, Guarantee Life Insurance Company became
one of only a few mutual life insurance companies in the nation, and the first
in Nebraska, to convert into a publicly owned life insurance organization. In
1997, Guarantee Life acquired PFG, Inc. and its subsidiaries, including AGL Life
Assurance Company. The Guarantee Life Companies Inc. operates through two
subsidiaries, including the principal subsidiary, Guarantee Life Insurance
Company, and PFG, Inc.
Company Description The stock of The Guarantee Life Companies Inc. trades on
the Nasdaq National Market System under the symbol GUAR.
Guarantee Life Insurance Company focuses its efforts on three distinct
business units: Individual Insurance, Employee Benefits, and Group Special
Markets. These units operate with their own dedicated distribution systems and
diversified product lines, and produce three different earnings sources.
PFG, Inc. and its subsidiaries operate as part of the Individual Insurance
Business of Guarantee Life Insurance Company. The subsidiaries include: AGL Life
Assurance Company, which primarily markets term insurance through independent
agents and brokers; Philadelphia Financial Group, Inc., which markets variable
insurance products and provides marketing services to the bank marketplace; and
PFG Distribution Company, a registered broker dealer for distributing variable
life and annuity products.
5
<PAGE>
MAPPING OUR PROGRESS
A Company On The Right Course
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS ($ IN MILLIONS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Income
Selected Data
Premiums and policyholder
assessments, net/(1)/ $230.9 $181.7 $208.6 $158.6 $141.1
Total revenues/(1)/ 310.3 252.0 294.4 247.5 236.4
Total policyholder benefits,
expenses, and dividends/(1)/ 284.6 229.4 274.5 220.1 208.7
Income from continuing
operations before income
taxes 25.7 22.6 19.9 27.4 27.7
Net income from
continuing operations 16.6 14.7 10.8 15.7 18.9
Diluted earnings per share
from continuing operations/(2)(4)(6)/
(Pro forma for 1993-95) $1.64 $1.46 $1.05 $1.66 $1.74
- ---------------------------------------------------------------------------------------------------
Balance Sheet Selected Data
Total invested assets/(5)/ $1,211.5 $1,094.3 $1,056.1 $985.6 $950.0
Total assets/(5)/ 1,519.0 1,305.2 1,280.8 1,188.0 1,152.8
Total liabilities/(5)/ 1,309.8 1,096.5 1,074.5 1,055.1 989.3
Total shareholders' equity/(4)/ 209.2 208.7 206.3 132.9 163.5
Book value per share/(3)/
(Pro forma for 1993-94) $21.98 $20.59 $19.23 $16.95 $16.44
- ---------------------------------------------------------------------------------------------------
Other Selected Data
Revenues by segment:
Group insurance
business $228.2 $175.1 $182.2 $140.1 $125.6
Individual insurance
business/(7)/ 120.9 116.1 112.2 107.4 110.8
- ---------------------------------------------------------------------------------------------------
</TABLE>
/(1)/The results of the Closed Block (individual policies that were in force on
the effective date of the conversion to a stock company and which had a dividend
scale in effect for 1994) for the periods subsequent to December 31, 1995 are
reported on one line in the Consolidated Statements of Earnings. Accordingly,
the line-by-line statements of earnings data are not comparable for all periods
presented. Total assets and total liabilities include the assets and liabilities
of the Closed Block respectively, and therefore amounts are comparable for all
periods presented.
/(2)/Excluding realized capital gains/losses.
/(3)/Excluding unrealized appreciation/depreciation on invested assets, e.g.
FAS115.
/(4)/During 1997, Guarantee Life initiated three voluntary stock buyback
programs. Guarantee Life repurchased approximately 1.1 million shares at a cost
of $23.6 million.
/(5)/Guarantee Life acquired a block of universal life policies in August 1996,
PFG, Inc. and subsidiaries in December 1997, and a block of excess loss policies
in December 1997.
/(6)/Guarantee Life adopted Statement of Financial Accounting Standards No. 128,
Earnings Per Share effective with the December 31, 1997 reporting period and has
- ------------------
restated earnings per share for 1997 and 1996. Pro forma per share amounts
assume no dilutive effect attributable to stock options for 1995, 1994, and
1993.
/(7)/Including revenues from the Closed Block for 1997 and 1996.
6
<PAGE>
Radar indicators, fed by sophisticated satellite information,
can locate objects and track weather.
To stay on course, Guarantee Life continually monitors progress through
communications, financial results, and customer feedback.
[ARTWORK APPEARS HERE]
Guarantee Life Profile
The Guarantee Life Companies Inc.
Monthly Stock Performance
12/19/95 to 12/31/97
<TABLE>
<CAPTION>
12/19/95 12/31/95 3/31/96 6/30/96 9/30/96 12/31/96 3/31/97 6/30/97 9/30/97 12/31/97
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
The Guarantee Life Companies Inc. 100.00 121.15 118.27 135.97 153.78 143.58 148.85 196.12 225.97 223.65
S&P 500 100.00 100.72 106.13 110.88 114.31 123.75 127.07 149.25 160.43 165.05
SNL Life & Health Insurance Index 100.00 102.24 107.93 111.13 117.25 133.29 137.63 162.42 176.47 185.64
</TABLE>
Total Shareholder Return, including price appreciation and dividends, was 54.1%
for 1997.
Company Statistics
. $1.5 billion in assets
. $209.2 million in shareholders' equity
. $38.4 billion of life insurance in force
. Guarantee Life Insurance Company is rated "A" (Excellent) by A.M. Best
. Guarantee Life Insurance Company has an "A-" (Excellent) rating by Weiss (top
4.4% of over 1,500 life, health, and annuity insurers)
. AGL Life Assurance Company is rated "B++"(Very Good) by A.M. Best and "C" by
Weiss
. Licensed in 48 states and the District of Columbia
. Charter member of the Insurance Marketplace Standards Association (IMSA)
. 1.8 million individual and group customers
. 1,325 Individual Insurance field sales associates
. 22 Regional Group Offices
. 8,838,101 shares of stock outstanding
7
<PAGE>
Mapping Our Progress
-------------------
The Guarantee
Life Companies Inc.
-------------------
-----------------
GUARANTEE LIFE
INSURANCE COMPANY
-----------------
----------------------
INVESTMENT DIVISION PFG, INC.
----------------------
--------- ------------ ------------
GROUP INDIVIDUAL AGL LIFE PHILADELPHIA PFG
INSURANCE INSURANCE INSURANCE FINANCIAL DISTRIBUTION
COMPANY GROUP, INC. COMPANY
GROUP --------- ------------ ------------
EMPLOYEE SPECIAL
BENEFITS MARKETS LEGEND
DIVISION DIVISION -----------------
Legal Equity
----
Business Unit
----
The Guarantee Life Organization
Guarantee Life Insurance Company consists of two business segments: the Group
Insurance Business, which includes the Employee Benefits Division and the Group
Special Markets Division; and the Individual Insurance Business. PFG, Inc.,
which operates as part of Guarantee Life Insurance Company's Individual
Business, includes three subsidiaries: AGL Life Assurance Company, Philadelphia
Financial Group, Inc., and PFG Distribution Company.
Total Assets ($ in millions)
91 $ 926.9
92 $1,069.8
93 $1,152.8
94 $1,188.0
95 $1,280.8
96 $1,305.2
97 $1,519.0
In 1997, total assets increased $176.3 million from acquisitions
Total Revenues ($ in millions)
91 $208.9
92 $226.8
93 $236.4
94 $247.5
95 $294.4
96 $292.3
97 $348.9
Total revenues, including the Closed Block, increased 19.4% in 1997
8
<PAGE>
Guarantee Life Profile
Life Insurance
In Force ($ in millions)
91 $19,365.9
92 $20,312.4
93 $20,686.4
94 $23,262.4
95 $25,461.5
96 $28,889.4
97 $38,392.8
Total group and individual life insurance increased by over 30% in 1997
Net Income from Continuing
Operations ($ in millions)
91 $20.5
92 $15.3
93 $18.9
94 $15.7
95 $10.8
96 $14.7
97 $16.6
Since 1994, net income has been unfavorably impacted by the investment made in
the Employee Benefits Division
Individual Insurance Business
The Individual Insurance Business targets individuals with a family income up
to $150,000 and small business owners. It provides a variety of competitive
life and annuity products including universal life, interest-sensitive whole
life, term life, and fixed or equity indexed annuities. The distribution has
grown by developing relationships with Regional Marketing Organizations (RMOs)
and independent agents.
Group Insurance Business
Employee Benefits Division
The Employee Benefits Division targets businesses with fewer than 500
employees by providing group non-medical products (core products) including
term life, accidental death and dismemberment, short-term disability, long-term
disability, and dental; and voluntary (worksite marketed) core products
including group term life, accidental death and dismemberment, short-term
disability, long-term disability, dental, and vision. A national distribution
system of 22 Regional Group Offices markets to employers through employee
benefits firms and brokers.
9
<PAGE>
MAPPING OUR PROGRESS
Group Special Markets Division
The Group Special Markets Division targets employer groups of 50 or more
lives with self-funded medical plans by providing specialty medical products
(specialty products) including excess loss insurance, medical reimbursement
insurance for business executives, and core products including group term life,
accidental death and dismemberment, short-term disability, and long-term
disability. The distribution in this division is focused on relationships with
Managing General Underwriters (MGUs), Third Party Administrators (TPAs), Blue
Cross/Blue Shield plans, and managed care organizations.
Invested Assets
A conservative philosophy guides Guarantee Life's investments. Objectives are
based on the Company's responsibility to provide safety of principal for
customers and a good return for shareholders. Guarantee Life focuses on
effectively managing the risks associated with credit, interest rates, and
liquidity. The Company actively manages its assets to achieve a favorable
relationship between investment risks and investment returns.
Fixed Maturity Portfolio Rating
[PIE CHART APPEARS HERE]
BBB and
Above 97%
Below BB 2%
BB 1%
97% of fixed maturity securities
are investment grade
Investment Portfolio
[PIE CHART APPEARS HERE]
Fixed
Maturity 84%
Mortgages 7%
Policy Loans 6%
Other 3%
1997 Invested Assets = $1.21 (billions)
10
<PAGE>
FOCUSED ON THE COURSE
[ARTWORK APPEARS HERE]
11
<PAGE>
BUSINESS & OPERATIONS
The main components of Staying the Course are: focusing on the journey to
attain an ultimate goal; making the right decisions by using the tools
available; piloting a strategy to differentiate yourself from your competition;
measuring the accomplishments; and re-charting the course when a response or
change is needed to reach your objectives.
Guarantee Life is focusing on the future by recognizing the significance and
the technological impact the Year 2000 challenge will have on organizations
world-wide. By dedicating a corporate team to oversee this effort, the Company
has established a comprehensive plan to achieve Year 2000 compliance. Its goal
is to ensure no interruptions in customer or product service through the Year
2000 and beyond.
In 1997, Guarantee Life continued to map its path by developing and acting on
its acquisition strategy. The Company focuses on selective acquisitions of small
life insurance companies, and blocks of excess loss or individual life business.
Its objectives include acquisitions that are accretive to earnings in their
first full year and satisfy the business unit's target rate of return. During
1997, Guarantee Life acquired PFG, Inc., and a block of excess loss business
through a coinsurance agreement with EBPLife Insurance Company.
Guarantee Life delivered on its commitment to build shareholder wealth in
1997. The stock closed on December 31, 1997 at $28.50, up from $18.50 at the end
of 1996. For the second time since the initial public offering in December 1995,
the Company increased the dividend on its common stock. Total shareholder
return, including price appreciation and dividends, was 54.1% for 1997.
Guarantee Life initiated three voluntary stock buyback programs during 1997
for oddlot shareholders who individually owned fewer than 100 shares of the
Company's common stock. These programs resulted in Guarantee Life's
12
<PAGE>
A gyroscope is a measure of balance. Guarantee Life is balanced by its three
distinct business units, which operate through their own distribution systems
and diversified product lines to produce three different earnings sources.
[ARTWORK APPEARS HERE]
FOCUSED ON THE COURSE
purchase of approximately 1.1 million shares and a reduction of almost 50% in
oddlot shareholder accounts. Each program offered small shareholders a
convenient and inexpensive method to sell their shares, while also reducing the
administrative costs associated with shareholder services. It is estimated that
the reduction in shareholder accounts will save approximately $350,000 in annual
expenses.
Guarantee Life is also Staying the Course by focusing on process improvements
and unit expense reductions to gain greater efficiencies in the way it conducts
business.
Individual Insurance Business
The Individual Insurance Business continues to generate stable earnings from
its comprehensive array of life and annuity products. Sales growth,
acquisitions, and expense management are the keys to its solid earnings results.
The Individual Business had good sales growth and active producer recruiting in
1997. Sales for life products increased 8.7% to $7.0 million in first year
annualized premiums during 1997. Sales of annuity products were $25.2 million in
first year annualized premiums for 1997, up from $9.3 million in 1996. The
increase in annuities was due to the equity indexed annuity, "Premier Index,"
which was introduced in August 1996. Due to stock market volatility, sales of
this product are not expected to remain at this level in 1998.
Guarantee Life's Individual Insurance Business provides added value for
policyholders and producers by aligning outstanding service with a strong
product portfolio. This new portfolio also produces improved profit margins for
shareholders. Individual's distribution has expanded by developing primary
relationships with Regional Marketing Organizations (RMOs), which in
13
<PAGE>
BUSINESS & OPERATIONS
turn develop relationships with independent producers. The effort has resulted
in approximately a 27% increase in the number of field sales associates
producing business for Guarantee Life.
As part of recruiting and keeping the best independent agents, Guarantee Life
was proud to introduce Virtual Information Link (ViLink) in March 1998.
Individual Insurance Distribution System
[MAP APPEARS HERE]
This Internet-based system makes information and updates available to agents at
anytime. Product and company information, field news, underwriting information,
forms, pending status, in-force inquiries, and e-mail capabilities are all
provided by ViLink. This system should improve service at all levels in the
Individual Insurance Business and have long-term expense savings for the
Company.
Guarantee Life is honored to receive certification as a charter member of the
Insurance Marketplace Standards Association (IMSA). To become a member, a
company must pass a third-party assessment of its market conduct policies and
procedures for individually sold life and annuity products.
14
<PAGE>
FOCUSED ON THE COURSE
Membership is earned by adopting, implementing, and monitoring policies and
procedures addressing each aspect of IMSA's Principles and Code of Ethical
Conduct.
On December 23, 1997, Guarantee Life completed its acquisition of PFG, Inc.
and its subsidiaries in a transaction valued at $37.25 million. This acquisition
of PFG, Inc. and its principal subsidiary, AGL Life Assurance Company, brought
active producers, additional distribution opportunities, system enhancements,
and expanded geographic coverage to Guarantee Life's Individual Business,
specifically in the Northeast region of the United States. Furthermore, the
acquisition of PFG, Inc. complements the strategic plan to expand the Individual
Insurance Business.
Guarantee Life continues to see viable opportunities to supplement the
internal growth of the Individual Insurance Business and Group Special Markets
Division through selective acquisitions.
Group Insurance Business
Employee Benefits Division
There are 22 Regional Group Offices operating as part of the Employee
Benefits Division (EBD), including Indianapolis which opened in January 1998.
Each office acts as a compass to direct Guarantee Life in the rapidly changing
employee benefits market for small- and medium- sized businesses. This area
offers many opportunities in a market sized at over $8 billion for businesses
with 100 or fewer employees, and a market sized at $15 billion for businesses
with 500 or
[ARTWORK APPEARS HERE]
15
<PAGE>
Business & Operations
fewer employees. Compared to 1996, sales in first year annualized premiums for
EBD increased by 52.4% to $75.0 million in 1997.
Since 1992, Guarantee Life has invested in the technology and infrastructure
necessary for EBD to develop this business in a market with recognized earnings
potential. The Company expects to begin realizing positive benefits from this
investment during the second half of 1998.
The transformation of EBD's operating processes was a management focus in
1997. Efficiencies have been, and continue to be, gained through this effort.
Despite a delay in the technological implementation of a new quoting system
during the third quarter 1997, the project to align home office service teams
with the Regional Group Offices for underwriting, new case issuance, premiums,
enrollment, and customer service continues to progress. Due to the growth of
this business, along with the process improvements, the division processed over
80,800 proposals in 1997, a 12% increase over the previous year. Productivity
of proposal quoting increased by 32% per full-time employee during 1997, while
new case issuance productivity increased from 11 to 27 cases per full-time
employee per month. The new automated quoting process is being tested in one of
the Regional Group Offices and will be fully implemented in all Regional Group
Offices by mid-1998.
[ARTWORK APPEARS HERE]
Voluntary (worksite marketed) products once again made a substantial
contribution to EBD's growth. In 1997, sales of these products increased to
$10.1 million in first year annualized premiums from $6.2 million in 1996.
Guarantee Life believes there are many opportunities within this market.
Currently, only 30% of employers offer voluntary products to their employees.
16
<PAGE>
Focused On The Course
Regional Group Offices
[MAP APPEARS HERE]
[Indicates year each office was opened)
This market potential is also conducive to the development of close, individual
customer relationships not typically associated with employee benefits programs.
Group Special Markets Division
Guarantee Life grows its excess loss business when economic conditions allow
pricing to achieve the desired profit levels, and it manages the business to
retain good business when profit margins are tighter. Since the end of 1996,
the market has been disposed to normal growth. This has translated into strong
sales for the Group Special Markets Division (GSM). In 1997, product sales grew
by 50.7% to $31.8 million in first year annualized premiums, over 1996 sales of
$21.1 million. Guarantee Life is a market leader in the niche for medical
supplemental reimbursement insurance for business executives with its product,
Exec-U-Care.
17
<PAGE>
Business & Operations
GSM intends to continue building key relationships with distributors to grow
the business through new products and sales, and strategic acquisitions.
Guarantee Life's distributors include Third Party Administrators (TPAs) and its
Managing Group Underwriter (MGU), National Benefit Resources, Inc. (NBR) in
Minneapolis, Minnesota.
A new product, Guarantee Life Protection Plus (GLPP), was introduced in 1997.
It is an aggregate-only excess loss insurance product coupled with an
administrative services agreement (ASA) provided by Guarantee Life through a
limited network of Certified Administrators. Several Administrators have
already been certified and additional representatives are expected to be
certified during 1998.
On December 31, 1997, Guarantee Life completed a coinsurance agreement with
EBPLife Insurance Company, an affiliate of First Data Corporation (NYSE: FDC),
to acquire its $30 million block of excess loss business. As this business
renews, it will be written on Guarantee Life policies through NBR. Guarantee
Life is confident that the EBPLife block of excess loss business will further
strengthen the ability to increase sales in GSM.
Conclusion
Guarantee Life continues Staying the Course set by the decision to
demutualize and become a public company in 1995. Staying the Course to become a
leader in the markets served by Guarantee Life's three business units. Staying
the Course through strategic acquisitions to grow the individual life and excess
loss businesses. Staying the Course to build value and enhance the confidence of
our distributors, shareholders, and policyholders. Staying the Course, as
Guarantee Life has done for 97 years, to build its financial strength. Staying
the Course to build shareholder wealth.
18
[ARTWORK DIVIDER]
Financial Review
The compass has served as an instrument for determining direction through the
ages. Today, Guarantee Life's mission is the compass that keeps results on
course and the Company moving in the right direction.
[ARTWORK APPEARS HERE]
<PAGE>
FINANCIAL REVIEW
Summary Consolidated Financial and Operating Data
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At or for the Year Ended December 31,
-----------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C> <C>
Consolidated Income Statement Data:
Premiums and policyholder assessments, net $ 230.9 $ 181.7 $ 208.6 $ 158.6 $ 141.1
Investment income, net 58.4 54.4 74.6 70.4 68.6
Realized investment gains (losses) 1.3 0.1 2.4 (1.2) 2.5
Ceding commissions and other income 15.6 12.7 8.8 19.7 24.2
Contribution from Closed Block (1) 4.1 3.1 -- -- --
----------- ----------- ---------- ---------- ----------
Total revenues 310.3 252.0 294.4 247.5 236.4
Total policyholder benefits, expenses and dividends 284.6 229.4 274.5 220.1 208.7
Income from continuing operations before income
taxes 25.7 22.6 19.9 27.4 27.7
Income tax expense 9.1 7.9 9.1 11.7 8.8
----------- ----------- ---------- ---------- ----------
Net income from continuing operations 16.6 14.7 10.8 15.7 18.9
Net income (loss) from discontinued operations(2) (0.2) 0.3 (1.7) (1.9) 1.8
Extraordinary charge for demutualization
expense, net -- -- 7.7 8.1 1.2
----------- ----------- ---------- ---------- ----------
Net income $ 16.4 $ 15.0 $ 1.4 $ 5.7 $ 19.5
=========== =========== ========== ========== ==========
Consolidated Balance Sheet Data:
Total invested assets (5) $ 1,211.5 $ 1,094.3 $ 1,056.1 $ 985.6 $ 950.0
Total assets (5) 1,519.0 1,305.2 1,280.8 1,188.0 1,152.8
Notes payable (5) 40.0 -- -- -- --
Total liabilities (5) 1,309.8 1,096.5 1,074.5 1,055.1 989.3
Total shareholders' equity(3) (4) 209.2 208.7 206.3 132.9 163.5
Segment Income Statement Data:
Revenues by segment:
Group insurance business $ 228.2 $ 175.1 $ 182.2 $ 140.1 $ 125.6
Individual insurance business 82.2 75.8 112.2 107.4 110.8
Income from continuing operations before
income taxes by segment:
Group insurance business $ 9.3 $ 10.1 $ 4.4 $ 14.6 $ 17.1
Individual insurance business 18.2 13.6 15.5 12.8 10.6
Earnings Per Share:(4) (6)
Basic 1.74 1.51 -- -- --
Diluted 1.70 1.49 -- -- --
Dividends per share 0.26 0.16 -- -- --
</TABLE>
- ---------
(1) The results of the Closed Block subsequent to December 31, 1995 are
reported on one line in the Consolidated Statements of Earnings. Accordingly,
the line-by-line income statements are not comparable for all periods presented.
Total assets and total liabilities include the assets and liabilities of the
Closed Block, respectively, and therefore amounts are comparable for all periods
presented. See Note 7 of Notes to Consolidated Financial Statements.
(2) Guarantee Life decided to withdraw from its Special Risk segment in 1994.
The operations of this segment have been reflected on a net basis and classified
as discontinued operations. See Note 15 of Notes to Consolidated Financial
Statements.
(3) Excluding the unrealized appreciation or depreciation of invested assets,
total shareholders' equity would have been $196.2 million, $204.8 million, and
$191.3 million as of December 31, 1997, 1996, and 1995 respectively.
(4) During 1997, Guarantee Life initiated three voluntary stock buyback
programs. Guarantee Life repurchased approximately 1.1 million shares at a cost
of $23.6 million.
(5) Guarantee Life acquired a block of universal life policies in August 1996,
PFG, Inc. and subsidiaries in December 1997, and a block of excess loss policies
in December 1997. See Note 1 of Notes to Consolidated Financial Statements.
(6) Guarantee Life adopted Statement of Financial Accounting Standards No. 128,
Earnings Per Share effective with the December 31, 1997 reporting period and has
restated earnings per share for all prior periods. See Note 1 of Notes to
Consolidated Financial Statements.
19
<PAGE>
Guarantee Life 1997 Annual Report
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The following analysis of the consolidated financial condition and results
of operations of Guarantee Life should be read in conjunction with the
consolidated financial statements and the notes thereto included herein.
Forward-looking Statements
This analysis contains numerous 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. Due to the
uncertainties inherent in forward-looking statements, readers are urged not to
place undue reliance on these statements.
Background
The Guarantee Life Companies Inc. is a holding company with most of its
operating activity conducted within its wholly owned subsidiary, Guarantee Life
Insurance Company. Guarantee Life Insurance Company consists of two operating
segments: the Group Insurance Business, which includes the Employee Benefits
Division ("EBD") and the Group Special Markets Division ("GSM"), and the
Individual Insurance Business.
On December 26, 1995 (the "Effective Date"), Guarantee Mutual Life Company
was converted to a stock life insurance company, Guarantee Life Insurance
Company ("Guarantee Life Insurance") and became a wholly owned subsidiary of The
Guarantee Life Companies Inc. ("Holding Company"). The consolidated financial
condition and results of operations of The Guarantee Life Companies Inc. and
subsidiaries (together, "Guarantee Life") for all periods prior to the Effective
Date, represent the financial condition and results of operations of Guarantee
Mutual Life Company and its subsidiaries.
On December 23, 1997, Guarantee Life completed its acquisition of PFG,
Inc., and its wholly owned subsidiaries ("PFG"), in a transaction valued at
$37.25 million. In the transaction, Guarantee Life acquired $168 million in
assets and assumed $137 million in liabilities. PFG will be managed through
Guarantee Life's Individual Business. PFG brings additional distribution
opportunities, system enhancements, and expanded geographic coverage to
Guarantee Life's Individual Insurance Business, specifically in the Northeast
region of the United States.
PFG includes PFG, Inc., AGL Life Assurance Company, a Pennsylvania-
domiciled insurance company; Philadelphia Financial Group, Inc., a company that
provides insurance programs, products, and services to the bank marketplace; and
PFG Distribution Company, a broker dealer for variable life and annuity
products.
On December 31, 1997, Guarantee Life completed a coinsurance agreement to
acquire a block of excess loss policies from EBPLife Insurance Company
("EBPLife"). In the transaction, Guarantee Life acquired $8.3 million in assets
and assumed $8.3 million in liabilities.
In August, 1996, Guarantee Life completed a coinsurance agreement to
acquire a block of excess loss policies from Security Life Insurance Company of
America ("Security Life"). In the transaction, Guarantee Life acquired $57.7
million in assets and assumed $57.7 million in liabilities.
20
<PAGE>
Building Relationships for Life(R)
Group Insurance Business Trends
The Employee Benefits Division targets businesses with fewer than 500
employees by providing group non-medical products (Core Products) including term
life, accidental death and dismemberment, short-term disability, long-term
disability, and dental; and voluntary (work site marketed) Core Products
including term life, accidental death and dismemberment, short-term disability,
long-term disability, dental, and vision.
EBD has experienced significant growth by most measures in the past several
years, as shown below:
1994 1995 1996 1997
---- ---- ---- ----
Number of offices, end of year 9 17 20 21
First year annualized premium sales (millions) $24.2 $34.4 $49.2 $75.0
Core Products earned premium (millions) $85.6 $108.0 $126.9 $181.3
Customer proposals n/a 44,000 72,000 81,000
Guarantee Life believes EBD's target market offers many opportunities,
with the market estimated to be in excess of $8 billion for businesses with 100
or fewer employees, and $15 billion for businesses with 500 or fewer employees.
A national distribution system of 21 Regional Group Offices markets to employers
through employee benefits firms and brokers. The significant growth in sales and
revenue has generated significant growth in policyholder benefits, acquisition
costs, and operating expenses. Guarantee Life has invested heavily over the past
two years to build an infrastructure in anticipation of the potential growth in
this business.
The Group Special Markets Division targets employer groups of 50 or more
lives with self-funded medical plans by providing specialty medical products
(Specialty Products) including excess loss insurance, medical reimbursement
insurance for business executives, and Core Products including term life,
accidental death and dismemberment, short-term disability, and long-term
disability. The distribution in this division is focused on relationships with
Managing General Underwriters (MGUs), Third Party Administrators (TPAs), Blue
Cross/Blue Shield plans, and managed care organizations.
Guarantee Life intends to grow the excess loss business when economic
conditions allow pricing to achieve the desired profit levels, and it intends to
manage the business to retain profitable business when profit margins are
tighter. A favorable pricing atmosphere has existed since the end of 1996, which
has translated into strong sales for GSM. In 1997, product sales grew by 50.7%
to $31.8 million of first year annualized premium, over 1996 sales of $21.1
million.
Guarantee Life intends to continue building strategic relationships with
distributors such as MGUs and TPAs to grow the business through new products and
sales, and pursue selected acquisitions.
On December 31, 1997, Guarantee Life completed a coinsurance agreement
with EBPLife Insurance Company to acquire its $30 million block of excess loss
business. As this business renews, it will be written on Guarantee Life policies
through its MGU relationship with National Benefit Resources, Inc. in
Minneapolis, Minnesota.
21
<PAGE>
Guarantee Life 1997 Annual Report
Individual Insurance Business Trends
The Individual Business targets individuals with a family income up to
$150,000 and small business owners by providing a variety of life insurance and
annuity products including universal life, interest-sensitive whole life, term
life, and fixed or indexed annuities.
Strong competition exists among insurance companies for agents with
demonstrated sales ability. In recent years, these pressures have resulted in
the development of new life insurance products and new compensation structures.
Over the last five years, management has focused on lowering policy acquisition
costs, refining its distribution systems and introducing more competitive and
profitable products. The distribution has expanded by developing relationships
with independent agents as well as Regional Marketing Organizations (RMOs), who
in turn develop relationships with producers. This effort resulted in an
increase of the Company's field force by 37% in 1996, and 49% in 1997, to 1,325
producers.
Sales of life insurance products, as measured by first year annualized
premium, have increased from $5.3 million in 1995 to $6.5 million in 1996, and
to $7.0 million in 1997. Sales of annuity products were $8.1 million in 1995,
$9.3 million in 1996, and $25.2 million in 1997. The increase in annuity sales
was due primarily to the equity indexed product introduced in August 1996. Sales
of the equity indexed product slowed significantly during the fourth quarter of
1997 due to reduced policyholder participation rates.
Year 2000 Issues
Guarantee Life has established a comprehensive plan to achieve Year 2000
compliance in its electronic information systems. A corporate team is dedicated
to coordinate the identification and implementation of necessary changes
required to computer systems and applications with no disruption to business
operations. An initial impact assessment has been completed and renovation
efforts are well under way.
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. During 1997, approximately
$800,000 was incurred on Year 2000 projects. The total cost of Year 2000
compliance is estimated to total approximately $3.8 million through 1999.
22
<PAGE>
Building Relationships for Life(R)
Operating Results for the Years Ended December 31, 1997, 1996 and 1995
Consolidated Results of Operations
As part of the conversion to a stock life insurance company, Guarantee
Life Insurance established a Closed Block to provide for dividends on certain
policies that were in force on the Effective Date. After the Effective Date, the
operating results from the Closed Block are reported on one line, contribution
from Closed Block, in the 1997 and 1996 consolidated statements of income. For
comparability with 1995, the following table presents the results of operations
for the years ended December 31, 1997 and 1996 combined with the results of
operations of the Closed Block. Management's discussion and analysis addresses
the combined results of operations unless noted otherwise.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1997 1996 1995
(in millions)
<S> <C> <C> <C>
Revenues:
Insurance premiums $ 277.2 $ 222.9 $ 235.6
Policyholder assessments 30.5 26.1 22.2
Reinsurance premiums (55.8) (45.5) (49.2)
-------- -------- --------
Net earned premiums and policyholder assessments 251.9 203.5 208.6
Investment income, net 80.3 75.9 74.6
Realized investment gains 1.1 0.1 2.4
Ceding commissions and other income 15.6 12.8 8.8
-------- -------- --------
Total revenues 348.9 292.3 294.4
Benefits and expenses:
Policyholder benefits, net of reinsurance 159.5 127.2 139.8
Interest credited to account balances 28.7 26.5 25.6
-------- -------- --------
Total policyholder benefits 188.2 153.7 165.4
Acquisition costs and operating expenses 123.9 105.2 98.5
Dividends to policyholders 11.1 10.8 10.6
-------- -------- --------
Total policyholder benefits, expenses and dividends 323.2 269.7 274.5
-------- -------- --------
Income before income taxes $ 25.7 $ 22.6 $ 19.9
======== ======== ========
</TABLE>
Insurance Premiums and Policyholder Assessments, Net. Net premiums and
policyholder assessments increased $48.4 million, or 23.8%, to $251.9 million in
1997. A $53.5 million, or 43.0%, increase in the Core Products net premium and a
$2.1 million, or 4.2%, increase in the Individual Business were partially offset
by a $7.1 million decrease in Specialty Products.
Net premiums and policyholder assessments decreased $5.1 million, or 2.4%,
to $203.5 million in 1996. Net premiums for Specialty Products in the Group
Business decreased $29.2 million, due mainly to the decision to stop writing the
SMART product (a small group major medical product) in October 1995. A $19.7
million increase in the Core Products net premium and a $4.3 million increase in
the Individual Business partially offset this decrease.
Investment Income, Net. Net investment income increased $4.4 million, or
5.8%, to $80.3 million in 1997. This increase was mainly due to an increase in
invested assets. Invested assets, excluding the assets acquired as part of the
PFG purchase, and excluding the amount of unrealized appreciation of invested
securities carried at fair value, increased $16.6 million, to $1,102.6 million
as of December 31, 1997 from $1,086.0 million as of December 31, 1996. Guarantee
Life acquired approximately $45.9 million in invested assets in the Security
Life acquisition in August, 1996. These additional assets were held for the full
year 1997, earning additional interest income.
23
<PAGE>
Guarantee Life 1997 Annual Report
Net investment income increased $1.3 million, or 1.7%, to $75.9 million in
1996. This increase also was the result of an increase in invested assets, which
increased $38.2 million to $1,094.3 million as of December 31, 1996 from
$1,056.1 million as of December 31, 1995. This increase includes full investment
of the 1995 initial public offering net proceeds and $45.9 million of net
invested assets acquired with a block of universal life policies on July 31,
1996, which were partially offset by the amounts required to fund the runoff of
the SMART policy liabilities, the amounts required to fund the runoff of the
policy liabilities in the discontinued operation segment, and a $16.5 million
reduction in unrealized gains and losses on invested assets recorded at fair
value.
The effective yield on invested assets was 7.4%, 7.4%, and 7.7% in 1997,
1996, and 1995, respectively. The reduction in 1996 was primarily due to lower
reinvestment rates for fixed maturity securities purchased in recent periods.
Realized Investment Gains (Losses). Realized investment gains and losses
occur primarily as a result of dispositions of Guarantee Life's invested assets
as part of its ongoing investment management activity. Gains during 1997
included the sale of an investment real estate property and the sale of
Guarantee American Life Company in January 1997. No other individually
significant gains or losses were realized during the year. Gains during 1996 and
1995 included the sale of equity securities as well as a number of fixed
maturity securities which were called at a premium. Losses during 1996 and 1995
included the disposition of several fixed maturity securities experiencing
credit deterioration, as well as recognizing losses for securities with declines
in value that Guarantee Life determined were other than temporary.
Total Policyholder Benefits. Total policyholder benefits, net of
reinsurance, increased $34.5 million, or 22.4%, to $188.2 million in 1997. This
increase was primarily the result of a $37.7 million, or 46.6%, increase in Core
Products, directly related to the earned premium increase. This increase was
offset by slight decreases in the Specialty Products ($1.9 million decrease) and
in the Individual Business ($1.3 million decrease).
Total policyholder benefits, net of reinsurance, decreased $11.7 million,
or 7.1%, to $153.7 million in 1996. This decrease was primarily the result of
Specialty Products net benefits decreasing $23.0 million, due to decreased
premium volume, which was partially offset by a $9.3 million increase in Core
Products and a slight increase in the amount of claims in the Individual
Business.
Total Acquisition Costs and Operating Expenses. Total expenses increased
$18.7 million, or 17.8%, to $123.9 million in 1997. This increase was mainly the
result of an $8.2 million increase in acquisition costs and a $12.5 million
increase in operating expenses in the Core Products, arising mainly from the
increased volume of business. Expenses decreased $3.1 million in Specialty
Products and increased $1.2 million in the Individual Business, mainly from
Deferred Policy Acquisition Costs (DPAC) amortization.
Total expenses increased $6.7 million, or 6.8%, to $105.2 million in 1996.
This increase was mainly the result of a $4.1 million increase in DPAC
amortization expense in the Individual Business. Expenses in the Group Business
increased by $8.8 million for Core Products and decreased by $7.9 million for
Specialty Products.
24
<PAGE>
Building Relationships for Life(R)
Income Tax Expense. Income tax expense increased $1.2 million, or 14.8%,
to $9.1 million in 1997, due to the $3.1 million increase in pre-tax income, and
a slight increase in the effective rate. Income tax expense decreased $1.2
million, or 13.2%, to $7.9 million in 1996 from $9.1 million in 1995, despite a
$2.7 million increase in pretax income. The decrease was due mainly to the
elimination of the equity add-on tax, which Guarantee Life Insurance was
required to pay as a mutual company. The equity add-on tax was in addition to
regular federal income and alternative minimum taxes, and based primarily on its
statutory surplus. As a stock life company, this tax does not impact Guarantee
Life Insurance. As disclosed in Note 9 of Notes to Consolidated Financial
Statements, Guarantee Life's income tax expense for the years ending December
31, 1997 and 1996 approximates the amount computed by applying the U.S. federal
income tax rate of 35 percent to income from continuing operations. For the year
ending December 31, 1995, income tax expense is greater due to the equity add-on
tax and other expenses incurred during the year which were non-deductible for
federal income tax purposes.
The IRS completed examinations of Guarantee Life's federal income tax
returns for the years ended December 31, 1990, 1991, 1992, and 1993. In February
1995, Guarantee Life paid approximately $6.5 million to settle the 1990 and 1991
examinations. The settlement was principally related to the disallowance of
negative adjustments related to the equity add-on tax and had no impact on
shareholders' equity as management had adequately reserved for this settlement.
In January 1996, Guarantee Life paid $3.9 million to settle the 1992
examination. Again, the settlement did not have a material impact on the
financial position of Guarantee Life as management had adequately reserved for
this settlement. Guarantee Life filed an amended return for 1993, based on the
settlements for 1990 through 1992. In August, 1997, the IRS finalized its
examination of 1993. The $547,000 Guarantee Life paid to settle the 1993
examination had also been adequately reserved for in the financial statements.
Insurance Operations-Group
The following table sets forth certain summarized financial data for
Guarantee Life's Group Insurance Business for the years ended December 31, 1997,
1996, and 1995.
Year Ended December 31,
-----------------------------
1997 1996 1995
---- ---- ----
(in millions)
Revenues:
Insurance premiums $ 249.7 $ 193.1 $ 206.3
Reinsurance premiums (49.7) (39.5) (43.2)
-------- -------- --------
Net earned premiums 200.0 153.6 163.1
Investment income, net 12.7 9.5 10.2
Realized investment gains (losses) 0.4 (0.4) 0.4
Ceding commissions 15.1 12.4 8.5
-------- -------- --------
Total revenues 228.2 175.1 182.2
Benefits and expenses:
Policyholder benefits, net of reinsurance 128.4 92.6 106.3
Acquisition costs and operating expenses 90.5 72.4 71.5
-------- -------- --------
Total policyholder benefits and expenses 218.9 165.0 177.8
-------- -------- --------
Income before income taxes $ 9.3 $ 10.1 $ 4.4
======== ======== ========
25
<PAGE>
Guarantee Life 1997 Annual Report
The following table sets forth Guarantee Life's group insurance underwriting
income for the years ended December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
Group Underwriting Income
Year Ended December 31,
------------------------------------------------------------------------------------------
1997 1996 1995
---------------------------- --------------------------- -------------------------------
(in millions)
Core Specialty Core Specialty Core Specialty
Products Products Total Products Products Total Products Products Total
-------- -------- ----- -------- -------- ----- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insurance premiums $ 181.3 $ 68.4 $ 249.7 $ 126.9 $ 66.2 $ 193.1 $ 108.0 $ 98.3 $ 206.3
Reinsurance premiums (3.5) (46.2) (49.7) (2.6) (36.9) (39.5) (3.4) (39.8) (43.2)
-------- ------- -------- -------- ------- -------- -------- ------- --------
Net earned premiums 177.8 22.2 200.0 124.3 29.3 153.6 104.6 58.5 163.1
Ceding commissions 0.2 14.9 15.1 (0.2) 12.6 12.4 0.3 8.2 8.5
-------- ------- -------- -------- ------- -------- -------- ------- --------
Total 178.0 37.1 215.1 124.1 41.9 166.0 104.9 66.7 171.6
Policyholder benefits 120.2 39.9 160.1 82.2 41.1 123.3 71.6 70.0 141.6
Reinsurance recoveries (1.6) (30.1) (31.7) (1.3) (29.4) (30.7) -- (35.3) (35.3)
-------- ------- -------- -------- ------- -------- -------- ------- --------
Net policyholder benefits 118.6 9.8 128.4 80.9 11.7 92.6 71.6 34.7 106.3
Acquisition costs and
operating expenses 68.3 22.2 90.5 47.1 25.3 72.4 38.3 33.2 71.5
-------- ------- -------- -------- ------- -------- -------- ------- --------
Underwriting income
(loss) $ (8.9) $ 5.1 $ (3.8) $ (3.9) $ 4.9 $ 1.0 $ (5.0) $ (1.2) $ (6.2)
======== ======= ======== ======== ======= ======== ======== ======= ========
----------------------------
</TABLE>
Total group net earned premiums increased $46.4 million, or 30.2%, to
$200.0 million in 1997. This increase is the net effect of the $53.5 million, or
43.0%, growth in Core Products and the $7.1 million decrease in Specialty
Products.
Total group net earned premiums decreased $9.5 million, or 5.8%, to $153.6
million in 1996. This decrease is the net effect of the $19.7 million growth in
Core Products and the $29.2 million decrease in Specialty Products. This
increase was due primarily to growth in the Core Product premiums generated by
the group sales offices, growth in the Specialty Products direct premiums, and a
decrease in the amount of premium ceded, especially in Specialty Products.
Core Products net earned premiums increased $53.5 million, or 43.0%, to
$177.8 million in 1997. The increase was primarily due to increased sales of all
Core Products through the group sales offices, as first year annualized premiums
increased 52.4% in 1997, to $75.0 million, from $49.2 million in 1996. Several
factors contributed to this large sales increase: one new sales office was
opened during 1997, the three offices opened during 1996 operated for the full
year, and Guarantee Life continued hiring sales representatives within other
existing offices. Management does not expect these large percentage increases in
sales to continue during 1998 or 1999.
Core Products net earned premiums increased $19.7 million, or 18.8%, to
$124.3 million in 1996. The increase was primarily due to increased sales of all
Core Products through the existing seventeen group sales offices and the opening
of three additional group sales offices in Boston, Phoenix, and Miami during
1996. First year annualized premiums for Core Products generated from the group
sales offices increased 43.0% in 1996, to $49.2 million, from $34.4 million in
1995.
Specialty Products net earned premiums decreased $7.1 million, or 24.2%,
to $22.2 million in 1997. The final runoff of the SMART major medical product in
1996 caused $4.1 million of this decrease; the remaining $3.0 million decrease
occurred in the excess loss product line. Excess loss direct premiums increased
$4.8 million, to $60.3 million, but with the new reinsurance treaties effective
mid-1996, an average of 75% of excess loss premiums are ceded to reinsurers.
Specialty Products net earned premiums decreased $29.2 million, or 49.9%,
to $29.3 million in 1996 from $58.5 million in 1995. This decrease was primarily
due to Guarantee Life's decision to cease writing the SMART major medical
product in 1995, causing a $16.7 million reduction in net premiums in 1996.
During all of 1996, Guarantee Life continued to manage growth in the excess loss
product line during an adverse pricing cycle in the group health insurance
industry. As a result, excess loss net premiums decreased $13.0 million in 1996.
26
<PAGE>
Building Relationships for Life(R)
Core Products net benefits increased $37.7 million, or 46.6%, to $118.6
million in 1997. This increase was caused by the combination of higher premiums
in all Core Products, slightly poorer underwriting experience, and fewer
reinsurance recoveries in 1997.
Core Products net benefits increased $9.3 million, or 13.0%, to $80.9
million in 1996. This increase was the effect of the increase caused by higher
premium in all Core Products, which was offset by significant improvements in
underwriting experience in all Core Products.
Specialty Products net benefits decreased $1.9 million, or 16.2%, to $9.8
million in 1997. This decrease was the combination of lower net premiums in
1997, which was offset by poorer underwriting experience in the excess loss
product line.
Specialty Products net benefits decreased $23.0 million, or 66.3%, to
$11.7 million in 1996 from $34.7 million 1995. This decrease was due primarily
to decreased premium volume, as underwriting experience did not change
significantly.
Total group acquisition costs and operating expenses increased $18.1
million, or 25%, to $90.5 million in 1997. These changes are the net effects of
increases in directly variable expenses such as commissions and premium taxes
from increased premiums in Core Products, offset by decreases in the
corresponding expenses in Specialty Products. Other operating expenses for Core
Products increased slightly, as a percent of direct premium, in 1997 over 1996.
Total group acquisition costs and operating expenses increased $0.9
million, or 1.3%, to $72.4 million in 1996 from $71.5 million in 1995. These
changes are the net effects of increases in variable expenses such as
commissions and premium taxes from increased premiums in Core Products, offset
by decreases in the corresponding expenses in Specialty Products. Other
operating expenses for Core Products have increased over 1995 at a decreasing
rate, during the year, as the business has grown. Certain operating expenses for
Specialty Products are decreasing, but at a slower rate than net premiums, as
the SMART block of business must be administered during the runoff, and the
management of the excess loss product line during the current cycle in the group
health insurance industry.
Insurance Operations-Individual
The following table sets forth certain summarized financial data for
Guarantee Life's Individual Insurance Business for the years ended December 31,
1997, 1996, and 1995.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1997 1996 1995
------- ------- -------
(in millions)
<S> <C> <C> <C>
Revenues:
Insurance premiums $ 27.5 $ 29.8 $ 29.3
Policyholder assessments 30.5 26.1 22.2
Reinsurance premiums (6.1) (6.1) (6.0)
------- ------- -------
Net premiums 51.9 49.8 45.5
Investment income, net 67.7 65.4 64.4
Realized investment gains 0.7 0.5 2.0
Ceding commissions and other income 0.6 0.4 0.3
------- ------- -------
Total revenues 120.9 116.1 112.2
Benefits and expenses:
Policyholder benefits, net of reinsurance 31.1 34.6 33.5
Interest credited to account balances 28.7 26.5 25.6
------- ------- -------
Total policyholder benefits 59.8 61.1 59.1
Acquisition costs and operating expenses 31.8 30.6 27.0
Dividends to policyholders 11.1 10.8 10.6
------- ------- -------
Total policyholder benefits, expenses and dividends 102.7 102.5 96.7
------- ------- -------
Income before income taxes $ 18.2 $ 13.6 $ 15.5
======= ======= =======
</TABLE>
27
<PAGE>
Guarantee Life 1997 Annual Report
Premiums decreased $2.3 million, or 7.7%, to $27.5 million in 1997. This
decrease is due to continued decline in the traditional life business. Premiums
increased $0.5 million, or 1.7%, to $29.8 million in 1996, due to the net effect
of an increase in premiums on policy riders and a slight decrease in traditional
life premium.
Policyholder assessments increased $4.4 million, or 16.9%, to $30.5
million in 1997. This increase was due to a combination of having the Security
Life block of universal life policies for twelve months in 1997 compared to only
five months in 1996 and growth in other universal life policies. Policyholder
assessments increased $3.9 million, or 17.6%, to $26.1 million in 1996. This
increase was in the universal life lines of business, including $2.4 million
from the Security Life block of universal life policies acquired in the third
quarter of 1996.
Total individual policyholder benefits decreased $1.3 million, or 2.1%, to
$59.8 million in 1997. Excluding interest credited to policyholder account
balances, total individual policyholder benefits decreased $3.5 million, or
10.1%, to $31.1 million in 1997. This decrease was almost entirely due to
improved mortality and the decrease in the traditional life business.
Total individual policyholder benefits increased $2.0 million, or 3.4%, to
$61.1 million in 1996. Excluding interest credited to policyholder account
balances, total individual policyholder benefits increased $1.1 million, or
3.3%, to $34.6 million in 1996. This increase was due to the net effect of a
$2.4 million increase in universal life benefits, offset by a $1.3 million
decrease in the traditional life business.
Interest credited to policyholder account balances increased $2.2 million,
or 8.3%, to $28.7 million in 1997. This increase includes a $2.6 million
increase for universal life, which in turn is comprised of the impact of having
the Security Life block of universal life policies for twelve months in 1997
compared to only five months in 1996, and an increase in average account
balances offsetting lower crediting rates. Additionally, interest credited
increased on the much higher balances for equity indexed annuities was offset by
a decrease in average account balances and crediting rates for fixed annuities.
Interest credited to policyholder account balances increased $0.9 million,
or 3.5%, to $26.5 million in 1996. This increase is the net effect of a $2.1
million increase for universal life, as the increase in account balances offset
lower crediting rates, and a $1.2 million decrease for annuities.
Total individual acquisition costs and operating expenses increased $1.2
million, or 3.9%, to $31.8 million in 1997. This increase was primarily due to a
$1.1 million increase in DPAC amortization, as changes in all other expenses
were minimal. DPAC amortization increased mostly in the annuity product lines
due to increased margins, as well as higher surrenders during 1996.
Total individual acquisition costs and operating expenses increased $3.6
million, or 13.3%, to $30.6 million in 1996. This increase was primarily due to
a $4.1 million increase in DPAC amortization, offset in part by a decrease in
operating expenses. DPAC amortization increased because of the universal life
policies acquired, as well as favorable mortality and interest margins on
existing universal life policies.
Policyholder dividends increased only slightly during 1997 and 1996,
reflecting an unchanged dividend scale applied to slightly higher policy values.
Liquidity and Capital Resources
Guarantee Life initiated three voluntary stock buyback programs during
1997 for oddlot shareholders who individually owned fewer than 100 shares of the
Company's common stock. These programs resulted in Guarantee Life's purchase of
approximately 1.1 million shares and a reduction of almost 50% in oddlot
shareholder accounts. Guarantee Life estimates the reduction in oddlot
shareholder accounts will save approximately $350,000 in annual shareholder
expenses. The programs were funded using available cash flows.
28
<PAGE>
Building Relationships for Life(R)
The Holding Company's ability to pay dividends to its stockholders and
meet its obligations, including debt service and operating expenses, primarily
depends upon receiving sufficient funds from its insurance subsidiaries. The
payment of dividends by Guarantee Life Insurance and AGL to the Holding Company
is subject to restrictions set forth in the insurance laws and regulations of
Nebraska and Pennsylvania. The Board of Directors of Guarantee Life Insurance
declared a $15 million extraordinary dividend to the Holding Company in November
1997, which was paid in January 1998. Guarantee Life Insurance can not 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.
Guarantee Life has a $50.0 million senior secured revolving line of credit
to be used for general corporate purposes and to fund capital infusions to
subsidiaries and future acquisitions. The credit agreement is effective through
2002. Funding for the credit facility is being provided by The Chase Manhattan
Bank, Norwest Bank Nebraska, N.A., and State Street Bank and Trust Company.
Guarantee Life drew $40.0 million on this credit facility to fund the PFG
acquisition in 1997. The entire $40.0 million is outstanding at December 31,
1997.
Interest Rate Changes
Interest rate changes may have temporary effects on the sale and
profitability of the universal life and annuity products offered by Guarantee
Life's insurance operations. For example, if interest rates rise, competing
investments (such as annuities or life insurance offered by Guarantee Life's
competitors, certificates of deposit, mutual funds, and similar instruments) may
become more attractive to potential purchasers of Guarantee Life's products
until Guarantee Life increases the rate credited to holders of its universal
life and annuity products. Guarantee Life constantly monitors interest earnings
on existing assets and yields available on new investments, and sells policies
and annuities that permit flexible responses to interest rate changes as part of
its management of interest spreads.
Changes in interest rates have not had a significant impact on Guarantee
Life's net income, although the interest rate environment has affected sales of
certain Guarantee Life product lines and may affect surrender and withdrawal
rates. For instance, Guarantee Life's sale of annuities declined during 1995,
during which time Guarantee Life maintained the spread between crediting rates
and earned rates on its annuities and other interest-sensitive life insurance
products. While sales of traditional fixed annuities also decreased in 1996 and
1997, total annuity sales increased to $25.2 million in 1997. This increase is a
result of Guarantee Life's August 1996 introduction of an equity indexed single
premium deferred annuity with credited rates linked to the growth in the S&P 500
index. However, the profitability of Guarantee Life's products is based not only
on interest rate spreads, but also on persistency, mortality, morbidity, and
operating expenses.
New Accounting Pronouncements
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes standards for reporting
information about operating segments. Generally, SFAS 131 requires that
financial information be reported on the basis that is used internally for
evaluating performance. Guarantee Life is required to adopt SFAS 131 effective
January 1, 1998, and comparative information for earlier years must be restated.
Guarantee Life anticipates that under SFAS 131, the Group Insurance Business
divisions, EBD and GSM, will be defined as segments and reported separately.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement 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 postretirement 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.
29
<PAGE>
Guarantee Life 1997 Annual Report
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of The Guarantee Life Companies Inc.:
We have audited the accompanying consolidated balance sheets of The
Guarantee Life Companies Inc. and subsidiaries (Guarantee Life) as of December
31, 1997 and 1996, and the related consolidated statements of income,
comprehensive income, shareholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1997. These consolidated financial
statements are the responsibility of Guarantee Life's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described in Note 7 to the consolidated financial statements, Guarantee
Life converted from a mutual to a stock life insurance company (Demutualization)
in 1995. The accompanying consolidated financial statements for the periods
prior to the Demutualization have been prepared utilizing generally accepted
accounting principles for stock life insurance companies as if Guarantee Life
was a stock life insurance company before the Demutualization. The accounting
policies used in the preparation of these consolidated financial statements are
described in Note 7.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The
Guarantee Life Companies Inc. and subsidiaries as of December 31, 1997 and 1996,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1997 in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Omaha, Nebraska
February 13, 1998
30
<PAGE>
Building Relationships for Life(R)
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(in thousands except share data)
<TABLE>
<CAPTION>
December 31,
----------------------------------
1997 1996
----------- -----------
Assets
------------
<S> <C> <C>
Invested assets:
Fixed maturities:
Available-for-sale, at fair value (amortized cost: $566,544 and $520,741). $ 582,700 $ 526,799
Held-to-maturity, at amortized cost (fair value: $184,480 and $147,813) 172,167 138,584
----------- -----------
754,867 665,383
Equity securities, at fair value (cost: $2,735 and $3,009) 3,735 2,946
Mortgage loans, net 85,849 70,156
Policy loans 21,657 19,482
Investment real estate, net 3,394 6,620
Other invested assets, net 32,212 29,880
Closed Block invested assets 309,777 299,807
----------- -----------
Total invested assets 1,211,491 1,094,274
Cash and cash equivalents 8,608 2,079
Accrued investment income 12,415 11,623
Ceded reinsurance recoverables 82,568 65,177
Accounts receivable, net 19,805 8,289
Deferred policy acquisition costs 102,696 77,968
Property, plant and equipment, net 19,427 20,102
Other assets 11,572 3,690
Closed Block other assets 17,754 22,020
Separate account assets 32,697 --
----------- -----------
Total assets $ 1,519,033 $ 1,305,222
=========== ===========
<CAPTION>
Liabilities and Shareholders' Equity
------------------------------------
<S> <C> <C>
Future policy benefits:
Life $ 69,381 $ 43,140
Accident and health 73,667 64,007
Policyholder account balances:
Universal life contracts 290,210 257,362
Annuity contracts 251,828 202,735
Policy and contract claims 53,607 50,248
Other policyholder funds 20,754 13,662
Unearned premium revenue 11,866 10,679
Amounts payable to reinsurers 6,938 5,557
Notes payable 40,000 --
Other liabilities 51,284 29,415
Closed Block liabilities 386,606 387,383
Discontinued operations 20,997 32,362
Separate account liabilities 32,697 --
----------- -----------
Total liabilities 1,309,835 1,096,550
Shareholders' equity:
Common stock $0.01 par value; 30,000,000 shares authorized, 9,944,383
shares issued 99 99
Additional paid-in capital 191,123 191,226
Retained earnings 27,463 13,435
Treasury stock, at cost (1,017,524 shares) (22,512) --
Unrealized appreciation of invested
securities carried at fair value, net 13,025 3,912
----------- -----------
Total shareholders' equity 209,198 208,672
Commitments and contingencies -- --
----------- -----------
Total liabilities and shareholders' equity $ 1,519,033 $ 1,305,222
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
Guarantee Life 1997 Annual Report
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
(in thousands except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Insurance premiums and policyholder assessments:
Life $ 76,260 $ 64,932 $ 80,830
Accident and health 179,700 136,158 154,741
Policyholder assessments 30,476 26,080 22,165
Reinsurance premiums (55,508) (45,480) (49,225)
--------- --------- ---------
230,928 181,690 208,511
Investment income, net 58,449 54,371 74,615
Realized investment gains 1,270 167 2,448
Ceding commissions and other income 15,558 12,700 8,846
Contribution from closed block 4,071 3,071 --
--------- --------- ---------
Total revenues 310,276 251,999 294,420
Policyholder benefits:
Benefits:
Life 62,749 57,655 72,614
Accident and health 113,335 85,759 108,324
Reinsurance recoveries (35,752) (36,468) (41,107)
140,332 106,946 139,831
Interest credited to policyholder account balances:
Annuity contracts 10,624 11,021 12,259
Universal contracts 15,028 12,467 10,328
Other -- -- 3,004
--------- --------- ---------
Total policyholder benefits 165,984 130,434 165,422
Expenses:
Policy acquisition costs 57,364 47,554 47,573
Other insurance operating expenses 61,191 51,365 50,985
--------- --------- ---------
Total expenses 118,555 98,919 98,558
Dividends to policyholders -- -- 10,571
Income from continuing operations before income taxes 25,737 22,646 19,869
Income tax expense 9,098 7,926 9,065
--------- --------- ---------
Net income from continuing operations 16,639 14,720 10,804
Net income (loss) from discontinued operations (195) 295 (1,697)
Extraordinary charge for demutualization expense, net -- -- 7,737
--------- --------- ---------
Net income $ 16,444 $ 15,015 $ 1,370
========= ========= =========
Basic Earnings per share:
Weighted average shares outstanding 9,436 9,944
========= =========
Net income from continuing operations $ 1.76 1.48
========= =========
Net income (loss) from discontinued operations $ (.02)$ .03
========= =========
Net income $ 1.74 1.51
========= =========
Diluted Earnings per share:
Weighted average shares outstanding 9,686 10,061
========= =========
Net income from continuing operations $ 1.72 1.46
========= =========
Net income (loss) from discontinued operations $ (.02) $ .03
========= =========
Net income $ 1.70 1.49
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
Building Relationships for Life(R)
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net income $ 16,444 $ 15,015 $ 1,370
Other comprehensive income, net of tax:
Unrealized appreciation (depreciation) of invested
assets carried at fair value, net 9,113 (11,014) 50,691
-------- -------- --------
Comprehensive income $ 25,557 $ 4,001 $ 52,061
======== ======== ========
</TABLE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
(in thousands except share data)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Common stock, beginning of year $ 99 $ 99 $ --
Issuance of common stock, 9,944,383 shares -- -- 99
---------- ---------- ----------
Common stock, end of year 99 99 99
---------- ---------- ----------
Additional paid in capital, beginning of year 191,226 191,226 --
Issuance of common stock -- -- 191,226
Options exercised and stock awards granted (103) -- --
---------- ---------- ----------
Additional paid in-capital, end of year 191,123 191,226 191,226
---------- ---------- ----------
Retained earnings, beginning of year 13,435 11 168,611
Net income before demutualization -- -- 1,359
Demutualization transaction -- -- (169,970)
Net income after demutualization 16,444 15,015 11
Shareholder dividends declared ($0.26/share in 1997,
$0.16/share in 1996) (2,416) (1,591) --
---------- ---------- ----------
Retained earnings, end of year 27,463 13,435 11
---------- ---------- ----------
Treasury stock, beginning of year -- -- --
Purchases of treasury stock, 1,069,011 shares (23,603) -- --
Options exercised (1,496 shares) and stock awards granted, (49,991 shares) 1,091 -- --
---------- ---------- ----------
Treasury stock, end of year (22,512) -- --
---------- ---------- ----------
Net unrealized appreciation (depreciation) on invested
assets carried at fair value:
Beginning of year 3,912 14,926 (35,765)
Unrealized appreciation (depreciation) of invested assets
carried at fair value, net 9,113 (11,014) 50,691
---------- ---------- ----------
End of year 13,025 3,912 14,926
---------- ---------- ----------
Total shareholders' equity $ 209,198 $ 208,672 $ 206,262
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE>
Guarantee Life 1997 Annual Report
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income from continuing operations $ 16,639 $ 14,720 $ 10,804
Adjustments to reconcile net income from continuing
operations to net cash provided by continuing operating
activities:
Policyholder assessments (30,476) (26,080) (22,165)
Interest credited to policyholder account balances 25,652 23,488 25,591
Realized investment (gains) losses (1,270) (167) (2,448)
Change in: (net of amounts acquired)
Ceded reinsurance recoverables (2,918) 1,179 4,961
Deferred policy acquisition costs 4,799 3,438 56
Liabilities for future policy benefits 13,745 11,084 3,105
Policy and contract claims (6,586) (9,393) 3,930
Other liabilities 6,492 (4,935) 2,009
Deferred income taxes (2,996) (1,780) (2,590)
Closed Block assets and liabilities, net (2,377) (666) 5,624
Other, net 11,291 8,439 (6,503)
--------- --------- ---------
Net cash provided by continuing operating activities 31,995 19,327 22,374
Net cash (used) by discontinued operations (11,560) (17,980) (26,387)
--------- --------- ---------
Net cash provided (used) by operating activities 20,435 1,347 (4,013)
Cash flows from investing activities:
Purchase of fixed maturities (226,294) (235,544) (162,158)
Proceeds from sale of fixed maturities:
Available-for-sale 144,607 194,471 144,391
Maturities, calls and principal reductions of fixed maturities 82,751 54,531 39,129
Purchase of mortgage loans (27,670) (13,542) (15,745)
Proceeds from repayment of mortgage loans 11,431 4,773 2,206
Acquisitions, net of cash acquired (30,913) -- --
Change in Closed Block invested assets, net (4,206) (1,267) (4,991)
Other, net (1,994) (20,590) (18,010)
--------- --------- ---------
Net cash used by investing activities (52,288) (17,168) (15,178)
Cash flows from financing activities:
Deposits to policyholder account balances 77,153 50,635 48,540
Withdrawals from policyholder account balances (52,752) (49,568) (32,321)
Purchase of treasury stock (23,603) -- --
Proceeds from issuance of notes payable 40,000 -- --
Shareholder dividends (2,416) (1,591) --
Policyholder cashouts from demutualization -- (6,877) --
Net proceeds from initial public offering -- -- 33,457
Extraordinary charge for demutualization expense -- -- (7,737)
--------- --------- ---------
Net cash provided (used) by financing activities 38,382 (7,401) 41,939
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 6,529 (23,222) 22,748
Cash and cash equivalents at beginning of year $ 2,079 $ 25,301 $ 2,553
--------- --------- ---------
Cash and cash equivalents at end of year $ 8,608 $ 2,079 $ 25,301
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE>
Building Relationships for Life(R)
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
(1) Summary of Significant Accounting Policies
(a) Organization and Principles of Consolidation
At December 31, 1997 the consolidated financial statements include The
Guarantee Life Companies Inc. (Holding Company) and its direct and indirect
wholly owned subsidiaries, all of which are collectively referred to hereinafter
as "Guarantee Life." Insurance subsidiaries domiciled in Nebraska include:
Guarantee Life Insurance Company (Guarantee Life Insurance), and Guarantee
Protective Life Company (Guarantee Protective). AGL Life Assurance Company (AGL)
is an insurance subsidiary domiciled in Pennsylvania.
On December 6, 1996, Guarantee American Life Insurance Company was renamed
"NGL American Life Insurance Company" in anticipation of its sale to National
Guardian Life Insurance Company, which closed on January 1, 1997. The sale
resulted in a gain of $785,000, and reduced invested assets by approximately
$4.4 million.
On December 23, 1997, Guarantee Life completed its acquisition of PFG,
Inc., and its subsidiaries (PFG), in a transaction valued at $37.3 million which
was accounted for as a purchase. In the transaction, Guarantee Life acquired
assets with a fair value of approximately $168 million and assumed liabilities
with a fair value of approximately $137 million. The excess of the purchase
price over the fair value of assets acquired and liabilities assumed was
recorded as Goodwill (included in other assets), and is being amortized
straight-line over 25 years.
PFG, Inc.'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. The pro forma unaudited
consolidated results of operations assume that PFG had been acquired as of the
beginning of the years ended December 31, 1997 and 1996, respectively and
include: total revenues of $331.9 million and $274.1 million, respectively; net
income from continuing operations of $13.2 million and $11.7 million,
respectively; and net income of $13.0 million and $12.0 million, respectively.
Basic earnings per share would have been $1.38 and $1.21, respectively and
diluted earnings per share would have been $1.34 and $1.19, respectively.
Pro forma data does not purport to be indicative of the results that would
have been obtained had this acquisition occurred at the beginning of the periods
presented and is not intended to be a projection of future results.
On December 31, 1997, Guarantee Life completed a coinsurance agreement to
acquire a block of excess loss policies from EBPLife Insurance Company
("EBPLife"). In the transaction, Guarantee Life acquired $8.3 million in assets
and assumed $8.3 million in liabilities.
In August 1996, Guarantee Life completed a coinsurance agreement to
acquire a block of excess loss policies from Security Life Insurance Company of
America ("Security Life"). In the transaction, Guarantee Life acquired $ 57.7
million in assets and assumed $ 57.7 million in liabilities.
All significant intercompany transactions have been eliminated in
consolidation.
(b) Investments in Fixed Maturities and Equity Securities
Categorization of fixed maturities and equity securities
Fixed maturity and equity securities are carried at fair value unless
Guarantee Life demonstrates that it has the positive intent and ability to hold
these investments to maturity. Fixed maturity and equity securities
35
<PAGE>
Guarantee Life 1997 Annual Report
must be classified into one of three categories: 1) held-to-maturity,
2) available-for-sale, or 3) trading securities.
Management determines the appropriate classification of fixed maturities
and equity securities at the time of purchase and reevaluates such designation
at each balance sheet date. When changes in conditions cause a fixed maturity
investment to be transferred to a different category, the security is
transferred to the new category at its fair value at the date of transfer.
During 1995, Guarantee Life transferred two securities with amortized cost
totaling $3.0 million from the held-to-maturity category due to deterioration in
the issuers' credit quality. There was an unrealized loss of $1.0 million
related to these transfers. There were no such transfers in 1996. In 1997,
Guarantee Life transferred one security with an amortized cost of $0.5 million
from the held-to-maturity category due to deterioration in the issuers' credit
quality. The credit was sold during 1997 realizing a loss of $80,000.
In November 1995, the Financial Accounting Standards Board issued a
Special Report, "A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities." This Special Report allowed
for a re-evaluation of the classification of debt and equity securities, and a
one-time transfer between categories. On December 29, 1995, Guarantee Life
transferred 38 securities with amortized cost totaling $58.6 million from
held-to-maturity to available-for-sale, with the corresponding $0.8 million in
unrealized loss being charged to shareholders' equity. These transfers were made
to afford consistent classification for similar investment securities across all
product portfolios.
Available-for-sale fixed maturities and equity securities
Available-for-sale fixed maturities and equity securities (common and
nonredeemable preferred stocks) are carried at fair value. After adjusting
related balance sheet accounts as if the unrealized gains had been realized, the
net adjustment is recorded in net unrealized appreciation (depreciation) on
securities within shareholders' equity. If the fair value of a security
classified as available-for-sale declines below its cost and this decline is
considered to be other than temporary, the security is reduced to its net
realizable value, and the reduction is recorded as a realized loss.
Held-to-maturity fixed maturities
Fixed maturities for which Guarantee Life has both the ability and the
intent to hold to maturity are stated at amortized cost adjusted for other than
temporary fair value decline. Amortized cost reflects actual cost adjusted for
amortization of premium and accretion of discount.
Mortgage loans
Mortgage loans on real estate are stated at unpaid principal balance, net
of unamortized discounts and valuation allowances. The valuation allowances on
mortgage loans are based on losses expected by management to be realized on
transfers of mortgage loans to real estate, on the disposition or settlement of
mortgage loans and on mortgage loans which management believes may not be
collectible in full.
Policy loans, investment real estate and other invested assets
Policy loans are carried at unpaid balances. Investment real estate is
generally stated at depreciated cost, including development costs, less
allowances for other than temporary decline in value. Investment real estate
acquired in satisfaction of debt is valued at the lower of cost or estimated
fair value at date of acquisition and is periodically revalued. Other invested
assets are recorded at amortized cost less allowances for other than temporary
decline in value.
Investment income
Bond premium and discounts are amortized into income using the scientific
yield method over the term of the security. Premiums and discounts on
mortgage-backed securities are amortized using the interest method over the
expected life of each security. In addition, a pro rata portion of premiums and
discounts is recognized when unscheduled principal payments are received and is
included in net investment income. Realized gains and losses on sales of
investments are recognized in net income on the specific identification basis.
Changes in fair values of available-for-sale fixed maturities and equity
securities are reflected as unrealized gains (losses) directly in shareholders'
equity and, accordingly, have no effect on net income.
36
<PAGE>
Building Relationships for Life(R)
Invested asset impairment and valuation allowances
Invested assets are considered impaired when Guarantee Life determines
that collection of all amounts due under the contractual terms is doubtful.
Guarantee Life adjusts invested assets to their estimated net realizable value
at the point at which it determines an impairment is other than temporary.
Guarantee Life has also established valuation allowances for mortgage loans and
other invested assets. Valuation allowances for other than temporary impairments
in value are netted against the asset categories to which they apply, and
additions to valuation allowances are included in total investment results.
(c) Deferred Policy Acquisition Costs
Certain commissions, expenses of the policy issue and underwriting
departments and other variable expenses have been deferred. For limited payment
and other traditional life insurance policies, these deferred policy acquisition
costs are being amortized in proportion to the ratio of the expected annual
premium revenue to the expected total premium revenue. Expected premium revenue
was estimated with the same assumptions used for computing liabilities for
future policy benefits for these policies.
For universal life and annuity type contracts, the deferred policy
acquisition costs are amortized over a period of not more than twenty years in
relation to the present value of estimated gross profits arising from estimates
of mortality, interest, expense and surrender experience. The estimates of
expected gross profits are evaluated regularly and are revised if actual
experience or other evidence indicates that revision is appropriate. Upon
revision, total amortization recorded to date is adjusted by a charge or credit
to current earnings. Deferred policy acquisition costs are adjusted for the
impact on estimated gross profits of net unrealized gains and losses on
securities.
For short duration contracts, certain acquisition costs have been deferred
and are amortized over the terms of the related insurance policies. Deferred
policy acquisition costs are reviewed for recoverability from future income,
including investment income, and costs which are deemed unrecoverable are
expensed in the period in which the determination is made. No such costs have
been deemed unrecoverable during the three years in the period ending December
31, 1997.
(d) Recognition of Insurance Premium Revenue and Related Expenses
For limited payment contracts, net premiums are recorded as revenue, and
the difference between the gross premium and the net premium is deferred and
recognized in income in a constant relationship to insurance in force. For other
traditional life policies, premiums are recognized when due, less allowances for
estimated uncollectible balances.
For universal life and annuity policies, contract charges for mortality,
surrender and expense, other than front-end expense charges, are reported as
income when charged to policyholder accounts. Expenses consist primarily of
benefit payments in excess of policyholder account values and interest credited
to policyholder accounts. Profits are recognized over the life of universal life
type contracts through the amortization of deferred policy acquisition costs in
relation to estimated gross profits from mortality, interest, surrender and
expense.
For accident and health policies, premium income is earned pro rata over
the term of the contracts. Premiums paid but not earned are recorded as
liabilities.
(e) Future Policy Benefits and Policyholder Account Balances
For traditional life insurance policies, future policy benefits and
dividend liabilities are computed using a net level premium method on the basis
of actuarial assumptions as to mortality, persistency and interest established
at policy issue. Assumptions established at policy issue as to mortality and
persistency are based on industry standards and Guarantee Life's historical
experience which, together with interest and expense assumptions, provide a
margin for adverse deviation. Interest rate assumptions principally range from
2.5% to 4.5%. When the liabilities for future policy benefits plus the present
value of expected future
37
<PAGE>
Guarantee Life 1997 Annual Report
gross premiums are insufficient to provide for expected future policy benefits
and expenses, unrecoverable deferred policy acquisition costs are written off
and thereafter a premium deficiency reserve is established through a charge to
earnings.
Accident and health benefits for active lives are calculated using the net
level premium method and assumptions as to future morbidity, withdrawals and
interest which provide a margin for adverse deviation. Benefit liabilities for
disabled lives are calculated using the present value of benefits method and
experience assumptions as to claim termination, expense and interest which also
provide a margin for adverse deviation.
Policyholders' account balances for universal life and annuity policies
are equal to the policy account value before deduction of any surrender charges.
The policy account value represents an accumulation of gross premium payments
plus credited interest less expense and mortality charges and withdrawals. An
additional liability is established for deferred front-end expense charges on
universal life type policies. These expense charges are recognized in income as
policyholder assessments using the same assumptions as are used to amortize
deferred policy acquisition costs. Weighted average interest crediting rates for
universal life policies were 5.68%, 5.90%, and 6.03%; and for annuity policies
were 5.38%, 5.46%, and 5.93% for 1997, 1996, and 1995 respectively.
(f) Policy and Contract Claims
Guarantee Life establishes a liability for unpaid claims based on
estimates of the ultimate cost of claims incurred, which is comprised of
aggregate case basis estimates and average claim costs for reported claims and
estimates of incurred but unreported losses based on past experience. Guarantee
Life's policy and contract claims liability includes a provision for both life
and accident and health claims.
The liability for unreported losses is established using various
statistical and actuarial techniques reflecting historical patterns of
development of paid and reported losses adjusted for current trends. The
liability is continually reviewed and updated as new information becomes
available. Resulting adjustments are reflected in income currently. Adjustments
related to claims incurred in prior periods have not been material for all
periods presented in the accompanying consolidated statements of income.
Management believes the liabilities for unpaid claims are adequate to
cover the ultimate liability; however, due to the underlying risks and the high
degree of uncertainty associated with the determination of the liability for
unpaid claims, the amounts which will ultimately be paid to settle these
liabilities cannot be determined precisely and may vary from the estimated
amount included in the consolidated balance sheets.
(g) Property, Plant and Equipment
Property, plant and equipment is presented at cost less accumulated
depreciation. Expenditures resulting in significant betterment or improvement of
the buildings are included in the cost of the building. Maintenance, repairs,
and renewals of a minor nature are charged to operations as incurred. Guarantee
Life uses the straight-line method of depreciation based upon the estimated
useful lives of the buildings and improvements.
(h) Guaranty Fund Assessments
As a condition of doing business, states and jurisdictions in which
Guarantee Life does business have adopted laws requiring membership in life and
health insurance guaranty funds, which are organized to pay contractual
obligations under insurance policies issued by insolvent and failed life and
health insurers. Member companies are subject to assessments each year based on
life, health, or annuity premiums collected in the state. In some states these
assessments may be applied against premium taxes.
In accordance with estimates provided by the National Organization of Life
and Health Guaranty Associations, Guarantee Life has established a liability of
$0.9 million in the accompanying consolidated financial statements for amounts
due for actual and potential insurance company failures in the states where
38
<PAGE>
Building Relationships for Life(R)
Guarantee Life writes business. Guarantee Life capitalizes the assessments which
are deductible when they are paid and generally amortizes the payments over not
more than five years. Guaranty fund assessments capitalized are reviewed
quarterly to determine that the unamortized portion of such costs does not
exceed recoverable amounts. At December 31, 1997, Guarantee Life had $2.1
million of unamortized guaranty fund assessments which are included in other
assets.
(i) Pension and Other Post Retirement Benefits
Guarantee Life has a defined benefit pension plan which covers
substantially all of its employees. Current pension costs are funded at the
maximum deductible amount allowed by the Internal Revenue Service (IRS).
Periodic net pension expense is based on the cost of incremental benefits for
employee service during the period, interest on the projected benefit
obligation, actual return on plan assets and amortization of actuarial gains and
losses. In addition to providing pension benefits, Guarantee Life provides life
insurance benefits to retired employees. Substantially all of Guarantee Life's
employees may become eligible for the life benefits. Guarantee Life recognizes
the cost of these post retirement benefits as they are earned by the employees
and accrues for the expected cost of providing those benefits to employees and
their beneficiaries during the years the employees render service.
(j) Federal Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(k) Fair Value of Financial Instruments
Fair values for all fixed securities are determined by independent
valuation procedures. The fair values for mortgage loans and policy loans are
estimated using discounted cash flow analyses and using interest rates currently
being offered for similar loans to borrowers with similar credit ratings. Loans
with similar characteristics are aggregated for purposes of the calculations.
Prepayments are assumed to occur at the same rate as in previous periods when
interest rates were at levels similar to current levels. The fair value of
investment real estate is based on market values for comparable local real
estate. The fair values of Guarantee Life's other invested assets are based on
current market prices and discounted expected future cash flows for related
investments.
Fair values for Guarantee Life's liabilities under investment type
insurance contracts (that is those contracts without significant mortality
risks) are estimated using discounted cash flow calculations, based on interest
rates currently being offered for similar contracts with maturities consistent
with those remaining for the contracts being valued. The intangible value of
long-term relationships with policyholders is not taken into account in
estimating fair values disclosed. Fair values for Guarantee Life's insurance
contracts other than investment type contracts are not required to be disclosed.
However, the fair values of liabilities under all insurance contracts are taken
into consideration in Guarantee Life's overall management of interest rate risk,
which minimizes exposure to changing interest rates through the matching of
investment maturities with amounts due under insurance contracts.
(l) Separate Accounts
Separate account assets, carried at market value, and liabilities
represent variable annuity and universal life contract funds invested primarily
in equity securities. The investment income, gains and losses of these accounts
accrue directly to the policyholders and are not included in the operations of
Guarantee Life.
39
<PAGE>
Guarantee Life 1997 Annual Report
(m) Cash Equivalents
For purposes of the consolidated statements of cash flows, Guarantee Life
considers cash equivalents to be all highly liquid debt instruments with
original maturities of three months or less when purchased. The carrying amounts
reported in the consolidated balance sheets for these instruments approximates
their fair value.
(n) Earnings Per Share
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. In February 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128
"Earnings Per Share" which revised the calculation and presentation provisions
of Accounting Principals Board ("APB") Opinion 15 and related interpretations.
SFAS No. 128, which was effective for periods ending after December 15, 1997,
requires companies to present both currently and retroactively, basic earnings
per share and diluted earnings per share instead of primary and fully-diluted
earnings per share which previously were required under APB Opinion 15.
Accordingly, earnings per share for all periods presented have been restated to
apply the provisions of SFAS No. 128. Had the Company reported earnings per
share under the previous APB Opinion 15, primary earnings per share for the
years ending December 1997 and 1996, would have been $1.72 and $1.51,
respectively.
The computations of income from continuing operations on both basic and
diluted bases, including reconciliations of the numerators and denominators, are
as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Basic-assumes no dilution:
Net income from continuing operations for the period $16,639 $14,720 $10,804
Weighted average number of common shares
outstanding during the period 9,436 9,944 --
------- ------- -------
Net income from continuing operations per share-basic $ 1.76 $ 1.48 --
======= ======= =======
Diluted-assumes full dilution:
Net income from continuing operations for the period $16,639 $14,720 $10,804
Weighted average number of common shares
outstanding during the period 9,436 9,944 --
Weighted average number of common stock
equivalent shares to reflect the dilutive effect of
common stock equivalent securities:
Stock Options 250 117 --
------- ------- -------
Total common and common equivalent shares
adjusted to calculate diluted earnings per share 9,686 10,061 --
------- ------- -------
Net income from continuing operations per share-diluted $ 1.72 $ 1.46 --
======= ======= =======
</TABLE>
40
<PAGE>
Building Relationships for Life(R)
(o) Discontinued Operations
In 1994, Guarantee Life decided to withdraw from the alternate workers'
compensation benefit program segment. The operations of this segment have been
reflected on a net basis and classified as discontinued operations in the
accompanying consolidated financial statements. See also note 15.
(p) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(q) Reclassifications
Certain reclassifications have been made to the prior consolidated
financial statements to conform with the most current presentation.
(2) Investments
Fixed maturities at December 31, 1997 (in thousands) are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $ 69,761 $ 1,270 $ 70 $ 70,961
Obligations of states and political subdivisions 13,828 449 -- 14,277
Debt securities issued by foreign governments 5,909 787 -- 6,696
Corporate securities 283,813 13,031 770 296,074
Mortgage-backed securities 193,233 4,177 2,718 194,692
-------- -------- -------- --------
$566,544 $ 19,714 $ 3,558 $582,700
======== ======== ======== ========
Held-to-maturity:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $ 10,038 $ 30 $ $ 10,068
Obligations of states and political subdivisions 8,092 -- -- 8,092
Corporate securities 153,045 12,283 -- 165,328
Mortgage-backed securities 992 -- -- 992
-------- -------- -------- --------
$172,167 $ 12,313 $ -- $184,480
======== ======== ======== ========
</TABLE>
Guarantee Life manages its credit risk associated with fixed maturities by
diversifying its portfolio. At December 31, 1997, Guarantee Life held no
corporate debt securities or foreign government debt securities of a single
issuer which had a carrying value in excess of 5% of shareholders' equity.
At December 31, 1997, Guarantee Life held $88.5 million of mortgage-backed
securities issued by U.S. Government agencies and $35.5 million of
mortgage-backed securities issued by Guarantee Life. At December 31, 1997,
Guarantee Life held no other mortgage-backed securities of a single issuer which
had a carrying value in excess of 5% of shareholders' equity. Guarantee Life's
non-income earning investments in fixed maturities are not material.
41
<PAGE>
Guarantee Life 1997 Annual Report
Fixed maturities at December 31, 1996 (in thousands) are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $ 72,802 $ 1,193 $ 54 $ 73,941
Obligations of states and political subdivisions 10,128 114 34 10,208
Debt securities issued by foreign governments 5,894 391 -- 6,285
Corporate securities 244,151 8,787 2,459 250,479
Mortgage-backed securities 187,766 2,056 3,936 185,886
-------- -------- -------- --------
$520,741 $ 12,541 $ 6,483 $526,799
======== ======== ======== ========
Held-to-maturity:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $ 2,494 $ -- $ 18 $ 2,476
Corporate securities 136,090 9,858 611 145,337
-------- -------- -------- --------
$138,584 $ 9,858 $ 629 $147,813
======== ======== ======== ========
</TABLE>
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties. The carrying value, amortized cost and estimated fair
value of fixed maturities by contractual maturity (in thousands) are as follows:
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------
Carrying Amortized Estimated
Value Cost Fair Value
--------- --------- ----------
<S> <C> <C>
Due in one year or less $ 21,292 $ 21,242 $ 21,357
Due after one year through five years 158,827 154,762 162,508
Due after five years through ten years 196,086 190,533 199,725
Due after ten years 182,978 177,949 187,906
--------- --------- ---------
559,183 544,486 571,496
Mortgage-backed securities 195,684 194,225 195,684
--------- --------- ---------
$754,867 $738,711 $767,180
========= ========= =========
</TABLE>
Guarantee Life had fixed maturities, mortgage loans, preferred stocks and
common stocks with carrying values aggregating $14.6 million as of December 31,
1997 on deposit with regulatory authorities.
A summary of realized investment gains (losses) (in thousands) is as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1997 1996 1995
--------- --------- ----------
<S> <C> <C>
Fixed maturities:
Gross gains $ 1,883 $ 1,899 $ 3,944
Gross losses (2,749) (2,669) (1,174)
Equity securities 898 1,002 23
Sale of Guarantee American 785 -- --
Other investments 486 (3) 143
Change in investment valuation allowances (33) (62) (488)
--------- --------- ---------
Realized investment gains $ 1,270 $ 167 $ 2,448
========= ========= =========
</TABLE>
42
<PAGE>
Building Relationships for Life(R)
A summary of consolidated net investment income (in thousands) is as
follows:
Years Ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
Fixed maturities $ 51,450 $ 50,844 $ 70,330
Equity securities 394 434 690
Mortgage loans 6,929 5,607 4,543
Policy loans 1,420 1,171 3,676
Investment real estate 1,415 1,930 1,797
Other 3,955 3,175 4,505
-------- -------- --------
65,563 63,161 85,541
Less investment expenses (5,510) (5,865) (6,941)
-------- -------- --------
Net investment income from invested assets 60,053 57,296 78,600
Less discontinued operations (note 15) (1,604) (2,925) (3,985)
-------- -------- --------
Net investment income $ 58,449 $ 54,371 $ 74,615
======== ======== ========
Investment expenses include depreciation and depletion of $0.6 million,
$0.9 million, and $0.9 million in 1997, 1996 and 1995, respectively.
A summary of the components of the net unrealized appreciation
(depreciation) on invested assets, including Closed Block, carried at fair value
(in thousands) is as follows:
Years Ended December 31,
------------------------
1997 1996
-------- --------
Unrealized appreciation (depreciation):
Fixed maturities available-for-sale $ 24,534 $ 8,297
Equity securities 1,000 (63)
Deferred policy acquisition costs (5,496) (2,215)
Deferred income taxes (7,013) (2,107)
-------- --------
Net unrealized appreciation $ 13,025 $ 3,912
======== ========
(3) Mortgage Loans
Investments in mortgage loans consist almost entirely of commercial
mortgage loans which are primarily fixed-rate first mortgages on completed
properties. The following table sets forth additions, reductions from payments
and other charges and foreclosures related to the mortgage loan portfolio (in
thousands):
Years Ended December 31,
------------------------
1997 1996
-------- --------
Commercial loans:
Beginning Balance $ 70,787 $ 61,087
Additions 27,670 13,542
Payments and other charges (12,291) (3,842)
-------- --------
Ending Balance 86,166 70,787
Other mortgage loans 947 138
Valuation allowance (1,264) (769)
-------- --------
$ 85,849 $ 70,156
======== ========
43
<PAGE>
Guarantee Life 1997 Annual Report
Guarantee Life manages its credit risk associated with these loans by
diversifying its mortgage portfolio by property type and geographic location. As
of December 31, 1997, there were 85 individual commercial mortgage loans
collateralized primarily by office buildings, retail properties, industrial
properties, apartment buildings and medical clinics. As of December 31, 1997,
Guarantee Life had no single mortgage loan outstanding which had a carrying
value in excess of 5% of shareholders' equity. As of December 31, 1997, all
commercial mortgage loans bore a fixed interest rate and Guarantee Life had no
material loans over 60 days past due. Guarantee Life had outstanding commitments
to fund mortgage loans totaling $0.5 million as of December 31, 1997.
(4) Deferred Policy Acquisition Costs
A summary of the policy acquisition costs deferred and amortized (in
thousands) is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of period $ 77,968 $ 70,168 $ 90,168
Policy acquisition costs deferred 55,897 44,116 46,392
Policy acquisition costs amortized (57,413) (47,554) (47,573)
Policy acquisition costs acquired in purchase 29,525 11,658 --
Policy acquisition costs reclassified to Closed Block other assets -- -- (15,437)
--------- --------- ---------
$ 105,977 $ 78,388 $ 73,550
========= ========= =========
Change in deferred policy acquisition costs relating to unrealized
appreciation of invested assets carried at fair value (3,281) (420) (3,382)
--------- --------- ---------
Total reflected in consolidated balance sheet $ 102,696 $ 77,968 $ 70,168
========= ========= =========
</TABLE>
The increase in policy acquisition costs deferred and amortized from 1996
to 1997 reflects growth in the group Core Products.
(5) Reinsurance
In the ordinary course of business, Guarantee Life assumes business from
and cedes business to other insurers under a variety of contracts. The existence
of ceded reinsurance constitutes a means by which Guarantee Life has
underwritten a portion of its business.
Guarantee Life's retention limit on its life insurance business in 1997
was generally $150,000 on a life risk in the Employee Benefits and Group Special
Markets Divisions, and $250,000 on an individual life risk at Guarantee Life
Insurance and $125,000 on a life risk at AGL. Certain reinsurers have agreed to
reinsure automatically all amounts on any one life in excess of the retention
amount not to exceed eight times Guarantee Life's retention in 1997. Amounts in
excess of the automatic acceptance limits of Guarantee Life's retention may be
applied for facultatively. As of December 31, 1997 and 1996, the amount of ceded
life insurance in force was approximately $1.7 billion and $1.5 billion,
respectively.
Guarantee Life cedes 100% of its individual accident and health business.
Guarantee Life's retention level on group accident and health business varies by
product.
Effective January 1, 1995, AGL entered into a reinsurance agreement to
assume $50,000,000 in existing single premium deferred annuity business from
Phoenix Home Mutual Life Insurance Company ("Phoenix"). Pursuant to the terms of
the reinsurance agreement, assets equal to policyholder liabilities assumed are
maintained in a trust account. As of December 31, 1997, policyholder deposits
related to this business amounted to $33.7 million.
44
<PAGE>
Building Relationships for Life(R)
In a separate reinsurance agreement, AGL assumed 80% quota share in all
production of a single deferred annuity product which was jointly developed with
Phoenix. Pursuant to the terms of the reinsurance agreement, assets equal to
policyholder liabilities assumed are maintained in a trust account. This
reinsurance agreement can be terminated by either party with respect to new
business with 90 days notice. As of December 31, 1997, policyholder deposits
related to this business amounted to $5.2 million.
Guarantee Life generally strives to diversify its credit risks related to
reinsurance ceded; however, certain concentrations of credit risk related to
reinsurance recoverables (including unearned premiums) exist with the insurance
organizations listed in the table below (in thousands):
December 31,
1997
------------
Swiss RE Life & Health America, Inc. $ 28,677
RGA Reinsurance Company 23,264
Lincoln National Life Insurance Company 17,422
Phoenix Home Life Mutual Insurance Company 16,493
Lone Star Life Insurance Company 11,721
UNUM Life Insurance Company of America 8,082
Life Reassurance Corporation of America 7,193
John Hancock Mutual Life Insurance Company 6,338
Manulife Reinsurance Corporation 5,087
Cologne Life Reinsurance Company 4,670
Security Life of Denver 3,596
Crown Life Insurance Company 3,471
Others 4,247
------------
Total before discontinued operations 140,261
Less discontinued operations (note 15) (57,693)
------------
Total reflected in accompanying consolidated balance sheet $ 82,568
============
This underwriting activity subjects Guarantee Life to certain risks. To
the extent that reinsurers who are underwriting Guarantee Life's business become
unable to meet their contractual obligations, Guarantee Life retains the primary
obligation to its direct policyholders because the existence of this reinsurance
does not discharge Guarantee Life from its obligation to its policyholders.
Guarantee Life has policies and procedures to approve reinsurers prior to
entering into an agreement and also to monitor financial stability on a
continuous basis. As of December 31, 1997 and 1996 Guarantee Life had no
significant overdue reinsurance balances. As of December 31, 1997 Guarantee Life
held funds and other collateral of $11.5 million related to the above
recoverables.
(6) Property, Plant, and Equipment
A summary of property, plant, and equipment (in thousands) is as follows:
December 31,
-------------------
1997 1996
-------- --------
Home office building $ 21,010 $ 20,505
Plant and equipment 14,730 14,447
Less accumulated depreciation (16,313) (14,850)
-------- --------
$ 19,427 $ 20,102
======== ========
45
<PAGE>
Guarantee Life 1997 Annual Report
(7) Closed Block
Guarantee Life has maintained a book of individual life policies which are
participating policies and entitle the policyholders to receive dividends based
on actual interest, mortality, morbidity, and expense experience for the related
policies. These dividends are distributed to the policyholders through an annual
dividend using current dividend scales which are approved by the Board of
Directors. These policies are now included in the Closed Block. The Company has
no other participating policies.
On December 15, 1994, Guarantee Life Insurance's Board of Directors
adopted a plan to convert Guarantee Life Insurance from its mutual form to a
stock life insurance company (demutualization). The Holding Company, a Delaware
corporation, was formed to act as the holding company for the demutualization of
Guarantee Life Insurance.
The demutualization was approved by policyholders on August 24, 1995. On
December 26, 1995, (the Effective Date) the Holding Company completed an initial
public offering of 2,875,000 shares, representing an approximate 29% ownership
interest in Holding Company outstanding common stock. In connection with the
demutualization, 7,069,383 shares were issued to certain eligible policyholders,
other eligible policyholders received $6.9 million in cash in lieu of common
stock, while other eligible policyholders received $4.5 million of policy
credits.
The plan of conversion contained an arrangement, known as a Closed Block,
to provide for dividends on policies that were in force on the effective date
and are within the classes of individual policies for which Guarantee Life
Insurance had a dividend scale in effect for 1994. The Closed Block is designed
to give reasonable assurance to holders of affected policies that assets will be
available to support such policies, including maintaining dividend scales in
effect for 1994 if the experience underlying such scales continues. The assets,
including revenue therefrom, allocated to the Closed Block will accrue solely to
the benefit of the holders of policies included in the block until the block is
no longer in effect. Guarantee Life will not be required to support the payment
of dividends on Closed Block policies from its general funds.
The Closed Block includes only those revenues, benefits, expenses, and
dividends considered in funding it. The pre-tax income of the Closed Block will
be reported as a single line item of total revenues from continuing operations
in Guarantee Life's consolidated statements of income. Income tax expense
applicable to the Closed Block, which was funded, will be reflected as a
component of income tax expense.
The excess of Closed Block liabilities over Closed Block assets as of
December 31, 1997 and 1996 represents the total estimated future contribution
from the Closed Block expected to emerge from operations in the Closed Block
after income taxes. The contribution from the Closed Block will be recognized in
income over the period the policies and contracts in it remain in force.
If, over the period the Closed Block remains in existence, the actual
cumulative contribution is greater than the expected cumulative contribution,
only such expected contribution would be recognized in income. The excess of the
actual cumulative contribution over such expected cumulative contribution would
be paid to Closed Block policyholders as additional policyholder dividends. If
over such period, the actual cumulative contribution is less than expected, only
such actual contribution would be recognized in income. However, dividends could
be changed in the future, which would increase future actual contributions until
the actual cumulative contributions equal the expected cumulative contributions.
Therefore, management believes that over time the actual cumulative
contributions from the Closed Block will approximately equal the expected
cumulative contributions due to the effect of dividend changes.
46
<PAGE>
Building Relationships for Life(R)
Summarized financial information of the Closed Block (in thousands) is as
follows:
December 31,
-------------------
1997 1996
-------- --------
Assets
------
Invested assets:
Fixed maturities:
Available-for-sale, at fair value (amortized cost
$202,869 and $190,504) $211,248 $193,121
Held-to-maturity, at amortized cost (fair value:
$52,224 and $58,837) 48,838 55,401
-------- --------
260,086 248,522
Policy loans 46,997 48,057
Other invested assets, net 2,694 3,228
-------- --------
Total invested assets 309,777 299,807
Cash and cash equivalents 328 1,480
Accrued investment income 4,221 4,428
Deferred policy acquisition costs 12,233 13,925
Other assets 972 2,187
-------- --------
Total Closed Block assets $327,531 $321,827
======== ========
Liabilities
-----------
Life future policy benefits $301,495 $301,568
Policyholder account balances for annuity contracts 868 894
Policy and contract claims 573 298
Other policyholder funds 72,024 72,186
Dividends payable to policyholders 7,767 7,646
Deferred income taxes 2,932 916
Other liabilities 946 3,875
-------- --------
Total Closed Block liabilities $386,606 $387,383
======== ========
Condensed statements of income for the Closed Block (in thousands) is as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1997 1996
-------- --------
<S> <C> <C>
Revenues:
Insurance premiums and policyholder assessments, net of reinsurance $ 20,933 $ 21,785
Investment income, net 21,894 21,543
Realized investment (losses) (155) (68)
Other income 86 93
-------- --------
Total revenues 42,758 43,353
Policyholder benefits and expenses:
Total policyholder benefits 22,244 23,209
Policy acquisition costs 1,983 1,999
Other insurance operating expense 3,404 4,259
-------- --------
Total benefits and expenses 27,631 29,467
Dividends to policyholders 11,056 10,815
-------- --------
Contribution from Closed Block $ 4,071 $ 3,071
======== ========
</TABLE>
47
<PAGE>
Guarantee Life 1997 Annual Report
(8) Liability for Unpaid Accident and Health Claims and Claim Adjustment
Expenses
The change in the liability for unpaid group accident and health claims
and claim adjustment expenses is summarized (in thousands) as follows:
Years Ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
Balance at January 1 $ 93,881 $ 97,355 $ 91,355
Less reinsurance recoverables (38,468) (41,305) (46,249)
-------- -------- --------
Net balance at January 1 55,413 56,050 45,106
Incurred related to:
Current year 79,739 72,192 76,616
Prior years 1,151 (18,392) (6,717)
-------- -------- --------
Total incurred 80,890 53,800 69,899
Paid related to:
Current year 48,590 40,131 42,046
Prior years 21,261 14,306 16,909
-------- -------- --------
Total paid 69,851 54,437 58,955
-------- -------- --------
Balance at December 31 66,452 55,413 56,050
Plus reinsurance recoverables 31,781 38,468 41,305
-------- -------- --------
Balance at December 31 $ 98,233 $ 93,881 $ 97,355
======== ======== ========
The liability for unpaid accident and health claims and claim adjustment
expenses is included in policy and contract claims and future policy benefits:
accident and health, on the consolidated balance sheets.
(9) Federal Income Taxes
The actual federal income tax expense attributable to income from
continuing operations differs from the amounts computed by applying the U.S.
federal income tax rate of 35% to income from continuing operations before
income taxes as a result of the following (in thousands):
Years Ended December 31,
------------------------
1997 1996 1995
------ ------ ------
Computed "expected" tax expense $9,008 $7,926 $6,954
Increase in income taxes resulting from:
Tax imposed on mutual company surplus -- -- 1,039
Other, net 90 -- 1,072
------ ------ ------
Total $9,098 $7,926 $9,065
====== ====== ======
Total income taxes, substantially all of which are federal, are recorded
in the consolidated statements of income and directly in certain shareholders'
equity accounts. Income tax expense (benefit) was allocated as follows: (in
thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Statements of Income:
Current $ 12,094 $ 9,706 $ 11,655
Deferred (2,996) (1,780) (2,590)
-------- -------- --------
Total income taxes from continuing operations 9,098 7,926 9,065
Income tax expense (benefit) in discontinued operations (107) 159 914
-------- -------- --------
Income taxes included in the statements of income $ 8,991 $ 8,085 $ 9,979
Shareholders' Equity:
Deferred income taxes related to unrealized appreciation of invested
securities carried at fair value, net 4,906 5,930 8,037
-------- -------- --------
Total income taxes $ 13,897 $ 14,015 $ 18,016
======== ======== ========
</TABLE>
48
<PAGE>
Building Relationships for Life(R)
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities (included in other
liabilities) are presented below (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Deferred tax assets:
Policy liabilities $ 30,707 $ 22,056 $ 23,904
Net operating loss carryovers 5,122 -- --
Other 10,110 9,143 5,569
-------- -------- --------
Net deferred tax assets $ 45,939 $ 31,199 $ 29,473
Deferred tax liabilities:
Deferred policy acquisition costs 35,475 25,493 26,271
Unrealized gain on investments available for sale 7,013 2,107 8,037
Other 3,266 3,280 795
-------- -------- --------
Total gross deferred tax liabilities 45,754 30,880 35,103
-------- -------- --------
Net deferred tax liabilities (assets) $ (185) $ (319) $ 5,630
======== ======== ========
</TABLE>
As discussed in note 1, Guarantee Life carries its invested securities
classified as available-for-sale at fair value. For federal income tax purposes,
Guarantee Life believes it is not a dealer with respect to these investment
securities and, therefore, recognizes gains and losses on such investment
securities only when they are sold.
As of December 31, 1997, Guarantee Life does not believe any valuation
allowance with respect to the gross deferred tax assets is necessary as it is
more likely than not that these deferred tax assets will be realized due to the
expected reversal of existing temporary differences attributable to gross
deferred tax liabilities and the carryback potential of prior year income taxes
paid.
Guarantee Protective, which joins in the filing of the consolidated
federal income tax return of Guarantee Life, has a Net Operating Loss (NOL)
carryover as of December 31, 1997 of approximately $134,000. Because the
acquisition of Guarantee Protective by Guarantee Life constituted an ownership
change as defined by Section 382 of the Internal Revenue Code, the maximum
amount of Guarantee Protective taxable income which may be offset by the NOL
carryover in any one tax year is approximately $457,000. During 1997, 1996, and
1995, Guarantee Life utilized the full $457,000.
Prior to 1984, a portion of Guarantee Protective's current income was not
subject to current income tax but was accumulated for income tax purposes in a
memorandum account designated as "policyholders' surplus." The total of the life
companies' balances in their respective "policyholders' surplus" accounts at
December 31, 1983 was frozen by the Tax Reform Act of 1984 and, accordingly,
there have been no additions to the accounts after that date. Certain triggering
events will cause a recapture of all or part of the "policyholders' surplus"
account. Any amounts recaptured must be included in taxable income and may not
be offset by any existing NOL carryovers. As of December 31, 1997, the balance
of Guarantee Protective's "policyholders' surplus" account was approximately
$2.4 million. In addition, the accumulated amount of income subject to current
taxation, less certain adjustments, is set aside in another special memorandum
tax account called a "shareholders' surplus" account. Dividends paid by
Guarantee Protective in excess of the balance in the "shareholders' surplus"
account cannot be paid without a portion of the "policyholders' surplus"
becoming taxable. The balance of Guarantee Protective's "shareholders' surplus"
account was $755,000 as of December 31, 1997.
49
<PAGE>
Guarantee Life 1997 Annual Report
Prior to 1996, as a mutual life insurance company, Guarantee Life
Insurance was required to pay, in addition to regular and alternative minimum
taxes, an additional tax commonly referred to as an "equity add-on tax," based
on its surplus. The amount of this "equity add-on tax" was determined annually
and calculated by comparing the earnings rate of mutual life insurance companies
versus certain stock life insurance companies.
The IRS completed examinations of Guarantee Life's federal income tax
returns for the years ended December 31, 1990, 1991, 1992, and 1993. In
February, 1995, Guarantee Life paid approximately $6.5 million to settle the
1990 and 1991 examinations. The settlement was principally related to the
disallowance of negative adjustments related to the equity add-on tax and had no
impact on shareholders' equity as management had already provided for that
amount.
In January 1996, Guarantee Life paid $3.9 million to settle the 1992
examination. Again, the settlement did not have a material impact on the
financial position of Guarantee Life as management had already provided for this
settlement. Guarantee Life filed an amended return for 1993, based on the
settlements for 1990 through 1992. In August, 1997, the IRS finalized its
examination of 1993. The $547,000 Guarantee Life paid to settle the 1993
examination had also been provided in the financial statements.
During the years ended December 31, 1997, 1996, and 1995, Guarantee Life's
cash payments for federal income taxes were $10.1 million, $15.2 million, and
$5.2 million, respectively.
PFG has net operating loss carryovers (NOL)as of December 31, 1997 of
approximately $11.5 million. These NOLs, if not utilized, will expire in the
years 2000 to 2012.
(10) Employee Benefit Plans
Pension Plans
Guarantee Life Insurance has a noncontributory defined benefit pension
plan (qualified plan) covering substantially all home office employees. Benefits
are based on the employee's average annual compensation during the 60
consecutive months which will produce the highest average for the employee. It
is Guarantee Life Insurance's policy to fund pension costs in accordance with
the requirements of the Employee Retirement Income Security Act of 1974 and,
based on such standards, no funding was required for each of the years
presented. Substantially all of the plan assets are invested in the general and
separate investment accounts of two life insurance companies.
Net pension cost related to the qualified plan included the following
components (in thousands):
Years Ended December 31,
-----------------------------
1997 1996 1995
------- ------- -------
Service cost-benefits earned during the year $ 1,752 $ 1,438 $ 1,007
Interest cost on projected benefit obligations 1,811 1,689 1,552
Actual return on plan assets (5,479) (4,274) (4,735)
Net amortization and deferral 2,450 1,574 2,294
------- ------- -------
Net pension cost $ 534 $ 427 $ 118
======= ======= =======
50
<PAGE>
Building Relationships for Life(R)
The funded status of the qualified plan is reconciled to accrued pension
cost included in the accompanying consolidated balance sheets as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Plan assets at fair value $ 37,528 $ 33,322
======== ========
Accumulated benefit obligations:
Vested (25,396) (21,192)
Nonvested (529) (521)
-------- --------
(25,925) (21,713)
Effect of projected future compensation levels on past service (4,941) (3,555)
-------- --------
Projected benefit obligation for service rendered to date (30,866) (25,268)
Plan assets in excess of projected benefit obligation 6,662 8,054
Unrecognized net loss from past experience different from that assumed and
effects of changes in assumptions (6,507) (7,190)
Unrecognized net obligation/asset at transition (878) (1,054)
-------- --------
Accrued pension cost $ (723) $ (190)
======== ========
</TABLE>
The assumptions used in determining pension information were as follows:
Years Ended December 31,
------------------------
1997 1996 1995
------ ------ ------
Discount rate assumed 6.75% 7.50% 7.25%
Rate of compensation progression 5.50 5.50 5.50
Expected return on assets 8.00 8.00 8.00
Guarantee Life maintains two nonqualified pension plans to provide equal
retirement benefits for employees whose benefits would otherwise be restricted
due to Internal Revenue Code restrictions or the deferral of compensation. As of
December 31, 1997, Guarantee Life's unfunded liability for these plans was
approximately $1.5 million.
Retiree Benefit Plans
In addition to providing pension benefits, Guarantee Life provides certain
life insurance benefits for retired employees. Substantially all employees may
become eligible for those benefits if they reach normal retirement age while
working for Guarantee Life. The benefits are determined at retirement and are
based upon retirement age, length of service and amount of group term life
insurance in force at retirement, subject to a maximum amount of $50,000.
Guarantee Life has established a liability in the amount of $1.1 million as of
December 31, 1997 and 1996. The liability is based upon the present value
(including mortality and persistency) of the amount required to fund the
obligation. Guarantee Life recognizes the cost of providing these benefits as
earned. Guarantee Life does not have a separate plan for retiree medical
benefits. No significant medical benefits have been paid for retirees for the
years presented.
Incentive Compensation, Deferred Compensation, Phantom Stock and 401(k)
Plans
Guarantee Life maintains the 1994 Long-Term Incentive Plan (Incentive
Plan), which includes incentive and nonqualified stock options, performance
shares and, under limited circumstances, restricted stock to officers and key
employees of Guarantee Life. The maximum number of shares of common stock that
may be issued under the Incentive Plan was increased by 600,000 in May, 1997 to
1,345,828. The options vest
51
<PAGE>
Guarantee Life 1997 Annual Report
in annual increments of 25% beginning on the second anniversary of the grant
date. Guarantee Life also maintains the Directors Stock Incentive Plan
(Directors Plan) which includes nonqualified stock options for the members of
the Board of Directors of the Holding Company. The maximum number of shares of
common stock that may be issued under the Directors Plan is 90,000. The options
vest six months after grant date. Under both plans, the exercise price of each
option equals the market price of the Holding Company's stock on the date of
grant, and an option's maximum term is ten years. During 1997, 49,991 shares of
restricted stock were granted.
In February, 1997, Guarantee Life's Board of Directors approved the 1997
Associate Stock Incentive Plan (Associate Plan). Under this plan, non-qualified
stock options may be granted to employees and agents. The maximum number of
shares of common stock that may be issued under the Associate Plan is 120,000.
Guarantee Life applies APB Opinion No. 25 and related Interpretations in
accounting for the Incentive Plan and the Directors Plan. Accordingly, no
compensation cost has been recognized for the two plans. Had compensation cost
been determined consistent with FASB Statement No. 123, Guarantee Life's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions used for the grants during the years ended December 31, 1997 and
1996, respectively: dividend yield of 1.4% and 1.4%; expected volatility of 33%
and 27%; risk-free interest rate of 5.87% and 5.14%; for expected lives of six
years for the Incentive Plan options and two years for the Directors Plan
options.
Year Ended December 31,
-------------------------
1997 1996
--------- ---------
Net income (in thousands)
As reported $ 16,444 $ 15,015
========= =========
Pro forma 15,924 $ 14,648
========= =========
Basic earnings per share
As reported $ 1.74 $ 1.51
========= =========
Pro forma $ 1.69 $ 1.47
========= =========
Diluted earnings per share
As reported $ 1.70 $ 1.49
========= =========
Pro forma $ 1.64 $ 1.46
========= =========
A summary of the status of Guarantee Life's stock option plans as of December
31, 1997, 1996, and 1995, and changes for the years ended is presented below:
Years Ended December 31,
------------------------------
1997 1996 1995
------- ------- -------
Outstanding, beginning of year 512,878 469,851 --
Granted 415,057 52,670 469,851
Exercised (1,496) -- --
Forfeited (28,337) (9,643) --
------- ------- -------
Outstanding, end of year 898,102 512,878 469,851
======= ======= =======
Options exercisable at year-end 143,917 30,000 --
======= ======= =======
52
<PAGE>
Building Relationships for Life(R)
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------- -------------------------------
Range of Number Weighted Avg Weighted Avg Number Weighted Avg
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices at 12/31/97 Contractual Life Price at 12/31/97 Price
- --------------- ----------- ---------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
$13.00 to 19.50 598,028 7.53 14.35 140,917 $ 13.88
$20.00 to 27.13 300,074 9.13 21.25 3,000 20.00
------- -------
$13.00 to 27.13 898,102 8.06 16.66 143,917 $ 14.01
======= =======
</TABLE>
Guarantee Life maintains the Guarantee Life Insurance Company Incentive
Compensation Plan (Incentive Compensation Plan) which provides short-term
incentives to eligible employees based upon financial and other performance
measures. As of December 31, 1997, 1996, and 1995, benefits in the amount of
$1.7 million, $1.2 million, and $1.2 million had been expensed and accrued for
the years then ended. Certain amounts awarded under the Incentive Compensation
Plan may be deferred under the Management Deferred Plan. During 1996, the
Incentive Compensation Plan was amended to require certain senior management to
use a minimum of 10% of their award to purchase shares of Holding Company stock.
Guarantee Life plans to provide the required shares by purchasing stock in the
open market, by issuing new shares or by issuing from treasury shares.
Guarantee Life maintains the Guarantee Life Insurance Company Phantom
Stock Plan (Phantom Stock Plan) for certain management employees. The amounts
awarded under the Phantom Stock Plan are based on long-term improvements in
Guarantee Life's capital performance. At December 31, 1997 and 1996, the accrued
benefits of the plan included in other liabilities was $1.2 million and
$752,000, respectively. Guarantee Life charged approximately $448,000, and
$238,000, to expense relating to this plan in 1997 and 1996, respectively. There
was no expense relating to this plan in 1995. As of December 31, 1997, 26,372
phantom shares with a value of $751,600 were vested. On the Effective Date,
Guarantee Life ceased granting awards under the Phantom Stock Plan, but prior
awards continue to accrue under the terms of the plan.
Guarantee Life maintains the Guarantee Life Insurance Company Deferred
Compensation Plan (Management Deferred Plan) and Guarantee Life Insurance
Company Board of Directors Deferred Compensation Plan (Director Deferred Plan)
that allow management and directors to defer compensation into an
interest-bearing account, which earns interest at a rate equal to that received
by employees for a Guarantee Life Insurance IRA, or into a separate phantom
stock account. Under this stock account option, contributions are deemed to have
been used to purchase shares in the Holding Company at current quoted market
rates. Concurrent with the declaration and payment of shareholder dividends,
similar per share amounts are contributed to accounts in the Management Deferred
Plan and Director Deferred Plan. As of December 31, 1997, 1996, and 1995
compensation in the amount of $1.7 million, $1.1 million, and $1.0 million
respectively, was accrued in these plans which fully funded the amounts due to
participants. Guarantee Life charged approximately $594,000, $152,000, and
$148,000, to expense relating to this plan in 1997, 1996, and 1995,
respectively.
Guarantee Life maintains the Guarantee Life Insurance Company Thrift
Savings Plan (401(k) Plan) for eligible salaried employees. Guarantee Life
matches employee contributions up to 3% of salary. All employee contributions
are vested immediately and all Company contributions are vested after three
years. Guarantee Life charged $594,000, $474,000, and $372,000, to expense
relating to this plan in 1997, 1996, and 1995, respectively. As of December 31,
1997 and 1996, the 401(k) Plan held approximately $4.2 million in a Guarantee
Life Insurance Group Accumulation Contract. These deposits are held by Guarantee
Life in a pooled account. The account is credited with actual earnings on the
underlying investments with a minimum guaranteed annual return of 2.5%.
53
<PAGE>
Guarantee Life 1997 Annual Report
Subject to certain limitations, PFG contributes up to 3% of each
participating employee's annual compensation to a qualified 401(k) Plan. At
December 31, 1997, the plan held approximately $2.0 million in assets.
PFG maintains a nonqualified, unfunded deferred compensation plan for
certain key management personnel and certain directors which provides for
payments upon retirement, death, or disability. Under the plan, management
personnel receive retirement payments equal to a portion of the average prior
five years' base compensation. Directors receive retirement payments based upon
the amount of years of service at PFG and their age at retirement. These
payments are to be made to the individuals or their designated beneficiary for a
maximum period of fifteen years for management personnel and five years for
directors. The plan also provides for reduced benefits upon early retirement,
disability, or termination of employment/service. The plan provided for full
vesting immediately upon a change in control of PFG, as occurred with the
acquisition by Guarantee Life. The Company anticipates that any benefits under
the plan will be funded by life insurance policies which have been issued. At
December 31, 1997, the accrued benefits of the plan included in other
liabilities was $6.5 million.
(11) Fair Value Information
The carrying value and estimated fair value of Guarantee Life's invested
assets and investment type insurance contracts (without material mortality risk)
were as follows (in thousands):
<TABLE>
<CAPTION>
As of December 31,
---------------------------------------------------------------
1997 1996
--------------------------- --------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Assets:
Fixed maturities $754,867 $767,185 $665,383 $674,612
Equity securities 3,735 3,721 2,946 2,946
Mortgage loans 85,849 91,160 70,156 72,181
Policy loans 21,657 20,098 19,482 17,910
Investment real estate 3,394 7,800 6,620 12,000
Other invested assets 32,212 32,212 29,880 29,880
======== ======== ======== ========
Liabilities:
Annuity contracts $251,828 $220,753 $202,735 $197,239
Other policyholder funds 20,754 20,754 13,662 13,662
======== ======== ======== ========
</TABLE>
(12) Regulatory Matters
A reconciliation of statutory net income determined for Guarantee Life
Insurance under statutory accounting practices to that reflected herein (in
thousands and including Closed Block and discontinued operations) is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net gain from operations as reported to
regulatory authorities $ 15,078 $ 5,077 $ 142
Change in deferred acquisition costs (3,210) (6,742) (2,121)
Deferred federal income taxes 2,996 1,780 2,590
Differences in statutory and GAAP reserves 1,074 1,589 (188)
Unearned ceding commission 186 1,116 596
Other, net 320 12,195 351
-------- -------- --------
Net income as reported herein $ 16,444 $ 15,015 $ 1,370
======== ======== ========
</TABLE>
54
<PAGE>
Building Relationships for Life(R)
A reconciliation of statutory surplus for Guarantee Life Insurance
determined under statutory accounting practices to shareholders' equity
reflected herein (in thousands and including Closed Block and discontinued
operations):
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1997 1996
--------- ---------
<S> <C> <C>
Statutory surplus as reported to regulatory authorities $ 106,950 $ 98,350
Deferred policy acquisition costs 85,403 91,893
Deferred federal income taxes 2,747 (597)
Asset valuation and interest maintenance reserves 17,921 20,107
Fixed maturities available-for-sale unrealized appreciation 24,534 8,297
Insurance reserves (44,192) (45,266)
Shareholders' equity in Holding Company 17,838 29,067
Other, net (2,003) 6,821
--------- ---------
Shareholders' equity as reported herein $ 209,198 $ 208,672
========= =========
</TABLE>
In May 1997, Guarantee Life Insurance filed an amended Annual Statement
for the year ended December 31, 1996, to reflect the ceding commission incurred
in the Security Life insurance transaction as fully expensed in 1996, rather
than deferring the amount and amortizing it into income. Consequently the 1996
amounts shown above have been restated.
Under the NAIC solvency monitoring program known as Risk-Based Capital
(RBC), Guarantee Life's insurance subsidiaries are required to measure its
solvency against certain parameters. As of December 31, 1997, Guarantee Life
Insurance, Guarantee Protective, and AGL exceeded the established minimums in
the RBC program. In addition, Guarantee Life Insurance, Guarantee Protective,
and AGL exceeded the minimum statutory capital and surplus requirements of their
state of domicile.
The Holding Company's ability to pay dividends to its stockholders and
meet its obligations, including debt service and operating expenses, primarily
depends upon receiving sufficient funds from its subsidiaries. The payment of
dividends by Guarantee Life Insurance and AGL are subject to restrictions set
forth in the insurance laws and regulations of Nebraska and Pennsylvania. Under
state law, Guarantee Life Insurance and AGL 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. In November 1997, the Board of
Directors of Guarantee Life Insurance declared a $15 million extraordinary
dividend to the Holding Company, which was paid in January 1998. Guarantee Life
Insurance can not 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.
(13) Segment Data
Group Insurance Business
The Group Insurance Business includes the Employee Benefits Division and
the Group Special Markets Division.
The Employee Benefits Division targets businesses with fewer than 500
employees by providing group non-medical products (Core Products) including term
life, accidental death and dismemberment, short-term disability, long-term
disability, and dental; and voluntary (work site marketed) Core Products
including term life, accidental death and dismemberment, short-term disability,
long-term disability, dental, and vision. A national distribution system of 21
Regional Group Offices markets to employers through employee benefits firms and
brokers.
55
<PAGE>
Guarantee Life 1997 Annual Report
The Group Special Markets Division targets employer groups of 50 or more
lives with self-funded medical plans by providing specialty medical products
(Specialty Products) including excess loss insurance and medical reimbursement
insurance for business executives, and Core Products including term life,
accidental death and dismemberment, short-term disability, and long-term
disability. The distribution in this division is focused on relationships with
Managing General Underwriters (MGUs), Third Party Administrators (TPAs), Blue
Cross/Blue Shield plans, and managed care organizations.
Individual Insurance Business
The individual insurance products include universal life, term life,
interest-sensitive whole life insurance, and annuities. These products are
marketed primarily to individuals and small business owners. Guarantee Life
markets its individual insurance products primarily through independent agents,
as well as Regional Marketing Organizations (RMOs), who in turn develop
relationships with producers. The Individual Business will include all of PFG.
Most of the individual insurance agents also sell insurance products offered by
other companies.
Corporate Business
The corporate business segment includes the Holding Company and the assets
and liabilities not required to support the insurance products of the group and
individual insurance businesses.
The following tables present information about Guarantee Life's operations
by business segment (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues from continuing operations:
Group $ 228,155 $ 175,110 $ 182,207
Individual 82,191 75,832 112,196
Corporate (70) 1,057 17
----------- ----------- -----------
Total $ 310,276 $ 251,999 $ 294,420
Income from continuing operations before income taxes:
Group 9,329 10,165 4,403
Individual 18,250 13,570 15,449
Corporate (1,842) (1,089) 17
----------- ----------- -----------
Total $ 25,737 $ 22,646 $ 19,869
Identifiable assets:
Group 255,742 224,184 221,739
Individual 1,187,444 1,029,529 985,724
Corporate 54,850 19,147 22,675
Discontinued operations 20,997 32,362 50,637
----------- ----------- -----------
Total $ 1,519,033 $ 1,305,222 $ 1,280,775
=========== =========== ===========
</TABLE>
(14) Commitments and Contingencies
Guarantee Life is party to certain claims and legal actions arising during
the ordinary course of business. In the opinion of management, after consulting
with legal counsel, these matters will not have a material adverse effect on the
operations or financial condition of Guarantee Life.
At December 31, 1997, Guarantee Life had a $50.0 million senior secured
revolving line of credit to be used for general corporate purposes, to fund
capital infusions to subsidiaries and for future permitted acquisitions. The
line bears interest at the Adjusted LIBO Rate for the borrowing period plus .55%
prior to May 26, 2000 and plus .80% after May 26, 2000 (6.3125% at December 31,
1997) on funds advanced and resets on a quarterly basis. The credit agreement is
effective through 2002.
56
<PAGE>
Building Relationships for Life(R)
Guarantee Life must pay annual administrative fees as well as quarterly
facility fees for the line of credit. The amount of administrative and facility
fees paid by Guarantee Life were insignificant in 1997 and 1996. Guarantee Life
must also pay quarterly utilization fees when the daily aggregate amount of
loans outstanding exceeds 33-1/3% of the aggregate commitments. No such fees
were paid by Guarantee Life in 1997 or 1996. Origination fees paid, related to
the line of credit were insignificant in 1997 and 1996.
Funding for the credit facility is being provided by The Chase Manhattan
Bank, Norwest Bank Nebraska, N.A. and State Street Bank and Trust Company. On
December 22, 1997, Guarantee Life drew $40.0 million on the credit facility to
fund the PFG acquisition. The entire $40.0 million was outstanding at December
31, 1997, $10.0 million remained available on the credit facility at December
31, 1997. Principal reductions in the amount of $10 million, $15 million, and
$15 million are required in the years 2000, 2001, and 2002, respectively.
Guarantee Life's credit agreement contains certain restrictions and
covenants related to, among others, minimum net worth, debt ratio, leverage
ratio, coverage ratio and Risk Based Capital ratio. At December 31, 1997,
Guarantee Life was in compliance with these covenants.
Guarantee Life has commitments under noncancelable operating leases for
facilities principally used by regional and district offices. Rental expense and
associated future minimum lease payments required under these leases are
insignificant.
During 1996, the Holding Company's Board of Directors adopted a
shareholder rights plan that is intended to ensure fair treatment of
shareholders in the event of any unsolicited offer that might lead to change in
control of Guarantee Life.
According to the plan, shareholders of record on November 29, 1996,
received one right for each share of common stock owned on that date. Each
right, when exercised, will entitle its holder to purchase one one-thousandth of
a share of Series A Junior Participating Cumulative Preferred Stock of the
Holding Company at an exercise price of $80.00.
The plan provides that after a person or group acquires 15% or more of the
Holding Company's voting shares, each of the rights (other than the rights held
by the 15% holder which become void once the holder reaches the 15% threshold)
offers the holder the right to acquire, upon payment of the exercise price,
common stock having a market value equal to twice the exercise price. In
addition, in the event that after a person or group acquires 15% or more of the
Holding Company's voting shares, or the Holding Company is acquired in a merger
or other business combination transaction of 50% or more of Guarantee Life's
assets, cash flow or earnings power are sold or otherwise transferred, each of
the rights (other than the rights held by the 15% holder) offers the holders the
right to acquire, upon payment of the exercise price, that number of shares of
common stock of the acquiring company which at the time of such transaction
would have a market value of two times the exercise price of the right. The plan
also provides that if a person or group acquires at least 15%, but less than
50%, of the Holding Company's voting stock, the Board may exchange each right
(other than those rights held by the 15% holder) for one share of the Holding
Company's common stock.
The rights may be redeemed by the Board of Directors for $0.01 per right
at any time prior to the first public announcement or communication to Guarantee
Life that a person or group has crossed the 15% threshold. The rights will
expire on November 18, 2006, unless earlier redeemed or exchanged by the Holding
Company in accordance with the provisions of the plan.
57
<PAGE>
Guarantee Life 1997 Annual Report
(15) Discontinued Operations
In November 1994, Guarantee Life made a decision to withdraw from its
alternative workers' compensation benefit program segment. To facilitate its
exit, Guarantee Life entered into a reinsurance arrangement whereby it cedes 80%
of all claims incurred after October 31, 1994. In addition, Guarantee Life
entered into a reinsurance arrangement to limit its exposure to $10,000 per
claim relating to its 20% retention.
Concurrent with the implementation of the reinsurance coverage, Guarantee
Life amended its agreement with the managing general agent which marketed this
product for Guarantee Life, whereby Guarantee Life agreed to write new or
renewal business for this line only until the earlier replacement by another
insurance carrier or November 1, 1995. In September 1995, a replacement carrier
began issuing policies in Louisiana and Georgia. Effective November 1, 1995,
Guarantee Life ceased writing Special Risk Policies.
Guarantee Life intends to allow the liabilities related to this business
to run off, unless an appropriate sale can be made. Guarantee Life does not
believe the disposal of this segment will result in a loss which would be
significant. Any gain resulting from a potential disposition would be recognized
when realized using the installment method of accounting.
The composition of the assets (liabilities) classified as discontinued are as
follows:
December 31,
----------------------
1997 1996
--------- ---------
Ceded reinsurance recoverables $ 57,693 $ 74,359
Policy and contract claims (78,578) (107,461)
Amounts payable to reinsurers (112) 740
--------- ---------
Net liabilities relating to discontinued operations $ (20,997) $ (32,362)
========= =========
The results of operations for the discontinued segment are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net premiums $ (581) $ 4,207 $ 12,072
Investment income, net and realized investment gains 1,634 2,899 4,057
Ceding commissions 241 1,455 19,076
-------- -------- --------
Total revenues 1,294 8,561 35,205
Net policyholder benefits (1,307) 4,062 12,256
Policy acquisition costs and other operating expense 2,903 4,045 25,560
-------- -------- --------
Income (loss) before income taxes (302) 454 (2,611)
Income tax expense (benefit) (107) 159 (914)
-------- -------- --------
Net income (loss) from discontinued operations $ (195) $ 295 $ (1,697)
======== ======== ========
</TABLE>
58
<PAGE>
Building Relationships for Life(R)
(16) Quarterly Results (unaudited)
(in thousands, except per share data)
1997
-------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
Revenues $ 69,223 $ 75,776 $ 79,864 $ 85,413
========== ========== ========== ==========
Net income $ 3,200 $ 4,346 $ 4,719 $ 4,179
========== ========== ========== ==========
Earnings per share, basic $ .32 $ .45 $ .51 $ .47
========== ========== ========== ==========
Earnings per share, diluted $ .32 $ .44 $ .50 $ .45
========== ========== ========== ==========
(in thousands, except per share data)
1996
-------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
Revenues $ 60,086 $ 63,029 $ 62,893 $ 65,991
========== ========== ========== ==========
Net income $ 2,206 $ 3,793 $ 4,959 $ 4,057
========== ========== ========== ==========
Earnings per share, basic $ .22 $ .38 $ .50 $ .41
========== ========== ========== ==========
Earnings per share, diluted $ .22 $ .38 $ .49 $ .40
========== ========== ========== ==========
Net income per share is computed independently for each of the quarters.
Therefore, the sum of the quarterly income per share may not equal the total for
the year.
59
<PAGE>
Guarantee Life 1997 Annual Report
Shareholder Information
Stock Listing
NASDAQ National Market System Symbol: GUAR
The common stock of The Guarantee Life Companies Inc. was listed on the NASDAQ
National Market System on December 20, 1995.
Stock Transfer Agent and Registrar
ChaseMellon Shareholder Services, L.L.C.
Overpeck Centre
85 Challenger Road
Ridgefield Park, New Jersey 07660
www.chasemellon.com
1-800-298-6807
Annual Meeting
The Annual Meeting of the Shareholders will be held on May 14, 1998, at 10 a.m.,
at Joslyn Art Museum, 2200 Dodge Street, Omaha, Nebraska.
Form 10-K
A copy of the most recent annual report on Form 10-K, as filed with the
Securities and Exchange Commission, will be provided free of charge upon request
to shareholders. Written requests should be directed to Investor Relations, The
Guarantee Life Companies Inc., Guarantee Centre, 8801 Indian Hills Drive, Omaha,
Nebraska 68114-4066. The Form 10-K can also be found on the Company's World Wide
Website, www.guar.com.
Common Stock and Dividend Information
- -------------------------------------------------------------------
1997 High Low Close Dividends Declared
- -------------------------------------------------------------------
First Quarter $21.500 $18.250 $19.125 $0.06
Second Quarter $25.125 $18.375 $25.125 $0.06
Third Quarter $29.250 $23.500 $28.875 $0.07
Fourth Quarter $30.750 $24.750 $28.500 $0.07
- -------------------------------------------------------------------
1996
- -------------------------------------------------------------------
First Quarter $17.000 $15.375 $15.375 $ -
Second Quarter $18.125 $15.750 $17.625 $0.05
Third Quarter $19.875 $15.750 $19.875 $0.05
Fourth Quarter $20.000 $18.000 $18.500 $0.06
- -------------------------------------------------------------------
On February 27, 1998, there were 50,755 shareholders of record and the closing
price was $26.75.
It is Guarantee Life's policy to provide equal opportunity in employment for all
persons; to prohibit discrimination in employment because of race, color,
religion, gender, age, marital status, disability, or national origin; and to
promote the full realization of equal employment opportunity through continuing
affirmative action endeavors.
60
<PAGE>
Board Of Directors
- --------------------------------------------------------------------------------
Robert D. Bates
Chairman of the Board, President
and Chief Executive Officer
The Guarantee Life Companies Inc.
C. R. "Bob" Bell
President
Greater Omaha Chamber of Commerce
John R. Cochran
Chairman of the Board
and Chief Executive Officer
FirstMerit Corporation
Theodore C. Cooley
Executive Vice President
The Guarantee Life Companies Inc.
Lee M. Gammill, Jr.
Vice Chairman of the Board (retired)
New York Life Insurance Company
Thomas T. Hacking
Chief Executive Officer
Hacking & Co.
James M. McClymond
Consultant
Thermal Technology, Inc.
Bernard W. Reznicek
National Director, Utility Marketing
Central States Indemnity Co. of Omaha
A. J. Scribante
Chairman of the Board and
Chief Executive Officer
VITAL LEARNING Corporation
Janice D. Stoney
Executive Vice President (retired)
U S WEST Communications
William F. Welsh II
President and Chief Executive Officer
Election Systems & Software, Inc.
Executive Officers
- --------------------------------------------------------------------------------
Michael G. Allen
Senior Vice President - Employee
Benefits Division
Robert D. Bates
Chairman of the Board, President
and Chief Executive Officer
William L. Bauhard
Senior Vice President and Chief
Financial Officer
David L. Bomberger
Senior Vice President - Finance
and Treasurer
C. E. "Duffy" Boyle/1/
Senior Vice President -
Information Systems and Services
Alan D. Brinkman/1/
Vice President and Corporate Actuary
Theodore C. Cooley
Executive Vice President - Individual
Division
Richard C. Easton/1/
Senior Vice President - Group
Marketing - Employee Benefits
Division
J. D. "Wayne" Gardner/1/
Senior Vice President - Product and
Strategic Development - Individual
Division
Mary G. Rahal
Senior Vice President - Human
Resources and Corporate Services
Gary H. Rittenhouse
Senior Vice President - Strategic
Initiatives and Group Special Markets
Richard A. Spellman
Senior Vice President, General
Counsel and Secretary
/1/Designates executive officers of insurance
subsidiary only
A Special Note
From Bob Bates
All of us at Guarantee Life would like to extend a special thanks to Gene
Conley and Fred Bekins who retired from our Board of Directors in 1997. For
many years, these two men made a very positive and lasting impression on
Guarantee Life through their knowledge, expertise, and dedication. They will be
missed.
We would also like to formally welcome Lee Gammill who joined the Board in May
1997. Lee brings with him a broad, yet in-depth knowledge of the life insurance
industry which complements and enhances our business strategies.
Our sincere thanks to each of you.
61
<PAGE>
Exhibit 21
Subsidiaries of the Registrant
Subsidiaries of The Guarantee Life Companies Inc. as of December 31, 1997
-------------------------------------------------------------------------
. Guarantee Life Insurance Company, a Nebraska stock insurance company
. Guarantee Protective Life Company, a Nebraska stock insurance company
. PFG, Inc., a Pennsylvania corporation (of which The Guarantee Life Companies
Inc. owns 75% of the voting stock and Guarantee Life Insurance Company owns
25% of the voting stock)
Subsidiaries of PFG, Inc.:
Philadelphia Financial Group, Inc., a Delaware corporation;
PFG Distribution Co., a Delaware corporation; and
AGL Life Assurance Company, a Pennsylvania corporation
<PAGE>
Exhibit 23
Consent of KPMG Peat Marwick LLP
CONSENT OF INDEPENDENT AUDITORS'
The Board of Directors
The Guarantee Life Companies Inc.:
We consent to incorporation by reference in Registration Statement Nos.
333-17863 and 333-22461 on Form S-8 of The Guarantee Life Companies Inc. of our
reports dated February 13, 1998 relating to the consolidated balance sheets of
The Guarantee Life Companies Inc. and subsidiaries (Guarantee Life) as of
December 31, 1997 and 1996, and the related consolidated statements of income,
comprehensive income, shareholders' equity and cash flows and related schedules
for each of the years in the three-year period ended December 31, 1997, which
reports are included or incorporated by reference in the December 31, 1997
Annual Report on Form 10-K of The Guarantee Life Companies Inc.
KPMG Peat Marwick LLP
Omaha, Nebraska
March 16, 1998
<PAGE>
Exhibit 24(b)
Power of Attorney of Director Gammill
KNOW ALL MEN BY THESE PRESENTS that the undersigned, a director of The
Guarantee Life Companies Inc., a Delaware corporation (the "Company"), hereby
appoints each of Robert D. Bates, Richard A. Spellman and Paul D. Ochsner as his
true and lawful attorney-in-fact to act for him and in his name and on his
behalf, individually and as a director of the Company, to sign one or more Form
10-K Annual Reports and Form 10-Q Quarterly Reports and any amendments thereto
and to file the same with the Securities and Exchange Commission and generally
to do and perform all things necessary to be done in connection with the
foregoing as fully in all respects as he could do personally.
IN WITNESS WHEREOF, I have hereunto set my hand this 4th day of June, 1997.
/s/ Lee M. Gammill, Jr
---------------------------------
Lee M. Gammill, Jr.
STATE OF NEW YORK )
) SS.
COUNTY OF NEW YORK )
The undersigned, being a notary public in and for the above county and
state, does hereby state that before me appeared Lee M. Gammill, Jr., being
personally known to me, who, being first duly sworn, did acknowledge that the
foregoing Power of Attorney was executed by him and that such execution was his
free act and deed.
/s/ Dirk S. Levinsohn
---------------------------------
Notary Public
My Commission Expires:
8/26/98 (SEAL)
- -------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997 AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<DEBT-HELD-FOR-SALE> 582,700 526,799
<DEBT-CARRYING-VALUE> 172,167 138,584
<DEBT-MARKET-VALUE> 184,480 147,813
<EQUITIES> 3,735 2,946
<MORTGAGE> 85,849 70,156
<REAL-ESTATE> 3,394 6,620
<TOTAL-INVEST> 1,211,491 1,094,274
<CASH> 8,608 2,079
<RECOVER-REINSURE> 82,568 65,177
<DEFERRED-ACQUISITION> 102,696 77,968
<TOTAL-ASSETS> 1,519,033 1,305,222
<POLICY-LOSSES> 196,655 151,395
<UNEARNED-PREMIUMS> 11,866 10,679
<POLICY-OTHER> 542,038 460,097
<POLICY-HOLDER-FUNDS> 20,754 13,662
<NOTES-PAYABLE> 40,000 0
0 0
0 0
<COMMON> 99 99
<OTHER-SE> 209,099 208,573
<TOTAL-LIABILITY-AND-EQUITY> 1,519,033 1,305,222
230,928 181,690
<INVESTMENT-INCOME> 58,449 54,371
<INVESTMENT-GAINS> 1,270 167
<OTHER-INCOME> 19,629 15,771
<BENEFITS> 140,332 106,946
<UNDERWRITING-AMORTIZATION> 57,364 47,554
<UNDERWRITING-OTHER> 61,191 51,365
<INCOME-PRETAX> 25,737 22,646
<INCOME-TAX> 9,098 7,926
<INCOME-CONTINUING> 16,639 14,720
<DISCONTINUED> (195) 295
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 16,444 15,015
<EPS-PRIMARY> 1.74 1.51
<EPS-DILUTED> 1.70 1.51
<RESERVE-OPEN> 55,413 56,050
<PROVISION-CURRENT> 79,739 72,192
<PROVISION-PRIOR> 1,151 (18,392)
<PAYMENTS-CURRENT> 48,590 40,131
<PAYMENTS-PRIOR> 21,261 14,306
<RESERVE-CLOSE> 66,452 55,413
<CUMULATIVE-DEFICIENCY> 0 0
</TABLE>
