<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------------------
FORM 10-Q
---------------------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 1998 Commission File Number 0-26788
THE GUARANTEE LIFE COMPANIES INC.
(Exact Name of the Registrant as Specified in its Charter)
Delaware 47-0785066
(State of Incorporation) (I.R.S. Employer Identification Number)
8801 Indian Hills Drive, Omaha, Nebraska 68114
(Address of Principal Executive Offices)
Registrant's telephone number: (402) 361-7300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes [X] No [ ]
Shares of common stock outstanding as of April 29, 1998: 8,838,101
================================================================================
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
Assets 1998 1997
------ ------------ ------------
(unaudited)
<S> <C> <C>
Invested assets:
Fixed maturities:
Available-for-sale, at fair value (amortized cost: $578,455 and $566,544)...... $593,304 $582,700
Held-to-maturity, at amortized cost (fair value: $180,558 and $184,480)........ 177,927 172,167
------------ ------------
771,231 754,867
Equity securities, at fair value (cost: $3,142 and $2,735).......................... 3,967 3,735
Mortgage loans, net................................................................. 84,762 85,849
Policy loans........................................................................ 22,511 21,657
Investment real estate, net......................................................... 3,318 3,394
Other invested assets, net.......................................................... 14,371 32,212
Closed block invested assets........................................................ 300,491 309,777
------------ ------------
Total invested assets.................................................................... 1,200,651 1,211,491
Cash and cash equivalents................................................................ 8,477 8,608
Accrued investment income................................................................ 11,859 12,415
Recoverable from reinsurers.............................................................. 87,420 82,568
Accounts receivable, net................................................................. 16,097 19,805
Deferred policy acquisition costs........................................................ 101,865 102,696
Property, plant and equipment, net....................................................... 19,151 19,427
Other assets ............................................................................ 14,452 11,572
Closed block other assets................................................................ 23,974 17,754
Separate account assets.................................................................. 38,809 32,697
------------ ------------
Total assets ............................................................................ $1,522,755 $1,519,033
============ ============
Liabilities and Shareholders' Equity
------------------------------------
Future policy benefits................................................................... $137,657 $143,048
Policyholder account balances............................................................ 544,793 542,038
Policy and contract claims............................................................... 59,966 53,607
Other policyholder funds................................................................. 16,285 20,754
Unearned premium revenue................................................................. 11,529 11,866
Payable to reinsurers.................................................................... 11,305 6,938
Notes payable............................................................................ 40,000 40,000
Other liabilities........................................................................ 47,887 51,284
Closed block liabilities................................................................. 385,906 386,606
Discontinued operations, net............................................................. 23,998 20,997
Separate account liabilities............................................................. 38,809 32,697
------------ ------------
Total liabilities........................................................................ 1,318,135 1,309,835
------------ ------------
Shareholders' equity:
Common stock $0.01 par value; 30,000,000 shares authorized, 9,944,383 shares
issued........................................................................... 99 99
Additional paid-in capital.......................................................... 191,129 191,123
Treasury stock, at cost (1,106,282 shares at March 31, 1998 and 1,017,524 shares at
December 31, 1997)............................................................... (25,154) (22,512)
Retained earnings................................................................... 27,201 27,463
Net unrealized investment gain ..................................................... 11,345 13,025
------------ ------------
Total shareholders' equity............................................................... 204,620 209,198
Commitments and contingencies............................................................ - -
------------ ------------
Total liabilities and shareholders' equity............................................... $1,522,755 $1,519,033
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
-------------- --------------
<S> <C> <C>
Revenues:
Direct and assumed premiums and policyholder assessments.............................. $88,205 $62,639
Reinsurance premiums.................................................................. (17,625) (12,189)
-------------- --------------
Net premiums and policyholder assessments............................................. 70,580 50,450
Investment income, net................................................................ 16,140 13,905
Realized investment gains............................................................. 119 144
Ceding commissions and other income................................................... 5,041 3,759
Contribution from Closed Block........................................................ 1,202 965
-------------- --------------
Total revenues........................................................................ 93,082 69,223
-------------- --------------
Policyholder benefits:
Direct and assumed benefits........................................................... 67,022 44,430
Reinsurance recoveries................................................................ (13,033) (7,506)
-------------- --------------
Net policyholder benefits............................................................. 53,989 36,924
-------------- --------------
Expenses:
Policy acquisition costs.............................................................. 17,969 12,344
Other insurance operating expense..................................................... 20,571 15,063
-------------- --------------
Total expenses........................................................................ 38,540 27,407
-------------- --------------
Income from continuing operations before income taxes................................. 553 4,892
-------------- --------------
Income tax expense.................................................................... 194 1,739
-------------- --------------
Net income from continuing operations................................................. 359 3,153
-------------- --------------
Net income (loss) from discontinued operations........................................ (2) 47
-------------- --------------
Net income............................................................................ $357 $3,200
============== ==============
Basic Earnings per share:
Weighted average shares outstanding.............................................. 8,853,228 9,929,127
============== ==============
Net income from continuing operations............................................ $0.04 $0.32
============== ==============
Net income (loss) from discontinued operations................................... $0.00 $0.00
============== ==============
Net income ...................................................................... $0.04 $0.32
============== ==============
Diluted Earnings per share:
Weighted average shares outstanding.............................................. 9,174,541 10,099,237
============== ==============
Net income from continuing operations............................................ $0.04 $0.31
============== ==============
Net income (loss) from discontinued operations................................... $0.00 $0.01
============== ==============
Net income....................................................................... $0.04 $0.32
============== ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
--------------- --------------
<S> <C> <C>
Net income $357 $3,200
Other comprehensive income, net of tax:
Unrealized appreciation (depreciation) of invested assets carried at fair value, net.......... (1,680) (10,059)
--------------- --------------
Comprehensive income.......................................................................... $(1,323) $(6,859)
=============== ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
------------- -------------
<S> <C> <C>
Net cash provided (used) by operating activities....................... $(17,330) $3,922
------------- -------------
Cash flows from investing activities:
Purchase of fixed maturities........................................ (70,042) (65,631)
Maturities, calls and principal reductions of fixed maturities...... 60,740 66,020
Purchase of mortgage loans.......................................... (1,325) (4,995)
Proceeds from repayment of mortgage loans........................... 2,415 1,236
Change in closed block invested assets.............................. 9,514 (4,608)
Change in short term invested assets................................ 17,841 2,701
Other, net.......................................................... (978) 3,028
------------- -------------
Net cash provided (used) by investing activities.................. 18,165 (2,249)
------------- -------------
Cash flows from financing activities:
Deposits to policyholder account balances........................... 16,738 19,592
Withdrawals from policyholder account balances...................... (13,935) (17,301)
Purchase of Treasury Stock.......................................... (3,150) (1,599)
Shareholder dividends............................................... (619) (597)
------------- -------------
Net cash (used) provided by financing activities................. (966) 95
------------- -------------
Net increase (decrease) in cash and cash equivalents................... (131) 1,768
Cash and cash equivalents at beginning of period....................... 8,608 2,079
------------- -------------
Cash and cash equivalents at end of period............................. $8,477 $3,847
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998 and 1997
(1) Summary of Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements
include The Guarantee Life Companies Inc. and its direct and indirect
wholly-owned insurance subsidiaries. These financial statements have been
prepared in conformity with generally accepted accounting principles for
interim financial information and reflect all adjustments (consisting only
of normal recurring items) which are, in the opinion of management,
necessary to present fairly the financial position and results of
operations for the periods presented.
Operating results for the three month periods ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1998. These financial statements and notes thereto
should be read in conjunction with the audited consolidated financial
statements for the fiscal year ended December 31, 1997, contained in
Guarantee Life's annual report on Form 10-K for the year ended December 31,
1997.
(2) Investments
Fixed maturities at March 31, 1998 (in thousands) are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies.................... $68,298 $1,011 $75 $69,234
Obligations of states and political subdivisions........... 13,639 490 6 14,123
Debt securities issued by foreign governments.............. 5,913 563 - 6,476
Corporate securities....................................... 302,249 12,964 978 314,235
Mortgage-backed securities................................. 155,830 3,109 2,723 156,216
Other asset-backed securities.............................. 32,526 548 54 33,020
------------- ------------- -------------- -------------
$578,455 $18,685 $3,836 $593,304
============= ============= ============== =============
Held-to-maturity:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies.................... $10,036 $39 $18 $10,057
Obligations of states and political subdivisions........... 7,961 51 12 8,000
Corporate securities....................................... 158,938 12,096 9,531 161,503
Mortgage-backed securities................................. 992 6 - 998
------------- ------------- -------------- -------------
$177,927 $12,192 $9,561 $180,558
============= ============= ============== =============
</TABLE>
(3) Closed Block
Summarized condensed financial information of the closed block (in thousands) is
as follows:
<TABLE>
<CAPTION>
March 31, December 31,
Assets 1998 1997
------ -------------- --------------
<S> <C> <C>
Invested assets:
Fixed maturities:
Available-for-sale, at fair value (amortized cost: $197,503 and $202,869) $204,878 $211,248
Held-to-maturity, at amortized cost (fair value: $49,473 and $52,224) 46,233 48,838
------------- -------------
251,111 260,086
Policy loans............................................................. 46,686 46,997
Other invested assets, net............................................... 2,694 2,694
------------- -------------
Total invested assets......................................................... 300,491 309,777
Cash and cash equivalents..................................................... 7,561 328
Accrued investment income..................................................... 3,236 4,221
Deferred policy acquisition costs............................................. 11,794 12,233
Other assets.................................................................. 1,383 972
------------- -------------
Total closed block assets..................................................... $324,465 $327,531
============= =============
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
March 31, December 31,
Liabilities 1998 1997
----------- ------------- -------------
<S> <C> <C>
Life future policy benefits................................................... $300,975 $301,495
Policyholder account balances for annuity contracts........................... 852 868
Policy and contract claims.................................................... 749 573
Other policyholder funds...................................................... 72,076 72,024
Dividends payable to policyholders............................................ 7,791 7,767
Deferred income taxes......................................................... 2,581 2,932
Other liabilities............................................................. 882 946
------------- -------------
Total closed block liabilities................................................ $385,906 $386,606
============= =============
</TABLE>
Condensed statement of income for the closed block for the three months ended
March 31 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
1998 1997
------------- -------------
<S> <C> <C>
Revenues:
Insurance premiums and policyholder assessments, net of reinsurance............... $5,236 $ 5,531
Investment income, net............................................................ 5,633 5,720
Realized investment gains (losses) ............................................... 11 (62)
Other income...................................................................... 2 21
------------- -------------
Total revenues.................................................................... 10,882 11,210
------------- -------------
Policyholder benefits and expenses:
Total policyholder benefits....................................................... 6,106 5,798
Policy acquisition costs.......................................................... 439 508
Other insurance operating expense................................................. 107 971
------------- -------------
Total benefits and expenses....................................................... 6,652 7,277
Dividends to policyholders........................................................ 3,028 2,968
------------- -------------
Contribution from the closed block................................................ $1,202 $ 965
============= =============
</TABLE>
The closed block includes only those revenues, benefits, expenses and dividends
resulting from the policies which were included in the closed block on December
26, 1995, the effective date of Guarantee Life Insurance Company's conversion to
a stock life insurance company. The pre-tax income of the closed block is
reported as a single line item, Contribution from closed block, in Guarantee
Life's condensed consolidated statements of income. Income tax expense
applicable to the closed block is reflected as a component of income tax
expense.
The excess of closed block liabilities over closed block assets as of March 31,
1998 represents the estimated future contribution from closed block, which will
be recognized in Guarantee Life's statements of income over the period the
underlying policies and contracts remain in force.
If, over the period the closed block remains in existence, the actual cumulative
contribution is greater than the expected cumulative contribution, only such
expected contribution will be recognized in Guarantee Life's statements of
income. The excess will be paid to closed block policyholders as additional
policyholder dividends. Alternatively, if the actual cumulative contribution is
less than the expected cumulative contribution, only such actual contribution
will be recognized in Guarantee Life's statements of income. However, dividends
will be changed in the future, to increase actual contributions until the actual
cumulative contributions equal the expected cumulative contributions.
(4) Earnings per common share
Basic earnings per share of common stock have been computed on the basis of the
weighted average number of shares of common stock outstanding. Diluted earnings
per share is based on the weighted average number of shares and common stock
equivalents outstanding. The Company's common stock equivalents relate to common
stock options.
7
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following analysis of the consolidated financial condition and results
of operations of Guarantee Life should be read in conjunction with the condensed
consolidated financial statements and the notes thereto included herein.
Forward-looking Statements
This 10-Q report contains certain forward-looking statements. All forward-
looking statements are inherently uncertain as they are based on various
management expectations and assumptions concerning future events and they are
subject to numerous known and unknown risks and uncertainties which could cause
actual results to differ materially from those projected. Such statements
reflect the current view of Guarantee Life with respect to future events and are
subject to certain risks, uncertainties and assumptions, including the business
factors described in Guarantee Life's annual report on Form 10-K for the year
ended December 31, 1997. Should one or more of such risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those described herein as believed, estimated or
expected.
Operating Results for the Three Months Ended March 31, 1998 and 1997
As part of the conversion to a stock life insurance company in 1995,
Guarantee Life Insurance established a Closed Block to provide for dividends on
certain policies that were in force on December 26, 1995 (the "Effective Date").
After the Effective Date, the operating results from the Closed Block are
reported on one line, Contribution from closed block, in the consolidated
statements of income. The following table presents the consolidated results of
operations combined with the results of operations of the Closed Block.
Management's discussion and analysis addresses the combined results of
operations unless noted otherwise.
Combined Results of Operations
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
1998 1997
-------------- --------------
<S> <C> <C>
Revenues:
Premiums and policyholder assessments, net................. $75,816 $55,981
Investment income, net..................................... 21,773 19,625
Realized investment gains.................................. 130 82
Ceding commissions and other income........................ 5,043 3,780
------------- --------------
Total revenues.................................................. 102,762 79,468
Benefits and expenses:
Policyholder benefits, net of reinsurance.................. 60,095 42,722
Expenses................................................... 39,086 28,886
Dividends to policyholders................................. 3,028 2,968
------------- --------------
Total policyholder benefits, expenses........................... 102,209 74,576
------------- --------------
Income from continuing operations before income taxes........... 553 4,892
Income taxes.................................................... 194 1,739
------------- --------------
Net income from continuing operations........................... $359 $3,153
============= ==============
Net income excluding realized gains............................. $275 $3,100
============= ==============
</TABLE>
Investment Income, Net. Net investment income increased $2.1 million, or
11.0% for the first quarter of 1998 over 1997. This increase was caused by an
increase in invested assets, which increased $120 million, or 11.0% in 1998. The
increase in invested assets is primarily due to the acquisition of PFG, Inc. on
December 23, 1997.
8
<PAGE>
Insurance Operations--Group
The following table sets forth Guarantee Life's group insurance
underwriting income for the three months ended March 31, 1998 and 1997.
<TABLE>
<CAPTION>
Group Underwriting Income
Three Months Ended March 31,
-------------------------------------------------------------------------------------
1998 1997
------------------------------------------ -----------------------------------------
(In thousands)
Employee Group Employee Group
Benefits Special Benefits Special
Division Markets Total Division Markets Total
<S> <C> <C> <C> <C>
Gross insurance premiums............ $49,193 $25,205 $74,398 $33,847 $20,114 $53,961
Ceded to reinsurers................. (1,130) (13,529) (14,659) (392) (10,513) (10,905)
------------- -------------- ------------- ------------- ------------- -------------
Net premiums........................ 48,063 11,676 59,739 33,455 9,601 43,056
Ceding commissions.................. 38 4,508 4,546 - 3,688 3,688
------------- -------------- ------------- ------------- ------------- -------------
Total net premiums and ceding
commissions.................... 48,101 16,184 64,285 33,455 13,289 46,744
------------- -------------- ------------- ------------- ------------- -------------
Gross policyholder benefits......... 34,524 17,991 52,515 21,904 12,233 34,137
Recoveries from reinsurers.......... (174) (11,017) (11,191) 1,368 (7,672) (6,304)
------------- -------------- ------------- ------------- ------------- -------------
Net benefits........................ 34,350 6,974 41,324 23,272 4,561 27,833
Expenses............................ 20,046 8,290 28,336 13,784 6,839 20,623
------------- -------------- ------------- ------------- ------------- -------------
Total net benefits and expenses.. 54,396 15,264 69,660 37,056 11,400 48,456
------------- -------------- ------------- ------------- ------------- -------------
Underwriting gain (loss) ........... $(6,295) $ 920 $(5,375) $(3,601) $1,889 $(1,712)
============= ============== ============= ============= ============= =============
</TABLE>
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information," which established standards for reporting
information about operating segments. Generally, SFAS 131 required that
financial information be reported on the basis that is used internally for
evaluation performance. Guarantee Life adopted SFAS 131 effective January 1,
1998, and comparative information for 1997 has been restated. Under 131,
Guarantee Life defined the Group Insurance Business divisions, EBD and GSM, as
segments and will report their operations separately.
The Employee Benefits Division (EBD) provides group non-medical (core
products) including term life, accidental death and dismemberment, short-term
disability, long-term disability, and dental; and voluntary (worksite marketed)
core products. The Group Special Markets Division provides specialty medical
products (specialty products) including excess loss insurance, medical
reimbursement insurance for business executives, and core products.
Employee Benefits Divisions (EBD) net earned premiums increased $14.6
million, or 43.7% for the first quarter of 1998 over 1997. The greatest
increases in net earned premiums occurred in the dental and LTD product lines.
Dental net earned premiums increased $8.0 million or 99.4% and LTD net earned
premiums increased $2.8 million or 38.8% for the first quarter of 1998 over
1997.
Group Special Markets (GSM) net premiums increased $2.1 million, or 21.6%
for the first quarter of 1998 over 1997. Net earned premiums for all products
increased with the largest increases in the excess loss, life, LTD and AD&D
product lines.
EBD net benefits increased $11.1 million, or 47.6% for the first quarter of
1998 over 1997. This increase is caused by higher premium volume in all product
lines and higher loss ratios in the life and dental lines. Dental prices have
been increased three times in the last eight months and risk appraisal
procedures have been adjusted to improve underwriting experience in the dental
line. During the first quarter of 1998, pricing was increased for all group
renewals and averaged between 5% and 7%.
GSM net benefits increased $2.4 million or 52.9%, for the first quarter of
1998 over 1997. This increase is due to higher premium volume in all product
lines and higher loss ratios in the excess loss line. Excess loss pricing and
risk management actions were taken during 1997 to improve underwriting
experience.
9
<PAGE>
Employee Benefits Division expenses increased $6.3 million, or 45.3% for
the first quarter of 1998 over 1997. This increase was due partly to the
increase in gross premium which directly impacts commissions, taxes, licenses,
and fees. The increase is also due to higher general operating expenses
associated with processing new business and the expansion of the Employee
Benefits Division.
Group Special Markets expenses increased $1.5 million, or 21.2% for the
first quarter of 1998 over 1997. This increase was due primarily to the increase
in gross premium which directly impacts commissions, taxes, licenses, and fees.
Insurance Operations--Individual
The following table sets forth the results of operations for Guarantee
Life's individual insurance business for the three months ended March 31, 1998
and 1997.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
------------- --------------
(In thousands)
<S> <C> <C>
Revenues:
Premiums and policyholder assessments, net of reinsurance premiums...... $16,077 $12,925
Investment income, net.................................................. 17,792 16,886
Realized investment gains (losses)...................................... (222) (177)
Ceding commissions and other income..................................... 497 92
----------- ------------
Total revenues............................................................... 34,144 29,726
Policyholder benefits and expenses:
Policyholder benefits, net of reinsurance............................... 18,771 14,889
Expenses................................................................ 10,024 7,701
Dividends to policyholders.............................................. 3,028 2,968
----------- ------------
Total policyholder benefits, expenses and dividends.......................... 31,823 25,558
----------- ------------
Income from continuing operations before income taxes........................ $2,321 $4,168
=========== ============
</TABLE>
On December 23, 1997 Guarantee Life acquired PFG, Inc., and its
subsidiaries (PFG). PFG's wholly owned subsidiaries include AGL Life Assurance
Company (AGL) and "Philadelphia Financial Group" which consists of Philadelphia
Financial Group, Inc., PFG Distribution Company, Philadelphia Financial Group
Agency of Ohio, Inc., PFG Insurance Agency of Texas, Inc., and Philadelphia
Financial Insurance Agency of Massachusetts, Inc. The results of operations
detailed above include PFG in the three months ended March 31, 1998, but not in
1997.
Net premiums and policyholder assessments increased $3.2 million, or 24.4%
for the first quarter of 1998 over 1997. The increase for the quarter relates
primarily to the acquisition of PFG in the fourth quarter of 1997.
Total individual policyholder benefits increased $3.9 million, or 26.1%,
for the first quarter of 1998 over 1997. This increase is due to higher than
expected mortality in the traditional and universal lines as well as the
inclusion of PFG in the first quarter of 1998. Interest credited on policyholder
account balances increased $1.0 million for the three months ended March 31.
This increase was due primarily to the inclusion of PFG in first quarter as
average crediting rates did not change significantly.
Total individual expenses increased $2.3 million or 30.2% for the first
quarter of 1998 over 1997. This increase relates primarily to operating expenses
incurred by PFG in the first quarter of 1998.
Policyholder dividends increased only slightly during 1998, reflecting an
unchanged dividend scale applied to increasing policy account values.
Liquidity and Capital Resources
The Holding Company's ability to pay dividends to its stockholders and meet
its obligations, including debt service and operating expenses, depends
primarily upon receiving sufficient funds from its subsidiaries. The payment of
dividends by Guarantee Life Insurance and AGL are subject to restrictions set
forth in the insurance laws and regulations
10
<PAGE>
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.
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.
Historically, Guarantee Life has generated positive cash flow from
operating activities and net deposits to policyholder accounts, and used these
funds to purchase fixed maturity securities or other invested assets. The
Company experienced negative cashflow from operations during the three months
ended March 31, 1998 due primarily to changes in ceded reinsurance recoverables,
other policyholder funds, other liabilities and closed block assets and
liabilities.
Interest Rate Changes
Interest rate changes may have temporary effects on the sale and
profitability of the universal life and annuity products offered by Guarantee
Life's insurance operations. For example, if interest rates rise, competing
investments (such as annuities or life insurance offered by Guarantee Life's
insurance competitors, certificates of deposit, mutual funds, and similar
instruments) may become more attractive to potential purchasers of Guarantee
Life's products until Guarantee Life increases the rate credited to holders of
its universal life and annuity products. Guarantee Life constantly monitors
interest rates with respect to a spectrum of durations and sells policies and
annuities that permit flexible responses to interest rate changes as part of its
management of interest rate spreads.
Changes in interest rates have not had a significant impact on Guarantee
Life's net income in the three months ended March 31, 1998.
New Accounting Pronouncements
In February 1998, the FASB issued Statement 132, "Employers' Disclosures
about Pensions and Other Post-retirement Benefits" which will be implemented in
Guarantee Life's December 31, 1998 financial statements. SFAS No. 132 will not
affect net income. SFAS No. 132 standardizes the disclosure requirements for
pensions and other post-retirement benefits to the extent practicable, requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis, and eliminates certain
disclosures that are no longer as useful as they were when SFAS No. 87, 88 and
106 were issued.
Part II Other Information
ITEMS 1, 2, 3, 4 and 5 are either inapplicable or are answered in the
negative and are omitted pursuant to the instructions to Part II.
ITEM 6 Exhibits and Reports on Form 8-K
(a) The following exhibits are being filed pursuant to Item 6(a) of Form 10-Q.
2 Incorporated by reference as an exhibit to Registrant's Form 8-K
filed March 19, 1998 (Commission File No. 0-26788)
27 Financial Data Schedule
(b) A report on Form 8-K dated March 19, 1998, was filed with the Commission to
report under Item 5, the signing of a stock purchase agreement among The
Guarantee Life Companies Inc., Ohio Farmers Insurance Company and Westfield
Life Insurance Company.
11
<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.
THE GUARANTEE LIFE COMPANIES INC.
Date: May 13, 1998 /s/ WILLIAM L. BAUHARD
---------------------------------------------------
William L. Bauhard
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1998 (UNAUDITED) AND THE
CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31,
1998 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 593,304
<DEBT-CARRYING-VALUE> 177,927
<DEBT-MARKET-VALUE> 180,558
<EQUITIES> 3,967
<MORTGAGE> 84,762
<REAL-ESTATE> 3,317
<TOTAL-INVEST> 1,200,651
<CASH> 8,477
<RECOVER-REINSURE> 87,420
<DEFERRED-ACQUISITION> 101,865
<TOTAL-ASSETS> 1,522,755
<POLICY-LOSSES> 197,623
<UNEARNED-PREMIUMS> 11,529
<POLICY-OTHER> 544,793
<POLICY-HOLDER-FUNDS> 16,285
<NOTES-PAYABLE> 40,000
0
0
<COMMON> 99
<OTHER-SE> 204,523
<TOTAL-LIABILITY-AND-EQUITY> 1,522,755
70,580
<INVESTMENT-INCOME> 16,140
<INVESTMENT-GAINS> 119
<OTHER-INCOME> 6,243
<BENEFITS> 53,989
<UNDERWRITING-AMORTIZATION> 17,969
<UNDERWRITING-OTHER> 20,571
<INCOME-PRETAX> 553
<INCOME-TAX> 194
<INCOME-CONTINUING> 359
<DISCONTINUED> (2)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 357
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
