<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------------------------------
FORM 10-K
--------------------------------------
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 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
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
------------------- ----------------
NONE NASDAQ
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
-------------------
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. [_]
As of March 19, 1999, 9,244,669 shares of Common Stock were outstanding. The
aggregate market value of such shares held by nonaffiliates was approximately
$150,225,871.
Select materials from the Proxy Statement for the Annual Meeting of
Shareholders, scheduled for May 13, 1999, have been incorporated by reference
into Part III of this Form 10-K.
Select materials from the 1998 Annual Report to Shareholders have been
incorporated by reference into Parts II and IV of this Form 10-K.
================================================================================
1
<PAGE>
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. Factors that may
cause actual results to differ materially from those contemplated or projected,
forecast, estimated or budgeted in such forward looking statements include,
among others, the following possibilities: (i) Guarantee Life's primary
reliance, as a holding company, on dividends from its subsidiaries to meet debt
payment obligations and the applicable regulatory restrictions on the ability of
Guarantee Life's subsidiaries to pay such dividends; (ii) the potential impact
on Guarantee Life's reported net income that could result from the adoption of
certain accounting standards by the Financial Accounting Standards Board; (iii)
tax law changes impacting the tax treatment of life insurance and investment
products; (iv) heightened competition, including specifically the
intensification of price competition, the entry of new competitors and the
development of new products by new and existing competitors; (v) adverse state
and federal legislation and regulation, including limitations on premium levels,
increases in minimum capital and reserves, and other financial viability
requirements; (vi) inability to carry out marketing and sales plans, including,
among others, changes to certain products and acceptance of the revised products
in the market; (vii) loss of key executives; (viii) changes in interest rates
causing a reduction of investment income or reduction in the value of Guarantee
Life's investment portfolio; (ix) general economic and business conditions which
are less favorable than expected; (x) unanticipated changes in industry trends
and ratings assigned by nationally recognized statistical organizations; and
(xi) inaccuracies in assumptions regarding future morbidity, persistency,
mortality and interest rates used in calculating reserve amounts. 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 three business segments: the Employee Benefits
Division ("EBD"), the Group Special Markets Division ("GSM"), and the Individual
Insurance Division ("Individual"). EBD markets group non-medical coverages,
including term life, long-term and short-term disability, dental and vision,
primarily through regional group sales offices. GSM markets specialty medical
products, such as excess loss, medical reimbursement insurance for business
executives, and related group non-medical 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 Division markets traditional life and
annuity products primarily through Regional Marketing Organizations ("RMOs") and
independent insurance agents. In 1998, 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 believes that operating three distinct business segments
provides for good diversification, thus mitigating the possible adverse impact
of changes in the insurance industry from potential health care reforms and the
cyclical nature of the group and individual markets.
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 also 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.
2
<PAGE>
On December 23, 1997, Guarantee Life completed its acquisition of PFG,
Inc., and its subsidiaries ("PFG"), in a transaction valued at $37.3 million
that 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 had been focused on the sale of term insurance through
brokers. It is licensed in 45 states and the District of Columbia. AGL is
managed as part of Guarantee Life's Individual Insurance Division. Through
December 31, 1998, the AGL contracted agents have been contracted with Guarantee
Life Insurance Company. All new individual life sales are being written as
Guarantee Life Insurance Company policies.
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 in the high net worth
marketplace. Philadelphia Financial Group, Inc. and PFG Distribution Co. are
operated as independent subsidiaries and managed as part of Guarantee Life's
Individual Insurance Division.
On December 31, 1997, Guarantee Life completed a coinsurance agreement to
acquire a block of excess loss policies from EBPLife Insurance Company. As
policies reached renewal dates, the Company rewrote selected risks (90 policies
totaling $206 million of in-force coverage) on Guarantee Life Insurance policy
forms.
Effective May 31, 1998, Guarantee Life acquired Westfield Life Insurance
Company ("Westfield") from Ohio Farmers Insurance Company for $100 million,
consisting of $90 million in cash and 371,402 shares of Guarantee Life common
stock valued at $10 million. In addition, approximately $2.0 million of
acquisition expenses were capitalized as part of this transaction. This
acquisition was accounted for as a purchase.
Westfield was originally incorporated as Colonial Heritage Life Insurance
Company in 1963. The Company previously offered a portfolio of individual life
products and fixed annuities in 47 states and the District of Columbia.
Guarantee Life has retained over 1,300 agents from Westfield's previous
distribution system. These agents offer the Guarantee Life Insurance portfolio
of individual products.
A.M. Best(R) rates both Guarantee Life Insurance and Westfield "A-
(Excellent), A.M. Best's fourth highest rating. AGL is rated "B++ (Very Good)"
by A. M. Best(R), its fifth highest rating. A.M. Best(R) assigns ratings to
solvent insurance companies, which currently range from "A++ (Superior)" to "D
(Vulnerable)" and include 13 rating categories.
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,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- --------
(in millions)
<S> <C> <C> <C> <C> <C>
Revenues from continuing operations (1):
Employee Benefits Division...................... $ 214.2 $ 166.2 $ 109.1 $ 88.8 $ 64.1
Group Special Markets........................... 80.0 62.0 66.0 93.4 76.0
Individual Division (2)......................... 131.0 82.2 75.8 112.2 107.4
Corporate....................................... 0.2 (0.1) 1.1 - -
------- ------- ------- ------- -------
Total........................................... $ 425.4 $ 310.3 $ 252.0 $ 294.4 $ 247.5
======= ======= ======= ======= =======
Income from continuing operations before
income taxes:
Employee Benefits Division...................... $ (9.1) $ (1.9) $ (0.6) $ (3.4) $ 2.3
Group Special Markets........................... 7.5 11.2 10.8 7.8 12.3
Individual Division............................. 23.1 18.2 13.6 15.5 12.8
Corporate....................................... (7.1) (1.8) (1.1) - -
------- ------- ------- ------- -------
Total........................................... $ 14.4 $ 25.7 $ 22.7 $ 19.9 $ 27.4
======= ======= ======= ======= =======
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
At or for the Years Ended December 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
-------- --------- --------- --------- --------
(in millions)
<S> <C> <C> <C> <C> <C>
Assets (at period end):
Employee Benefits Division...................... $ 132.2 $ 141.9 $ 126.2 $ 113.5 $ 99.0
Group Special Markets........................... 101.6 113.8 98.0 108.3 105.7
Individual Division............................. 1,693.0 1,187.4 1,029.5 985.7 908.0
Corporate....................................... 44.3 54.9 19.1 22.7 -
Discontinued Operations......................... 21.1 21.0 32.4 50.6 75.3
-------- -------- -------- -------- --------
Total Consolidated Assets....................... $1,992.2 $1,519.0 $1,305.2 $1,280.8 $1,188.0
======== ======== ======== ======== ========
</TABLE>
- -----------
(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.
Employee Benefits Division
Guarantee Life's Employee Benefits Division offers group non-medical
products, including term life, accidental death and dismemberment, short- and
long-term disability, dental and vision insurance. EBD distributes its products
through a national distribution system of regional group offices.
Guarantee Life intends to grow EBD and improve its profitability by
increasing sales through its national distribution system of sales offices. As
this distribution system expands, Guarantee Life will continue its strategy of
providing centralized home office service and support to distributors and
customers. 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.
Marketing
EBD's products are marketed primarily to businesses with 500 or fewer
employees. Its group non-medical products are marketed primarily through its
national distribution system of regional group offices, which develops group
insurance business through employee benefit firms and brokers. A senior vice
president located in the home office manages EBD's marketing through the
regional group offices. Six regional vice presidents, who supervise group field
operations, operate under his direction.
Guarantee Life has developed regional group offices in major metropolitan
areas of the United States to facilitate the development of relationships, and
improve the provision of marketing services with, employee benefit firms and
brokers and to increase sales. As of December 31, 1998, Guarantee Life had 22
regional group offices in major metropolitan areas in 19 states. This
distribution system generated $61.0 million of first year annualized premium
sales during the year ended December 31, 1998 and $75.0 million of first year
annualized premium sales for the year ended December 31, 1997. Although EBD
continued to expand its distribution system in 1998, pricing actions taken in
late 1997 and early 1998, particularly in the dental product line, resulted in a
decrease in new sales.
4
<PAGE>
The following table sets forth information regarding when the group sales
offices were established.
Group Sales Offices
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994 1993 1992
------ ------ ------ ------ ------ ------ ----
Indianapolis Nashville Boston Philadelphia Portland Kansas City Cincinnati
Phoenix Detroit Houston Los Angeles Charlotte
Miami Atlanta Chicago Baltimore
Dallas Denver Orlando
Minneapolis San Francisco
Seattle
<S> <C> <C> <C> <C> <C> <C> <C>
Total number of offices at 22 21 20 17 15 9 5
period end
</TABLE>
Group Non-Medical Products
EBD's group non-medical products accounted for $201.3 million, or 58.8% of
total net earned premiums for Guarantee Life for the year ended December 31,
1998. The following table sets forth the net earned premiums for EBD for the
past five years.
EBD Net Earned Premiums
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
$ 201.3 $ 155.7 $ 104.1 $ 83.0 $ 58.2
</TABLE>
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 $60.4 million, or
30.0%, of EBD's net earned premiums for the year ended December 31, 1998.
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 $8.3
million, or 4.1%, of EBD's net earned premiums for the year ended December 31,
1998.
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 $21.6 million, or 10.7%, of EBD's
net earned premiums for the year ended December 31, 1998.
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 $43.5
million, or 21.6%, of EBD's net earned premiums for the year ended December 31,
1998.
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 $67.5 million, or 33.5%, of EBD's net earned premiums for the year
ended December 31, 1998.
Voluntary Products. Guarantee Life's voluntary worksite-marketed products
currently include term life, dependent life, dental, accidental death and
dismemberment, short-term disability, and long-term disability insurance that is
paid for by
5
<PAGE>
employees through payroll deductions. In 1998, sales of voluntary products
were $10.7 million as compared to $10.1 million in 1997. In-force voluntary
premium is included in the group non-medical product discussions above.
Product Development and Management
EBD's product actuaries 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 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 regional
group offices for underwriting, premiums, enrollment, and customer service. In
1997, the regional alignment of teams was completed, quoting processes
streamlined and specifications for other processes and systems established.
During 1998, a new quoting system was implemented that has further streamlined
the quoting and new case issue process. These initiatives resulted in the
elimination of redundant data entry and multiple hand-offs, which has increased
productivity.
Insurance Underwriting
Guarantee Life uses underwriting standards to protect the quality of its
group life and health business. Standard rating systems are used 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.
Group Special Markets Division
Guarantee Life's Group Special Markets Division offers specialty products,
including excess loss insurance for employers with self-funded medical plans and
medical reimbursement insurance for business executives, as well as group
non-medical products typically sold in conjunction with the excess loss
insurance. GSM manages and distributes its products through its MGUs, TPAs, Blue
Cross/Blue Shield plans and managed care organizations. Guarantee Life intends
to manage the growth of the specialty products, focusing on quality of business
rather than premium growth.
Marketing
GSM's products are marketed primarily to businesses with 50 to 500
employees. Its excess loss and Exec-U-Care products, and to a lesser extent its
group non-medical products, are distributed through MGUs, TPAs, Blue Cross and
Blue Shield plans and managed care organizations. These multiple distribution
systems complement those served by the EBD regional group offices.
Guarantee Life's excess loss insurance product is marketed by National
Benefit Resources, Inc. ("NBR"), which accounted for 68% of Guarantee Life's
excess loss insurance premiums during 1998. 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.
6
<PAGE>
Group Products
GSM products accounted for $59.2 million, or 17.3%, net earned premiums for
Guarentee Life for the year ended December 31, 1998. The following table sets
forth net earned premiums for GSM for the past five years.
GSM Net Earned Premiums
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
$ 59.2 $ 44.3 $ 49.4 $ 80.1 $ 53.6
</TABLE>
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 to 500 lives with self-funded medical plans. Excess loss accounted for
$20.0 million, or 33.8%, of GSM's net earned premiums for the year ended
December 31, 1998.
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 $6.8 million, or 11.5%, of GSM's net earned premiums
for the year ended December 31, 1998.
Group Non-Medical Products. GSM also offers the group non-medical products
in combination with its sales of excess loss. These products, which include
group life, accidental death & dismemberment, short-term disability, long-term
disability, and dental, are similar to the group non-medical products provided
by EBD. Net earned premiums from these products accounted for $22.8 million, or
38.5%, of GSM's total for the year ended December 31, 1998.
EBPLife. GSM acquired the EBPLife block of business on December 31, 1997,
which includes excess loss and group life coverages. As this business renewed,
it was rewritten on Guarantee Life Insurance policies. Net earned premium for
this block accounted for $8.7 million, or 14.7%, of GSM's total for the year
ended December 31, 1998.
Product Development and Management
GSM's product actuaries 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. After release, sales and pricing assumptions are monitored to
assist in making any necessary adjustments.
Insurance Underwriting
Guarantee Life uses underwriting standards to protect the quality of its
group life and health business. Standard rating systems are used 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 Division
Guarantee Life's individual insurance products include universal life, term
life and interest-sensitive whole life insurance and annuities. As of December
31, 1998, Guarantee Life's Individual Insurance Division had $19.2 billion of
life insurance in force and approximately 262,000 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.
7
<PAGE>
Marketing
Guarantee Life's products are marketed primarily to individuals with family
incomes up to $150,000 and small business owners. Guarantee Life's individual
insurance products are marketed primarily by an independent agency force of
approximately 2,808 producers. These producers are contracted through regional
marketing organizations ("RMOs") or as personal producing general agents
("PPGAs"). During 1998, the top 100 independent agents produced 83% of
Individual's business. Most of the individual insurance agents also sell
insurance products offered by other companies.
A marketing vice president located in the home office manages Guarantee
Life's agency marketing efforts. Four regional vice presidents divide
responsibility for field relationships and recruit and develop 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 $10.9 million and
$13.9 million, respectively, of the individual insurance business's first year
annualized premiums for 1998.
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 few years, Guarantee Life
introduced several new universal life products. Sales of universal life policies
represented 61% of first year annualized premiums for individual life products
for the year ended December 31, 1998.
Annuities. Guarantee Life markets single premium fixed annuities, flexible
premium fixed annuities and equity indexed annuities. 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. Guarantee Life's equity indexed single
premium deferred annuity establishes credited rates linked to the growth in the
S&P 500 index which accounted for approximately 80% of annuity sales in 1998.
Sales of the indexed annuity slowed significantly during the fourth quarter of
1997 and all of 1998 due to reduced participation rates, resulting from
volatility in the financial markets, lower interest rates and increased
competition.
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. Most of the current term sales are level premium products
with rates guaranteed over the 10, 15, 20 or 30 year term of the product.
Minimum policy size is $50,000. 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 reinsures this portfolio and, as a result, this portfolio did
not produce significant amounts of net earned premium in the three years ended
December 31, 1998. For the year ended December 31, 1998, term life sales
represented 36% 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, 1998, sales of interest-sensitive whole life products
represented 3% of first year annualized premiums for individual life products.
8
<PAGE>
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,
------------------------------------------------------------
1998 1997 1996 1995 1994
------- -------- ------ ------ -------
(In Millions)
<S> <C> <C> <C> <C> <C>
Universal life..................................... $ 7.0 $ 5.8 $ 5.5 $ 4.3 $ 7.0
Traditional life (1)............................... 3.9 1.2 1.0 1.0 1.4
------- -------- ------ ------ -------
Total life(1)...................................... 10.9 7.0 6.5 5.3 8.4
Annuities (2)...................................... 13.9 25.2 9.3 8.1 21.5
------- -------- ------ ------ -------
Total......................................... $ 24.8 $ 32.2 $ 15.8 $ 13.4 $ 29.9
======= ======== ====== ====== =======
</TABLE>
- ----------
(1) Prior to 1995, does not include interest-sensitive whole life products,
which were introduced in 1995.
(2) The increase in annuity sales in 1997 was primarily due to the equity
indexed annuity product introduced in August, 1996. In 1998 annuity sales
declined due to lower participation rates on the equity indexed annuity product.
Annuity sales for 1998 do not include AGL's separate account business.
Crediting Rates and Policyholder Dividends
Guarantee Life pays dividends, credits interest and determines other
non-guaranteed elements on its individual insurance policies depending on the
type of product. Although certain non-guaranteed 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 non-guaranteed 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, fixed annuities, indexed annuities and
group insurance product lines. AGL maintains separate accounts for its variable
universal life and annuity product lines. Westfield maintains asset segments for
traditional life, universal life and annuities.
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 Life's average crediting rates on universal life contracts were 5.77%,
5.68% and 5.90% and its average crediting rates on annuities were 5.28%, 5.38%
and 5.46% for the years ended December 31, 1998, 1997 and 1996, respectively.
For the equity indexed annuity product, participation rates are established
on a monthly 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 of 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, 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.
This includes 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.
Corporate Administration
The three business segments of Guarantee Life share a common need for
various services such as finance and accounting, investment management, agent
licensing and commissions, legal and compliance, and marketing. In an effort to
operate efficiently, these functions are consolidated in the area of Corporate
Administration ("Corporate"). Corporate's operations include the cost of these
services provided to all of Guarantee Life as well as those services provided to
its shareholders.
10
<PAGE>
Operating losses of Corporate increased $5.3 million, or 294.4%, in 1998
due entirely to the increase in interest expense resulting from outstanding debt
obligations issued for purposes of acquiring PFG and Westfield.
These debt obligations totaled $112.5 million at December 31, 1998.
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
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. The disposal of this
segment has not resulted in a significant loss thus far. As of December 31,
1998, net liabilities related to discontinued operations were $21.1 million,
down 72.0% from the December 31, 1994 balance of $75.3 million. Management
expects the net liability to continue to decrease with no significant impact on
net income.
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.
11
<PAGE>
The following table summarizes consolidated invested assets by asset
category as of December 31, 1998, 1997, 1996, 1995, and 1994.
CONSOLIDATED INVESTED ASSETS
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------- ------------------ ------------------- ------------------- -----------------
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) ..................... $ 978.4 62.4 $ 663.1 54.7 $ 595.3 54.4 $ 580.7 55.0 $ 540.5 54.8
Private........................ 322.3 20.6 351.9 29.1 318.6 29.1 317.1 30.0 312.4 31.7
---------- ----- --------- ----- ---------- ----- ---------- ----- -------- ----
Subtotal .................... 1,300.7 83.0 1,015.0 83.8 913.9 83.5 897.8 85.0 852.9 86.5
Equity securities ................ 23.9 1.5 3.7 0.3 3.0 0.3 6.0 0.6 4.9 0.5
Mortgage loans ................... 103.7 6.6 85.8 7.1 70.2 6.4 61.5 5.8 48.1 4.9
Policy loans ..................... 78.0 5.0 68.7 5.7 67.5 6.2 63.5 6.0 62.9 6.4
Investment real estate ........... 3.2 0.2 3.4 0.2 6.6 0.6 6.9 0.6 7.2 0.7
Other invested assets ............ 14.6 0.9 11.6 1.0 9.8 0.9 8.1 0.8 9.1 1.0
Short-term
investments.................... 43.1 2.8 23.3 1.9 23.3 2.1 12.3 1.2 0.5 0.0
---------- ----- --------- ----- ---------- ----- ---------- ----- -------- -----
Total invested
assets .................... $ 1,567.2 100.0% $ 1,211.5 100.0% $ 1,094.3 100.0% $ 1,056.1 100.0% $ 985.6 100.0%
========== ===== ========= ===== ========== ===== ========== ===== ======== =====
</TABLE>
- --------------
(1) The carrying value includes unrealized gains of $32.6 million, $24.5
million, $8.7 million and $23.8 million as of December 31, 1998, 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 a total return basis. Evaluation of total
investment return requires that the risk and expected return of each asset be
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
with 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 and
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, 1998, comprised 83.0% 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 97.0% of fixed maturity securities as of December
31, 1998, and, to a lesser extent, fixed-rate commercial mortgage loans. During
the past three years, the effective yield on Guarantee Life investment portfolio
was 7.2% in 1998, 7.4% in 1997 and 7.4% in 1996. This decline is primarily due
to lower reinvestment rates for fixed maturity securities purchased in recent
periods.
12
<PAGE>
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 that 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.
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, 1998.
Fixed Maturity Securities
Carrying Value, Fair Value and Amortized Cost
December 31, 1998
----------------------------------------
Carrying Amortized
Value Fair Value Cost
----- ---------- ----
(In Millions)
Public ........... $ 978,444 $ 979,134 $ 951,269
Private .......... 322,297 336,633 317,039
---------- ---------- ----------
Total ....... $1,300,741 $1,315,767 $1,268,308
========== ========== ==========
Guarantee Life's portfolio of investment grade fixed maturity securities is
well diversified by number and type of issuer. No issuer, other than securities
retained in the 1992 securitization of commercial mortgage loans and obligations
of the United States government or its agencies, represents more than 0.7% of
investment grade fixed maturity securities. As of December 31, 1998, 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, 1998.
<TABLE>
<CAPTION>
Fixed Maturity Securities by NAIC Designation
December 31, 1998
---------------------------------------------------------------------
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 ....................... $ 769.5 80.9% $ 160.3 50.6% $ 929.8 73.3%
2 BBB- to BBB+ ....................... 173.2 18.2% 127.2 40.1% 300.4 23.7%
-------- ----- -------- ----- ---------- -----
Total investment grade ............. 942.7 99.1% 287.5 90.7% 1,230.2 97.0%
3 BB to BB+ .......................... 4.5 0.5% 19.0 6.0% 23.5 1.9%
4 B .................................. 3.3 0.3 2.0 0.6% 5.3 0.4%
5 CCC or lower ....................... 0.3 -- 8.4 2.7% 8.7 0.7%
6 In or near default ................. 0.5 0.1% 0.1 0.0% 0.6 0.0%
-------- ----- -------- ----- ---------- -----
Total below investment grade ....... 8.6 0.9% 29.5 9.3% 38.1 3.0%
-------- ----- -------- ----- ---------- -----
Total .............................. $ 951.3 100.0% $ 317.0 100.0% $ 1,268.3 100.0%
======== ===== ======== ===== ========== =====
</TABLE>
13
<PAGE>
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.
Mortgage-backed securities ("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,
1998, MBS were $231.6 million, or 22.9% (based on amortized cost), of fixed
maturity securities, of which $141.2 million, or 61.0%, of MBS were guaranteed
by the U.S. government or an agency of the U.S. government. Retained securitized
bonds were $25.3 million, or 11.0%, of MBS as of December 31, 1998.
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, 1998,
all MBS owned by Guarantee Life, excluding the $25.3 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 that 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 that are limited by Nebraska
law, principal-only securities or other MBS that may exhibit extreme market
value volatility.
Commercial Mortgage Loans
As of December 31, 1998, commercial mortgage loans constituted $104.3
million of Guarantee Life's $105.2 million mortgage loan portfolio.
Substantially all commercial mortgage loans are fixed-rate first mortgage loans
on completed properties. As of December 31, 1998, there were 106 individual
commercial mortgage loans, all of which were first mortgage loans, and all bore
a fixed interest rate.
14
<PAGE>
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, 1998.
<TABLE>
<CAPTION>
Composition of Commercial Mortgage Loan Portfolio
by Property Type and Top Five States
December 31, 1998
-------------------------------
Amount % of Total
------ ----------
(Dollars in Millions)
Property Type
<S> <C> <C>
Office........................................ $32.2 30.8%
Medical Office................................ 4.0 3.9%
Retail........................................ 14.1 13.5%
Apartment..................................... 12.4 11.9%
Industrial.................................... 37.9 36.3%
Other......................................... 3.7 3.6%
------ ------
Total....................................... $104.3 100.0%
====== ======
Top Five States
California.................................... $13.6 13.0%
Nebraska...................................... 10.9 10.5%
Indiana....................................... 10.7 10.2%
Oregon........................................ 7.5 7.2%
Michigan...................................... 7.1 6.8%
</TABLE>
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 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, 1998, 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, 1998.
<TABLE>
<CAPTION>
Commercial Mortgage Loan Scheduled Principal Repayments
December 31, 1998
----------------------------------------------------------------------
Maturity Payments All Other Annual
Year On Balloon Loans Loan Payments Total % of Total
---- ---------------- ------------- ----- ----------
(Dollars in Millions)
<S> <C> <C> <C> <C>
1998................... $0.0 $5.3 $5.3 5.0%
1999................... - 5.2 5.2 5.0%
2000................... 1.0 5.6 6.6 6.3%
2001................... 1.5 4.9 6.4 6.1%
2002-2018.............. 11.5 69.3 80.8 77.6%
----- ----- ------ ------
Total.................. $14.0 $90.3 $104.3 100.0%
===== ===== ====== ======
</TABLE>
The high quality of Guarantee Life's commercial mortgage loan portfolio is
evidenced by its delinquency experience. As of December 31, 1998, Guarantee Life
had no commercial mortgage loans classified as either delinquent or in
foreclosure.
15
<PAGE>
Other Invested Assets
Guarantee Life held $78.0 million of policy loans on individual insurance
products as of December 31, 1998. 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 6.4%, 6.2%, and 6.2%, as of December 31,
1998, 1997 and 1996, 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 $57.6 million of other invested assets, including $43.1
million of short-term investments and interest of $8.8 million in the GMLC Trust
(a securitized mortgage loan portfolio originally established in December 1992
by Guarantee Mutual Life Insurance Company). Other invested assets are reported
net of a valuation allowance of $2.6 million.
Asset/Liability Management and Market Risk
Guarantee Life's Consolidated Balance Sheet includes a substantial amount
of assets and liabilities with fair values that are subject to market risks.
Since the majority of Guarantee Life's invested assets are fixed maturity
securities without equity features, interest rate risk is the largest market
risk factor affecting Guarantee Life's consolidated financial position. The
following sections address the significant market risks associated with
Guarantee Life's business activities as of December 31, 1998.
Equity Price Risk
Equity securities represent 1.5% of Guarantee Life's total invested assets.
Because of this small exposure, market price fluctuations do not significantly
affect Guarantee Life's consolidated financial position.
The Individual Division's equity indexed annuity has an equity market
component, where interest credited to the contracts is linked to the performance
of the S&P 500(R) index. The company manages this risk by purchasing call
options that mirror the interest credited to the contracts. Because of this use
of custom hedges, there is no significant equity market risk to the company
associated with the product.
Interest Rate Risk
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 support 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 within each insurance entity, all assets support all 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. Liability-based
benchmarks serve as a guideline for defining optimal asset allocation within the
segmented product lines and are representative of the unique interest rate
sensitivities and liquidity needs within each product line. The benchmarks are
designed to maintain a reasonable "match" comparing key-rate durations of the
assets and liabilities so as to minimize the market value risk that changing
interest rates pose to the Company.
Matching the investment portfolio to the cash flow demands of the product
lines is an important risk management activity for the Company. A key part of
this risk management function is cash flow testing of the assets and liabilities
for major product lines under various scenarios to evaluate the adequacy of
reserves. In developing the investment strategies to support the product lines,
the Company establishes a level of cash and securities which, combined with
expected net cash inflows from operations, maturities of fixed maturity
investments and principal payments on MBS, are believed to be adequate to meet
anticipated short- and long-term benefit and expense payment obligations. There
can be no assurance that future experience regarding benefits and surrenders
will be similar to historic experience since withdrawal and surrender levels are
influenced by such factors as the interest rate environment, the relative
competitiveness of other financial products available, and the claims-paying and
financial strength ratings of the Company's life insurance subsidiaries.
16
<PAGE>
EBD and GSM are not particularly sensitive to changes in interest rates
because those policies do not have accumulation components. However, fair values
of assets backing group liabilities are affected by changes in interest rates.
Likewise, the Individual Division's term products, for which risk and profit are
primarily mortality based, are also not interest-sensitive.
In the Individual Division, interest-sensitive products (which include
universal life, annuities, and dividend receiving policies in the Closed Block),
the objective is to maintain target spreads in rising and falling interest rate
environments. Credited interest rates for universal life policies and annuity
contracts are established on a monthly basis by Guarantee Life's interest rate
committee. For Closed Block policies, changes in interest rates affecting
investment income are, over time, directly reflected through changes in
dividends.
Rising interest rates may help individual annuity sales, which have been
depressed because low credited rates make those products less competitive
compared to other consumer investment options. At the same time, more
competitive rates available on new products make the existing business more
likely to surrender. Alternatively, decreasing interest rates may present an
opportunity to widen the spread on existing policies, but may make it more
difficult to sell new accumulation business at appropriate margins.
The fair values of Guarantee Life's fixed maturity investments will
fluctuate in response to changes in market interest rates. Increases and
decreases in prevailing interest rates generally translate into decreases and
increases in fair values of those instruments. Additionally, fair values of
interest rate sensitive instruments may be affected by the credit worthiness of
the issuer, prepayment options, relative values of alternative investments, the
liquidity of the instrument, and other general market conditions.
At December 31, 1998, Guarantee Life had $112.5 million of outstanding debt
consisting of a six-year Senior Secured Term Loan Facility with a balance of
$82.5 million and a five-year Senior Secured Revolving Credit Facility with a
balance of $30.0 million. The interest rate is computed as LIBOR plus a margin
based upon Guarantee Life's leverage ratio and A.M. Best(R) Rating. This rate
was 6.75% at December 31, 1998. Because the rate is variable, the fair value of
the outstanding debt would remain constant in a changing rate environment.
The table below summarizes the estimated effects of hypothetical increases
and decreases in interest rates (shown in basis points) on certain assets that
are subject to interest rate risk. It is assumed that the changes occur
immediately and uniformly to each category of instrument. The hypothetical
changes in market interest rates do not reflect what could be deemed best or
worst case scenarios. Significant variations in market interest rates could
produce changes in the timing of repayments due to prepayment options available.
For these reasons, actual results might differ from those reflected in the table
that follows:
<TABLE>
<CAPTION>
Estimated Fair Value after Hypothetical Change in Interest Rate (000's)
--------------------------------------------------------------------------------
Fair Value 100 bp decr 100 bp incr 200 bp incr 300 bp incr
---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
As of December 31, 1998:
Bonds and mortgage loans $1,138,900 $1,188,404 $1,091,463 $1,046,304 $1,003,467
Mortgage-backed securities 327,356 335,471 317,218 304,606 290,956
------- ------- ------- ------- -------
Total $1,466,256 $1,523,815 $1,408,681 $1,350,910 $1,294,423
As of December 31, 1997:
Bonds and mortgage loans (1) 969,032 1,013,644 926,473 886,106 848,428
Mortgage-backed securities (1) 195,117 198,833 189,946 183,714 177,045
------- ------- ------- ------- -------
Total $1,164,149 $1,212,477 $1,116,419 $1,069,820 $1,025,473
</TABLE>
(1) December 31, 1997 amounts exclude Westfield , which was acquired in May
1998.
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. 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
17
<PAGE>
competition in the future to insurers who sell annuities and life insurance
products. Guarantee Life may also face increased competition with respect to its
group non-medical products as other group health insurers enter these markets to
diversify their businesses.
Guarantee Life believes that a strong distribution system is vital to
remaining competitive in the marketplace. It 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 abilities who are seeking companies with competitive compensation
and products. In addition to agents and brokers, the opportunities for new
distribution channels are increasing rapidly due to technological advances such
as the internet. Guarantee Life recognizes the importance of new technology and
will strive to position itself to take advantage of technological opportunities.
Employees
As of December 31, 1998, Guarantee Life had 731 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 and Guarantee Protective Life Company (a
wholly owned subsidiary of Guarantee Life Insurance) 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.
Westfield was redomesticated to Nebraska effective September 1, 1998 and is
now subject to the jurisdiction of the Nebraska Department of Insurance. Its
most recent regulatory financial examination was performed by the Ohio
Department of Insurance for the three year period ending December 31, 1994. No
material issues were raised.
Regulation of Investments. Guarantee Life Insurance and Westfield are
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
non-admitted assets for purposes of measuring statutory surplus. As of December
31, 1998, Guarantee Life Insurance and Westfield complied, in all material
respects, with all laws and regulations relating to investments.
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 non-admitted assets for purposes of measuring
statutory surplus. As of December 31, 1998, 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
18
<PAGE>
certain marketing affiliations, cost-sharing arrangements, 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.
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.
The Clinton Administration has recently proposed raising excise taxes on
the deferred acquisition costs of selling life insurance products, ending the
deduction for interest on loans against corporate-owned life insurance, and
including policyholders' surplus account balances in gross income, thus raising
insurers' federal taxes. The industry feels the proposed taxes will indirectly
raise the cost of popular insurance-related retirement products and, thus, would
be harmful to consumers and the industry.
Congress continues debate on H.R. 10, the financial services reform bill,
which would, among other things, allow banks to sell life insurance products.
Currently, the main unresolved issue is which government bureaucracy will
regulate such sales and what role the state insurance regulators would play.
Passage of this bill will result in a significant increase in competition in the
future.
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, Westfield and
regional group 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 1998.
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 28, and "Shareholder Information" on page 59 in Guarantee
Life's 1998 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 17, and from
"Consolidated Statements of Income" on page 32 in Guarantee Life's 1998 Annual
Report to Shareholders.
19
<PAGE>
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 18-29 in Guarantee Life's 1998 Annual Report to
Shareholders.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information required by this Item is incorporated herein by reference
from pages 16-17 of this Form 10-K..
ITEM 8. Financial Statements and Supplementary Data.
The information required by this Item is incorporated herein by reference
from pages 30-58 in Guarantee Life's 1998 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 13, 1999,
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 13, 1999,
incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
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 13, 1999,
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 13, 1999,
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 1998 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
Notes to the Consolidated Financial Statements
(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.
20
<PAGE>
(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)
2(c) Merger Agreement among The Guarantee Life Companies Inc.,
Guarantee Subsidiary, Inc. and PFG, Inc., dated as of October
17, 1997. (7)
2(d) Stock Purchase Agreement among The Guarantee Life Companies
Inc., Ohio Farmers Insurance Company and Westfield Life
Insurance Company dated as of March 19, 1998..(9)
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.
(11)
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) Credit Agreement by and between The Guarantee Life Companies
Inc., Guarantee Life Insurance Company, The Chase Manhattan
Bank, Credit Lyonnais New York Branch, Deutsch Bank AG, New York
and/or Cayman Island Branches, FirstMerit Bank, N.A., First
National Bank of Chicago, First National Bank of Omaha, First
Union National Bank, Fleet National Bank, Norwest Bank Nebraska,
N.A., State Street Bank and Trust Company and SunTrust Bank
dated as of May 28, 1998.(10)
10(p) Retirement Plan for Employees of The Guarantee Life Companies
Inc. (As Amended and Restated Effective January 1, 1998)
10(q) Amendment No. 1 to the Guarantee Mutual Life Company Phantom
Stock Plan (As Amended and Restated).
10(r) Amendment No. 4 to The Guarantee Life Companies Inc.'s 1994
Long-Term Incentive Plan.
10(s) Amendment No. 5 to The Guarantee Life Companies Inc.'s 1994
Long-Term Incentive Plan.
10(t) Second Revised Exhibit A to The Guarantee Life Companies Inc.
and Guarantee Life Insurance Company Executive Severence Plan.
10(u) The Guarantee Life Companies Inc. Supplemental Retirement Plan
(As Amended and Restated effective January 1, 1998).
10(v) The Guarantee Life Companies Inc. Equalizer Plan (As Amended and
Restated January 1, 1998).
13 1998 Annual Report to Shareholders
21 Subsidiaries of the Registrant
23 Consent of KPMG Peat Marwick LLP
24(a) Powers of Attorney(3)
24(b) Power of Attorney of Director Gammill(11)
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).
21
<PAGE>
(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)
(9) Incorporated by reference as an exhibit to Registrant's Form 8-K
filed March 19, 1998 (Commission File No. 0-26788).
(10) Incorporated by reference as an exhibit to Registrant's Form 8-K
filed June 12, 1998 (Commissions File No. 0-26788).
(11) Incorporated by reference as an exhibit to Registrant's Form 10-K
filed March 18, 1998 (Commission File No. 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:
Item Reported Financial Statements Filed Date of Report
------------- -------------------------- --------------
Item 5 - Other Events None October 7, 1998
22
<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 26th day of
March, 1999.
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 26th day of March, 1999.
Signatures Title
---------- -----
/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, Chief Financial Officer
- ----------------------------- and Treasurer (Principal Financial & Accounting
William L. Bauhard Officer)
/s/ C.R. "Bob" BELL* Director
- -----------------------------
C. R. "Bob" Bell
/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
/s/ JANICE D. STONEY* Director
- -----------------------------
Janice D. Stoney
23
<PAGE>
/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
24
<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 16, 1999, we reported on the consolidated balance
sheets of The Guarantee Life Companies Inc. and subsidiaries (Guarantee Life) as
of December 31, 1998 and 1997, 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, 1998, as contained in the
1998 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 1998. 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 16, 1999
25
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
SCHEDULE I--SUMMARY OF INVESTMENTS
December 31, 1998
(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............... $ 141,371 $ 144,441 $ 144,386
Obligations of states and political subdivisions....... 20,735 22,893 22,259
Debt maturities issued by foreign governments.......... 22,372 24,517 24,494
Corporate securities................................... 782,608 819,149 805,157
Mortgage-backed securities............................. 301,222 304,767 304,445
---------- ---------- ----------
Total fixed maturities................................. $1,268,308 $1,315,767 $1,300,741
---------- ---------- ----------
Equity securities:
Common stocks of banks, trusts and insurance
Companies.......................................... 20,643 23,835 23,835
Mortgage loans.............................................. 105,211 109,438 103,736
Policy loans................................................ 77,984 72,829 77,984
Investment real estate...................................... 3,211 7,800 3,211
Other long-term investments................................. 14,589 14,589 14,589
Short-term investments...................................... 43,074 43,074 43,074
---------- ---------- ----------
Total investments........................................... $1,533,020 $1,587,332 $1,567,170
========== ========== ==========
</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 $304.4
million, fair value of $314.9 million, and carrying value of $314.1 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.
26
<PAGE>
THE GUARANTEE LIFE COMPANIES INC.
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(In Thousands)
<TABLE>
<CAPTION>
Balance Sheet
-------------
As of and for the period ended December 31,
-------------------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Investment in consolidated subsidiaries.............................................. $ 332,711 $ 219,818
Other invested assets................................................................ 0 2,248
---------- ----------
Total invested assets........................................................... 332,711 222,066
Cash and cash equivalents............................................................ 3,513 523
Dividends receivable from subsidiary................................................. 0 15,000
Other assets......................................................................... 5,769 1,799
---------- ----------
Total assets......................................................................... 341,993 239,388
========== ==========
Notes Payable........................................................................ $ 112,500 $ 30,000
Accrued liabilities.................................................................. 3,976 1,216
Income taxes......................................................................... (4,525) (1,026)
---------- ----------
Total liabilities.................................................................... 111,951 30,190
Shareholders' equity:
Common stock.................................................................... $ 103 $ 99
Additional paid-in capital...................................................... 201,255 191,123
Retained earnings............................................................... 33,962 27,463
Treasury stock, end of year..................................................... (25,054) (22,512)
Accumulated other comprehensive income, net..................................... 19,776 13,025
---------- ----------
Total shareholders' equity........................................................... 230,042 209,198
---------- ----------
Total liabilities and shareholders' equity........................................... $ 341,993 $ 239,388
========== ==========
<CAPTION>
Income Statement
----------------
For the period ended December 31,
----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Equity in earnings of subsidiaries................................................... $ 15,527 $ 17,642 $ 15,723
Investment income, net............................................................... 694 (69) 1,057
Realized Losses...................................................................... 3,010 0 0
General and administrative expenses.................................................. 7,681 1,774 2,146
-------- -------- --------
Income before income taxes........................................................... 5,530 15,799 14,634
Income tax (benefit)expense.......................................................... (3,499) (645) (381)
-------- -------- --------
Net income........................................................................... $ 9,029 $ 16,444 $ 15,015
======== ======== ========
<CAPTION>
Consolidated Statements of Comprehensive Income
-----------------------------------------------
For the period ended December 31,
----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income........................................................................... $ 9,029 $ 16,444 $ 15,015
Other comprehensive income, net of tax:
Unrealized appreciation (depreciation) of invested
assets carried at fair value, net.................................................. 6,751 9,113 (11,014)
-------- ------- -------
Comprehensive income................................................................. $ 15,780 $25,557 $ 4,001
======== ======= =======
</TABLE>
27
<PAGE>
THE GUARANTEE LIFE COMPANIES INC.
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(CONTINUED)
(In Thousands)
<TABLE>
<CAPTION>
For the period ended December 31,
-------------------------------------
1998 1997 1996
--------- --------- ---------
Cash Flow
---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income..................................................... $ 9,029 $ 16,444 $ 15,015
Adjustments to reconcile net income to net cash provided by
operating activities
Equity in earnings of subsidiaries........................ (15,527) (17,642) (15,723)
Other, net................................................ (4,446) (1,615) (39)
--------- --------- ---------
Net cash used by operations.................................... (10,944) (2,813) (747)
--------- --------- ---------
Cash flows from investing activities:
Dividend from insurance subsidiary........................ 25,132 10,000 -
Purchases (sales)of fixed maturities...................... (11) 17,494 (17,547)
Purchase of PFG, Inc...................................... - (28,457) -
Purchase of Westfield..................................... (90,863) - -
Net change in short term investments...................... 2,248 (954) (1,294)
--------- --------- ---------
Net cash used by investing activities.......................... (63,494) (1,917) (18,841)
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from issuance of note payable................ 82,500 30,000 -
Purchase of treasury stock................................ (3,150) (23,603) -
Options exercised......................................... 608 1,091 -
Change in unpaid IPO expenses............................. - - (1,302)
Dividends paid to shareholders............................ (2,530) (2,416) (1,591)
--------- --------- ---------
Net cash provided (used) by financing activities............... 77,428 5,072 (2,893)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents........... 2,990 342 (22,481)
Cash and cash equivalents at beginning of period............... 523 181 22,662
--------- --------- ---------
Cash and cash equivalents at end of period..................... $ 3,513 $ 523 $ 181
========= ========= =========
</TABLE>
Supplemental disclosure of noncash investing activities:
On June 2, 1998, Guarantee Life issued 371,402 shares of common stock
valued at $10.0 million in conjunction with the Westfield acquisition.
These condensed financial statements should be read in conjunction with the
consolidated financial statements and the accompanying notes thereto.
28
<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, 1998:
Employee Benefits Division..... $ 3,833 $ 123,231 $ 1,736 $201,337 $11,797 $150,071 $26,975 $46,336
Group Special Markets.......... 0 39,658 140 59,246 1,709 33,776 30,252 8,547
Individual Division............ 151,486 1,297,683 11,583 81,565 81,723 88,381 22,807 25,126
Corporate...................... - (223) - - 1,340 1 1 7,219
-------- ---------- -------- -------- ------- -------- ------- -------
Total...................... 155,319 1,460,349 13,459 342,148 96,569 272,229 80,035 87,228
======== ========== ======== ======== ======= ======== ======= =======
Year ended December 31, 1997:
Employee Benefits Division..... $ 536 $ 91,658 $ 658 $155,744 $10,125 $107,065 $22,601 $38,375
Group Special Markets.......... 0 33,484 108 44,258 2,555 21,354 22,790 6,640
Individual Division............ 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:
Employee Benefits Division..... $ - $ 84,688 $ 474 $104,126 $ 5,159 $ 69,042 $15,024 $25,624
Group Special Markets.......... - 32,934 95 49,497 4,309 23,526 21,364 10,365
Individual Division............ 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
======== ========== ======== ======== ======== ======== ======= =======
</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, 1998,
1997 and 1996.
29
<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, 1998:
Life insurance in force................... $47,309,551 $4,808,809 $1,060,683 $43,561,425 2.43%
=========== ========== ========== =========== ====
Premiums:
Life and annuity(1) (2) 172,636 14,689 1,536 159,483 0.96%
Accident and Health.................. 239,164 63,392 6,893 182,665 3.77%
----------- ---------- ---------- ----------- ----
Total premiums....................... $ 411,800 $ 78,081 $ 8,429 $ 342,148 2.46%
=========== ========== ========== =========== ====
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).................. 126,717 5,065 1,213 122,865 0.99%
Accident and health.................. 172,318 50,704 7,382 128,996 5.72%
----------- ---------- ---------- ----------- ----
Total premiums....................... $ 299,035 $ 55,769 $ 8,595 $ 251,861 0.56%
=========== ========== ========== =========== ====
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%
============= ========== ========== =========== ====
</TABLE>
(1) Includes life insurance premiums and policyholder assessments.
(2) Includes gross amount of $20,342 and ceded amount of $200 attributable
to Closed Block.
The table above includes amounts attributable to the Closed Block.
30
<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, 1998:
Allowance for other invested assets... $2,555 $ - $ - $2,555
Allowance for mortgage loans.......... 1,264 212 1 1,475
====== ====== ====== ======
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
====== ====== ====== ======
</TABLE>
31
<PAGE>
Exhibit 10(p)
RETIREMENT PLAN FOR EMPLOYEES
OF
THE GUARANTEE LIFE COMPANIES INC.
(AS AMENDED AND RESTATED EFFECTIVE JANUARY 1, 1998)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I - INTRODUCTION AND PURPOSE 1
- ------------------------------------
ARTICLE II - DEFINITIONS 3
- ------------------------
ARTICLE III - PARTICIPATION 16
- ---------------------------
A. Eligibility to Participate 16
B. Termination and Reemployment 16
ARTICLE IV - ACCOUNT BALANCES AND CREDITS 17
- -----------------------------------------
A. Account Balances 17
B. Initial Account Balance 17
C. Credits 17
ARTICLE V - AMOUNT AND PAYMENT OF BENEFITS 19
- ------------------------------------------
A. Normal Retirement Benefit 19
B. Early Retirement Benefit 19
C. Vested Benefit 19
D. Death Benefits 20
E. Payment of and Form of Retirement Benefits 22
F. Payment of Small Benefits 27
G. Determination of Benefits Upon Reemployment 28
ARTICLE VI - FINANCING 28
- ----------------------
A. Funding Policy 28
B. Employer Contributions, Forfeitures 28
C. Employee Contributions 29
D. Irrevocability 29
ARTICLE VII - LIMITATIONS ON RETIREMENT BENEFITS AND
- ----------------------------------------------------
CONTRIBUTIONS 30
- -------------
A. Maximum Benefit 30
B. Aggregation of Benefits from Defined Benefit
and Defined Contribution Plans 33
C. Temporary Limitations on Retirement Benefits
By Reason of Government Regulations 33
</TABLE>
<PAGE>
<TABLE>
<S> <C>
ARTICLE VIII - ADMINISTRATION 37
- -----------------------------
A. Plan Administrator, Committee 37
B. Fiduciary Duties 38
ARTICLE IX - AMENDMENT, DURATION, TERMINATION, MERGER 39
- -----------------------------------------------------
A. Amendment and Duration of the Plan 39
B. Termination of the Plan 40
C. Merger of the Plan 42
ARTICLE X - MISCELLANEOUS PROVISIONS 43
- ------------------------------------
A. Required Information to be Furnished 43
B. Rights of Participants 43
C. Benefits Not Assignable 44
D. Claims Procedure 44
E. Beneficiary Designation 48
F. Distribution in Event of Incapacity 50
G. Non-Duplication of Benefits 51
H. Gender and Number 51
I. Applicable Law 51
J. Top-Heavy Provisions 52
</TABLE>
<PAGE>
ARTICLE I
INTRODUCTION AND PURPOSE
------------------------
On August 1, 1928, the Employer had established a defined benefit plan for
the exclusive benefit of Employees, in the form of Group Annuity Contract Number
45, issued by the Metropolitan Life Insurance Company of New York, the terms of
which were stated successively in several amended and restated instruments.
1. With the enactment of the Social Security Amendments of 1972, it became
clear that amendments were needed to take into consideration Benefits
provided under the Social Security Act. In addition to introducing a
Partial Offset of Social Security Benefits, Participation Requirements,
Vesting Provisions, Service Requirement for Full Benefit, and other
provisions were amended. Effective January 1, 1974, Group Annuity Contract
Number 45 was amended to an Immediate Participation Guarantee Deposit
Administration Contract. Because of this change in funding instrument and
numerous changes in the Plan provisions, the Plan was amended and restated
in its entirety as of January 1, 1974.
2. Because of the many changes in Plan provisions required effective January
1, 1976, in accordance with the Employee Retirement Income Security Act of
1974, the Plan was amended and restated in its entirety.
3. Because of the many changes in Plan provisions required by the Tax Equity
and Fiscal Responsibility Act of 1982 (TEFRA), the Deficit Reduction Act of
1984 (DEFRA), and the Retirement Equity Act of 1984 (REA), the Plan was
amended and restated in its entirety, effective January 1, 1984.
4. Because of the many changes in Plan provisions required by the Tax Reform
Act of 1986 (TRA 86) and various other Acts, the Plan has been amended and
restated in its entirety, effective January 1, 1989 (unless otherwise
specifically noted).
5. Because of the many changes by the Small Business Job Protection Act of
1996, and the Taxpayer Relief Act of 1997, and the decision to convert the
plan to a new format based on individual account balances, the plan is
amended and restated in its entirety effective January 1, 1998 (except as
otherwise specifically noted).
<PAGE>
This restated Plan is effective for Employees actively employed on or after
January 1, 1998, except as otherwise noted herein. Employees who terminated
employment on or prior to January 1, 1998, will be covered according to the
applicable provisions of the Plan as in effect at the time of such termination
of employment (subject to certain legally mandated plan provisions noted in this
Amended and Restated Plan). All actively employed Employees will be covered
under the restated Plan with no loss of benefits accrued under the provisions of
the Plan in effect on December 31, 1997 (the "Prior Plan"), as follows:
1. Each Employee of the Employer who was an Active Participant under the
Prior Plan on the day before the effective date of the amended and
restated Plan is deemed to meet all the eligibility requirements set
forth in the amended and restated Plan.
2. Each Employee's participation under the Prior Plan is deemed to be
included as participation under the restated Plan.
3. Each Participant's Entry Date under the Prior Plan is substituted for
the Entry Date under the amended and restated Plan where appropriate.
4. Each Employee or former Employee who was an Inactive Participant under
the Prior Plan as of the day immediately preceding the effective date
of the amended and restated Plan will become an Inactive Participant
under the amended and restated Plan as of the effective date of the
amended and restated Plan. However, the eligibility for benefits and
the amount of benefits, if any, payable to or on behalf of either such
Employee will be determined in accordance with the provisions of the
Prior Plan, except as may be otherwise stated in the amended and
restated Plan.
The Plan as restated continues to be for the exclusive benefit of Employees
of the Employer. It is intended that the Plan, as restated, will comply with the
requirements of the Employee Retirement Income Security Act of 1974 and will
continue to qualify
2
<PAGE>
under the Internal Revenue Code of 1986 and any later amendments to either such
Act or Code.
Headings at the beginning of Articles and Sections are for the convenience
of reference and are not a part of the Plan and will not influence its
construction. The provisions of the Plan will be construed as a whole in such
manner as to carry out the provisions of the Plan and will not be construed
separately without relation to the context.
ARTICLE II
DEFINITIONS
-----------
For purposes of this Plan, the following terms when capitalized will have
the meanings indicated:
(1) "Account Balance" shall mean the accumulated value of a Participant's
Initial Account Balance, Pay Credits, and Investment Credits as determined
according to the provisions of Article IV.
(2) "Accrued Benefit" shall mean:
(a) as of any date on or before a Participant attains age 65, a benefit in
the form of a single life annuity commencing on the Participant's
Normal Retirement Date that is the Actuarial Equivalent of the
Participant's Account Balance, projected to age 65 with interest at a
rate per annum equal to the "applicable interest rate" as defined in
section 417(e)(3) of the Code. For purposes of this paragraph (a), the
"applicable interest rate" used at any time during a Plan Year shall
be the rate on 30-year Treasury securities as specified by the
Secretary of the Treasury for the month of September of the preceding
Plan Year; and
(b) as of any date after a Participant attains age 65, a benefit in the
form of a single life annuity commencing on the Participant's Annuity
Starting Date that is the Actuarial Equivalent of the Participant's
Cash Balance Account, determined as of the Annuity Starting Date.
3
<PAGE>
Actuarial Equivalence shall be determined using the applicable interest
rate and the applicable mortality table as defined in section 417(e)(3) of the
Code. The applicable interest rate used at any time during a Plan Year shall be
the rate on 30-year Treasury securities as specified by the Secretary of the
Treasury for the month of September of the preceding Plan Year.
For Participants who do not earn an Hour of Service after December 31,
1997, the Accrued Benefit shall be determined by the provisions of the Plan in
effect on December 31, 1997. Alternatively, with respect to Participants who are
both employed by the Employer and Participants in the Plan on January 1, 1998,
the Accrued Benefit of such Participants for Plan Years ending prior to January
1, 2008, shall be the greater of (a) the Accrued Benefit determined under the
preceding paragraph of this section, or (b) the Earned Retirement Benefit as
defined under Article 1(17) of the Plan as in effect on December 31, 1997.
The Earned Retirement Benefit shall be subject to cost-of-living
adjustments under Article 5(4) of the Plan in effect on December 31, 1997.
With respect to an employed Participant who is a Participant in the Plan on
December 31, 1997, and remains employed until December 31, 2007, the alternative
Accrued Benefit based on the Participant's Earned Retirement Benefit shall be
frozen on December 31, 2007. Thereafter, the Participant's Accrued Benefit shall
be the greater of the Participant's Accrued Benefit determined as of December
31, 2007, or the Participant's Accrued Benefit determined under the first
paragraph of this Section.
4
<PAGE>
(3) "Active Participant" shall mean an Employee who is eligible to
participate in the Plan in accordance with the provisions of Article III.
(4) "Actuarial Equivalent" shall mean a benefit differing in time, period
or manner of payment from a specific benefit provided under the Plan, but having
the same value as such specific benefit when computed by the Actuary for the
Plan, using the following assumptions:
(a) Except as otherwise provided herein, for purposes of converting from
one periodic form of payment to another, including, without
limitation, different commencement dates for payment, Actuarial
Equivalence shall be determined using the 1983 Group Annuity Mortality
Table with mortality values weighted 50% male, and 50% female, and an
interest rate of seven and one-half percent (7.5%), compounded
annually.
(b) For purposes of converting from a periodic form of payment to a lump
sum form of payment, including, without limitation, different
commencement dates for payment, Actuarial Equivalence shall be
determined using the applicable interest rate as defined in section
417(e)(3) of the Code and the applicable mortality table prescribed by
the Secretary of the Treasury for such use under section 417(e)(3) of
the Code. The applicable interest rate used for determining the
actuarial equivalence of a lump sum form of payment for any Plan Year
shall be the rate on 30-year Treasury securities as specified by the
Secretary of the Treasury for the month of September of the preceding
Plan Year.
(5) "Actuary" shall mean the person or persons, firm or firms, designated
by the Board of Directors of the Employer to serve as Actuary hereunder.
(6) "Affiliated Employer" shall mean the Employer and any corporation
which is a member of a controlled group of corporations (as defined in Section
414(b) of the Code) which includes the Employer; any trade or business (whether
or not incorporated) which is under common control (as defined in Section 414(c)
of the Code) with the Employer; any organization (whether or not incorporated)
which is a member
5
<PAGE>
of an affiliated service group (as defined in Section 414(m) of the Code) which
includes the Employer; and any other entity required to be aggregated with the
Employer pursuant to regulations under Section 414(o) of the Code.
(7) "Beneficiary" or "Beneficiaries" shall mean such person(s) who at any
particular time shall be entitled to receive any amount of benefit in case of
the Participant's death as provided in Article X.E.
(8) "Break in Service" shall mean a Period of Severance of one year. When
aggregating Breaks in Service, fractional years of a Period of Severance shall
be counted and shall be expressed in terms of months, 30 days being counted as
one month and fewer than 30 days being disregarded.
For purposes of determining a Participant's eligibility for participation,
Break in Service shall mean a 12 consecutive month period coinciding with an
Employee's Period of Service for eligibility during which he is credited with
500 or less Hours of Service.
(9) "Code" shall mean the Internal Revenue Code of 1986, as heretofore or
hereafter amended or supplemented, or as superseded by laws of similar effect,
together with regulations promulgated pursuant thereto.
(10) "Committee" shall mean the Committee appointed to administer the Plan
pursuant to Article VIII.
(11) "Death Benefit" shall mean the benefit described in Article V.D.
(12) "Disability" shall mean, for the purposes of this Plan, the complete
inability of the Participant due to accidental bodily injury or sickness,
6
<PAGE>
(a) during the first twenty-four (24) months of such disability, to
perform any and every duty pertaining to his occupation; and
(b) during any continuation of such disability following the first twenty-
four (24) months of disability, to engage in any work or occupation
for which he is reasonably fitted by education, training or
experience;
and provided further, that he does not engage in any occupation, work or
employment for wage or profit during any such disability.
(13) "Early Retirement Benefit" shall mean the benefit described in Article
V.B.
(14) "Early Retirement Date" shall mean the first day of any month
coincident with or next following the date on which a Participant has attained
the age of 55 and has completed a Period of Service of at least ten years as an
Active Participant.
(15) "Effective Date" of this amendment shall mean January 1, 1998, unless
otherwise specified and shall apply to only those Participants whose employment
with the Employer or Affiliated Employer, whether or not as a Participant, was
not interrupted prior to the Effective Date. All Participants who terminated
employment prior to the Effective Date shall be governed by the provisions of
the Plan as it was in effect on the date of their termination of employment,
except if an Employee returns to Employment after the Effective Date, in which
case the Employee shall be governed by the provisions of the Plan in effect
after the Effective Date.
(16) "Employee" shall mean any person in the regular service of the
Employer who receives regular compensation. The term "Employee" shall include
only those persons for whom the Employer pays Social Security taxes, and shall
not include any individual determined by the Employer to be an independent
contractor or any agent of
7
<PAGE>
the Employer. Employee shall include any leased employees within the meaning of
Section 414(n)(2) of the Code. Notwithstanding the foregoing, if such leased
employees constitute less than twenty percent of the Employer's non-highly
compensated work force within the meaning of Section 414(n)(1)(C)(ii) of the
Code, the term "Employee" shall not include those leased employees covered by a
plan described in Section 414(n)(5) of the Code unless otherwise provided by the
terms of the Plan.
(17) "Employer" shall mean The Guarantee Life Companies Inc., any successor
thereto which shall assume the obligations of this Plan, all members of a
controlled group of corporations (as defined in Section 414(b) and modified by
Section 415(h) of the Code), all commonly controlled trades or businesses (as
defined in Section 414(c) and modified by Section 415(h) of the Code), or any
affiliated service groups (as defined in Section 414(m) of the Code) of which
the adopting Employer is a part.
(18) "Hour(s) of Service" shall mean:
(a) Each hour for which an Employee is directly or indirectly paid or
entitled to payment by the Employer for the performance of duties.
These hours shall be credited to the Employee for the computation
period or periods in which the duties are performed; and
(b) Each hour (up to a maximum of 501 hours in a Plan Year) for which an
Employee is directly or indirectly paid or entitled to payment by an
Employer for reasons other than for the performance of duties such as
vacation, holiday, sick leave, jury duty, layoff, military leave or
leave of absence; and
(c) Each hour for which back pay, irrespective of mitigation of damage,
has been either awarded or agreed to by the Employer. These Hours
shall be credited to the Employee for the computation period or
periods to which the award or agreement pertains rather than the
computation period in which the award, agreement or payment was made;
and
8
<PAGE>
(d) Each hour during a period of Disability or in satisfaction of a salary
continuation agreement between the Employer and the Participant.
With respect to paragraphs (b) and (c) above, no credit shall be given:
(i) On account of payments made or due under a plan maintained solely
for the purpose of complying with applicable workers'
compensation, unemployment compensation or disability insurance
laws; or
(ii) For payments which solely reimburse an Employee for medical or
medically related expenses incurred by the Employee.
Hours of Service shall also be credited in the manner set forth above for
any period while on an Employer approved leave of absence provided the Employee
returns to employment with the Employer within 31 days after the expiration of
such leave of absence. No more than 501 Hours of Service shall be credited under
this paragraph to an Employee who does not perform any duties for the Employer
during a single continuous period of time, unless the Committee establishes
uniform, nondiscriminatory rules which provide for additional Hour of Service
credits to such Employees.
Hours of Service shall also be credited for any period of service in the
armed forces of the United States, in accordance with the provisions of Section
414(u) of the Code.
The rules concerning Hours of Service contained in paragraphs (b) and (c)
of Regulation 2530.200(b)-2 issued by the Department of Labor are incorporated
into the Plan by reference and shall be applied in a uniform and
nondiscriminatory manner.
9
<PAGE>
Hours of Service which would have been credited pursuant to this section
except for the fact that they were rendered for an Affiliated Employer rather
than for the Employer shall be credited under this Plan for all purposes except
Periods of Service for Benefit Accrual.
Solely for purposes of determining whether or not an Employee incurs a
Break in Service as defined under Article II(8), an Employee who begins an
absence for maternity or paternity reasons on or after July 1, 1985 shall be
credited with the number of Hours of Service which would otherwise have been
earned but for such absence, or in any case in which such Hours cannot be
determined, to a maximum of 501 Hours. The Hours of Service credited under this
paragraph shall be credited (a) in the Plan Year the absence begins if necessary
to prevent a Break in Service during that Plan Year, or (b) in the following
Plan Year. An absence from work for maternity reasons means an absence due to
(a) the pregnancy of the Employee, (b) the birth of a child of the Employee, (c)
the placement of a child in connection with the adoption of the child by the
Employee, or (d) caring for such child immediately following the birth or
placement for adoption.
(19) "Inactive Participant" shall mean a Participant who is not an Active
Participant.
(20) "Initial Account Balance" shall mean the portion of a Participant's
Account Balance as determined in Article IV.B.
(21) "Investment Credits" shall mean additions to the Account Balance as
described in Article IV.C.
10
<PAGE>
(22) "Investment Percentage" shall mean the average yield rate on one year
U.S. Treasury notes for the month of September of the prior Plan Year, plus 1/2
of 1%. The Investment Percentage shall be a minimum of 4% and a maximum of 10%.
(23) "Normal Form of Payment" shall mean a monthly benefit payable on the
first day of each month beginning with a Participant's benefit commencement date
and ending with the first day of the month of death.
(24) "Normal Retirement Benefit" shall mean the benefit described in
Article V.A.
(25) "Normal Retirement Date" shall mean the first day of the month
coincident with or next following the Participant's attainment of age 65.
(26) "Participant" shall mean an Employee or former Employee or any
Beneficiary who is or may become eligible to receive a benefit from this Plan.
(27) "Pay Credits" shall mean additions to the Account Balance based on
Salary as described in Article IV.C.
(28) "Period of Service"
(a) Period of Service for Benefit Accrual
-------------------------------------
For purposes of determining a Participant's Accrued Benefit, Period of
Service means the period of time beginning on a Participant's
Employment Commencement Date or Reemployment Commencement Date
(whichever is applicable) and ending on his Severance from Service
Date. "Employment Commencement Date" and "Reemployment Commencement
Date" shall have the same meaning as defined in DOL Regs. (S)2530.202-
2.
(b) Period of Service for Vesting:
-----------------------------
11
<PAGE>
For purposes of determining vesting, Period of Service means the
period beginning on the Participant's Employment Commencement Date or
Reemployment Commencement Date and ending on his Severance from
Service Date. If a Participant, who has terminated employment by
reason of a quit, discharge, or retirement, or death, or performs an
Hour of Service within twelve months of his Severance from Service
Date, then he shall be entitled to credit for the Period of Severance.
(c) Aggregation of Service:
----------------------
For the purpose of determining the length of a Participant's Period of
Service for purposes of benefit accrual or vesting, all Periods of
Service that are counted shall be aggregated and measured in terms of
full years and full months (thirty days or more being counted as one
month and fewer than thirty days being disregarded). In addition to
the Period of Service to which a Participant may be entitled under the
provisions of this Article II(28), the Participant shall also be
entitled to credit for such further Period of Service (if any) as may
be required from time to time by any federal law other than the
Employee Retirement Income Security Act of 1974.
In determining a Participant's Period of Services for vesting, Service
of the Participant will be disregarded with respect to which he has
received:
1. A distribution of the present value of his entire vested Accrued
Benefit if such distribution does not exceed $5,000 (or an amount
permitted under regulations prescribed by the Secretary of the
Treasury or his delegate), or
2. A distribution of the present value of his vested Accrued Benefit
attributable to such Service, which he elected to receive.
Clause (1) above shall apply only if such distribution was made on
termination of the Employee's participation in the Plan. Clause (2)
above shall apply only if such distribution was made either on
termination of the Employee's participation in the Plan, or under such
circumstances as may be provided under regulations by the Secretary of
Treasury or his delegate.
A Participant who terminates his participation in the Plan and receives a
distribution which is less than the present value of his Accrued Benefit,
however,
12
<PAGE>
will not lose credit for Service as provided in the foregoing paragraph if
he resumes participation in this Plan and repays the full amount of such
distribution with interest at the rate of 5% per annum. Finally, upon
repayment of such distribution, the Participant's Accrued Benefit will be
recomputed so as to credit him for Service prior to the date he terminated
his participation in and received a distribution, and after the date he
resumes participation. However, in no event will there ever be a
duplication of benefits under the Plan.
(29) "Period of Severance" shall mean a continuous period of time which the
Employee is not employed by the Employer and does not perform an Hour of Service
for the Employer. Such period of time shall begin on the Employee's Severance
From Service Date and shall end on his Reemployment Commencement Date.
(30) "Plan" shall mean the Retirement Plan for Employees of The Guarantee
Life Companies Inc., as set forth herein, together with any amendments or
supplements thereto.
(31) "Plan Administrator" shall mean the Employer or such other
organization or individual that the Employer may appoint pursuant to Article
VIII.A.
(32) "Plan Year" shall mean the period on which the records of the Plan are
kept. The Plan Year is the calendar year. The limitation year is the Plan Year.
(33) "Qualified Joint and Survivor Annuity" shall mean a monthly benefit
for the life of the Participant with a survivor benefit payable to the
Participant's Spouse in an amount equal to 1/2 of the benefit payable to the
Participant. The amount of benefit payable under a Qualified Joint and Survivor
Annuity shall be an amount which is the
13
<PAGE>
Actuarial Equivalent to the benefit which would have been payable to the
Participant under the Normal Form of Payment.
(34) "Retirement Act" or "Act" shall mean those provisions of the Employee
Retirement Income Security Act of 1974, as may be hereafter amended or
supplemented, or as superseded by laws of similar effect, together with
regulations promulgated pursuant thereto.
(35) "Salary" shall mean the Participant's compensation for the Plan Years,
including bonuses, commissions and overtime, but excluding directors' fees,
Employer contributions to deferred compensation plans, expense reimbursements,
other forms of irregular or non-recurring compensation, provided that Salary
shall include any salary reductions contributed to the Employer's qualified
retirement plan containing features provided under Section 401(k) of the Code,
and salary reductions to the Employee's plan under Section 125 of the Code.
The Salary for any Participant used to determine benefits under the Plan
shall not exceed $160,000 (or such other maximum amount permitted under Section
401(a)(17)(B) of the Code). The cost-of-living adjustment in effect for a
calendar year applies to any period, not exceeding 12 months, over which
compensation is determined (determination period) beginning in such calendar
year. If a determination period consists of fewer than 12 months, the Omnibus
Budget Reconciliation Act of 1993 ("OBRA `93") annual compensation limit will be
multiplied by a fraction, the numerator of which is the number of months in the
determination period, and the denominator of which is 12.
14
<PAGE>
For Plan Years beginning on or after January 1, 1994, any reference in this
Plan to the limitation under Section 401(a)(17) of the Code shall mean the OBRA
'93 annual compensation limit set forth in this provision.
If compensation for any prior determination period is taken into account in
determining an employee's benefit accruing in the current Plan Year, the
compensation for that prior determination period is subject to the OBRA '93
annual compensation limit in effect for that prior determination period. For
this purpose, for determination periods beginning before the first day of the
Plan Year beginning on or after January 1, 1994, the OBRA '93 annual
compensation limit is $150,000.
(36) "Social Security Wage Base" shall mean the OASDI Wage Base in effect
for the Plan Year under the Code.
(37) "Surviving Spouse" or "Spouse" shall mean a spouse who is married to
the Participant as of the earlier of the date benefit payments to the
Participant commence under the Plan or the Participant's date of death.
(38) "Trust" or "Trust Fund" shall mean the fund established pursuant to
the terms of the Plan and the Trust Agreement to which contributions are to be
made by the Employer and from which pensions and other benefits under the Plan
are to be paid.
(39) "Trust Agreement" or "Agreement" shall mean the Trust Agreement, as
amended, substituted or replaced from time to time, entered into between the
Board of Directors of the Employer and the Trustee for purposes of the Plan.
(40) "Trustee" shall mean the person or persons, either corporate or
individual, or any combination thereof, appointed by the Employer, which shall
have
15
<PAGE>
accepted the appointment as Trustee pursuant to the Trust Agreement. Trustee
shall also include any successor Trustee(s).
(41) "Vested Benefit" shall mean the benefit described in Article V.C.
ARTICLE III
PARTICIPATION
-------------
A. ELIGIBILITY TO PARTICIPATE
--------------------------
Every Employee who was a Participant under the Plan as of December 31,
1997, shall continue to be a Participant under this restated Plan as of January
1, 1998.
Every other Employee shall become a Participant on the first day of the
month coincident with or next following the later of (a) completion of one month
of continuous service, and (b) attainment of age 21.
However, Employees whose wages and/or working conditions are negotiated
through a collective bargaining agreement are eligible to participate in this
Plan only if such collective bargaining agreement so provides. Employees who are
leased Employees within the meaning of Section 414(n) of the Code are not
eligible to participate.
B. TERMINATION AND REEMPLOYMENT
----------------------------
If a Participant incurs a termination of employment, that Participant shall
cease to be an Active Participant under the Plan.
If the Participant returns to employment following the termination of
employment, he shall again become a Participant on the date of rehire provided
the participation requirements of the Plan, as set forth in Article III.A, have
been fulfilled.
16
<PAGE>
ARTICLE IV
ACCOUNT BALANCES AND CREDITS
----------------------------
A. ACCOUNT BALANCES
----------------
Each Participant shall have an individual Account Balance maintained under
this Plan. A Participant's Account Balance shall be comprised of the Initial
Account Balance plus any Pay Credits and Investment Credits as determined
according to the provisions of this Article IV.
B. INITIAL ACCOUNT BALANCE
-----------------------
As of January 1, 1998, the Initial Account Balance shall equal the
Actuarial Equivalent of the Participant's Accrued Benefit determined under the
Plan provisions as of December 31, 1997, assuming payments begin at age fifty-
five (55) years or, if the Participant has already attained age 55, age nearest
birthday.
C. CREDITS
-------
Each Participant shall have their Account Balance credited with one or more
of the following:
1. Pay Credits
-----------
Each Participant's Account Balance shall be credited with an amount
equal to a percentage of the Participant's Salary received for the
Plan Year while the Participant is an Active Participant of this Plan.
Such percentage shall be based on a Participant's age (as of the end
of the Plan Year) and the amount of his Compensation above and below
the Social Security Wage Base as follows:
17
<PAGE>
Pay Credit
----------
<TABLE>
<CAPTION>
Below Social Security Above Social Security
Age Wage Base Wage Base
--- --------------------- ---------------------
<S> <C> <C>
Under 30 3.0% 6.0%
30-39 4.0% 8.0%
40-49 5.0% 10.0%
50 and above 6.0% 12.0%
</TABLE>
While a Participant is providing no services to the Employer by reason
of Disability, the Participant's Account shall be credited with Pay
Credits equal to the applicable percentage multiplied by the
Participant's Salary for the Plan Year prior to Disability, or for the
Plan Year in which the Disability occurred, whichever Salary is
greater. Such credits shall cease on the earlier of a Participant's
Normal Retirement Date or the date the Participant's Disability ended;
provided, however, if a disabled employee recovers from Disability
prior to his Normal Retirement Date but does not return to active
employment with the Employer within 90 days of his recovery, at the
request of the Employer, his benefits will be determined as though he
had terminated employment on the date his Disability began.
Notwithstanding any provision of this Plan to the contrary,
contributions, benefits and service credit with respect to qualified
military service shall be provided in accordance with Section 414(u)
of the Code.
2. Investment Credits
------------------
Each Participant's Account Balance shall be credited with an amount
equal to the Investment Percentage appropriate for the Plan Year,
multiplied by the Participant's Account Balance determined as of the
first day of the Plan Year. Investment Credits shall be credited until
payments commence under the Plan. If the period for crediting the
Investment Credits is less than 12 months, pro rata Investment Credits
shall be credited. A rehired Participant shall receive pro rata
Investment Credits on his restored Account Balance beginning from the
first day of the month following his rehire date.
In order to be credited with Pay Credits for a Plan Year, a Participant
must earn 1,000 or more Hours of Service during the Plan Year; provided,
however, in the Plan
18
<PAGE>
Year of termination of service, Pay Credits will be credited if the Participant
has completed at least 1,000 Hours of Service times the number of whole months
prior to termination and divided by 12.
ARTICLE V
AMOUNT AND PAYMENT OF BENEFITS
------------------------------
A. NORMAL RETIREMENT BENEFIT
-------------------------
The monthly Normal Retirement Benefit of a Participant who retires on or
after his Normal Retirement Date shall be equal to his Accrued Benefit
determined as of that date.
B. EARLY RETIREMENT BENEFIT
------------------------
A Participant may elect to retire early on any Early Retirement Date and to
receive an Early Retirement Benefit commencing on the first day of any month but
not later than the April 1 following the calendar year of attainment of age 70-
1/2.
A Participant whose benefit payments will commence on his Normal Retirement
Date shall be eligible to receive his Accrued Benefit. In the event that benefit
payments commence before or after the Participant's Normal Retirement Date, the
Actuarial Equivalent of the Accrued Benefit shall be paid.
C. VESTED BENEFIT
--------------
A Participant whose employment is terminated for reasons other than
retirement or death after completing a Period of Service for Vesting of at least
three years may elect to receive a Vested Benefit commencing on the first day of
any month but not later than the April 1 following the calendar year of
attainment of age 70-1/2.
19
<PAGE>
All benefit payments commencing prior to the Participant attaining age 55
will be made according to the rules set forth in Article V.E, but only in one of
the following forms: Normal Form of Payment, Lump Sum Option, or if the
Participant is married at the time benefits are to commence, the Qualified Joint
and Survivor Annuity.
The Vested Benefit of a Participant shall be equal to his Accrued Benefit
determined as of his date of termination of employment.
If payment of the Vested Benefit commences before or after the
Participant's Normal Retirement Date, the amount paid shall be the Actuarial
Equivalent of the Vested Benefit.
D. DEATH BENEFITS
--------------
1. Active Participants
-------------------
In the event of a Participant's death prior to retirement or
termination of employment, his Beneficiary designated in accordance with
the provisions of Article X.E shall be entitled to a Death Benefit. The
Death Benefit is as set forth in Article V.D.2 and Article V.D.3.
If the Beneficiary is the Surviving Spouse, the value of the Death
Benefit shall be payable in the form of a level life annuity as described
in Article V.E for the life of the Surviving Spouse with such benefit
commencing on the first day of the month following death. The Surviving
Spouse may elect to receive in lieu of the level life annuity, the Death
Benefit in a single lump sum. The Surviving Spouse may also elect to defer
payments beyond the time they would otherwise begin, but not later than the
date the Participant would have attained age 70-1/2.
20
<PAGE>
In the event of the death of the Surviving Spouse described above
prior to the time payments begin, the Death Benefit shall be paid to the
Surviving Spouse's Beneficiary within one year of the Spouse's death. If a
Beneficiary other than the Surviving Spouse has been designated as provided
under Article X.E, the Death Benefit shall be paid at the election of the
Beneficiary either in the form of a level life annuity with payments
commencing within one year of the date of death or in the form of a single
lump sum payment within five years of the date of death.
2. Terminated Participant - Death before Benefit Commencement
----------------------------------------------------------
In the event of the death of a terminated Participant who has met each
of the conditions set forth below, a benefit shall be paid to the
Beneficiary:
(a) The Participant was entitled to receive a Normal, Early, or
Vested Benefit at the time of termination of employment.
(b) Benefit payments have not begun as of the date of death.
The Death Benefit to be paid to the Beneficiary is 100% of the
Participant's Account Balance. For deaths occurring prior to January 1,
2000, with respect to Participants who were active Participants on January
1, 1998, the Participant's Surviving Spouse or Dependent Child shall be
entitled to receive the greater of the death benefit set forth in this
Section V.D.2. or the Death and Survivor Benefits payable under Article 6
of the Plan in effect prior to January 1, 1998. Benefits shall be payable
under the same forms and with the same restrictions as described in the
preceding paragraph for the Beneficiary of an Active Participant.
21
<PAGE>
3. Terminated Participant - Death After Benefit Commencement
---------------------------------------------------------
Except for payments to a Beneficiary or Beneficiaries required to be
made after a Participant's benefit commencement date pursuant to the form
of benefit elected by the Participant, no payment shall be made on behalf
of a Participant on account of his death.
E. PAYMENT OF AND FORM OF RETIREMENT BENEFITS
------------------------------------------
1. Commencement of Retirement Benefits
-----------------------------------
Notwithstanding any provision in this Plan to the contrary, payment of
a Participant's benefits shall begin when the Participant elects but not
later than the last to occur of the following events:
(a) The April 1 following the calendar year of his attainment of age
70-1/2, or
(b) The 60th day after the close of the Plan Year containing his date
of termination of employment with the Employer.
Notwithstanding the above, if a Participant is a 5% owner of the
Employer within the meaning of Section 416(i) of the Code at any time
during the five Plan Years ending with the Plan Year during which the
Participant attains age 70-1/2, payments shall commence not later than the
April 1 following the close of such Plan Year whether or not the
Participant has terminated at such time.
2. Form of Payment
---------------
A Participant who has a Spouse as of the benefit commencement date
will automatically receive benefit payments under the Qualified Joint and
Survivor
22
<PAGE>
Annuity form. Other Participants will automatically receive benefits under
the Normal Form of Payment.
In lieu of the respective forms of payment set forth above, a
Participant may request to receive retirement benefits under any optional
form of retirement benefit as provided in Article V.E.3.
3. Optional Forms Available (Options)
----------------------------------
Optional forms of retirement benefit payments are available to
Participants under this Plan at their benefit commencement date subject to
the provisions of Articles V.C, V.E.4 and X.E. Options available are set
forth below, with benefits payable thereunder determined as the Actuarial
Equivalent of the Normal Form of Payment.
Option 1: Life Annuity With 60 Months Certain Option
-------- ------------------------------------------
A monthly benefit payable to the Participant on the first
day of each month beginning with the benefit commencement
date and ending with the first day of the month in which he
dies; however, in the event of the Participant's death
within 60 months following the benefit commencement date,
the same monthly amount is payable for the balance of such
60 month period to a Beneficiary designated by the
Participant.
Option 2: Life Annuity With 120 Months Certain Option
-------- -------------------------------------------
A monthly benefit payable to the Participant on the first
day of each month beginning with the benefit commencement
date and ending with the first day of the month in which he
dies; however, in the event of the Participant's death
within 120 months following the benefit commencement date,
the same monthly amount is payable for the balance of such
120 month period to a Beneficiary designated by the
Participant.
Option 3: Joint and 100% Survivor Option
-------- ------------------------------
A monthly retirement benefit payable to the Participant
during the remainder of his lifetime and, following the
death
23
<PAGE>
of the Participant, 100% of such monthly amount is payable
to his Spouse for the remainder of such Spouse's lifetime,
if such Spouse shall be living upon the death of such
Participant.
Option 4: Lump Sum
-------- --------
A lump sum benefit.
4. Procedure for Requesting, Canceling or Changing an Option
---------------------------------------------------------
Each request for an option must be in writing, on a form provided for
that purpose, and filed with the Employer within the period 90 days prior
to such Participant's benefit commencement date. Each such form must
specify the scheduled commencement date of benefits under the option
elected.
A Participant may, within the period 90 days prior to the benefit
commencement date hereunder, request to cancel or change an option
previously requested and approved by the Employer, subject to the spousal
consent requirements set forth below, but each such cancellation and each
such change shall be treated as a new election of an option and shall be
treated as such for all purposes of the Plan.
The Employer shall furnish the Participant with a general description
of the normal and optional forms of benefits, including the form in which
the benefit will be paid if no optional form is elected, the availability
and procedures for electing optional forms, and a statement of the rights
of the Participant's Spouse. The Employer shall also furnish, upon a timely
written request by the Participant, a written explanation, including an
explanation of the financial effect on the Participant's benefit, of the
automatic form of payment described in
24
<PAGE>
Article V.E.2. The Employer shall provide such explanation within 30 days
of the Participant's initial written request. The Employer is not required
to respond to a request beyond the first request and may respond to such
request as he shall deem appropriate.
A Participant who is married at the time of benefit commencement may not
elect a form of payment other than a Qualified Joint and Survivor Annuity
without the written consent of the Spouse. The Spouse's consent must be
either witnessed by a Plan representative or notarized. Spousal consent may
be waived if the Participant satisfactorily shows that there is no Spouse
or consent cannot be obtained because the Spouse cannot be found.
The period for requesting or canceling an optional form of benefit shall
not end prior to 90 days after all information required pursuant to the
provisions of this Article V.E.4 shall have been furnished to the
Participant.
Any distribution provided for in this Article V.E.4 may commence less
than 30 days after the notice is given, provided that:
(a) the Plan Administrator clearly informs the Participant that the
Participant has a right to a period of 30 days after receiving the
notice to consider whether to waive the joint and survivor annuity
and consent to a form of distribution other than a joint and
survivor annuity.
(b) the Participant is permitted to revoke an affirmative distribution
election at least until the annuity starting date, or, if later, at
any time prior to the expiration of the 7-day period that begins
the day after the explanation of the joint and survivor annuity is
provided to the Participant.
25
<PAGE>
(c) the annuity starting date is after the date that the explanation of
the joint and survivor annuity is provided to the Participant.
However, the annuity starting date may be before the date that any
affirmative distribution election is made by the Participant and
before the date that the distribution is permitted to commence under
(d) below, and
(d) distribution in accordance with the affirmative election does not
commence before the expiration of the 7-day period that begins the day
after the explanation of the joint and survivor annuity is provided to
the Participant.
5. Transfer of Interest
--------------------
Notwithstanding any provision of the Plan to the contrary that would
otherwise limit a distributee's election under this Section, a distributee
may elect at the time and in the manner prescribed by the Plan
Administrator, to have any portion of an eligible rollover distribution
paid directly to an eligible retirement plan specified by the distributee
in a direct rollover. At the direction of the Administrator, the Trustee
shall effect transfers elected by distributees hereunder.
For purposes of the preceding paragraph, the following definitions
shall apply:
(a) "Eligible rollover distribution" shall mean any distribution of
all or any part of the balance to the credit of the distributee,
except an eligible rollover distribution does not include the
following:
(i) Any distribution that is one of a series of substantially
equal periodic payments (not less frequently than annually)
made for the life (or life expectancy) of the distributee or
the joint lives (or joint life expectancies) of the
distributee and the distributee's designated beneficiary, or
for a specified period of ten years or more;
26
<PAGE>
(ii) Any distribution to the extent such distribution is required
under Section 401(a)(9) of the Code; and
(iii) The portion of any distribution that is not includible in
gross income (determined without regard to the exclusion of
net unrealized depreciation with respect to employer
securities).
(b) "Eligible retirement plan" shall mean an individual retirement
account described in Section 408(a) of the Code, an individual
retirement annuity described in Section 408(b) of the Code, an
annuity plan described in Section 403(a) of the Code, or a
qualified trust described in Section 401(a) of the Code, that
accepts the distributee's eligible rollover distribution.
However, in the case of an eligible rollover distribution to the
surviving spouse, an eligible retirement plan is an individual
retirement account or individual retirement annuity.
(c) "Distributee" shall mean an Employee or former Employee. In
addition, the Employee's or former Employee's surviving spouse
and the Employee's or former Employee's spouse or former spouse
who is the alternate payee under a qualified domestic relations
order, as defined in Section 414(p) of the Code, are distributees
with regard to the interest of the spouse or former spouse.
(d) "Direct rollover" shall be a payment by the Plan to the eligible
retirement plan specified by the distributee.
F. PAYMENT OF SMALL BENEFITS
-------------------------
The Employer, in its sole discretion, may provide, in lieu of any other
benefits payable under the Plan, for payment in a single lump sum if the
Actuarial Equivalent of the Accrued Benefit has never been more than $5,000.
27
<PAGE>
G. DETERMINATION OF BENEFITS UPON REEMPLOYMENT
-------------------------------------------
Upon reemployment, a Participant's Account Balance shall equal the Account
Balance at termination of employment, less any payments made prior to
employment. Credits are added to the Account Balance according to the provisions
of Article IV.
Upon subsequent termination of employment, the benefit payable under this
Plan shall be reduced by the value of any lump sum or monthly benefit previously
paid to the Participant to the extent necessary to assure that no benefits are
duplicated under the Plan.
ARTICLE VI
FINANCING
---------
A. FUNDING POLICY
--------------
The funding of the Plan and payment of the benefits thereunder will be
provided for by means of either a contract issued by an insurance company (the
Insurer) to the Employer or a Trust Agreement between the Board of Directors of
the Employer and the Trustee.
The Plan Administrator shall have custody of any such contract and shall
have and exercise all of the rights of an owner of the contract, subject,
however, to the terms of the Plan. In the event of a conflict between the terms
of the Plan and the terms of the group annuity contract, the terms of the Plan
shall control.
B. EMPLOYER CONTRIBUTIONS, FORFEITURES
-----------------------------------
The Employer will contribute to the Plan annually or otherwise from time to
time such amounts as it shall determine, based on the advice of the Actuary, as
necessary to
28
<PAGE>
at least conform to minimum funding requirements of any applicable Federal law
as now in effect or thereafter amended or adopted.
Any forfeiture arising from a Participant's termination of employment or
death or for any other reason prior to the termination of the Plan will be used
by the Actuary in his determination to reduce any Employer contribution required
and will not increase any benefits otherwise payable hereunder.
C. EMPLOYEE CONTRIBUTIONS
----------------------
Participants shall make no contributions to the Plan.
D. IRREVOCABILITY
--------------
The Employer will have no right, title or interest in the assets of the
Plan, and no part of such assets will revert to the Employer, except that, after
satisfaction of all liabilities of the Plan as set forth in Article IX.B., such
amount remaining shall revert to the Employer. However, all contributions are
made subject to deductibility and continued qualification of the Plan. Amounts
contributed under the following circumstances will be returned to the Employer
within one year of the indicated date:
1. Mistake of fact - date of payment.
2. Before failure to qualify - date of failure to qualify.
3. Before disallowance of deduction - date of disallowance of deduction.
29
<PAGE>
ARTICLE VII
LIMITATIONS ON RETIREMENT BENEFITS
----------------------------------
AND CONTRIBUTIONS
-----------------
A. MAXIMUM BENEFIT
---------------
The annual benefit payable to a Participant shall not exceed the lesser of:
(a) 100% of the Participant's average annual compensation for his
highest 3 consecutive calendar years of service, or
(b) $90,000 or such other maximum amount permitted under Section 415
of the Code.
If a Participant has less than 10 years of participation, the limit of (b)
above shall be multiplied by the ratio of years of participation to 10 years. A
year of participation is a twelve month period measured from the date the
Employee first enters the Plan pursuant to Article III A and anniversaries
thereof during which the Participant completes 1,000 or more Hours of Service.
If a Participant's Period of Service for Vesting is less than 10, the limit of
(a) above shall be multiplied by the ratio of his Period of Service for Vesting
to 10. The limitations of (a) and (b) above shall not be reduced to less than
1/10 of such limitations without regard to the adjustments for less than ten
years of participation or vesting service. The limitation contained in (b) above
shall be applied separately with respect to each increase in benefits under the
Plan arising from any Plan amendment changing the benefit structure adopted on
May 16, 1989, or later, by multiplying such increase by the ratio of years of
participation after the effective date of the change (maximum 10 years) to 10.
30
<PAGE>
The annual benefit payable between age 62 and the Social Security
Retirement Age shall not exceed the $90,000 benefit limitation reduced by the
Social Security early retirement reduction factors and multiplied by the
Adjustment Factor.
The annual benefit payable prior to age 62 shall not exceed the Actuarial
Equivalent of the defined benefit dollar limit payable at age 62 as defined in
the previous paragraph.
The annual benefit payable after the Social Security Retirement Age shall
not exceed the Actuarial Equivalent of $90,000 (or such other maximum amount
permitted under Section 415 of the Code) payable at the Social Security
Retirement Age.
For purposes of this section, "Social Security Retirement Age" shall mean
the age used as the retirement age for the Participant under Section 216(l) of
the Social Security Act except that such section shall be applied without regard
to the age increase factor, and as if the early retirement age under Section
216(l)(2) of such Act were 62.
For purposes of this section, "Adjustment Factor" shall mean the cost-of-
living adjustment factor prescribed by the Secretary of the Treasury under
Section 415(d) of the Code for years beginning after December 31, 1987, applied
to such items and in such manner as the Secretary shall prescribe.
For purposes of this section, compensation will mean the total amount paid
to such individual by the Employer which can be considered as compensation under
Section 415 of the Code and applicable regulations for the Plan Year, determined
on a cash basis of accounting.
31
<PAGE>
If the Accrued Benefit of a Participant as of June 30, 1987 under the terms
of the Plan in effect on such date exceeds the maximum benefit set forth herein,
then for purposes of Code Section 415(b) and (e) and for purposes of this Plan,
the maximum defined benefit dollar limitation shall be equal to the Accrued
Benefit as of June 30, 1987.
For purposes of this section, limitations will be tested relative to the
amount of Actuarially Equivalent benefits payable for the continued lifetime of
the Participant. The interest rate for Actuarial Equivalence under this section
shall be five percent. This Actuarial Equivalent will ignore option features
unless the benefit payable after the death of the retired Participant exceeds
the benefit payable during his lifetime.
The dollar limitations set forth in this Article VII.A will be
automatically increased pursuant to IRS regulations.
The benefit limits contained in this section will not apply if the annual
benefit payable to the Participant does not exceed $10,000, multiplied by 1/10th
of the Participant's Period of Service for Vesting, to a maximum of 10 years.
The limit of the preceding sentence shall not be reduced below 1/10 of the limit
without regard to the adjustment for a Period of Service for Vesting of less
than ten years.
This section shall be modified as set forth in Article VII.B with respect
to any Participant who has participated in any defined contribution plan
maintained by the Employer. For the purposes of this section, all defined
benefit programs of the Employer will be treated as one defined benefit plan.
32
<PAGE>
B. AGGREGATION OF BENEFITS FROM DEFINED BENEFIT AND DEFINED CONTRIBUTION PLANS
---------------------------------------------------------------------------
For Plan Years beginning prior to January 1, 1999, after a Participant's
benefits have been adjusted (if necessary) to comply with Article VII.A, then
the sum of (1) and (2) will be computed:
(1) The Participant's benefit from the Employer's defined benefit
program(s) divided by the lesser of (a) 1.25 multiplied by the dollar
limitation of Article VII.A, and (b) 1.40 multiplied by the maximum
benefit which would be paid to the Participant under Article VII.A.
(2) The sum of the annual additions to the Participant's account balance
under the Employer's defined contribution plan(s) divided by the sum
of the lesser of the following amounts determined for such Limitation
Year and each prior year of service (a) 1.25 multiplied by the dollar
limitation in effect under Section 415(c)(1)(A) of the Code for such
year, and (b) 1.40 multiplied by the maximum addition in effect under
Section 415(c)(1)(B) of the Code for such year.
If the sum exceeds 1.0, the Participant's benefits under the Employer's
defined benefit plan(s) shall be reduced until the sum does not exceed 1.0. Such
reduction shall be reflected in accordance with the provisions of the Employer's
defined benefit plan(s).
C. TEMPORARY LIMITATIONS ON RETIREMENT BENEFITS BY REASON OF GOVERNMENT
--------------------------------------------------------------------
REGULATIONS
-----------
1. Applicability of this Section
-----------------------------
The provisions of this section shall apply only in respect of the
retirement benefits payable under the Plan to or on account of the 25
highest paid Employees of the Employer, determined as of the Amendment Date
applicable to such Employer, whose monthly benefits upon Normal Retirement
under the Plan would exceed $125 and will so apply only in the event that,
prior to the end of
33
<PAGE>
the 10 year period beginning on the applicable Amendment Date, the Plan is
terminated or the current costs thereof are not met.
2. Limitations on Retirement Income
--------------------------------
If, at any time prior to the end of the 10 year period beginning on
the applicable Amendment Date, the Plan is terminated or the current costs
thereof are not met, the Employer contributions that may be used to provide
the monthly retirement benefit payable to or on account of any retired
Participant or Beneficiary to whom this section is applicable shall not
exceed an amount equal to the largest of the amounts determined under (a),
(b), (c), and (d) below:
(a) The contributions of the Employer - including funds attributable
thereto - which would have been applied to provide the monthly
retirement benefit of each such Participant of the Plan as in
effect immediately prior to the applicable Amendment Date,
assuming the Plan had been continued in effect without change;
(b) $20,000;
(c) The sum of items (i) and (ii) below:
(i) The amount, if any, of the Employer's contributions -
including funds attributable thereto - which would have been
applied to provide the monthly retirement benefit of each
such Participant under the Plan as in effect immediately
prior to the applicable Amendment Date if the Plan had been
terminated on such date; plus
(ii) An amount computed by multiplying the smaller of the
following amounts by the number of years elapsed since the
applicable Amendment Date for which the current costs of the
Plan had been met: (i) $10,000, or (ii) an amount equal to
20% of such Participant's average regular annual
compensation earned for his services with the Employer for
the 5 calendar years immediately preceding the date of such
34
<PAGE>
determination, or if earlier, the Participant's retirement
or prior termination of service; or
(d) A dollar amount which, as of the earlier of the date the Plan
terminates or the date benefits commence, is, under the
regulations of the Pension Benefit Guaranty Corporation, equal to
the present value of:
(i) In the case of a Participant who at any time within the 60
months preceding such date has owned (within the meaning of
Code Section 1563, applied without regard to Section
1563(e)(3)(C)) more than ten percent in value of the voting
stock or of all the stock of the Employer, the benefit
guaranteed for such Participant under ERISA Section 4022, or
which would be guaranteed if the Plan terminated on such
date, and
(ii) In the case of any other Participant, the maximum benefit
described in ERISA Section 4022(b)(3)(B) without regard to
any other limitations in said Section 4022,
provided, that the date on which benefits of the Employee become payable
shall be recomputed for each year if the full current costs of the Plan are
met for such year.
Notwithstanding the above, a Participant who is subject to the above
limitation and who retires within the 10 year period following the
applicable Amendment Date shall be entitled to receive the full amount of
his annuity, including any optional form of annuity or a lump sum
settlement, if at the time of his Retirement the Plan has not been
terminated and the full current costs have been met. Such Participant shall
provide adequate security for the payment of any restricted benefits as may
be required.
35
<PAGE>
3. Definition of Amendment Date
----------------------------
For purposes of this Article VII.C, "Amendment Date" shall mean the
Effective Date of the Plan or the effective date of any amendment which
increases substantially the possibility of discrimination in favor of
highly compensated employees.
4. Procedure upon Termination of Plan
----------------------------------
In the event the Plan is terminated while the limitations of this
Article VII.C are in effect, that portion of the Fund arising from
contributions made by the Employer in respect to those of the Participants
to whom the provisions of this Article VII.C are applicable, which is in
excess of the foregoing limitations, will be apportioned among other
Participants of the Plan, including retired and terminated Participants, to
the extent the Fund is insufficient to provide full Accrued Benefits for
all Plan Participants.
5. Limitation of Applicability of this Section
-------------------------------------------
In the event that it should be determined by statute or ruling by the
Internal Revenue Service that the provisions of this Article VII.C are no
longer necessary to qualify the Plan under the Code or other applicable
Federal law, this Article VII.C will become ineffective without amendment
to the Plan.
36
<PAGE>
ARTICLE VIII
ADMINISTRATION
--------------
A. PLAN ADMINISTRATOR, COMMITTEE
-----------------------------
In order to assist the Employer in the administration of the Plan, the
Employer reserves the power to create at any time hereafter, a Committee to act
as Plan Administrator which will consist of not less than three members
appointed by the Employer, and subject to removal by it at any time. In the
absence of such appointment, the Employer shall be the Plan Administrator and
all functions of the Committee shall be deemed functions of the Employer.
Names of the current members of any such Committee shall be available from
the Secretary of the Employer. The Plan Administrator and the Committee shall
have discretionary power and authority to construe and interpret the Plan, to
supply any omissions therein, to reconcile and correct any errors or
inconsistencies, to make and publish rules for regulation of the Plan, to decide
any questions in the administration and application of the Plan, including all
questions relating to the individual rights of Participants, and to make
equitable adjustments for any mistakes or errors in the administration of the
Plan. All such decisions of the Committee will be final and binding upon the
Employer and the Participants. The Committee will have no power to add or
subtract from or to modify any of the terms of the Plan, nor to change or add to
any benefits provided by the Plan.
Any act which the Plan authorizes or requires the Committee to do may be
done at a meeting of the Committee by a majority of members then voting.
37
<PAGE>
The Committee may appoint a secretary and such other agents and
representatives as it may deem advisable (who may, but need not be members of
the Committee) to keep records or assist it in doing any other act or thing to
be done or performed by the Committee. In its relationship with the Trust on any
matter or thing included in this Plan, one member of the Committee may be
authorized by it to sign or execute on its behalf any document. The Committee
will certify to such Trust the name and signature of the member of the Committee
who is so authorized.
The members of the Committee will serve without compensation for services
as such, but all expenses of the Committee shall be paid by the Employer.
B. FIDUCIARY DUTIES
----------------
1. Named Fiduciary
---------------
The Employer will be named fiduciary for the Plan.
2. Agent for Service of Legal Process
----------------------------------
In any legal proceeding, including arbitration involving the Plan, the
Secretary of the Employer is designated as the appropriate and exclusive
agent for the receipt of service of legal process directed to the Plan.
3. Powers, Duties and Responsibilities of the Committee
----------------------------------------------------
The Committee will have the following additional powers, duties, and
responsibilities, which it may retain or delegate among the below-mentioned
bodies:
(i) Powers, duties and responsibilities of administration, delegable
to other agents or representatives;
38
<PAGE>
(ii) Powers, duties and responsibilities of custody and disbursement,
delegable to the Trustee or an insurance company; and
(iii) Powers, duties and responsibilities of investment, delegable to
the Trustee, an investment adviser or an insurance company.
The Committee may appoint an investment adviser, or an insurance
company, and review or redelegate the exercise of these powers, duties and
responsibilities at any time.
The Committee will prescribe in writing, and will review from time to
time, a funding policy which considers both immediate and long range
financial goals of the Plan.
The Employer may provide appropriate insurance coverage for the
members of the Committee and each other fiduciary of the Plan who is not
otherwise appropriately insured.
ARTICLE IX
AMENDMENT, DURATION, TERMINATION, MERGER
----------------------------------------
A. AMENDMENT AND DURATION OF THE PLAN
----------------------------------
The Employer hopes and expects to continue the Plan but necessarily
reserves the right to amend the Plan at any time or from time to time or to
terminate the Plan. Amendments will be made by appropriate actions of the Board
of Directors. Except as provided in Article VI, no such action will operate to
recapture for the Employer any part of the Fund previously contributed under the
Plan, nor, except to the extent necessary to meet the requirements of the
Internal Revenue Service or any other
39
<PAGE>
governmental authority, to adversely affect the retirement of the Participants
already retired or the Fund securing each retirement.
If a plan amendment should change any vesting schedule, any Participant
having not less than 5 years of Vesting Service whose vesting percentage was
decreased by such amendment shall be permitted to elect, within a reasonable
period of time after the adoption of such amendment, to have his vesting
percentage computed under the plan without regard to such amendment.
No amendment shall be effective to the extent it has the effect of reducing
a Participant's Accrued Benefit as in effect on the amendment date except as
permitted by Code Section 412(c)(8). An amendment shall be considered to reduce
Accrued Benefits to the extent it:
1. Changes the basis for determining Actuarial Equivalent for optional
forms of payment or Early Retirement Benefits,
2. Eliminates or reduces any Early Retirement Benefit or retirement type
subsidy (as defined under Code Section 411(d)(6)), but only with
respect to Participants at the time of the amendment who satisfy (or
eventually satisfy) the pre-amendment conditions for the subsidy, or
3. Eliminates a valuable optional form of payment unless permitted by
regulations under Code Section 411(d)(6).
B. TERMINATION OF THE PLAN
-----------------------
In the event of termination of the Plan for any reason, the rights of
Participants who shall then retire or who have theretofore retired from the
employment of the Employer and who, or whose Beneficiaries, are then entitled to
receive, or are then in receipt of a benefit hereunder, and the right of
Participants who, on the date of such
40
<PAGE>
termination or discontinuance, are then employed by the Employer, shall be
determined in accordance with any applicable Federal law as now in effect or
hereafter amended or adopted. The Trust Fund shall be allocated and distributed
as set forth below, subject to the provisions of such applicable Federal law,
and after such distribution, any funds remaining shall be paid in cash to the
Employer. Upon a complete termination of the Plan or in the event of a complete
discontinuance of contributions thereunder by an Employer, each Participant
employed by such Employer shall be fully vested in his Accrued Benefit to the
extent such Accrued Benefit is then funded.
In the event that it has been determined that there has been a partial
termination of the Plan, each Participant who is affected by such partial
termination shall be treated in accordance with the preceding paragraph as if
the Plan had fully terminated.
At least 10 days before the date of the proposed termination of the Plan by
the Employer, notification of such event will be made to the Pension Benefit
Guaranty Corporation (PBGC). Upon receipt by the Employer of a notice from the
PBGC that the assets held under the Plan are sufficient to discharge when due
all obligation of the Plan with respect to the Participant's basic benefits
(i.e., the portion of a Participant's retirement benefit guaranteed by the PBGC
within the meaning of Section 4022 of ERISA), the Employer will allocate the
assets remaining in the Fund, to the extent they are not allocated to
individuals in accordance with any group annuity contract comprised in the Fund,
in the order set forth below:
1. For each Participant an amount will be allocated to
provide that portion of the remainder of a Participant's
Accrued Benefit which is derived from the Participant's
contributions.
41
<PAGE>
2. For each Participant who retired or was eligible to retire
on a date which was at least three (3) years prior to the
date of termination, an amount will be allocated to provide
the lowest annual rate of retirement benefit payable in
accordance with Article V as in effect during the five (5)
year period ending on the date of termination and not
included in 1 above.
3. For each Participant an amount will be allocated to provide
for the Participant the remainder of his basic benefit, not
included in 1 and 2 above.
4. For each Participant an amount will be allocated to provide
for the Participant the remainder of his accrued benefit,
not provided in 1, 2 and 3 above.
If the assets held under the Plan are insufficient to provide the
retirement benefits described herein or the Plan is terminated by the PBGC, then
the retirement benefit a Participant might otherwise receive may be reduced by
the PBGC in its sole discretion, but in no event will the retirement benefit be
less than the amount guaranteed under the applicable provisions of Title IV of
ERISA and any regulations issued pursuant thereto.
If the amounts available for allocation are insufficient to provide the
prescribed retirement benefit within a priority class, then such amounts will be
allocated on a pro rata basis within that class.
C. MERGER OF THE PLAN
------------------
If the Plan is merged into or consolidated with any other plan, or if the
Plan's assets or liabilities are transferred to any other plan, each Participant
will be entitled to receive a benefit immediately after the merger,
consolidation, or transfer (if the Plan
42
<PAGE>
was then terminated) equal to or greater than the benefit he would have received
had the Plan been terminated immediately before the merger, consolidation or
transfer.
ARTICLE X
MISCELLANEOUS PROVISIONS
------------------------
A. REQUIRED INFORMATION TO BE FURNISHED
------------------------------------
A Participant and any Beneficiary shall furnish the Employer any
information or proof requested by the Employer reasonably required to administer
the Plan. Failure on the part of any Participant or Beneficiary to comply with
such request within a reasonable period of time and in good faith shall be
sufficient grounds for suspending benefits to such Participant or Beneficiary.
The Employer may rely absolutely on any such information furnished and shall not
be bound to inquire as to its accuracy or veracity.
By becoming a Participant, each Employee shall, for all purposes, be deemed
conclusively to have assented to the provisions of this Plan, and all amendments
hereto.
B. RIGHTS OF PARTICIPANTS
----------------------
Nothing herein contained will be deemed to give any Employee the right to
be retained in the service of the Employer or to interfere with the right of the
Employer to discharge such Employee at any time, nor will it be deemed to give
the Employer the right to require the Employee to remain in its service, nor
will it interfere with the Employee's right to terminate his service at any
time.
43
<PAGE>
C. BENEFITS NOT ASSIGNABLE
-----------------------
The benefits provided hereunder are intended for the personal security of
persons entitled to payments under the Plan, and are not subject in any manner
to the debts or other obligations of Participants or their Beneficiaries, and
such benefits may not be sold, transferred, or assigned or encumbered in any
manner by Participants or their Beneficiaries, either voluntarily or
involuntarily, except as may be required by law. The preceding sentence shall
also apply to the creation, assignment, or recognition of a right to any benefit
payable with respect to a Participant pursuant to a domestic relations order,
unless such order is determined to be a qualified domestic relations order as
defined in Code Section 414(p).
D. CLAIMS PROCEDURE
----------------
1. Initial Claims
--------------
The Employer shall notify a Participant in writing within 90 days of
his written application for benefits of his eligibility or non-eligibility
for benefits under the Plan. The Employer may designate a person or
department with whom benefit applications shall be filed. If the Employer
determines that a Participant is not eligible for benefits or full
benefits, the notice shall set forth:
(a) The specific reasons for such denial;
(b) A specific reference to the provision of the Plan on which the
denial is based;
(c) A description of any additional information or material necessary
for the claimant to perfect his claim, and a description of why
it is needed; and
44
<PAGE>
(d) An explanation of the Plan's claims review procedure and other
appropriate information as to the steps to be taken if the
Participant wishes to have his claim reviewed.
If the Employer determines that there are special circumstances
requiring additional time to make a decision, the Employer shall notify the
Participant of the special circumstances and the date by which a decision
is expected to be made, and may extend the time for up to an additional 90
day period.
2. Appeal Procedures
-----------------
If a Participant is determined by the Employer to be not eligible for
benefits, or if the Participant believes that he is entitled to greater or
different benefits, he shall have the opportunity to have his claims
reviewed by the Employer by filing a petition for review with the Employer
by certified or registered mail within 90 days after receipt by him of the
notice issued by the Employer. Said petition shall state the specific
reasons the Participant believes he is entitled to benefits or greater or
different benefits.
Within 60 days after receipt by the Employer of said petition, the
Employer shall afford the Participant (and his counsel, if any) an
opportunity to present his position to the Employer orally or in writing,
and said Participant (or his counsel) shall have the right to review the
pertinent documents. The Employer shall notify the Participant of its
decision in writing within said 60 day period, stating specifically the
basis of said decision written in a manner calculated to be understood by
the Participant and the specific provisions of the Plan on which the
decision is based. If, because of the need for a hearing, the 60
45
<PAGE>
day period is not sufficient, the decision may be deferred for up to
another 60 day period at the election of the Employer, but notice of this
deferral shall be given to the Participant.
In the event of the death of a Participant, the same procedure shall
be applicable to his Beneficiaries.
3. Arbitration
-----------
(a) Agreement to Arbitrate. All claims, disputes, controversies and
----------------------
differences that may arise concerning the Plan and/or Trust
established hereunder to which the Trustee, the Plan
Administrator or the Plans may be a party, including, but not
limited to, all claims arising under state or federal statute,
shall be settled by arbitration according to the rules of the
American Arbitration Association concerning commercial disputes.
Prior to any request for arbitration under this Section, the
complaining party seeking arbitration shall give notice in
writing to the responding party setting forth in detail the facts
giving rise to the dispute and the relief sought. Thereafter,
the responding party shall have fourteen (14) days to respond and
the parties shall make a good faith effort to reach a resolution
of the dispute.
(b) Procedures.
----------
(i) If the parties fail to reach resolution, either party may,
by written notice to the other within ten (10) days after
such failure, appoint an arbitrator who shall be a lawyer or
retired judge knowledgeable in employee benefits law
matters. The other party shall, by written notice, within
ten (10) days after receipt of such notice by the first
party, appoint a second arbitrator and in default of such
second appointment the first arbitrator appointed shall be
sole arbitrator.
(ii) When two arbitrators have been appointed as provided for
above, they shall, if possible, agree on a third arbitrator,
and shall appoint him or her by written notice signed by
both of them and a copy mailed to each party within ten (10)
days after such appointment.
46
<PAGE>
(iii) In the event ten (10) days shall elapse after the appointment
of the second arbitrator without notice of appointment of the
third arbitrator, as provided for above, then either party, or
both, may, in writing, within twenty (20) days after the
original appointments, request the American Arbitration
Association to appoint the third arbitrator. All arbitrators
must disclose possible bias or prejudice and knowledge of the
parties prior to acceptance of position as arbitrator.
(iv) The facts and issues in dispute shall be set forth in writing,
separately stated and numbered, and signed by the parties. One
copy shall be provided to each of the parties and one copy
shall be furnished to each of the arbitrators.
(v) The arbitrators shall expeditiously hold an arbitration
hearing at Omaha, Nebraska, which shall be stenographically
recorded. If the arbitrators so determine, the parties shall
be entitled to conduct such pre-hearing discovery as the
arbitrators deem appropriate in their discretion. At the
hearing, the laws of evidence of the State of Nebraska shall
apply, and the three arbitrators shall allow each party to
present that party's case, evidence, and witnesses, if any, in
the presence of the other party, and shall render their award,
including a provision for payment of costs and expenses to be
paid by one or both of the parties to the arbitration, as the
arbitrators deem just. All witness testimony shall be taken
under oath.
(vi) The findings of a majority of the arbitrators shall be
conclusive and binding on the parties, their heirs, successors
and assigns. The award shall be issued no later than thirty
(30) days after the hearing. The award shall be made in
writing with a concise statement of the arbitration tribunal's
findings of fact and conclusions of law.
(vii) The arbitrator shall award to the prevailing or substantially
prevailing party all fees connected with such arbitration,
including reasonable legal and accounting fees actually
incurred.
(viii) The fees and expenses of each party's arbitrator shall be
borne by such party and the parties shall jointly and equally
bear the expense of the third arbitrator.
47
<PAGE>
(ix) Judgment upon the award rendered may be entered in any court
for confirmation of the award and the entry of a judgment or
for any other relief with respect to the award as provided by
law.
(x) In the event any arbitration proceeding which is brought
pursuant to this Section is resolved in favor of the Trustee,
Plan Administrator or Plans, they shall be entitled to be
reimbursed from the Trust Fund for any and all costs, fees and
other expenses connected with such arbitration and incurred by
them for which they have become liable.
E. BENEFICIARY DESIGNATION
-----------------------
1. Designation
-----------
Each Participant may, from time to time during his lifetime, designate
the Beneficiary(ies) to receive the benefits which may be payable under the
Plan in the event of his death. Each such designation will revoke all
prior designations by such Participant and shall be in writing on a form
provided for that purpose and filed with the Employer. Such designation
may name one or more primary Beneficiaries.
If a Participant dies and such death occurs prior to the distribution
of benefits under the Plan, such Beneficiary shall automatically be the
Surviving Spouse of the Participant unless such Surviving Spouse consented
in writing to the Participant's designation of an alternate Beneficiary,
and such consent was witnessed by a Plan representative or notarized.
Prior to the time the Employer accepts the designation of any non-
Spouse Beneficiary, the Participant shall be provided with a written
explanation of (1)
48
<PAGE>
the terms and conditions of death benefits under the Plan, (2) the
Participant's right to make and the effect of benefits under the Plan, (3)
the Participant's right to make and the effect of an election to waive the
Surviving Spouse as the Beneficiary, (4) the rights of the Participant's
Spouse, and (5) the right to make and the effect of a revocation of a
previous election waiving the Surviving Spouse as Beneficiary.
If the Participant establishes to the satisfaction of the Employer
that a Spouse's written consent cannot be obtained because there is no
Spouse or the Spouse cannot be located, the Spouse's consent requirement
shall be waived.
There shall be no limit on the number of times a Participant may
change a Beneficiary designation in accordance with the above rules prior
to the time of distribution.
2. Disposition of Death Benefits on Failure to Designate Beneficiary
-----------------------------------------------------------------
In the event a Participant:
(a) Shall fail to designate a Beneficiary to receive his death
benefits; or
(b) Having designated a Beneficiary, shall thereafter revoke such
designation without naming another Beneficiary; or
(c) Having named a Beneficiary, such designation shall fail, in whole
or in part, by reason of the prior death of such Beneficiary or
by reasons of the death of the Beneficiary and any contingent
Beneficiaries before the receipt of all payments due, or for any
other cause,
49
<PAGE>
the aforementioned death benefit of such Participant or the part thereof as
to which such Participant's designation shall fail, as the case may be,
shall be payable upon such failure to the Surviving Spouse of the
Participant, if she shall then survive; but if not, then in equal shares to
such of the issue of the Participant as then survive Per Stirpes and not
per capita; but if no Spouse or issue then survive, then to the father and
mother of such Participant in equal shares or all thereof to the survivor
of them if only one parent then survives, then to such of the brothers and
sisters for such Participant as then survive in equal shares; but if no
Spouse, issue, parent, brother or sister of the Participant shall then
survive, then such death benefit or the part thereof as to which such
Participant's designation shall fail, as the case may be, shall be paid to
the executor or administrators of the estate of the deceased Participant.
For purposes of this Article X.E, "Per Stirpes" means in equal shares
among living children and the issue of deceased children, the latter taking
by right of representation, and "issue" means all persons who are descended
from the person referred to, either by legitimate birth to or legal
adoption by him, or any of his legitimately born or legally adopted
descendants.
F. DISTRIBUTION IN EVENT OF INCAPACITY
-----------------------------------
If any person entitled to receive any payment hereunder shall be
physically, mentally or legally incapable of receiving or acknowledged receipt
thereof, and no legal representative has been appointed for him, the
administrator, in his discretion, may (but shall not be required to) cause any
sum otherwise payable to him to be paid for the
50
<PAGE>
benefit of the Participant to such one or more as may be chosen by the
administrator from the following: the beneficiaries, if any, designated by such
person, the institution maintaining him, or his spouse, children, parents or
other relatives by blood or marriage; and any payment so made for the benefit of
a Participant shall be a complete discharge of all liability under the plan in
respect of any such payment.
G. NON-DUPLICATION OF BENEFITS
---------------------------
There shall be no duplication of benefits under this Plan. If, by reason of
his employment, a Participant is eligible at any time for more than one benefit
under Article V, he shall receive only one such pension benefit for the same
period of employment. Nothing in this Plan shall be construed to provide for
duplication of benefits with respect to the same period of employment.
H. GENDER AND NUMBER
-----------------
The masculine pronoun whenever used herein will include the feminine gender
and the singular number as used herein will include the plural and the plural
the singular unless the context clearly indicates a different meaning.
I. APPLICABLE LAW
--------------
To the extent that state law shall not have been preempted by the
provisions of the Retirement Act or any other laws of the United States
heretofore or hereafter enacted, as the same may be amended from time to time,
this Plan shall be administered, construed and enforced according to the laws of
the State of Nebraska.
51
<PAGE>
J. TOP HEAVY PROVISIONS
--------------------
1. Effective Date
--------------
The provisions of this Article X.J shall be effective for any Plan
Year if and only if the Plan is deemed to be a Top Heavy Plan for that Plan
Year.
2. Top-Heavy Plan
--------------
The Plan is deemed to be a Top Heavy Plan for any Plan Year if, as of
the Determination Date, (a) the present value of accrued benefits for Key
Employees is greater than or equal to sixty percent (60%) of the present
value of accrued benefits for all Employees, and (b) the Plan is part of a
required aggregation group (as defined in the following paragraph) and the
required aggregation group is top heavy. However, and notwithstanding the
results of the sixty percent test, the Plan shall not be considered a Top
Heavy Plan for any Plan Year in which the Plan is a part of a required or
permissive aggregation group (as defined below) which is not top heavy.
Determination Date for any Plan Year is the last day of the preceding Plan
Year.
The "required aggregation group" consists of (i) each plan of the
Employer in which a Key Employee participates, and (ii) each other plan of
the Employer that enables a plan in which a Key Employee participates in
the Plan Year containing the Determination Date or any of the four
preceding Plan Years to meet the nondiscrimination requirements of Sections
401(a)(4) and 410 of the Code. All employers aggregated under Code Sections
414(b), (c) or (m) are
52
<PAGE>
considered a single employer. A "permissive aggregation group" consists of
those plans that are required to be aggregated and one or more plans
(providing comparable benefits or contributions) that are not required to
be aggregated, but which, when taken together, satisfy the requirements of
Sections 401 (a)(4) and 410 of the Code.
A required aggregation group and a permissive aggregation group will
include any plans of the employer which have been terminated within the
Plan Year containing the determination date or any of the four preceding
Plan Years.
The present value of accrued benefits consists of the Actuarial
Equivalent of the Accrued Benefit from this Plan plus the sum of the
present value of the Employee's accrued benefits, if any, under any other
plans aggregated with this Plan. It also includes distributions from this
Plan and any other plans required to be aggregated made during the Plan
Year containing the Determination Date and the four preceding Plan Years.
For the Plan Years beginning January 1, 1985 and after, the accrued benefit
for any individual who has not received any compensation (other than
benefits under the plans) at any time during the five Plan Years ending on
the Determination Date shall not be included in the present value of
accrued benefits. Payments made to the Beneficiary of a Key Employee shall
be treated as if made to a Key Employee.
Solely for the purpose of determining if the Plan, or any other plan
included in an aggregation group of which this Plan is a part, is top-heavy
(within the meaning of Section 416(g) of the Code), the accrued benefit of
an
53
<PAGE>
Employee other than a key employee (within the meaning of Section 416(i)(1)
of the Code) shall be determined under (a) the method, if any, that
uniformly applies for accrual purposes under all plans maintained by the
Affiliated Employers, or (b) if there is no such method, as if such benefit
accrued not more rapidly than the slowest accrual rate permitted under the
fractional accrual rate of Section 411(b)(1)(C) of the Code.
A Key Employee is any Employee, or former Employee, falling within the
definition of key employee under Section 416 of the Code. Subject to such
definition, an Employee or former Employee is deemed to be a Key Employee
for the Plan Year it at any time during the Plan Year or the four preceding
years the Employee is described by one of the following four items:
(a) An officer of the Employer having an annual compensation greater
than 50% of the maximum annual addition amount in effect under
Code Section 415(b)(1)(A) for such Plan Year. For purposes of
this subsection, no more than fifty Employees (or, if less, the
greater of three or ten percent of the Employees) shall be
treated as officers.
(b) One of the ten Employees owning the largest interests in the
Employer who has an annual compensation greater than the maximum
annual addition amount in effect under Code Section 415(c)(1)(A)
for such Plan Year. If two Employees have the same interest in
the Employer, the Employee having greater annual compensation
from the Employer shall be treated as having a larger interest.
(c) A 5% owner of the Employer.
(d) A 1% owner of the Employer with W-2 compensation of more than
$150,000.
54
<PAGE>
3. Compensation
------------
If the Plan is deemed to be a Top Heavy Plan for the Plan Year, no
more than $160,000 of Compensation (or such larger dollar amount permitted
under the Code) shall be recognized for that Plan Year for any Participant
in the determination of benefits under the Plan.
4. Maximum Benefits
----------------
If the Plan is deemed to be a Top Heavy Plan for the Plan Year for the
purposes of determining the maximum benefits payable from this Plan and any
defined contribution plan maintained by the Employer as described in
Article VII.B, all instances of 1.25 in Article VII.B are replaced with
1.00.
5. Minimum Benefits
----------------
For any Plan Year the Plan is deemed to be a Top Heavy Plan, all
Participants who are not Key Employees shall accrue a minimum benefit equal
to 2% (maximum 20%) times five year average salary payable as a level life
only option. Such minimum benefit shall be provided only to the extent it
would increase the Accrued Benefit otherwise provided by the Plan.
6. Minimum Vesting
---------------
Notwithstanding the provisions of Article V.C, if the Plan is ever
considered Top Heavy, a Participant's vested percentage in his Accrued
Benefit shall not be less than the percentage determined in accordance with
the following table:
55
<PAGE>
YEARS OF VESTING SERVICE VESTED PERCENTAGE
------------------------ ------------------------------
Less than 2 0%
2 20%
3 40%
4 60%
5 80%
6 or more 100%
IN WITNESS WHEREOF, the Employer has caused this Plan to be executed by its
duly authorized officer this 31st day of December, 1998.
THE GUARANTEE LIFE COMPANIES INC.
By: /s/ Mary G. Rahal
-----------------
56
<PAGE>
Exhibit 10(q)
AMENDMENT NO. 1
TO THE GUARANTEE MUTUAL LIFE COMPANY
PHANTOM STOCK PLAN
(AS AMENDED AND RESTATED)
RESOLVED, that the Guarantee Life Insurance Company Phantom Stock Plan
(as Amended and Restated On October 23, 1995) (the "Plan") be and hereby is
amended by adding Section 6.06 to the Plan to read as follows:
Section 6.06. Transfer to Guarantee Life Insurance Company Deferred
--------------------------------------------------------------------
Compensation Plan. At any time after a participant has become 100% vested
------------ -----
in the Phantom Shares under Article IV of the Plan, but before the calendar
year in which a participant is subject to mandatory cash-out of the
participant's Phantom Shares under Section 6.03, a participant may, in the
month of December, request the Compensation and Benefits Committee to
transfer all or a portion of such Phantom Shares to the Stock Account of
the Guarantee Life Insurance Company Deferred Compensation Plan. The final
decision and approval regarding the transfer of Phantom Shares, is at the
sole discretion of the Compensation and Benefits Committee. All such
transfers shall be effective the January 1 following the date of the
request. The participant shall specify the amount of the value of the
transferred Phantom Shares to be allocated to the participant's Stock
Account under the Deferred Compensation Plan. All transfers shall be based
on the value of the participant's Phantom Shares as of the date of the
transfer. From and after the effective date of any transfer of the Phantom
Shares to the Deferred Compensation Plan, all of the transferred amounts
shall be subject to the provisions of the Deferred Compensation Plan; and
FURTHER RESOLVED, that this amendement shall be effective January 1,
1997.
<PAGE>
Exhibit 10(r)
AMENDMENT NO. 4
TO THE GUARANTEE LIFE COMPANIES INC.'S
1994 LONG-TERM INCENTIVE PLAN
RESOLVED, that section 6.10 of the The Guarantee Life Companies Inc.'s 1994
Long-Term Incentive Plan is amended to include the word "immediate" before the
phrase "family members or to trusts for their benefit;" and
FURTHER RESOLVED, that this amendment shall be effective November 13, 1997.
<PAGE>
Exhibit 10(s)
AMENDMENT NO. 5
TO
THE GUARANTEE LIFE COMPANIES INC.'S
1994 LONG-TERM INCENTIVE PLAN
WHEREAS, pursuant to Section 3.2 of the 1994 Long-Term Incentive Plan, the
Compensation Committee has the authority to construe and interpret the Plan and
to establish rules and regulations for the administration of the Plan; and
WHEREAS, the Committee intends to clarify certain plan provisions regarding
a Change in Control of the Company;
NOW THEREFORE BE IT RESOLVED, that with respect to any Option that upon a
Change in Control is cancelable in exchange for a payment of cash under a stock
option agreement, the cash payment shall be made promptly no later than thirty
(30) days following a Change in Control; and
FURTHER RESOLVED, that with respect to any Option which, after a Change in
Control, contains provisions for waiver of terms and conditions on exercise or
vesting upon involuntary or constructive termination of employment, the
following rules shall apply:
(a) an involuntary or constructive termination of employment shall have
the same meaning as "involuntary termination without cause" and "voluntary
termination for Good Reason" as set forth in the Guarantee Life Companies
Executive Severance Plan.
(b) No waiver shall operate to extend the exercise period for any Option
or to amend the terms of any Option subject to the terms of Section 422 of the
Code, such that Section 422 of the Code would not apply.
(c) No such waiver shall operate to extend the exercise period on any
Options.
FURTHER RESOLVED, that this amendment shall be effective as of November 12,
1998.
<PAGE>
Exhibit 10(t)
The Guarantee Life Companies Inc. and
Guarantee Life Insurance Company
Executive Severance Plan
Second Revised
Exhibit A
PARTICIPANTS
Tier I
Chief Executive Officer
Tier II
Senior Vice President - Strategic Planning
Senior Vice President, Chief Financial Officer and Treasurer
Senior Vice President and Actuary - Employee Benefits Division
Senior Vice President - Information Systems and Services
Senior Vice President - Employee Benefits Division Operations
Executive Vice President - Individual Division
Senior Vice President - Employee Benefits Division Marketing
Senior Vice President - Employee Benefits Division - Finance
Senior Vice President - Human Resources and Operation Services
Senior Vice President - Strategic Initiative and Group Special Markets
Senior Vice President - Individual Insurance Services
Senior Vice President, General Counsel and Secretary
Tier III
Vice President - Investor Relations
*THERE ARE NO POSITIONS THAT QUALIFY FOR TIER III AT THIS TIME.
<PAGE>
Exhibit 10(u)
THE GUARANTEE LIFE COMPANIES INC.
SUPPLEMENTAL RETIREMENT PLAN
(AS AMENDED AND RESTATED EFFECTIVE JANUARY 1, 1998)
ARTICLE I
THE PLAN AND PURPOSE
--------------------
1.1 The Plan. The Guarantee Life Companies Inc. (the "Company") hereby
amends and restates The Guarantee Life Companies Inc. Supplemental Retirement
Plan (the "Plan"), effective January 1, 1998.
1.2 Purpose. The Company maintains the Retirement Plan for Employees of
The Guarantee Life Companies Inc. ("Retirement Plan"). Section 415 and
401(a)(17) of the Internal Revenue Code ("Code") limit the benefits payable from
the above-named Retirement Plan in certain instances. It is the objective of the
Company to equalize benefits so no Participant is adversely affected by the
limitations of Code Section 415 and 401(a)(17). In addition, the Company
maintains The Guarantee Life Insurance Company Deferred Compensation Plan (the
"Deferred Compensation Plan"). The election to defer compensation under the
Deferred Compensation Plan may also limit the benefits payable from the
Retirement Plan. It is the objective of the Company to restore benefits so no
Participant is adversely affected by their election to defer compensation under
the Deferred Compensation Plan. In addition, the Company maintains an Executive
Severance Plan for certain members of management who are entitled to certain
benefits upon a Change in Control of the Company. It is the objective of the
Company to fund the non-vested accrued benefits of said officers under the Plan
and The Guarantee Life Insurance Company Thrift Savings Plan ("Thrift Savings
Plan") under certain circumstances following a Change in Control. Therefore,
this Plan is established for these purposes.
ARTICLE II
PARTICIPATION
-------------
2.1 Participation. Each employee whose benefit from the Retirement Plan
is less than the benefit would have been had no limitation been imposed under
Code Section 415 and 401(a)(17) shall become a Participant under this Plan. In
addition, each employee who elects to defer compensation under the Deferred
Compensation Plan and as a result whose benefit from the Retirement Plan is less
than the benefit would have been had no deferral election been made shall become
a Participant under this Plan. In addition, any Participant in the Executive
Severance Plan shall become a participant under this Plan. No other employees
shall become Participants under this Plan.
1
<PAGE>
ARTICLE III
BENEFITS
--------
3.1 Benefit Amount.
(a) Each Participant hereunder, who retires at the normal retirement
age of 65, shall receive a Supplemental Retirement Benefit equal to the
excess of (i) over (ii), where,
(i) equals the value of Retirement Plan accrued benefits the
Participant would have received had there been no Code Section 415 and
401(a)(17) limitations in effect, and had no election been made by the
Participant to defer compensation under the Deferred Compensation
Plan, and
(ii) equals the value of Retirement Plan accrued benefits the
Participant actually shall receive from the Retirement Plan.
(b) Each Participant hereunder who either terminates with the Company
employment prior to the normal retirement age of 65 shall receive a
Supplemental Retirement Benefit equal to the excess of (i) over (ii),
where,
(i) equals the value of Retirement Plan accrued benefits the
Participant would have received had no election been made by the
Participant to defer compensation under the Deferred Compensation
Plan, and
(ii) equals the value of Retirement Plan accrued benefits the
Participant actually shall receive from the Retirement Plan.
(c) Each Participant hereunder who is also a Participant in the
Executive Severance Plan and who has a Qualifying Termination in connection
with a Change in Control, shall receive a Supplemental Retirement Benefit
equal to the following:
(i) the excess of (A) over (B) where (A) equals the value of the
Retirement Plan accrued benefits the Participant would have received
had there been no Code Section 415 and 401(a)(17) limitations in
effect, and had no election been made by the Participant to defer
compensation under the Deferred Compensation Plan, and (B) equals the
value of the Retirement Plan accrued benefits the Participant actually
shall receive from the Retirement Plan; and
(ii) the value of any non-vested Retirement Plan accrued benefits
and the Thrift Savings Plan on the date of the Qualifying Termination.
The term "Qualifying Termination" and "Change in Control" shall have
the same meaning as under the Executive Severance Plan.
2
<PAGE>
3.2 Benefit Computation. The value set forth in Section 3.1 above shall
be determined by the Company and shall be based upon factors necessary to
equalize the benefit for the affected Participant. If a beneficiary of a
Participant qualifies for a death benefit under the Retirement Plan, a
supplemental death benefit, computed as provided in Section V.D.2 of the
Retirement Plan and based on the Participant's Supplemental Retirement Benefit,
will be paid to such Participant's beneficiary.
In the event, on the date of a Participant's termination, the Participant's
Earned Retirement Benefit exceeds the Participant's Accrued Benefit (as defined
in Article II(2) of the Retirement Plan), the amount of the Participant's
monthly Supplemental Retirement Benefit will be subject to a cost-of-living
adjustment on each January 1st subject to the Participant's retirement. The
percentage adjustment in the Participant's Total Retirement Benefit (the benefit
provided by the Retirement Plan plus the Supplemental Retirement Benefit) will
be calculated in the same manner as the cost-of-living adjustment provided in
the Retirement Plan. The amount of the monthly Supplemental Retirement Benefit
will equal the Participant's Total Retirement Benefit, less the amount provided
by the Retirement Plan.
3.3 Payment of Benefits. The benefits hereunder shall be payable upon the
same event that causes the payment of benefits under the Retirement Plan. The
form of benefit shall be elected by the Participant, in writing, at the time of
initial entry as a Participant in this Plan. The alternative forms of benefit
shall be limited to those set forth in the Participation Election Agreement for
this Plan. Forms of payment may be amended by a Participant with the consent of
the Committee, and may also be amended without consent of the Committee if made
in a year prior to separation from employment and at least twelve (12) months
prior to such separation.
ARTICLE IV
FUNDING
-------
4.1 Funding. This Plan shall be unfunded for tax purposes and for
purposes of Title I of ERISA. The Participants under this Plan shall be no more
than general unsecured creditors of the Company with regard to the benefits
payable hereunder. Assets of the Company, including, but not limited to,
insurance policies, annuity contracts, or the proceeds therefrom, shall not be
held under any trust, except a Grantor Trust, for the benefit of Participants or
their beneficiaries or held in any way as collateral security for the fulfilling
of the obligations of the Company under this Plan. Any and all of the Company's
assets and policies shall be, and remain, the general, unpledged and
unrestricted assets of the Company.
ARTICLE V
MISCELLANEOUS
-------------
5.1 Nonalienation of Benefits. No benefit payable under this Plan shall
be subject, at any time and in any manner, to anticipation, alienation, sale,
transfer, assignment, pledge, encumbrance, attachment or garnishment by
creditors of the Participant or the Participant's beneficiary.
3
<PAGE>
5.2 Administration. This Plan shall be administered by a Committee,
appointed by the Board of Directors, in accordance with the intent and
provisions of this Plan. The Committee shall interpret and implement this Plan
to carry out the purposes set forth above.
5.3 Forfeit of Benefits. No benefit will be payable under this Plan if a
Participant engages in any act that would constitute "Cause" as defined in
Section 4.4 of the Executive Severance Agreement.
5.4 Amendment and Termination. The Company may amend and terminate this
Plan, at any time, by action of its Board of Directors.
5.5 Applicable Law. This Plan and all rights hereunder shall be governed
by and construed according to the laws of the State of Nebraska except to the
extent Federal statutes supersede Nebraska law.
IN WITNESS WHEREOF, this Company has amended and restated this Plan in
Omaha, Nebraska, to be effective the date and year first above written.
Executed at Omaha, Nebraska, this 31st day of December, 1998.
THE GUARANTEE LIFE COMPANIES INC.
By /s/ Mary G. Rahal
-----------------
4
<PAGE>
Exhibit 10(v)
THE GUARANTEE LIFE COMPANIES INC.
EQUALIZER PLAN
(AS AMENDED AND RESTATED EFFECTIVE JANUARY 1, 1998)
ARTICLE I
THE PLAN AND PURPOSE
--------------------
1.1 The Plan. The Guarantee Life Companies Inc. (the "Company") hereby
amends and restates its Equalizer Plan (the "Plan"), effective January 1, 1998.
1.2 Purpose. Prior to January 1, 1989, the Company maintained a defined
benefit pension plan ("Retirement Plan") with an offset benefit formula for all
eligible employees. This offset formula provided a monthly Normal Retirement
Benefit of 55% of the Participant's Average Monthly Compensation, less 50% of
the Participant's Primary Social Security Retirement Benefit. If the
Participant has less than 20 years of service at Normal Retirement Age 65, the
benefit is multiplied by the ratio of the number of complete years of service
over 20.
Effective January 1, 1989, the Company amended the Retirement Plan and
replaced the offset formula with a unit benefit formula. The features of this
Retirement Plan are contained in the plan documents known as the Retirement Plan
for the Home Office Employees of Guarantee Mutual Life Company. The Plan was
further amended effective January 1, 1998, with incorporating a cash balance
benefit formula. The current plan provides that until December 31, 2007, a
Participant will receive from the plan the greater of the cash balance benefit
or the unit benefit. After December 31, 2007, only the cash balance benefit
will be paid.
It is the objective of the Company to assure that certain key employees
will receive as deferred compensation the amount they would have received had
the formulas not changed.
ARTICLE II
PARTICIPATION
-------------
2.1 Participation. This Plan shall cover only the employees listed on
Exhibit A.
ARTICLE III
BENEFITS
--------
3.1 Benefit Amount. Each Participant hereunder who retires from the
service of the Company on or after age 65 shall receive a benefit equal to the
excess of (a) over (b), where
(a) equals the benefits the Participant would have received had the
Retirement Plan offset benefit formula remained in effect, and
<PAGE>
(b) equals the benefits the Participant actually shall receive from
the Retirement Plan.
3.2 Benefit Computation. The benefits set forth in (a) and (b) above
shall be determined by the Company and shall be based upon factors necessary to
equalize the benefit for the affected Participant.
In determining the benefits payable under this Plan, the Company may employ
any actuary, legal counsel, accountant, or any other person for the purpose of
carrying out the intent of this Plan.
3.3 Term of Payment. All benefits under this Plan shall be payable in a
lump sum.
ARTICLE IV
FUNDING
-------
4.1 Funding. This Plan shall be unfunded for tax purposes and for
purposes of Title I of ERISA. The Participants under this Plan shall be no more
than general unsecured creditors of the Company with regard to the benefits
payable hereunder. Assets of the Company, including, but not limited to,
insurance policies, annuity contracts, or the proceeds therefrom, shall not be
held under any trust, except a Grantor Trust, for the benefit of Participants or
their beneficiaries or held in any way as collateral security for the fulfilling
of the obligations of the Company under this Plan. Any and all of the Company's
assets and policies shall be, and remain, the general, unpledged and
unrestricted assets of the Company.
ARTICLE V
MISCELLANEOUS
-------------
5.1 Nonalienation of Benefits. No benefit payable under this Plan shall
be subject, at any time and in any manner, to anticipation, alienation, sale,
transfer, assignment, pledge, encumbrance, attachment or garnishment by
creditors of the Participant or the Participant's beneficiary.
5.2 Administration. This Plan shall be administered by a Committee,
appointed by the Board of Directors, in accordance with the intent and
provisions of this Plan. The Committee shall interpret and implement this Plan
to carry out the purposes set forth above.
5.3 Amendment and Termination. The Company may amend and terminate this
Plan, at any time, by action of its Board of Directors.
5.4 Applicable Law. This Plan and all rights hereunder shall be governed
by and construed according to the laws of the State of Nebraska except to the
extent Federal statutes supersede Nebraska law.
2
<PAGE>
IN WITNESS WHEREOF, this Company has amended and restated this Plan in
Omaha, Nebraska, to be effective the date and year first above written.
Executed at Omaha, Nebraska, this 31st day of December, 1998.
THE GUARANTEE LIFE COMPANIES INC.
By /s/ Mary G. Rahal
------------------
3
<PAGE>
EXHIBIT A
Plan Participants:
Ron Brown
Rich Cruise
Jeff VanOeveren
<PAGE>
Exhibit 13
[GRAPHIC APPEARS HERE]
1998 Annual Report
[LOGO OF THE GUARANTEE LIFE
COMPANIES INC. APPEARS HERE]
<PAGE>
Mission Statement:
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.
Table of Contents
Financial Highlight 2
Guarantee Life Profile 3
Chairman's Letter to
Shareholders 6
Financial Review 17
Shareholder Information 58
Board of Directors and
Executive Officers 59
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. They are subject to
numerous known and unknown risks and uncertainties that 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>
A Retrospective
This year, the Guarantee Life annual report is written about each aspect of
the business from my perspective. We have had a challenging year. A year filled
with successes, disappointments, and changes. I welcome the opportunity to help
you understand what we have learned from all of this and how it has strengthened
our prospects for the future.
Robert D. Bates
Chairman and CEO
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. Founded as an individual life insurance company, Guarantee Life
began its Group insurance business in 1972 and the Employee Benefits Division in
1992.
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. Since 1997, Guarantee Life
acquired PFG, Inc., including its principal subsidiary, AGL Life Assurance
Company, and Westfield Life Insurance Company.
The stock of The Guarantee Life Companies Inc. trades on the Nasdaq
National Market System under the symbol GUAR. Guarantee Life's home office is in
Omaha, Nebraska.
<PAGE>
Financial Highlights ($ in millions except share data)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Income
Selected Data
Premiums and policyholder
assessments, net(1) $322.0 $230.9 $181.7 $208.6 $158.6
Total revenues(1) 425.5 310.3 252.0 294.4 247.5
Total policyholder benefits,
expenses, and dividends(1) 411.1 284.6 229.4 274.5 220.1
Income from continuing
operations before income taxes 14.4 25.7 22.6 19.9 27.4
Net income from continuing operations 9.3 16.6 14.7 10.8 15.7
Diluted earnings per share from continuing
operations(2)(4)(6)
(Pro forma for 1994-95) $0.77 $1.64 $1.46 $1.05 $1.66
- ----------------------------------------------------------------------------------------------------------
Balance Sheet Selected Data
Total invested assets(5) $1,567.2 $1,211.5 $1,094.3 $1,056.1 $985.6
Total assets(5) 1,992.2 1,519.0 1,305.2 1,280.8 1,188.0
Total liabilities(5) 1,762.2 1,309.8 1,096.5 1,074.5 1,055.1
Total shareholders' equity(4) 230.0 209.2 208.7 206.3 132.9
Book value per share(3)(4)
(Pro forma for 1994) $22.78 $21.98 $20.59 $19.23 $16.95
- ----------------------------------------------------------------------------------------------------------
Other Selected Data
Revenues by Division:
Employee Benefits $214.2 $166.2 $109.1 $88.8 $64.1
Group Special
Markets 80.0 62.0 66.0 93.4 76.0
Individual(7) 169.9 120.9 116.1 112.2 107.4
- ----------------------------------------------------------------------------------------------------------
</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, and completed the last program in 1998 with the purchase of an
additional 0.1 million shares at a cost of $3.2 million.
(5)Guarantee Life acquired a block of universal life policies in August 1996,
PFG, Inc. and subsidiaries in December 1997, a block of excess loss policies in
December 1997, and Westfield Life Insurance Company in May 1998.
(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 and 1994.
(7)Including revenues from the Closed Block for 1998, 1997, and 1996.
2
<PAGE>
Guarantee Life Profile
Company Statistics
. $2.0 billion in assets
. $230.0 million in shareholders' equity
. $47.3 billion of life insurance in force
. Guarantee Life Insurance Company is rated "A-" (Excellent) by A.M. Best
Company [Best rates Westfield Life "A-" (Excellent) and AGL "B++" (Very
Good)]
. Guarantee Life Insurance Company has an "A-" (Excellent) rating by Weiss
Ratings Inc. [Weiss rates Westfield Life "B" (Good) and AGL "C" (Fair)]
. Licensed in 48 states and the District of Columbia
. 2.0 million individual and group customers
. 22 Regional Group Offices
. 2,808 Individual Division field sales associates
. Guarantee Life Insurance Company is a charter member of the Insurance
Marketplace Standards Association (IMSA)
. 9,244,669 shares of common stock outstanding
[Quote/Fact Box]
"A.M. Best views positively the company's attention to its three diverse
business units. Its core traditional individual life and annuity segment
production base was built from its independent and career agency force. More
recently, distribution channels have been broadened with regional marketing
organizations producing increased volumes of business. The group special markets
segment targets employers' self-funded insurance programs offering excess loss
insurance, marketed through third party administrators. The employee benefits
division markets group life, dental and disability products on a true group and
voluntary basis through group representatives and employee benefit consultants.
These three segments, and diversified distribution sources, enhance the
company's ability to weather economic and market changes in any particular
segment. Guarantee Life maintains a conservatively managed and diverse
investment portfolio, designed to meet long-term policyholder obligations, while
optimizing investment performance relative to the company's liability profile."
Best's Insurance Reports(R)
- ------------------------
Life-Health United States 1998 Edition
[Box-End]
3
<PAGE>
Guarantee Life Profile
The Guarantee Life Organization
The Guarantee Life Companies Inc. operates through three subsidiaries. Its
principal subsidiary is Guarantee Life Insurance Company. The other two
subsidiaries are Westfield Life Insurance Company and PFG, Inc., including its
principal subsidiary, AGL Life Assurance Company.
ORGANIZATION CHART
THE GUARANTEE LIFE COMPANIES INC.
GUARANTEE LIFE
INSURANCE COMPANY
WESTFIELD LIFE
INSURANCE COMPANY
AGL ASSURANCE COMPANY
OTHER SUBSIDIARIES
Guarantee Life Insurance Company consists of three operating segments: the
Employee Benefits Division, the Group Special Markets Division, and the
Individual Insurance Division, which includes the subsidiary operations of PFG,
Inc. and Westfield Life.
AGL Life Assurance Company primarily marketed term insurance through
independent agents and brokers, who now market Guarantee Life products. PFG's
two other subsidiaries are the Philadelphia Financial Group, Inc. and PFG
Distribution Company, which both support AGL's variable life and annuity
business.
Westfield Life Insurance Company was acquired in May 1998 and now is part
of the Individual Division. Approximately 1,300 of Westfield Life's former
agents currently market Guarantee Life's portfolio of individual products.
Guarantee Life's businesses are correlated to balance the mortality,
morbidity, and investment risks of different insurance product lines,
distribution systems, and infrastructures. Each unit's national presence plays a
role in serving our target market of small businesses and individuals, while
providing diversified revenue and earnings sources.
[Quote/Fact Box]
1999 Corporate Goals and Key Strategies
. Achieve earnings targets
. Enhance customer service
. Achieve target loss ratios through disciplined sales and risk management
. Focus on effective execution of all action plans
. Reduce unit expenses through continued process improvements
. Implement technology enhancements to improve productivity and service
. Strengthen linkage between associate incentives and Company profitability
by continuing to build our Total Rewards compensation system
. Improve capital ratios
[Box-End]
4
<PAGE>
Employee Benefits Division
The Employee Benefits Division (EBD) targets businesses with fewer than 500
employees by providing group non-medical products including:
. term life
. accidental death and dismemberment
. short-term disability
. long-term disability
. dental
voluntary (worksite marketed) products including:
. term life
. accidental death and dismemberment
. short-term disability
. long-term disability
. dental
. vision
A national distribution system of 22 Regional Group Offices markets to
businesses through employee benefits firms and brokers.
Group Special Markets Division
The Group Special Markets Division (GSM) targets employer groups of between
50 and 500 lives with self-funded medical plans by providing specialty medical
products including:
. excess loss insurance
. medical reimbursement insurance for business executives
. group non-medical products including:
. term life
. accidental death and dismemberment
. short-term disability
. long-term disability
[Quote/Fact Box]
"Guarantee Life has built these businesses to achieve balance. Balance of
revenue, balance of earnings sources, and balance of risk are key objectives in
our strategy. We have been in the Individual business for almost 100 years and
it is a very stable, profitable business. Group Special Markets generates higher
returns than the Individual during favorable markets, but its volatility makes
its profitability more unpredictable. In the long-term, Employee Benefits should
be positioned between Individual and GSM with respect to return on equity and
stability."
Robert D. Bates
Chairman and CEO
[Box-End]
The product distribution for GSM is focused on relationships with Managing
General Underwriters (MGUs), Third Party Administrators (TPAs), Blue Cross/Blue
Shield plans, and managed care organizations.
Individual Division
The Individual Division (Individual) targets individuals with a family
income up to $150,000 and small business owners by providing a variety of life
and annuity products including:
. universal life
. interest-sensitive whole life
. term life
. fixed annuities
The distribution has expanded by developing relationships with Regional
Marketing Organizations (RMOs) and independent agents.
5
<PAGE>
Chairman's Letter to Shareholders
- -A Perspective on 1998 Business Operations~
Dear Fellow Shareholder:
1998 was not "black and white" in its results. Our earnings disappointment
for the year was a result of numerous fluctuations in several of our product
lines and an operating problem associated with our dental business.
[Quote/Fact Box]
Net premiums and policyholder assessments were up 35.8% to $342.1 million for
1998 versus $251.9 million in 1997.
[Box-End]
While we are disappointed with our financial performance, we have used these
challenges to strengthen our resolve. We have thoroughly analyzed our dental
operations and took aggressive, corrective actions in that product line.
Management also took decisive, comprehensive actions throughout the Company to
improve profitability, expense management, pricing, and risk management. These
actions enhanced the fundamental profit drivers in our operations and are
beginning to yield results.
Guarantee Life's core strengths continue to provide a solid framework for
profitable growth. We have breadth of product offerings, a high quality
investment portfolio, and diversified distribution systems, revenues, and
earnings sources. Our three business segments have been built to balance the
normal fluctuations that occur in their respective markets.
Our focus is to enhance the long-term value of our Company, while
delivering short-term results. Although our 1998 earnings were less than
expected, there was notable progress in all three businesses. We had very
significant revenue growth in 1998 and made progress in reducing our unit
expenses throughout the Company. We continued to develop our distribution
systems and now have a national presence in all three of our Divisions. Our
acquisitions have been effectively integrated into our Individual Division,
resulting in greater expense reductions than expected and adding to our critical
mass and earnings. We improved our infrastructure to support the growing
Employee Benefits business, which also strengthened its administrative
operations. We believe our Group Special Markets business is on very solid
footing as we enter 1999 due to better pricing and risk management improvements
in our excess loss product line.
As a Company, we have the talent and focus to significantly enhance our
operations through growth, profitability, stability, customer satisfaction, and
market presence. We have achieved growth through acquisitions and distribution
development; profitability and stability will improve through our strategy of
balanced business
[BAR CHART APPEARS HERE]
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
98 $464.3
Includes revenues from the Closed Block.
6
<PAGE>
units and earnings sources; and enhanced market presence is being achieved
through our focus on customer service and the growth of our distribution systems
to a national level.
Our Market
We are effectively operating in one of the fastest growing markets in the
insurance industry. Some facts about this market:
. Small businesses accounted for more than 50% of new job creation in
the 1990s.
. 80% of employees work for companies employing less than 500 people.
. 1.7 million new jobs created in the 1990s were by firms having less
than 20 employees.
. Health insurance is employees' highest priority, followed by life
insurance.
. Only 23% of households had an opportunity to purchase life insurance
from an agent in 1997, down from 33% in 1990, which increases the need
for its provision as an employee benefit.
. Employers recognize and respond to employees' desires for improved
benefits to remain competitive and retain talent.
Guarantee Life's Employee Benefits Division, including its voluntary
(worksite marketed) line of products, focuses on this market, as does our Group
Special Markets Division. The products in our Individual Division also meet the
needs of small business owners and employees. We are focused on this growth area
for the insurance industry, and for our Company.
We are pleased that we achieved incremental, quarter-to-quarter improvement
in earnings per diluted share (from $0.03 per diluted share in the first quarter
to $0.30 per diluted share in the fourth quarter). This trend is a good
indicator that our corrective actions are working and that our improvements are
impacting our day-to-day business. However, we recognize that continued
improvement in expense management, operating efficiencies, and risk management
will drive our future earnings improvement, and this is our focus. We must
continue to improve earnings to achieve our goal of a double-digit return on
equity within the next two years.
Robert D. Bates Chairman and CEO [PHOTO OF ROBERT D. BATES
APPEARS HERE]
<PAGE>
Investments
A conservative philosophy guides Guarantee Life's investments. Goals are
based on the Company's objectives to provide safety of principal for customers
and a good return for shareholders. Guarantee Life focuses on managing the risks
associated with credit, interest rates, and liquidity. The Company balances its
assets to achieve a favorable relationship between investment risks and
investment returns.
[BAR CHART APPEARS HERE]
TOTAL ASSETS ($ 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
98 $1,992.2
[Quote/Fact Box]
"We are very pleased with the positive performance of our investment portfolio
in 1998. Unlike the negative impact felt by many financial institutions during
the turbulence of the domestic and foreign securities markets in the third
quarter of 1998, our sound investment principles have produced positive gains.
Our balanced investment strategies have served us well through a challenging
period of time and our strong performance has supported our operating strategies
effectively."
Robert D. Bates
Chairman and CEO
[Box-End]
[PIE CHART APPEARS HERE]
Investment Portfolio
Mortgages 7%
Policy Loans 5%
Other 5%
Fixed Maturity 83%
1998 Invested Assets = $1.57 billion
[PIE CHART APPEARS HERE]
Fixed Maturity Portfolio Rating
BB or lower 3%
BBB and Above 97%
97% of fixed maturity securities are investment grade
<PAGE>
Guarantee Life's core strengths have been further enhanced through our
commitment to managing risk in its broadest context. By design, our investment
portfolio is directed to support the risk inherent in the insurance business,
and our asset quality remains high. We have historically managed both of these
critical areas very effectively by balancing risk and reward. We do not
anticipate any asset problems that might compound other challenges as we grow
the business. Given the mortality and morbidity fluctuations that did occur in
our blocks of business during 1998, we also used reinsurance to control and
manage the inherent risks.
[BAR CHART APPEARS HERE]
Net Income from Continuing
Operations ($ in millions)
91 $20.5
92 $15.3
93 $18.9
94 $15.7
95 $10.8
96 $14.7
97 $16.6
98 $ 9.3
Net income in 1998 was adversely impacted by the high claims experience in many
of the Company's product lines.
As we go into 1999, we are confident that our profit drivers are headed in
the right direction. We believe our strategy of diversified products and
distribution systems will serve us well as our business grows. We simply have to
move faster in terms of improving our expense and loss ratios.
[Quote/Fact Box]
Guarantee Life has historically managed risk well and continues to enhance
its risk management. Noteworthy 1998 achievements in specific areas of risk
management include: charter IMSA membership; effective management of challenging
public stock market environment; continued high quality investment portfolio;
new information systems for financial reporting, claims administration, and
group insurance proposal and policy issue; improved mortality/morbidity
monitoring through our actuarial database; and the employment of additional risk
management professionals.
[Box-End]
Expense Management
All segments of the organization are intent on reducing unit expenses and
avoiding costs. We are continually evaluating opportunities within the Company
that will allow us to become a more streamlined organization and remain
competitive in today's marketplace. As one result of our continuing efforts to
operate as effectively and efficiently as possible, organizational changes were
made during September 1998. These changes reduced annual operating expenses by
$2.4 million on a pre-tax basis.
[Quote/Fact Box]
Expense management resulted in lower operating unit expenses in 1998, compared
to 1997.
[Box-End]
9
<PAGE>
Year 2000
Guarantee Life Insurance Company has established a comprehensive plan to
achieve our Year 2000 compliance objectives. A dedicated corporate team has been
in place since 1997 to oversee and perform quality assurance activities.
Significant progress was made in 1998 with over 90% of the renovation and
certification phases of the project being completed. All major systems have been
renovated or replaced to meet Year 2000 compliance, with the exception of one
claims software application, which is in the final stages of implementation. We
will continue to work on any final infrastructure upgrades, contingency
planning, and company-wide and business partner testing to adequately prepare
for the new millennium.
Consolidating Industry
The insurance industry is facing increased competition from the many
changes occurring in the financial services industry. Excess capacity, advanced
technology, and industry consolidation will continue to put pressure on product
prices and profit margins.
During this past year, mergers occurred involving several of our direct
competitors, significantly increasing their size. However, size is not the only
differentiation for success. Size does not impact how effective you might be in
selecting the most profitable segments of the market, nor does it necessarily
attract the best talent, or allow the ability to change quickly. While there are
clearly advantages to size, it does not preclude a company like Guarantee Life
from using best practices to enable us to compete effectively. We believe we are
well positioned with our products and national distribution to continue to be a
key player in our markets.
[LINE CHART APPEARS HERE]
The Guarantee Life Companies Inc.
Total Return Performance
Index Value
<TABLE>
<CAPTION>
12/20/95 12/31/95 6/30/96 12/31/96 6/30/97 12/31/97 6/30/98 12/31/98
<S> <C> <C> <C> <C> <C> <C> <C> <C>
The Guarantee Life Companies Inc. 100.00 103.28 115.91 122.40 167.18 190.65 147.11 125.35
S&P 500 100.00 101.71 111.97 124.97 150.72 166.67 196.19 214.30
SNL Life & Health Insurance Index 100.00 102.01 110.88 133.00 162.06 185.23 216.77 218.21
</TABLE>
Employee Benefits Division
1998 was a year of many challenges in the Employee Benefits Division. These
challenges were the catalyst for accelerating positive actions to make
significant and necessary changes. The management team, home office, and field
staffs in EBD stepped forward and addressed these intense challenges in some of
the most effective ways that I have seen in my 30 years in the insurance
business. I believe, by working through these challenges, we are now better
poised for the future. The results of these efforts are beginning to emerge.
10
<PAGE>
Since 1992, we have established 22 Regional Group Offices in a national
distribution system and have made a significant investment in the infrastructure
of EBD. We operate in a $15 billion market composed of companies employing less
than 500 people. Guarantee Life is a serious competitor in the life, disability,
and dental businesses. We are differentiating ourselves as one of a handful of
companies capable of providing small employers with most of their employee
benefits needs. Our market presence was strengthened by achieving $61 million of
new sales in 1998 due to Guarantee Life's top talent in the home office and the
field.
We are continuing to build the appropriate information systems to enhance
efficiencies in EBD. We have, and are, developing the procedures and
infrastructure to support our growth. We will continue enhancing the
infrastructure until all the parts of EBD work effectively together to develop
the desired profits.
[Quote/Fact Box]
Sales of non-medical group products for 1998 were $61.0 million in first year
annualized premiums, compared to $75.0 million in sales for 1997. The majority
of the $14 million year over year reduction was due to the planned sales decline
in the dental product line.
[Box-End]
In 1998, attention was rightfully directed at our dental product line. We
thoroughly analyzed this product and employed a noted dental consultant to help
us do this. We determined that our dental product is an important part of our
group non-medical product portfolio for the small and mid-sized businesses in
our market. We understand what created the problems in 1998 and corrective
actions on pricing and risk management were taken. However, these actions did
cause dental product sales to decline for the year.
Regional Group Offices
Employee Benefits Division
[MAP SHOWS REGIONAL GROUP OFFICES THAT OPENED, YEAR BY YEAR,
FOR 1992 THROUGH 1998]
11
<PAGE>
The financial results of the dental product line have begun to show that
our actions are working. During the second half of the year, the dental loss
ratio was more in line with our objectives, signifying an improvement from the
beginning of 1998. We believe that we are rehabilitating this line of business
and that it will contribute to profitability improvements in 1999.
The decision was also made to gain access to a Preferred Provider
Organization (PPO) for the long-term success of our dental product. In February
1999, we announced an agreement with the Guardian Life Insurance Company of
America to provide Guarantee Life with access to their DentalGuard Preferred
Select Network, a dental PPO. This alliance will allow us the opportunity to
open up new markets, provide employers and employees with the ability to choose
a plan that best suits their needs, and improve the overall profitability of our
dental business. We plan to begin selling this enhancement to our dental product
in the fourth quarter of 1999.
Our distribution continues to be a valuable asset of our Employee Benefits
business. Our quote engine is an electronic, rules-driven quoting and issuance
system that provides consistent ratings, proposal wordings, and issuance of sold
policies. It is a competitive advantage for our distribution and results in
higher quality business being put on the books. The quote engine helps the field
increase their efficiency in terms of underwriting consistency and speed in
filling quotes.
[Quote/Fact Box]
"We believe the company will continue to demonstrate sequential quarterly
improvement throughout 1999 as management focuses on expense reductions and
continued aggressive management of the dental insurance operation. We believe
that management is committed to achieving a double-digit return on equity within
the next two years."
Elizabeth C. Malone CFA
Managing Director
Friedman, Billings, Ramsey & Co., Inc.
(1/28/99)
[Box-End]
The home office administration of EBD required improvements during 1998 to
provide better service, increase productivity, and reduce unit expenses. While
much has been done with the implementation of the quote engine and other
technology, this extensive project is not yet completed. We are operating on a
plan and timeline to complete the work by year-end 2000. In the meantime, we
anticipate that incremental improvements will continue to be reflected by lower
unit costs and improved customer satisfaction.
The loss ratio in our group life product line has returned to a level more
consistent with our expectations for this product. We thoroughly analyzed the
group life block of business as a result of the high mortality
12
<PAGE>
experienced in the third quarter of 1998. We did not find any underlying issues
that indicated an inherent problem in the block. We believe the problems were
fluctuations that are common in the insurance business and will occur from time
to time.
With the steps taken in 1998 and with others to come in 1999, we expect
solid sales growth as we go through the year. First quarter sales in 1999 will
clearly reflect that a positive sales momentum has again been established, and
we do expect an increase in sales for the full year of 1999, compared to 1998.
A thorough understanding of 1998 and its challenges was critical in making
the changes necessary to improve EBD's profitability in 1999. We believe we have
done this throughout all areas of the Division. Although new sales were down
because of the necessary price increases, persistency of the business continues
to be good. We also continue to focus on improving our centralized
infrastructure to further capitalize on our competitive edge. We are determined
to have consistent, high quality, cost-effective service and pricing for the
small and mid-sized business market. EBD must continue to effectively integrate
risk management disciplines into all product lines, while promoting aggressive
home office and field expense management.
[Quote/Fact Box]
Sales of EBD's voluntary (worksite marketed) products for 1998 increased to
$10.7 million in first year annualized premiums, compared to $10.1 million for
1997.
[Box-End]
Group Special Markets Division
The operations of the Group Special Markets Division is balanced between
the high return, but volatile, excess loss coverage, which supports small to
mid-sized employers' self-funded medical plans, and the stable earnings of
executive medical reimbursement and group life products. These products are
"customer intimate" and offer Guarantee Life the potential of high returns.
We are pleased with the EBPLife block of excess loss business we acquired
in December 1997. Our successful renewals of this business represented a
significant portion of the sales increase in our Group Special Market Division
for 1998.
Our excess loss product experienced higher loss ratios in 1998 than our
objectives. However, the loss ratio did improve to its lowest level for 1998
during the fourth quarter. We believe the excess loss loss ratio will continue
to improve in 1999 as a result of the pricing initiatives implemented during the
last half of 1997. The loss ratio improvement should also continue due to
tighter risk selection guidelines in place for both our new and renewal
business. Our medical reimbursement and life business in this Division continue
to provide solid profits, and we expect the medical reimbursement business to
grow in 1999.
13
<PAGE>
In 1998, the excess loss reinsurance market began to require that more of
the risk be borne by the carrier and distributor. This will result in improved
risk selection as the interests of the distributor are more aligned with the
profitability of the business. We believe this change is healthy for the
long-term profitability of the excess loss business. In our case, we now have
risk on 30% of each claim up to a maximum of $300,000, or $90,000 versus $75,000
with our former reinsurance arrangement. All risk over $300,000 is 100%
reinsured. While we are obtaining the necessary rate increases on our in-force
business and will see the associated revenue growth, our new business growth in
1999 will trail 1998 until the rest of the market tightens its standards. We
expect to be well positioned as the market firms.
[Quote/Fact Box]
Sales for 1998 in the Group Special Division increased to $35.5 million,
compared to $31.8 for 1997.
[Box End]
In 1999, GSM will focus on managing the excess loss loss ratios back to
historical levels, while maintaining the "customer intimacy" that has made
Guarantee Life successful in this volatile business. Relationships are extremely
important, and we are very fortunate to have long-term partnerships with our
TPAs and our MGU, National Benefit Resources, Inc. (NBR) in Minneapolis,
Minnesota. These relationships help our business through the challenging times.
Another focus for 1999 will be on maintaining our favorable relationship
with our excess loss reinsurers to benefit from their expertise and demonstrate
adherence to the guidelines we have jointly set. The key goal for the Division
is to enhance its profitability in a rapidly changing market segment.
Individual Division
The origins of Guarantee Life start in the Individual Division as it
continues to provide a stable earnings base upon which to grow the organization.
Overall, Individual had a very good year. During 1998, revenue growth remained
strong, while further reductions were made in unit expenses. Its national
distribution was enhanced and expanded by our two acquisitions. These
acquisitions also added critical mass to the Company, which is one of Guarantee
Life's stated strategies. The one disappointment during the year was an adverse
Individual Insurance Distribution System
[MAP APPEARS HERE]
. Regional Marketing Organizations
. Not currently licensed in New York & New Hampshire
14
<PAGE>
fluctuation in mortality during the first quarter. However, fluctuations are
typical in the insurance business and will occur from time to time.
[Quote/Fact Box]
Sales of individual life insurance products for 1998 increased to $10.9 million,
compared to sales of $7.0 million in 1997. Annuity product sales for 1998 were
$13.9 million, compared to $25.2 million for 1997.
[Box-End]
There was a dramatic increase in the sales of individual life insurance
products during 1998, primarily due to the two acquisitions that were integrated
during the year. Annuity sales were down due to low interest rates and the
competitive nature of its market. We are not growing our annuity business right
now because our pricing is set to attract sales only when the market enables
appropriate margins to be derived. We are satisfied with our current level of
annuity sales given this environment. Our existing block of annuity business is
very profitable and contributes to Individual's earnings, but our principal
focus is the sales growth of our life insurance products.
The Individual Division has played an important role in two of our key
strategies: growth through acquisitions and achievement of critical mass. During
late 1997 and early in 1998, we acquired and integrated PFG, Inc. and Westfield
Life Insurance Company, respectively. We have exceeded our targeted expense
reductions with these projects and expect to make further reductions in 1999.
Guarantee Life has been successful in gaining a larger national presence by
adding producers and sales from these acquisitions.
PFG, Inc. and its primary subsidiary, AGL Life Assurance Company, support
the Individual Division's effort to leverage its infrastructure, enhance
earnings, and build a strong national presence with a competitive and focused
portfolio of products. Specific achievements associated with the PFG, Inc.
integration include:
. annual expense savings of $2.8 million ($0.8 million more than plan);
. establishment of PFG, Inc. as a TPA for Guarantee Life products;
. an initiative for a new commission payment and administration system; and
. effective consolidation of term portfolios.
[Quote/Fact Box]
The acquisitions of AGL at the end of 1997, and Westfield Life in mid-1998, have
expanded our distribution network and accounted for $3.3 million of the sales
increase during 1998.
[Box-End]
Westfield Life Insurance Company was acquired in May 1998 and has benefited
Guarantee Life in many ways including:
. Westfield Life's existing block of business was acquired on favorable terms
providing earnings enhancement for Individual;
. immediate integration and relationships were achieved through
administrative and marketing arrangements with personnel formerly serving
Westfield Life's business;
. Westfield Life's distribution transitioned well to Guarantee Life's
products (approximately 1,300 new agents licensed with us);
. Westfield Life's existing worksite marketed products are complementary to
our Employee Benefits business; and
. expense reductions of $4.1 million were achieved reducing Individual's
overall unit expenses.
15
<PAGE>
[BAR CHART APPEARS HERE]
LIFE INSURANCE IN FORCE ($ IN MILLIONS)
91 $19,365.9
92 $20,312.5
93 $20,686.4
94 $23,262.4
95 $25,461.5
96 $28,889.4
97 $38,392.8
98 $47,309.6
Total group and individual life insurance in force increased by 23% in 1998
In 1998, we introduced a final expense product with relatively low face
value amounts designed to provide benefits for death expenses. We also
introduced a 30-year term product, Term Builder 30, which is expected to promote
the growth of our Term Builder portfolio of products. The introduction of new
products like these, along with services such as ViLink(R), a communication,
information, and updating system available to agents via the Internet, continue
to fortify our positive position in the individual insurance industry.
[Quote/Fact Box]
Guarantee Life Insurance Company is a proud charter member in the Insurance
Marketplace Standards Association or IMSA.
"IMSA members have adopted policies and procedures that demonstrate a commitment
to honesty, fairness, and integrity in all customer contacts involving sales and
service of individual life insurance and annuity products."
Insurance Marketplace Standards Association (3/98)
[Box-End]
In 1999, Individual will enhance its profit performance through further
refinement and execution of the Regional Marketing Organization strategy,
enhancement of the AGL and Westfield Life distributions, consolidation and
development of its product portfolio to anticipate changing market requirements,
and continued expense reductions through technology deployment and efficiency
processes.
Closing Comment
Although 1998 was a very challenging year for everyone, we are encouraged
by the actions we have taken to improve the fundamental profit drivers in our
operations. Challenges can be utilized to propel changes that might otherwise be
slower to develop. I believe that we capitalized on our opportunities for change
in 1998. All members of the Guarantee Life team are optimistic and energized as
we begin 1999.
Sincerely,
/s/ Robert D. Bates
Robert D. Bates
Chairman of the Board,
President and Chief Executive Officer
16
<PAGE>
Financial Review
<TABLE>
<CAPTION>
Summary Consolidated Financial and Operating Data
- ------------------------------------------------------------------------------------------------------------------------------
At or For the Year Ended December 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- ------
(in millions)
<S> <C> <C> <C> <C> <C>
Consolidated Income Statement Data:
Premiums and policyholder assessments, net $ 322.0 $ 230.9 $181.7 $208.6 $158.6
Investment income, net 74.7 58.4 54.4 74.6 70.4
Realized investment gains (losses) 2.0 1.3 0.1 2.4 (1.2)
Ceding commissions and other income 22.1 15.6 12.7 8.8 19.7
Contribution from Closed Block(1) 4.7 4.1 3.1 - -
-------- -------- -------- -------- ------
Total revenues 425.5 310.3 252.0 294.4 247.5
Total policyholder benefits, expenses and dividends 411.1 284.6 229.4 274.5 220.1
-------- -------- -------- -------- ------
Income from continuing operations before income taxes 14.4 25.7 22.6 19.9 27.4
Income tax expense 5.1 9.1 7.9 9.1 11.7
-------- -------- -------- -------- ------
Net income from continuing operations 9.3 16.6 14.7 10.8 15.7
Net income (loss) from discontinued operations(2) (0.3) (0.2) 0.3 (1.7) (1.9)
Extraordinary charge for demutualization
expense, net - - - 7.7 8.1
-------- -------- -------- -------- ------
Net income $ 9.0 $ 16.4 $15.0 $1.4 $5.7
======== ======== ======== ======== ======
Consolidated Balance Sheet Data:
Total invested assets(5) $1,567.2 $1,211.5 $1,094.3 $1,056.1 $985.6
Total assets(1)(5) 1,992.2 1,519.0 1,305.2 1,280.8 1,188.0
Notes payable(5) 112.5 40.0 - - -
Total liabilities(1)(5) 1,762.2 1,309.8 1,096.5 1,074.5 1,055.1
Total shareholders' equity(3)(4) 230.0 209.2 208.7 206.3 132.9
Segment Income Statement Data:
Revenues by segment:
Employee Benefits Division $ 214.2 $ 166.2 $109.1 $88.8 $64.1
Group Special Markets Division 80.0 62.0 66.0 93.4 76.0
Individual Insurance Division 131.0 82.2 75.8 112.2 107.4
Corporate 0.2 (0.1) 1.1 - -
Income from continuing operations before income
taxes by segment:
Employee Benefits Division $ (9.1) $ (1.9) $(0.6) $(3.4) $2.3
Group Special Markets Division 7.5 11.2 10.8 7.8 12.3
Individual Insurance Division 23.1 18.2 13.6 15.5 12.8
Corporate (7.1) (1.8) (1.1) - -
Earnings Per Share(4):
Basic 1.00 1.74 1.51 - -
Diluted 0.98 1.70 1.49 - -
Dividends per share 0.28 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
within accumulated other comprehensive income, total shareholders' equity would
have been $210.3 million, $196.2 million, and $204.8 million as of December 31,
1998, 1997, and 1996 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 in 1997, and completed the last programs in 1998 with the
purchase of an additional 0.1 million shares at a cost of $3.2 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. Effective May 1998, Guarantee Life acquired Westfield Life
Insurance Company. See Note 1 of Notes to Consolidated Financial Statements.
17
<PAGE>
Guarantee Life 1998 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 accompanying 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. Refer to the Guarantee
Life Form 10-K for a discussion of specific risk factors. 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 three operating
segments: the Employee Benefits Division ("EBD"), the Group Special Markets
Division ("GSM") and the Individual Insurance Division ("Individual").
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
$37.3 million. In the transaction, Guarantee Life acquired $175.0 million in
assets and assumed $137.1 million in liabilities. PFG is being managed through
Guarantee Life's Individual Division. PFG brought additional distribution
opportunities, system enhancements, and expanded geographic coverage to
Guarantee Life's Individual Business, specifically in the Northeast region of
the United States.
PFG, Inc. includes: 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.
Effective May 31, 1998, Guarantee Life acquired Westfield Life Insurance
Company ("Westfield") from Ohio Farmers Insurance Company for $100.0 million,
consisting of $90.0 million in cash and 371,402 shares of Guarantee Life common
stock valued at $10.0 million. In addition, approximately $2.0 million of
expenses were capitalized as part of this transaction. Guarantee Life acquired
$396.9 million in assets and assumed $294.5 million in liabilities in this
transaction. The Westfield acquisition increased Guarantee Life's Individual
sales force by over 1,300 agents and added nearly 87,000 policies, $280.0
million in policy reserves, and $55.0 million in revenues to Guarantee Life's
Individual Division.
In an agreement dated May 28, 1998, Guarantee Life replaced its previous
$50.0 million credit arrangement with Senior Secured Credit Facilities in an
aggregate principal amount of $140.0 million. These Facilities were issued for
the purpose of financing the Westfield and PFG acquisitions.
18
<PAGE>
Building Relationships for Life(R)
Employee Benefits Division Trends
EBD targets businesses with fewer than 500 employees by providing group
non-medical products including term life, accidental death and dismemberment,
short-term disability, long-term disability, and dental; and voluntary (worksite
marketed) products including term life, accidental death and dismemberment,
short-term disability, long-term disability, dental, and vision.
EBD has experienced considerable growth in the past several years, as
shown below:
<TABLE>
<CAPTION>
1998 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Number of offices, end of year 22 21 20 17
First year annualized premium sales (millions) $61.0 $75.0 $49.2 $34.4
Net earned premium (millions) $201.3 $155.7 $104.1 $83.0
Customer proposals 75,000 81,000 72,000 44,000
</TABLE>
Guarantee Life believes EBD's target market offers many opportunities,
with the total 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 22 Regional Group Offices markets
to employers through employee benefits firms and brokers. The significant growth
in sales and revenue has also generated significant growth in policyholder
benefits, acquisition costs, and operating expenses. Guarantee Life has invested
heavily over the past several years to build an infrastructure in support of the
growth in this business. Until 1998, EBD new sales had shown considerable
growth. Pricing actions in late 1997 and in 1998, particularly in the dental
line, resulted in a decrease in new sales in 1998.
Group Special Markets Division Trends
GSM targets employer groups between 50 and 500 lives with self-funded
medical plans by providing specialty medical products including excess loss
insurance, medical reimbursement insurance for business executives, and group
non-medical 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's intent is 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. Guarantee Life intends to continue building strategic relationships
with distributors such as MGUs, TPAs, Blue Cross and Blue Shield plans and
health maintenance organizations to grow the business through new products and
sales.
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 renewed in 1998, it was written on Guarantee Life
Insurance Company policies through its MGU relationship with National Benefits
Resources, Inc. in Minneapolis, Minnesota.
Individual Insurance Division Trends
The Individual Division primarily targets persons with a family income
up to $150,000 and small business owners by providing a variety of life and
annuity products including universal life, interest-sensitive whole life, term
life, and fixed 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.
Management has focused on lowering policy acquisition costs, refining its
distribution systems and introducing more competitive and profitable products.
The distribution has expanded through acquisitions and by
19
<PAGE>
Guarantee Life 1998 Annual Report
developing relationships with independent agents as well as Regional Marketing
Organizations (RMOs), who in turn develop relationships and contract with
independent producers. These efforts resulted in an increase of the Company's
field force by 37% in 1996, 49% in 1997, and 110% in 1998, to 2,808 producers.
Sales of life products, in terms of first year annualized premium, have
increased from $6.5 million in 1996, to $7.0 million in 1997, and to $10.9
million in 1998. Sales of annuity products were $9.3 million in 1996, $25.2
million in 1997, and $13.9 million in 1998. The decrease in annuity sales in
1998 was due primarily to lower participation rates resulting from volatility in
the financial markets, lower interest rates and increased competition.
Year 2000 Issues
Guarantee Life recognizes the significance and technological impact that
the Year 2000 (Y2K) challenge will have on organizations world-wide and has
established a comprehensive plan to achieve compliance. Our overall goal is to
ensure that we continue to provide quality products and services with no
interruption to our customers. All of our critical Y2K renovation efforts are
well underway across the Company. Our focus is not only on our internal systems,
but also whether or not our key business partners, vendors, and suppliers will
be compliant in the next millennium.
While Y2K-related work had been in process much earlier, formal project
organization and impact assessment activities began in November 1996. A
separate, dedicated corporate team was put in place in March 1997 to lead our
compliance efforts and provide guidance and support to our specific Y2K projects
across the Company. Using standard project methodology and management processes,
Guarantee Life is taking a phased approach towards Y2K compliance. Five major
phases have been identified for this effort: Impact Assessment, Infrastructure &
Methods, Renovation, Certification, and Implementation.
Impact Assessment
During the assessment phase, mission critical applications impacted were
identified and a high-level budget was developed and approved. The total cost of
Y2K compliance is estimated at approximately $2.9 million through 2000. This
represents approximately 7% of the total Information Technology (IT) budget over
this time period. Approximately $1,062,000 in Y2K-related expenses have been
incurred in 1998, as compared to approximately $800,000 in 1997.
Correction of the Y2K issues is a high priority project and other IT
projects have been deferred due to Y2K efforts. However, Guarantee Life does not
believe the deferral of other IT projects has had a material effect on financial
condition or results of operations in 1998 or 1997. Guarantee Life's IT staff
has continued to work on other high priority projects concurrent with the Y2K
project.
Infrastructure
Progress of Guarantee Life's core information technology infrastructure and
application areas is measured for the mainframe, midrange, and client/server
environments. Over 250 third party application packages and over 130 custom
applications and external interfaces have been inventoried and are being tracked
for compliance.
Renovation
IT Systems - A renovation strategy was defined for each of our mission
----------
critical applications. In some cases, it was decided to upgrade vendor supplied
software with Y2K-compliant releases. In other cases, decisions were made to
replace software altogether taking advantage of new functionality. For most
in-house developed applications, modifications are being made to ensure
compliance.
Several of our policy administration and claims processing applications
have either been renovated through vendor-supplied upgrades or replaced with Y2K
compliant packages. Most of the system replacements had been planned but were
merely accelerated due to the Y2K issues. In the Individual Division,
significant model office testing has been conducted to ensure compliance and the
updated systems have been put into production successfully. A vendor-supplied
claims system is the remaining mission critical application being renovated in
the Employee Benefits Division and should be Y2K-ready by early second quarter
1999. The existing mainframe administration, custom-developed applications and
claims systems were renovated in 1998 for contingency purposes. All systems will
go through additional certification testing by June 1999.
20
<PAGE>
Building Relationships for Life(R)
Our existing general ledger and accounts payable applications were replaced
with a new vendor-supplied Y2K-compliant package in 1997. Our vendor-supplied
Investment systems are compliant. Human Resource administration and payroll
systems were successfully upgraded in 1998. Other smaller, non-critical
applications will either be renovated or replaced in 1999.
Each of our major operating platforms has been upgraded. A complete
inventory of data center hardware and software has been completed and assessed.
Test environments are in place on each platform. A separate network lab is
available for testing business software and end user computing applications.
Over 85% of the applications have been tested to date. In addition, our imaging
and fax software were upgraded successfully in April 1998. A limited number of
third party, mainframe system software and workstation upgrades will take place
in early 1999. All others were completed in 1998.
PFG's core administrative systems were developed to accommodate a four
digit year. The operating system software was upgraded in 1998. Key application
systems and infrastructure will undergo further certification testing in 1999.
Other software/hardware components and business partners' compliance status are
currently being validated. Existing Westfield business is administered through a
third party administrator, who has indicated their primary system is Y2K
compliant. New business is administered on the Guarantee Life Individual
administrative system at the home office, which was renovated in June 1998.
Non-IT Systems - All our major suppliers and vendors providing services
--------------
related to our facilities have been contacted. Our telephone switch is currently
Y2K compliant. The voice mail system was upgraded for Y2K compliance in May
1998. Call accounting software was also upgraded in October 1998. Our elevators
are not impacted by the Year 2000. Our security system was upgraded in 1998. We
believe that our climate control components will function properly in the Year
2000. Additional rollover tests will be conducted in 1999 to certify compliance.
We have contacted our telecommunications, gas, water and electric utility
companies regarding their Y2K compliance status. They have all communicated that
their renovation efforts are in progress and will be completed by the Year 2000.
Certification
Recognizing that over 50% of the effort on Y2K projects is spent in the
testing phases, Guarantee Life is committed to ensuring that our remediation
efforts go through thorough unit, integration, regression, and end-to-end
testing. A testing tool was purchased specifically for this effort. To date,
rollover tests (i.e. changing the CPU date past 2000) have been performed on our
network servers, AS/400, mainframe and HP UNIX platforms. A Y2K-specific
rollover test was successfully conducted at our Business Recovery test site in
December 1998. Plans have been established to continue testing business cycles
using significant dates (e.g. 12/31/1999, 2/29/2000) on all of our platforms in
1999.
Completing Our Internal Remediation
Our Impact Assessment and Infrastructure & Methods phases are completed.
90% of the Renovation and Certification phases are complete. Additional
certification testing (e.g. of third party providers' systems), final
workstation upgrades and final business partner risk assessment and contingency
planning will take place in 1999.
Guarantee Life is actively monitoring the compliance programs of its key
business partners, vendors and suppliers. Over 345 business partners have been
inventoried and are being tracked for compliance. Electronic interfaces to our
key suppliers have been identified and will be verified before June 1999. The
team is particularly focusing on assessing any Y2K risk associated with our key
administrative and marketing arrangements. In particular, we continue to work
with a major third party administrator to ensure that they have appropriate
plans.
Risks and Business Contingency Planning
The Company believes that its most reasonable and likely worst case Y2K
scenario will include these elements: (1) one or more of the Company's third
party providers will be unable to provide the services expected, and (2) one or
more parts of the Company's processing software will operate incorrectly. At
this time, we are unable to estimate the potential loss of revenue due to such a
scenario. The Company believes that its testing of its critical hardware and
software will reveal any significant Y2K problems, that such problems will be
capable of remediation, and that the Company's software and hardware will
perform substantially as planned when Year 2000 processing begins.
21
<PAGE>
Guarantee Life 1998 Annual Report
The Company will continue to evaluate situations where indicators point to
a potential risk of failure. In these cases, contingency plans will be developed
identifying alternative strategies. A primary focus in 1999 will be to
incorporate these contingency plans into a corporate-wide Y2K contingency plan
that will tie into our Business Resumption planning activities as they are so
closely related to Y2K contingency efforts. The Company currently does not have
a contingency plan regarding such risks.
The foregoing Y2K discussion contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements, including without limitation, anticipated costs, the dates by which
the Company expects to substantially complete programming changes, remediation
and testing of systems and the impact of the redeployment of existing staff, are
based on management's best current estimates, which were derived utilizing
numerous assumptions about future events, including the continued availability
of certain resources, representations received from third party service
providers and other factors. However, there can be no guarantee that these
estimates will be achieved, and actual results could differ materially from
those anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to identify and cover all relevant computer systems,
results of Y2K testing, adequate resolution of Y2K issues by businesses or other
third parties who are service providers, suppliers, customers of the Company,
unanticipated system costs, the need to replace hardware, the adequacy of and
ability to implement contingency plans and similar uncertainties. The
"forward-looking statements" made in the foregoing Y2K discussion speak only as
of the date on which such statements are made, and the Company undertakes no
obligation to update any forward-looking statement to reflect events or
circumstances after the date on which such statement is made or to reflect the
occurrence of unanticipated events.
Operating Results for the Years Ended December 31, 1998, 1997, and 1996
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 1998, 1997, and 1996 consolidated statements of
income. The following table presents the results of operations for the years
ended December 31, 1998, 1997, and 1996 including 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,
------------------------------
1998 1997 1996
------ ------ ------
(in millions)
<S> <C> <C> <C>
Revenues:
Insurance premiums $383.2 $277.2 $222.9
Policyholder assessments 37.0 30.5 26.1
Reinsurance premiums (78.1) (55.8) (45.5)
------ ------ ------
Net earned premiums and policyholder assessments 342.1 251.9 203.5
Investment income, net 96.6 80.3 75.9
Realized investment gains 3.4 1.1 0.1
Ceding commissions and other income 22.2 15.6 12.8
------ ------ ------
Total revenues 464.3 348.9 292.3
Benefits and expenses:
Policyholder benefits, net of reinsurance 232.4 159.5 127.2
Interest credited to account balances 39.8 28.7 26.5
------ ------ ------
Total policyholder benefits 272.2 188.2 153.7
Acquisition costs and operating expenses 167.3 123.9 105.2
Dividends to policyholders 10.4 11.1 10.8
------ ------ ------
Total policyholder benefits, expenses and dividends 449.9 323.2 269.7
------ ------ ------
Income before income taxes $ 14.4 $ 25.7 $ 22.6
====== ====== ======
</TABLE>
22
<PAGE>
Building Relationship for Life(R)
Insurance Premiums and Policyholder Assessments, Net
Net premiums and policyholder assessments increased $90.2 million, or
35.8%, to $342.1 million in 1998. Approximately one-half of the increase was in
EBD where 1998 premiums increased over 1997 by $45.6 million. This increase can
be attributed to continued growth through new sales. Individual Division
premiums increased $29.7 million over 1997 due almost entirely to the
acquisitions of Westfield and PFG. The remaining increase of approximately $14.9
million occurred in GSM due primarily to the acquisition of the EBPLife excess
loss block and general growth in other product lines.
In 1997, net premiums and policyholder assessments increased $48.4 million,
or 23.8%, to $251.9 million. A $51.6 million, or 49.6%, increase in EBD and a
$2.1 million, or 4.2%, increase in Individual were partially offset by a $5.1
million, or 10.3%, decrease in GSM.
Investment Income, Net
Net investment income increased $16.3 million, or 20.3%, to $96.6 million
in 1998. This increase was due to the increase in invested assets resulting
primarily from the acquisitions of Westfield and PFG. The Westfield acquisition
added $339.7 million of invested assets to the year end total. Because PFG was
acquired in December 1997, its invested assets had little impact on 1997
investment income. PFG invested assets, which totaled $75.6 million on December
31, 1998, generated investment income during all of 1998. Invested assets,
excluding the Westfield and PFG acquisitions and unrealized appreciation,
increased approximately $20.3 million during 1998.
In 1997, net investment income increased $4.4 million, or 5.8%, to $80.3
million. This increase was due primarily to an increase in invested assets of
$16.6 million at December 31, 1997 as compared to December 31, 1996. In
addition, the Security Life invested assets of $45.9 million acquired in August
1996 earned interest during 1997.
The effective yield on invested assets was 7.2% in 1998, and 7.4% in both
1997 and 1996. The reduction in yield can be attributed primarily to two
factors: first, the invested assets acquired in the May 1998 acquisition of
Westfield and the December 1997 acquisition of PFG are lower yielding than the
existing Guarantee Life Insurance Company portfolio; and second, the lower
interest rate environment in 1998 caused proceeds from maturities and
prepayments on higher yielding securities originally purchased in higher rate
environments to be reinvested at lower interest rates.
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. Net gains during 1998 increased $2.3 million, or
209%, over 1997. We would not expect the trend of higher net gains to continue
in 1999.
In 1997, net realized gains increased $1.0 million over 1996 due to gains
on the sale of an investment property and the sale of Guarantee American Life
Company. No other items were significant.
Total Policyholder Benefits
Total policyholder benefits increased $84.0 million in 1998 due to several
factors. Net benefits in EBD increased $42.9 million, or 40.1%, primarily due to
premium growth and a higher net loss ratio in 1998. Net benefits in Individual
increased $28.6 million, or 47.8%, due almost entirely to the acquisitions of
Westfield and PFG. Net benefits in GSM increased $12.3 million, or 57.5%, due to
the inclusion of EBPLife benefits of $5.7 million in 1998 and increases in both
premium volume and loss ratios over 1997 levels.
In 1997, total policyholder benefits, net of reinsurance, increased $34.5
million, or 22.4%, to $188.2 million. Net benefits in EBD increased $38.0
million due to premium growth. This was offset slightly by decreases of $1.3
million in Individual and $2.2 million in GSM.
23
<PAGE>
Guarantee Life 1998 Annual Report
Total Acquisition Costs and Operating Expenses
Total expenses increased $43.4 million, or 35.0%, to $167.3 million in
1998, as a result of increased operating and acquisition expenses in each of the
divisions and in the Holding Company. The Individual Division operating and
acquisition expenses increased $16.2 million, or 50.9%, over 1997 due primarily
to the inclusion of PFG and Westfield, which added $15.3 million in acquisition
and operating expenses. Operating expenses in EBD increased $12.3 million, or
20.2%, due to the growth in earned premium and business volume. GSM's
acquisition and operating expenses increased $9.4 million, or 32.0%, as higher
earned premium translated to higher commissions, and other general and
administrative expenses. Expenses increased $5.9 million in the Holding Company
primarily due to the interest and other costs on debt used to finance the PFG
and Westfield acquisitions.
In 1997, total expenses increased $18.7 million, or 17.8%, to $123.9
million. This increase was mainly the result of an increase in EBD acquisition
and operating expenses of $7.6 million and $12.7 million, respectively. Expenses
increased by $1.1 million over 1996 in Individual mainly from increased Deferred
Policy Acquisition Costs (DPAC) amortization, while GSM acquisition and
operating expenses decreased $2.3 million due to a decrease in earned premium.
Income Tax Expense
Income tax expense decreased $4.1 million, or 44.6%, to $5.0 million in
1998, due to the $11.3 million decrease in pre-tax income. 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 nondeductible
expenses.
Insurance Operations - Employee Benefits Division
The following table sets forth certain summarized financial data for EBD
for the years ended December 31, 1998, 1997, and 1996.
Year Ended December 31,
-------------------------------
1998 1997 1996
------ ------ -------
(in millions)
Revenues:
Insurance premiums $206.3 $159.1 $106.3
Reinsurance premiums (5.0) (3.4) (2.2)
------ ------ ------
Net earned premiums 201.3 155.7 104.1
Investment income, net 11.8 10.1 5.2
Realized investment gains (losses) 0.9 0.3 -
Ceding commissions 0.2 0.1 (0.2)
------ ------ ------
Total revenues 214.2 166.2 109.1
Benefits and expenses:
Policyholder benefits, net of reinsurance 150.0 107.1 69.0
Acquisition costs and operating expenses 73.3 61.0 40.7
------ ------ ------
Total policyholder benefits and expenses 223.3 168.1 109.7
------ ------ ------
Income before income taxes $ (9.1) $ (1.9) $ (0.6)
====== ====== ======
EBD net earned premiums increased $45.6 million, or 29.3%, to $201.3
million in 1998. The increase was primarily due to continued strong new sales
($61.0 million of first year annualized premium) relative to the in-force block.
One new sales office was opened during 1998 contributing to an increased volume
of business. Net dental premium increased $24.8 million. Dental sales totaled
$20.6 million in first year annualized premium in 1998. Long-term and short-term
disability net premiums increased $12.8 million, representing 28.1% of the
increase. EBD disability sales in 1998 were $19.7 million in first year
annualized premium. Group life and accidental death & dismemberment (AD&D) net
premiums increased $7.9 million, contributing 17.3% of the total increase. Group
life and AD&D new sales in 1998 were $20.7 million in first year annualized
premium.
24
<PAGE>
Buiilding Relationships for Life(R)
In 1997, EBD net earned premiums increased $51.6 million, or 49.6%, to
$155.7 due primarily to new sales totaling $75.0 million of first year
annualized premium. One new sales office was opened and existing offices
experienced general sales growth among all product lines, particularly dental,
which experienced new sales of $30.5 million in first year annualized premium.
EBD net benefits increased $42.9 million, or 40.1%, to $150.0 million in
1998. Net dental benefits accounted for $22.0 million, or 51.3%, of the increase
due to premium growth and deterioration in claims experience. Disability net
benefits accounted for $13.5 million, or 31.5%, of the increase as claims
experience deteriorated and premium volume increased. An increase in life and
AD&D net benefits of $7.4 million accounted for the remaining 17.2% of the
increase due to higher premium volume and claims experience.
In 1997, net benefits increased $38.0 million, or 55.0%, to $107.1 million.
This increase was caused by the combination of higher premiums, slightly poorer
underwriting experience, and fewer reinsurance recoveries.
EBD acquisition costs and operating expenses increased $12.3 million, or
20.2%, to $73.3 million in 1998. This increase was consistent with, but at a
lower rate than, the growth in premium and benefits volume as some
"economies-of-scale" were realized in general & administrative expenses.
Increases in commissions and premium tax expenses were more consistent with
growth in premium.
In 1997, acquisition costs and operating expenses increased $20.3 million,
or 49.9%, to $61.0 million. This increase was due to increases in variable
expenses such as commissions and premium taxes from increased premiums.
Insurance Operations - Group Special Markets Division
The following table sets forth certain summarized financial data for GSM
for the years ended December 31, 1998, 1997, and 1996.
Year Ended December 31,
-----------------------------
1998 1997 1996
------ ------- -------
(in millions)
Revenues:
Insurance premiums $117.9 $ 90.5 $ 86.7
Reinsurance premiums (58.7) (46.2) (37.3)
------ ------ ------
Net earned premiums 59.2 44.3 49.4
Investment income, net 1.7 2.6 4.3
Realized investment gains (losses) - 0.1 (0.3)
Ceding commissions 19.1 15.0 12.6
------ ------ ------
Total revenues 80.0 62.0 66.0
Benefits and expenses:
Policyholder benefits, net of reinsurance 33.7 21.4 23.5
Acquisition costs and operating expenses 38.8 29.4 31.7
------ ------ ------
Total policyholder benefits and expenses 72.5 50.8 55.2
------ ------ ------
Income before income taxes $ 7.5 $ 11.2 $ 10.8
====== ====== ======
GSM net earned premium increased $14.9 million, or 33.6%, to $59.2 million
in 1998. An increase in excess loss net premium of $13.0 million represented
87.2% of the total increase. This can be attributed to rate increases associated
with the excess loss product and the acquisition of the EBPLife block of
business.
In 1997, net earned premium decreased $5.1 million, or 10.3%, to $44.3
million in 1997. The final runoff of the SMART major medical product in 1996
accompanied by new reinsurance treaties associated with the excess loss product
line resulting in higher ceded premiums were the primary contributors to this
decrease.
25
<PAGE>
Guarantee Life 1998 Annual Report(R)
GSM net benefits increased $12.3 million, or 57.5%, to $33.7 million in
1998. Net benefits in the excess loss business represented $10.5 million, or
85.4%, of this increase resulting from deterioration in the loss ratio of the
excess loss product and acquisition of the EBPLife block of business.
In 1997, net benefits decreased $2.1 million, or 8.9%, to $21.4 million.
This decrease was the result of lower net premiums offset by poorer underwriting
experience in the excess loss product line.
GSM acquisition costs and operating expenses increased $9.4 million, or
32.0%, to $38.8 million in 1998. This increase was primarily due to the increase
in commissions and fees related to the increase in premiums. Acquisition costs
and operating expenses decreased $2.3 million, or 7.3%, to $29.4 million in 1997
due primarily to the lower premiums.
Insurance Operations - Individual Insurance Division
The following table sets forth certain summarized financial data for
Individual for the years ended December 31, 1998, 1997, and 1996.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1998 1997 1996
------ ------ ------
(in millions)
<S> <C> <C> <C>
Revenues:
Insurance premiums $ 59.0 $ 27.5 $ 29.8
Policyholder assessments 37.0 30.5 26.1
Reinsurance premiums (14.4) (6.1) (6.1)
------ ------ ------
Net earned premiums and policyholder assessments 81.6 51.9 49.8
Investment income, net 81.7 67.7 65.4
Realized investment gains 3.8 0.7 0.5
Ceding commissions 2.8 0.6 0.4
Total revenues 169.9 120.9 116.1
Benefits and expenses:
Policyholder benefits, net of reinsurance 48.6 31.1 34.6
Interest credited to policyholder account balances 39.8 28.7 26.5
------ ------ ------
Total policyholder benefits 88.4 59.8 61.1
Acquisition costs and operating expenses 48.0 31.8 30.6
Dividends to policyholders 10.4 11.1 10.8
------ ------ ------
Total policyholder benefits and expenses 146.8 102.7 102.5
------ ------ ------
Income before income taxes $ 23.1 $ 18.2 $ 13.6
====== ====== ======
</TABLE>
Premiums increased $31.5 million, or 114.5%, to $59.0 million in 1998. This
increase was due to the acquisitions of PFG and Westfield, which accounts for
$19.0 million and $9.3 million of the increase, respectively. Premiums decreased
$2.3 million, or 7.7%, to $27.5 million in 1997.
Policyholder assessments increased $6.5 million, or 21.3%, to $37.0 million
in 1998. This increase is also due to the acquisitions of PFG and Westfield,
which accounted for $0.5 million and $8.5 million of the increase, respectively.
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.
Total individual policyholder benefits, net of reinsurance, increased $28.6
million, or 47.8%, to $88.4 million in 1998. Excluding interest credited to
policyholder account balances, total individual policyholder benefits increased
$17.5 million, or 56.3%, to $48.6 million in 1998. Both of these increases were
almost entirely due to the PFG and Westfield acquisitions. PFG had $10.6 million
of total policyholder benefits, net of reinsurance and $7.0 million of
policyholder benefits excluding interest credited to policyholder account
balances. Westfield had $16.3 million of total policyholder benefits net of
reinsurance and $8.2 million of policyholder benefits excluding interest
credited to policyholder account balances.
26
<PAGE>
Building Relationships for life(R)
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.
Interest credited to policyholder account balances increased $11.1 million,
or 38.7%, to $39.8 million in 1998. This increase is again primarily related to
the PFG and Westfield acquisitions. PFG accounts for $3.6 million of the
increase, while Westfield accounts for $8.1 million of the increase.
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 interest credited on universal life policies, 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.
Total individual acquisition costs and operating expenses increased $16.2
million, or 50.9%, to $48.0 million in 1998. This increase was primarily due to
the acquisitions of PFG and Westfield, which account for $8.2 million and $7.0
million of the increase, respectively.
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 Deferred Policy Acquisition Costs ("DPAC")
amortization. DPAC amortization increased mostly in the annuity product lines
due to increased margins.
Policyholder dividends decreased $0.7 million, or 6.3%, to $10.4 million
during 1998, reflecting a reduced dividend scale for traditional life policies
that are part of the Closed Block.
Corporate Administration
The three business segments of Guarantee Life share a common need for
various services such as finance and accounting, investment management, agent
licensing and commissions, legal and compliance, and marketing. In an effort to
operate efficiently, these functions are consolidated in the area of corporate
administration ("Corporate"). Corporate's operations include the cost of these
services provided to all of Guarantee Life, as well as those services provided
to its shareholders.
Virtually all costs associated with providing the above services, are
allocated to the Divisions based upon a specific allocation formula. Expenses
are allocated in a manner that would be most reflective of the costs that would
be incurred if these services were provided within the Divisions themselves.
Debt costs and the costs associated with shareholder services are not allocated
to the Divisions.
The operating results of Corporate for the three years ended December 31,
1998 are summarized as follows:
Year Ended December 31,
-------------------------
1998 1997 1996
----- ----- -----
(in millions)
Total Revenues $ 0.2 $(0.1) $ 1.1
Total Expenses 7.3 1.7 2.2
----- ----- -----
Income before taxes $(7.1) $(1.8) $(1.1)
===== ===== =====
Investment income from invested assets is allocated to the various product
lines in conformity with Guarantee Life's asset/liability management approach,
which seeks to match specific investments with specific product lines. In 1996,
investment income from invested assets in excess of those needed to support the
various product lines was allocated to Corporate.
27
<PAGE>
Guarantee Life 1998 Annual Report
Total expenses in 1998 increased $5.6 million, or 329.4%, due primarily to
the interest expense associated with the outstanding debt issued during the
year. Total interest expense for the years ended December 31, 1998 and 1997
totaled $5.7 million and $0.1 million, respectively. The Company had no
outstanding debt in 1996.
Total expenses decreased in 1997 by approximately $0.5 million, or 22.7%,
due primarily to higher costs in 1996 relating to the establishment of new
shareholder services from the demutualization in December 1995.
Liquidity and Capital Resources
Guarantee Life initiated three voluntary stock buyback programs during
1997, with the final one being completed in 1998, 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 1.2 million
shares and a reduction of approximately 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 from operations.
The Holding Company's ability to pay dividends to its stockholders and meet
its obligations, including debt service and operating expenses, depends
primarily upon receiving sufficient funds from its subsidiaries. The payment of
dividends by Guarantee Life, AGL, and Westfield are subject to restrictions set
forth in the insurance laws and regulations of Nebraska and Pennsylvania. Under
state law, Guarantee Life, AGL and Westfield may pay, within a twelve-month
period, dividends only from the earned surplus arising from its business and
must receive the prior approval of the state departments to pay a dividend if
such dividend would exceed the greater of (i) 10% of statutory capital and
surplus as of the preceding year end and (ii) the net statutory gain from
operations for the previous calendar year. State law gives the broad discretion
to disapprove requests for dividends in excess of these limits.
The Board of Directors of Guarantee Life Insurance Company declared a $15
million extraordinary dividend to the Holding Company in November 1997, which
was paid in January 1998. In December 1998, the Board of Directors of Westfield
Life declared and paid a $20 million extraordinary distribution of excess
capital to the Holding Company. The State of Nebraska approved both of these
transactions. In September 1998, AGL's Board of Directors declared and paid a
$2.4 million dividend to PFG, Inc. In 1999, Guarantee Life Insurance can declare
a dividend of up to $12.5 million without permission from the Nebraska
Department of Insurance. AGL can declare a dividend of up to $1.9 million
without permission from the Pennsylvania Department of Insurance. Westfield
cannot declare a dividend in 1999 without permission from the Nebraska
Department of Insurance.
Guarantee Life increased its outstanding debt obligations by $72.5 million
to $112.5 million during the year ended December 31, 1998 due primarily to the
acquisition of Westfield Life Insurance Company effective May 31, 1998.
Guarantee Life replaced its previous $50 million credit agreement with Senior
Secured Credit Facilities in an aggregate principal amount of $140 million. The
Facilities consist of a six-year Senior Secured Term Loan of $90 million and a
Senior Secured Revolving Credit Facility with a term of five years up to $50
million. At December 31, 1998, Guarantee's debt obligations consisted of $82.5
million under the Senior Secured Term Loan and $30 million under the Revolving
Credit Facility. An underwriting price concession in connection with the
issuance of this debt required the Holding Company to pay a one-time fee of
$825,000 to the administrative agent in December 1998 in the event an offering
of at least $100 million of long-term debt securities to refinance a portion of
the existing debt agreement had not been consummated by December 1, 1998. The
fee was paid.
Management believes that the current amortization of the Term Loan (see
Note 14 to the Consolidated Financial Statements) and a lack of significant
improvement in earnings, particularly in EBD, could create a liquidity
constraint at the Holding Company beyond 1999 unless other actions are taken.
Such actions could include, but are not limited to, the issuance of long-term
debt securities, reinsurance, or other financing alternatives. Management
believes these sources will provide sufficient liquidity for the Holding Company
to meet its future obligations.
28
<PAGE>
Building Relationships for Life
New Accounting Pronouncements
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities," which will be implemented on January 1,
2000, and included in Guarantee Life's December 31, 2000 financial statements.
SFAS 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires an entity to recognize all
derivatives as either assets or liabilities and measure them at fair value. The
accounting for changes in the fair value of a derivative will be determined by
the intended use of the derivative. Early implementation of SFAS 133 would have
resulted in an insignificant change in net income.
In October 1998, the FASB issued SFAS 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise," which will be effective for Guarantee Life's
December 31, 1999 financial statements. SFAS 134 requires that after the
securitization of mortgage loans held for sale, an entity engaged in mortgage
banking activities classify the resulting mortgage-backed securities based on
its ability and intent to sell or hold those investments. SFAS 134 will not
affect net income.
29
<PAGE>
Guarantee Life 1998 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, 1998 and 1997, 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, 1998. 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.
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, 1998 and 1997,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1998 in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Omaha, Nebraska
February 16, 1999
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,
---------------------------
1998 1997
---------- ----------
<S> <C> <C>
Assets
------
Invested assets:
Fixed maturities:
Available-for-sale, at fair value
(amortized cost: $865,597 and $566,544) $ 888,363 $ 582,700
Held-to-maturity, at amortized cost
(fair value: $158,341 and $184,480) 147,180 172,167
---------- ----------
1,035,543 754,867
Equity securities, at fair value
(cost: $20,643 and $2,735) 23,835 3,735
Mortgage loans, net 103,736 85,849
Policy loans 31,767 21,657
Investment real estate, net 3,211 3,394
Other invested assets, net 54,970 32,212
Closed Block invested assets 314,108 309,777
---------- ----------
Total invested assets 1,567,170 1,211,491
Cash and cash equivalents 23,794 8,608
Accrued investment income 13,900 12,415
Ceded reinsurance recoverables 95,511 82,568
Accounts receivable, net 19,641 19,805
Deferred policy acquisition costs, net 144,844 102,696
Property, plant and equipment, net 19,929 19,427
Other assets 12,607 11,572
Closed Block other assets 16,224 17,754
Separate account assets 78,629 32,697
---------- ----------
Total assets $1,992,249 $1,519,033
========== ==========
Liabilities and Shareholders' Equity
------------------------------------
Future policy benefits:
Life $ 97,433 $ 69,381
Accident and health 80,700 73,667
Policyholder account balances:
Universal life contracts 445,986 290,210
Annuity contracts 349,834 251,828
Policy and contract claims 68,701 53,607
Other policyholder funds 43,751 20,754
Unearned premium revenue 13,149 11,866
Notes payable 112,500 40,000
Other liabilities 63,516 58,222
Closed Block liabilities 386,933 386,606
Discontinued operations 21,075 20,997
Separate account liabilities 78,629 32,697
---------- ----------
Total liabilities 1,762,207 1,309,835
Shareholders' equity:
Common stock $0.01 par value; 30,000,000
shares authorized, 10,315,785 shares
issued at December 31, 1998 and
9,944,383 at December 31, 1997 103 99
Additional paid-in capital 201,255 191,123
Retained earnings 33,962 27,463
Treasury stock, at cost (1,087,124 and
1,017,524 shares at December 31, 1998
and 1997, respectively) (25,054) (22,512)
Accumulated other comprehensive
income, net 19,776 13,025
---------- ----------
Total shareholders' equity 230,042 209,198
Commitments and contingencies - -
---------- ----------
Total liabilities and shareholders' equity $1,992,249 $1,519,033
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
Guarantee Life 1998 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,
--------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Insurance premiums and policyholder
assessments:
Life $116,811 $ 76,260 $ 64,932
Accident and health 246,056 179,700 136,158
Policyholder assessments 37,020 30,476 26,080
Reinsurance premiums (77,881) (55,508) (45,480)
-------- -------- --------
322,006 230,928 181,690
Investment income, net 74,651 58,449 54,371
Realized investment gains 1,978 1,270 167
Ceding commissions and other income 22,124 15,558 12,700
Contribution from Closed Block 4,723 4,071 3,071
-------- -------- --------
Total revenues 425,482 310,276 251,999
Policyholder benefits:
Benefits:
Life 96,046 62,749 57,655
Accident and health 184,691 113,335 85,759
Reinsurance recoveries (67,082) (35,752) (36,468)
-------- -------- --------
213,655 140,332 106,946
Interest credited to policyholder
account balances:
Annuity contracts 16,059 10,624 11,021
Universal contracts 20,353 15,028 12,467
-------- -------- --------
Total policyholder benefits 250,067 165,984 130,434
Expenses:
Policy acquisition costs 77,964 57,364 47,554
Other insurance operating expenses 83,055 61,191 51,365
-------- -------- --------
Total expenses 161,019 118,555 98,919
Income from continuing operations
before income taxes 14,396 25,737 22,646
Income tax expense 5,039 9,098 7,926
-------- -------- --------
Net income from continuing
operations 9,357 16,639 14,720
Net income (loss) from
discontinued operations (328) (195) 295
-------- -------- --------
Net income $ 9,029 $ 16,444 $ 15,015
======== ======== ========
Basic Earnings per share:
Weighted average shares
outstanding 9,064 9,436 9,944
======== ======== ========
Net income from continuing
operations $ 1.03 $ 1.76 $ 1.48
======== ======== ========
Net income (loss) from
discontinued operations $ (.03) $ (0.02) $ 0.03
======== ======== ========
Net income $ 1.00 $ 1.74 $ 1.51
======== ======== ========
Diluted Earnings per share:
Weighted average shares
outstanding 9,256 9,686 10,061
======== ======== ========
Net income from continuing
operations $ 1.01 $ 1.72 $ 1.46
======== ======== ========
Net income (loss) from
discontinued operations $ (0.03) $ (0.02) $ 0.03
======== ======== ========
Net income $ 0.98 $ 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)
Year Ended December 31,
---------------------------------
1998 1997 1996
------- ------- --------
Net income $ 9,029 $16,444 $ 15,015
Other comprehensive income,
net of tax:
Unrealized appreciation
(depreciation) of invested
assets carried at fair value,
net 6,751 9,113 (11,014)
------- ------- --------
Comprehensive income $15,780 $25,557 $ 4,001
======= ======= ========
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
(in thousands except share data)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Common stock, beginning of year $ 99 $ 99 $ 99
Issuance of common stock, 371,402 shares 4 - -
-------- -------- --------
Common stock, end of year 103 99 99
-------- -------- --------
Additional paid-in capital, beginning
of year 191,123 191,226 191,226
Issuance of common stock 9,996 - -
Options exercised and stock awards
granted 136 (103) -
-------- -------- --------
Additional paid-in capital, end of year 201,255 191,123 191,226
-------- -------- --------
Retained earnings, beginning of year 27,463 13,435 11
Net income 9,029 16,444 15,015
Shareholder dividends declared
($0.28/share in 1998, $0.26/share
in 1997, $0.16/share in 1996) (2,530) (2,416) (1,591)
-------- -------- --------
Retained earnings, end of year 33,962 27,463 13,435
-------- -------- --------
Treasury stock, beginning of year (22,512) - -
Purchases of treasury stock (119,722
shares in 1998, 1,069,011 shares
in 1997) (3,150) (23,603) -
Options exercised (42,730 shares
in 1998, 1,496 shares in 1997)
and stock awards granted,
(7,392 shares in 1998,
49,991 shares in 1997) 608 1,091 -
-------- -------- --------
Treasury stock, end of year (25,054) (22,512) -
-------- -------- --------
Accumulated other comprehensive income:
Beginning of year 13,025 3,912 14,926
Unrealized appreciation (depreciation)
of invested assets carried at fair
value, net 6,751 9,113 (11,014)
-------- -------- --------
End of year 19,776 13,025 3,912
-------- -------- --------
Total shareholders' equity $230,042 $209,198 $208,672
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE>
Guarantee Life 1998 Annual Report
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income from continuing operations $ 9,357 $ 16,639 $ 14,720
Adjustments to reconcile net income
from continuing operations to net
cash provided by continuing operating
activities:
Policyholder assessments (37,020) (30,476) (26,080)
Interest credited to policyholder
account balances 36,412 25,652 23,488
Realized investment (gains) losses (1,978) (1,270) (167)
Change in: (net of amounts acquired)
Ceded reinsurance recoverables (12,358) (2,918) 1,179
Deferred policy acquisition costs 1,907 4,799 3,438
Liabilities for future policy benefits 13,695 13,745 11,084
Policy and contract claims 13,863 (6,586) (9,393)
Other liabilities 4,908 6,492 (4,935)
Deferred income taxes 3,077 (2,996) (1,780)
Closed Block assets and liabilities, net (2,475) (2,377) (666)
Other, net 10,902 10,200 8,439
-------- -------- --------
Net cash provided by continuing operating
activities 40,290 30,904 19,327
Net cash (used) by discontinued operations (251) (11,560) (17,980)
-------- -------- --------
Net cash provided (used) by operating activities 40,039 19,344 1,347
-------- -------- --------
Cash flows from investing activities:
Purchase of fixed maturities (329,247) (226,294) (235,544)
Proceeds from sale of fixed maturities:
Available-for-sale 358,102 144,607 194,471
Maturities, calls and principal reductions
of fixed maturities 29,392 82,751 54,531
Purchases of equity securities and short-term
investments (32,924) (3,121) (9,505)
Purchase of mortgage loans (25,900) (27,670) (13,542)
Proceeds from repayment of mortgage loans 7,806 11,431 4,773
Acquisitions, net of cash acquired (90,863) (30,913) -
Change in Closed Block invested assets, net (4,331) (4,206) (1,267)
Other, net (3,848) 1,127 (11,085)
-------- -------- --------
Net cash used by investing activities (91,813) (52,288) (17,168)
-------- -------- --------
Cash flows from financing activities:
Deposits to policyholder account balances 76,715 77,153 50,635
Withdrawals from policyholder account balances (77,183) (52,752) (49,568)
Purchase of treasury stock (3,150) (23,603) -
Options excercised 608 1,091 -
Proceeds from issuance of long term debt 90,000 40,000 -
Principal payments on debt obligations (17,500) - -
Shareholder dividends (2,530) (2,416) (1,591)
Policyholder cashouts from demutualization - - (6,877)
-------- -------- --------
Net cash provided (used) by financing
activities 66,960 39,473 (7,401)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents 15,186 6,529 (23,222)
Cash and cash equivalents at beginning of year 8,608 2,079 25,301
-------- -------- --------
Cash and cash equivalents at end of year $ 23,794 $ 8,608 $ 2,079
======== ======== ========
</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, 1998, 1997, and 1996
- --------------------------------------------------------------------------------
(1) Summary of Significant Accounting Policies
(a) Organization and Principles of Consolidation
At December 31, 1998 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), Guarantee
Protective Life Company (Guarantee Protective), and Westfield Life Insurance
Company (Westfield). 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 $175.0 million and assumed liabilities with a
fair value of approximately $137.1 million. This acquisition was accounted for
as a purchase and, accordingly, the acquired assets and liabilities have been
recorded at their estimated fair value at date of acquisition. The results of
operations since the date of acquisition have been included in the accompanying
consolidated financial statements. 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 20 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.
Effective May 31, 1998, Guarantee Life acquired the Westfield Life
Insurance Company from Ohio Farmers Insurance Company for $100.0 million,
consisting of $90.0 million in cash and 371,402 restricted shares of Guarantee
Life common stock valued at $10.0 million. In addition, approximately $2.0
million of expenses were capitalized as part of this transaction. Guarantee Life
acquired $396.9 million in assets and assumed $294.5 million in liabilities in
this transaction. The acquisition has been accounted for as a purchase and
accordingly, the acquired assets and liabilities have been recorded at their
estimated fair value at the date of acquisition. No goodwill was recorded in
this transaction. The results of operations, since the date of acquisition, have
been included in the accompanying consolidated financial statements.
The unaudited pro forma consolidated results of operations, which assume
that PFG and Westfield had been acquired as of January 1, 1997 are as follows:
Year Ended December 31,
-----------------------------------
(in millions except per share data)
1998 1997
------ ------
Total Revenue $450.0 $389.2
Net Income from Continuing Operations $12.1 $14.2
Net Income $11.7 $14.0
Earnings per Share:
Basic $1.27 $1.43
Diluted $1.24 $1.40
35
<PAGE>
Guarantee Life 1998 Annual Report
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 indicative of future results.
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 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 re-evaluates such designation
at each balance sheet date. When changes in condition 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. In
1998 and 1996 there were no such transfers. 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.
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 within other accumulated comprehensive income 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.
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 a component of accumulated comprehensive income
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
For limited payment and other traditional life insurance policies, certain
commissions, expenses of the policy issue and underwriting departments and other
variable expenses have been deferred. 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
acquisitions 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 life 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, 1998.
(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 received 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 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.
37
<PAGE>
Guarantee Life 1998 Annual Report
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 5.77%, 5.68%, and 5.90%; and for annuity policies
were 5.28%, 5.38%, and 5.46% for 1998, 1997, and 1996, 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
$0.8 million in the accompanying consolidated financial statements for amounts
due for actual and potential insurance company failures in the states where
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, 1998, Guarantee Life had $1.5
million of unamortized guaranty fund assessments which are included in other
assets.
38
<PAGE>
Building Relationships for Life(R)
(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
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
reinsurance contracts (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.
(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.
39
<PAGE>
Guarantee Life 1998 Annual Report
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 except per share data):
Year Ended December 31,
------------------------------
1998 1997 1996
------ ------- -------
Basic-assumes no dilution:
Net income from continuing operations
for the period $9,357 $16,639 $14,720
Weighted average number of common shares
outstanding during the period 9,064 9,436 9,944
Basic per share net income from
continuing operations $ 1.03 $ 1.76 $ 1.48
Diluted-assumes full dilution:
Net income from continuing operations
for the period $9,357 $16,639 $14,720
Weighted average number of common shares
outstanding during the period 9,064 9,436 9,944
Weighted average number of common stock
equivalent shares to reflect the
dilutive effect of common stock
equivalent securities:
Stock options 192 250 117
Total common and common equivalent shares
used to calculate diluted earnings
per share 9,256 9,686 10,061
Diluted per share net income from
continuing operations $ 1.01 $ 1.72 $ 1.46
The computation of weighted average number of common stock equivalent
shares excludes 199,018, 2,825, and 7,121 anti-dilutive options for the years
ended December 31, 1998, 1997, and 1996 respectively.
(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.
40
<PAGE>
Building Relationships for Life(R)
(2) Investments
Fixed maturities at December 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 $101,338 $ 2,603 $ 89 $103,852
Obligations of states and
political subdivisions 13,081 1,524 - 14,605
Debt securities issued by
foreign governments 15,394 1,290 4 16,680
Corporate securities 506,911 21,571 5,527 522,955
Mortgage-backed securities 228,873 3,515 2,117 230,271
-------- -------- -------- --------
865,597 30,503 7,737 888,363
Equity Securities 20,643 4,176 984 23,835
-------- -------- -------- --------
$886,240 $ 34,679 $ 8,721 $912,198
======== ======== ======== ========
Held-to-maturity:
U.S. Treasury securities and
obligations of U.S.
Government corporations
and agencies $ 3,627 $ 55 $ - $ 3,682
Obligations of states and
political subdivisions 7,654 634 - 8,288
Corporate securities 133,203 11,103 658 143,648
Mortgage-backed securities 2,696 27 - 2,723
-------- -------- -------- --------
$147,180 $ 11,819 $ 658 $158,341
======== ======== ======== ========
</TABLE>
Guarantee Life manages its credit risk associated with fixed maturities by
diversifying its portfolio. At December 31, 1998, 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, 1998, Guarantee Life held $141.6 million of mortgage-backed
securities issued by U.S. Government agencies and $25.3 million of
mortgage-backed securities issued by Guarantee Life. At December 31, 1998,
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.
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
Equity Securities 2,735 1,299 299 3,735
-------- ------- ------- --------
$569,279 $21,013 $ 3,857 $586,435
======== ======= ======= ========
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>
41
<PAGE>
Guarantee Life 1998 Annual Report
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:
December 31, 1998
----------------------------------------
Carrying Amortized Estimated
Value Cost Fair Value
---------- ---------- ----------
Due in one year or less $ 29,406 $ 29,254 $ 29,551
Due after one year through
five years 224,767 218,179 226,541
Due after five years
through ten years 287,346 281,104 290,712
Due after ten years 261,057 252,671 266,906
---------- ---------- ----------
802,576 781,208 813,710
Mortgage-backed securities 232,967 231,569 232,994
---------- ---------- ----------
$1,035,543 $1,012,777 $1,046,704
========== ========== ==========
Guarantee Life had fixed maturities, mortgage loans, preferred stocks, and
common stocks with carrying values aggregating $9.2 million as of December 31,
1998 on deposit with regulatory authorities.
A summary of realized investment gains/losses (in thousands) is as follows:
Year Ended December 31,
----------------------------------
1998 1997 1996
-------- -------- --------
Fixed maturities:
Gross gains $ 4,669 $ 1,883 $ 1,899
Gross losses (1,419) (1,851) (2,669)
Equity securities - Gross gains 1,944 - 1,002
Sale of Guarantee American - 785 -
Other investments (3,007) 1,401 (3)
Change in investment valuation
allowances (209) (948) (62)
------- ------- --------
Realized investment gains $ 1,978 $ 1,270 $ 167
======= ======= ========
A summary of consolidated net investment income (in thousands) is as
follows:
Year Ended December 31,
-----------------------------------
1998 1997 1996
------- ------- -------
Fixed maturities $65,313 $51,450 $50,844
Equity securities 229 394 434
Mortgage loans 7,682 6,929 5,607
Policy loans 1,984 1,420 1,171
Investment real estate 990 1,415 1,930
Other 3,672 3,955 3,175
------- ------- -------
79,870 65,563 63,161
Less investment expenses (2,443) (5,510) (5,865)
------- ------- -------
Net investment income from
invested assets 77,427 60,053 57,296
Less discontinued operations
(note 15) (2,776) (1,604) (2,925)
------- ------- -------
Net investment income $74,651 $58,449 $54,371
======= ======= =======
Investment expenses include depreciation and depletion of $0.7 million,
$0.6 million, and $0.9 million in 1998, 1997, and 1996, respectively.
42
<PAGE>
Building Relationships for Life(R)
A summary of the components of the net unrealized appreciation on invested
assets, including Closed Block, carried at fair value (in thousands) is as
follows:
Year Ended December 31,
-------------------------
1998 1997
-------- -------
Unrealized appreciation:
Fixed maturities available-for-sale $ 32,568 $24,534
Equity securities 3,485 1,000
Deferred policy acquisition costs (5,629) (5,496)
Deferred income taxes (10,648) (7,013)
-------- -------
Net unrealized appreciation $ 19,776 $13,025
======== =======
(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):
Year Ended December 31,
---------------------------
1998 1997
-------- --------
Commercial loans:
Beginning Balance $ 86,166 $ 70,787
Additions 25,900 27,670
Payments and other charges (7,759) (12,291)
-------- --------
Ending Balance 104,307 86,166
Other mortgage loans 904 947
Valuation allowance (1,475) (1,264)
-------- --------
$103,736 $ 85,849
======== ========
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, 1998, there were 106 individual commercial mortgage loans
collaterized primarily by office buildings, retail properties, industrial
properties, apartment buildings, and medical clinics. As of December 31, 1998,
Guarantee Life had no single mortgage loan outstanding which had a carrying
value in excess of 5% of shareholders' equity. As of December 31, 1998, all
commercial mortgage loans bore a fixed interest rate and Guarantee Life had no
material loans over 60 days past due. Guarantee Life had no outstanding
commitments to fund mortgage loans as of December 31, 1998.
(4) Deferred Policy Acquisition Costs
A summary of the policy acquisition costs deferred and amortized (in
thousands) is as follows:
Year Ended December 31,
--------------------------------------
1998 1997 1996
-------- -------- --------
Balance at beginning of period $102,696 $ 77,968 $ 70,168
Policy acquisition costs deferred 80,048 55,848 44,116
Policy acquisition costs amortized (77,964) (57,364) (47,554)
Policy acquisition costs acquired
in purchase 40,198 29,525 11,658
-------- -------- --------
144,978 105,977 78,388
Change in deferred policy
acquisition costs relating to
unrealized appreciation of
invested assets carried at
fair value (134) (3,281) (420)
-------- -------- --------
Total reflected in consolidated
balance sheet $144,844 $102,696 $ 77,968
======== ======== ========
43
<PAGE>
Guarantee Life 1998 annual Report
(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.
Amounts paid or deemed to have been paid for reinsurance contracts are
recorded as reinsurance receivables. The cost of reinsurance related to
long-duration contracts is accounted for over the life of the underlying
reinsured policies using assumptions consistent with those used to account for
the underlying policies.
Guarantee Life's retention limit on its life insurance business in 1998 was
generally $150,000 on a life risk in the Employee Benefits and Group Special
Markets Divisions, $250,000 on a life risk at Guarantee Life Insurance and
Westfield, 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 1998. Amounts in
excess of the automatic acceptance limits of Guarantee Life's retention may be
applied for facultatively. As of December 31, 1998 and 1997, the amount of ceded
life insurance in force was approximately $1.6 and $1.7 billion, respectively.
Effective September 1, 1998, Guarantee Life entered into a new reinsurance
arrangement with a consortium of reinsurers for its excess loss insurance
program. Under the new arrangement, Guarantee Life increased its retention from
30% at the first $250,000 to 30% on the first $300,000 of eligible expenses per
claim with 100% reinsurance coverage on expenses in excess of that amount.
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 $50.0 million 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, 1998, policyholder deposits
related to this business amounted to $27.9 million.
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, 1998, policyholder deposits
related to this business amounted to $4.9 million.
44
<PAGE>
Building relationships for Life(R)
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,
1998
------------
Swiss RE Life & Health America, Inc. $ 28,249
RGA Reinsurance Company 28,238
Lonestar Life Insurance Company 11,673
Lincoln National Life Insurance Company 10,356
Phoenix Home Life Mutual Insurance Company 9,153
UNUM Life Insurance Company of America 6,086
Cologne Life Reinsurance Company 5,840
Life Reassurance Corp. of America 3,546
John Hancock Mutual Life Insurance Company 3,278
EBP Life Insurance Company 3,154
Security Life of Denver 2,420
Business Men's Assurance Company 2,387
Manulife Reinsurance Corp. 2,168
Indianapolis Life Insurance Company 1,930
Crown Life Insurance Company 1,835
First Excess & Reinsurance Corp. 1,076
All Others 3,880
--------
Total before discontinued operations 125,269
Less discontinued operations (note 15) (29,758)
--------
Total reflected in accompanying consolidated balance sheet $ 95,511
========
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, 1998 and 1997 Guarantee Life had no
significant overdue reinsurance balances. As of December 31, 1998 Guarantee Life
held funds and other collateral of $10.2 million related to the above
recoverables.
The effect of reinsurance on premiums and amounts earned is as follows (in
thousands):
Direct premiums and policyholder assessments $ 391,458
Reinsurance assumed 8,429
Reinsurance ceded (77,881)
---------
Net premiums and amounts earned $ 322,006
=========
(6) Property, Plant, and Equipment
A summary of property, plant, and equipment (in thousands) is as follows:
December 31,
--------------------------
1998 1997
-------- --------
Home office building $ 19,928 $ 21,010
Plant and equipment 12,767 14,730
Less accumulated depreciation (12,766) (16,313)
-------- --------
$ 19,929 $ 19,427
======== ========
45
<PAGE>
Guarantee Life 1998 Annual Report
(7) Closed Block
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 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. 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.
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 is
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, is reflected as a component of
income tax expense.
The excess of Closed Block liabilities over Closed Block assets as of
December 31, 1998 and 1997 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,
-------------------------
1998 1997
-------- --------
Assets
------
Invested assets:
Fixed maturities:
Available-for-sale, at fair value (amortized
cost $210,935 and $202,869) $220,603 $211,248
Held-to-maturity, a amortized cost (fair
value $48,460 and $52,224) 44,595 48,838
-------- --------
265,198 260,086
Policy loans 46,217 46,997
Other invested assets, net 2,693 2,694
-------- --------
Total invested assets 314,108 309,777
Cash and cash equivalents 2,000 328
Accrued investment income 2,367 4,221
Deferred policy acquisition costs 10,476 12,233
Other assets 1,381 972
-------- --------
Total Closed Block assets $330,332 $327,531
======== ========
Liabilities
-----------
Life future policy benefits $300,254 $301,495
Policyholder account balances
for annuity contracts 885 868
Policy and contract claims 839 573
Other policyholder funds 71,966 72,024
Dividends payable to policyholders 7,052 7,767
Deferred income taxes 3,384 2,933
Other liabilities 2,553 946
-------- --------
Total Closed Block liabilities $386,933 $386,606
======== ========
Condensed statements of income for the Closed Block (in thousands) is as
follows:
Year Ended December 31,
-----------------------------------
1998 1997 1996
-------- -------- --------
Revenues:
Insurance premiums and policyholder
assessments, net of reinsurance $ 20,142 $ 20,933 $ 21,785
Investment income, net 21,918 21,894 21,543
Realized investment (losses) 1,465 (155) (68)
Other income 46 86 93
-------- -------- --------
Total revenues $ 43,571 $ 42,758 $ 43,353
Policyholder benefits and expenses:
Total policyholder benefits $ 22,162 $ 22,244 $ 23,209
Policy acquisition costs 2,071 1,983 1,999
Other insurance operating expenses 4,189 3,404 4,259
-------- -------- --------
Total benefits and expenses 28,422 27,631 29,467
Dividends to policyholders 10,426 11,056 10,815
-------- -------- --------
Contribution from Closed Block $ 4,723 $ 4,071 $ 3,071
======== ======== ========
47
<PAGE>
Guarantee Life 1998 Annual Report
(8) Liability for Unpaid Accident and Health Claims and Claim Adjustment
Expenses
The change in the liability for unpaid EBD and GSM accident and health
claims and claim adjustment expenses is summarized (in thousands) as follows:
Year Ended December 31,
---------------------------------------
1998 1997 1996
--------- --------- ---------
Balance at January 1 $ 98,233 $ 93,881 $ 97,355
Less reinsurance recoverables (31,781) (38,468) (41,305)
--------- --------- ---------
Net balance at January 1 66,452 55,413 56,050
Incurred related to:
Current year 125,296 79,739 72,192
Prior years 5,936 1,151 (18,392)
--------- --------- ---------
Total incurred 131,232 80,890 53,800
Paid related to:
Current year 74,045 48,590 40,131
Prior years 39,654 21,261 14,306
--------- --------- ---------
Total paid 113,699 69,851 54,437
--------- --------- ---------
Balance at December 31 83,985 66,452 55,413
Plus reinsurance recoverables 39,201 31,781 38,468
--------- --------- ---------
Balance at December 31 $ 123,186 $ 98,233 $ 93,881
========= ========= =========
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):
Year Ended December 31,
--------------------------------
1998 1997 1996
------ ------ ------
Computed "expected" tax expense $5,039 $9,008 $7,926
Increase in income taxes
resulting from:
Other, net -- 90 --
------ ------ ------
Total $5,039 $9,098 $7,926
====== ====== ======
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):
Year Ended December 31,
------------------------------------
1998 1997 1996
-------- -------- --------
Statements of Income:
Current $ 11,356 $ 12,094 $ 9,706
Deferred (6,317) (2,996) (1,780)
-------- -------- --------
Total income taxes from
continuing operations 5,039 9,098 7,926
Income tax expense (benefit)
in discontinued operations (177) (107) 159
-------- -------- --------
Income taxes included in the
statements of income $ 4,862 $ 8,991 $ 8,085
Shareholders' Equity:
Deferred income taxes related
to unrealized appreciation of
invested securities within
accumulated other comprehensive
income carried at fair value,
net 3,635 4,906 (5,930)
-------- -------- --------
Total income taxes $ 8,497 $ 13,897 $ 2,155
======== ======== ========
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):
Year Ended December 31,
-----------------------------------
1998 1997 1996
------- ------- -------
Deferred tax assets:
Policy liabilities $29,828 $30,707 $22,056
Net operating loss carryovers 7,739 5,122 --
Other 10,162 10,110 9,143
------- ------- -------
Net deferred tax assets $47,729 $45,939 $31,199
Deferred tax liabilities:
Deferred policy acquisition
costs 31,923 35,475 25,493
Unrealized gain on investments
available for sale 10,648 7,013 2,107
Other 2,291 3,266 3,280
------- ------- -------
Total gross deferred tax
liabilities 44,862 45,754 30,880
------- ------- -------
Net deferred tax assets $ 2,867 $ 185 $ 319
======= ======= =======
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, 1998, 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.
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, 1998, 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 $1.2 million as of December 31, 1998.
During the years ended December 31, 1998, 1997, and 1996, Guarantee Life's
cash payments for federal income taxes were $8.7 million, $10.1 million, and
$15.2 million, respectively.
PFG has net operating loss carryovers (NOL) as of December 31, 1998 of
approximately $11.9 million. These NOLs, if not utilized, will expire in the
years 2000 to 2018.
(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
49
<PAGE>
Guarantee Life 1998 Annual Report
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 periodic benefit cost related to the qualified plan included the
following components (in thousands):
Year Ended December 31,
-------------------------------------
1998 1997 1996
------- ------- -------
Service cost-benefits earned
during the year $ 1,682 $ 1,752 $ 1,438
Interest cost on projected
benefit obligations 1,939 1,811 1,689
Actual return on plan assets (2,951) (5,479) (4,274)
Net amortization and deferral (523) 2,450 1,574
------- ------- -------
Net periodic benefit cost $ 147 $ 534 $ 427
======= ======= =======
The changes in benefit obligation and plan assets for the qualified plan
included in the consolidated balance sheets are as follows (in thousands):
December 31,
------------------------
1998 1997
-------- --------
Change in projected benefit obligation:
Projected benefit obligation at
beginning of year $ 30,866 $ 25,268
Service cost 1,682 1,752
Interest cost 1,939 1,811
Plan amendments (1,597) --
Actuarial loss 1,490 3,308
Benefits paid (1,760) (1,273)
-------- --------
Projected benefit obligation at
end of year $ 32,620 $ 30,866
-------- --------
Change in fair value of plan assets:
Plan assets at beginning of year $ 37,528 $ 33,322
Actual return on plan assets 6,298 5,479
Employer contributions -- --
Participant contributions -- --
Benefits paid (1,760) (1,273)
-------- --------
Plan assets at end of year $ 42,066 $ 37,528
-------- --------
Funded status $ 9,446 $ 6,662
Unrecognized net actuarial gain (8,141) (4,910)
Unrecognized prior service cost (1,473) (1,597)
Unrecognized net asset at transition (703) (878)
-------- --------
Accrued pension benefit cost $ (871) $ (723)
======== ========
The assumptions used in determining pension information were as follows:
Year Ended December 31,
--------------------------------
1998 1997 1996
------ ------ ------
Discount rate assumed 6.50% 6.75% 7.50%
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, 1998, Guarantee Life's unfunded liability for these plans was
approximately $2.1 million.
50
<PAGE>
Building Relationships for Life(R)
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, 1998 and 1997. 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 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 1998, no
shares of restricted stock have been granted to employees or Directors under
their respective plans.
In February 1997, Guarantee Life's Board of Directors approved the 1997
Associate Stock Incentive Plan (Associate Plan). Under this plan, nonqualified
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. A
total of 90,200 options had been granted under this plan as of December 31,
1998.
Guarantee Life applies APB Opinion No. 25 and related interpretations in
accounting for the Incentive Plan, Associate Plan, and the Directors Plan.
Accordingly, no compensation cost has been recognized for the three plans since
the exercise price of the options was equal to the fair value of the company's
common stock on the date of grant. Had compensation cost been determined using a
fair value based method, 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, 1998, 1997, and 1996, respectively: dividend yield
of 1.4%, 1.4%, and 1.4%; expected volatility of 35%, 33%, and 27%; risk-free
interest rate of 5.50%, 5.87%, and 5.14%; for expected lives of six years for
the Incentive Plan options and two years for the Directors Plan option. The
weighted average fair values of stock options granted in 1998, 1997, and 1996
were $24.75, $20.71, and $17.41, respectively.
Year Ended December 31,
-----------------------------------------
1998 1997 1996
--------- ---------- ----------
Net income (in thousands)
As reported $ 9,029 $ 16,444 $ 15,015
========= ========== ==========
Pro forma $ 8,127 15,924 $ 14,648
========= ========== ==========
Basic earnings per share
As reported $ 1.00 $ 1.74 $ 1.51
========= ========== ==========
Pro forma $ 0.90 $ 1.69 $ 1.47
========= ========== ==========
Diluted earnings per share
As reported $ 0.98 $ 1.70 $ 1.49
========= ========== ==========
Pro forma $ 0.88 $ 1.64 $ 1.46
========= ========== ==========
51
<PAGE>
Guarantee Life 1998 Annual Report
A summary of the status of Guarantee Life's stock option plans as of
December 31, 1998, 1997, and 1996, and changes for the years ended is presented
below:
Year Ended December 31,
--------------------------------------
1998 1997 1996
-------- ------- ------
Outstanding, beginning of year 898,102 512,878 469,851
Granted 248,514 415,057 52,670
Exercised (42,730) (1,496) --
Forfeited (127,453) (28,337) (9,643)
-------- ------- -------
Outstanding, end of year 976,433 898,102 512,878
======== ======= =======
Options exercisable at year-end 209,607 143,917 30,000
======== ======= =======
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------- -------------------------
Range of Number Weighted Avg Weighted Avg Number Weighted Avg
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices at 12/31/98 Contractual Life Price at 12/31/98 Price
- --------------- ----------- ---------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
$13.00 to 20.69 546,286 6.63 $14.91 209,607 $13.70
$21.00 to 28.50 430,147 8.49 $23.15 - -
------- -------
$13.00 to 28.50 976,433 7.45 $18.54 209,607 $13.70
======= =======
</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, 1998, 1997, and 1996 benefits in the amount of $0.4
million, $1.7 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, 1998 and 1997, the accrued benefits
of the plan included in other liabilities was $754,000 and $1.2 million,
respectively. Guarantee Life charged approximately $448,000 and $238,000 to
expense relating to this plan in 1997 and 1996, respectively, but reduced the
accrual in 1998 due to the decline in the Holding Company's share price. As of
December 31, 1998, all 40,783 shares awarded under the Phantom Stock Plan in
previous years were vested. Guarantee Life no longer grants awards under 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 Company IRA, or into a separate
phantom stock account. Under this phantom 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,
1998, 1997, and 1996 compensation in the amount of $1.9 million, $1.7 million,
and $1.1 million, respectively, was accrued in these plans which fully funded
the amounts due to participants. Guarantee Life charged approximately $314,000,
$594,000, and $152,000 to expense relating to this plan in 1998, 1997, and 1996,
respectively.
52
<PAGE>
Building Relationships for Life(R)
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 $686,000, $594,000, and $474,000 to expense
relating to this plan in 1998, 1997, and 1996, respectively. These deposits are
held by Guarantee Life in a pooled account. The account is credited with the
actual earnings on the underlying investments with a minimum guaranteed annual
return of 2.5%.
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, 1998 and 1997, the plan held approximately $1.9 million and $2.0
million in assets, respectively.
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, 1998 and 1997, the accrued benefits of the plan included in other
liabilities were $4.1 and $6.5 million, respectively.
(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>
December 31,
----------------------------------------------------
1998 1997
----------------------- -----------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Assets:
Fixed maturities $1,035,543 $1,046,704 $ 754,867 $ 767,185
Equity securities 23,835 23,835 3,735 3,721
Mortgage loans 103,736 109,438 85,849 91,160
Policy loans 31,767 29,730 21,657 20,098
Investment real estate 3,211 7,800 3,394 7,800
Other invested assets 54,970 54,970 32,212 32,212
Liabilities:
Annuity contracts $ 349,834 $ 336,326 $ 251,828 $ 220,753
Other policyholder funds 43,751 43,751 20,754 20,754
</TABLE>
(12) Regulatory Matters
A reconciliation of statutory net income determined for Guarantee Life
under statutory accounting practices to that reflected herein (in thousands and
including Closed Block and discontinued operations) is as follows:
Year Ended December 31,
----------------------------------
1998 1997 1996
-------- -------- --------
Net gain from operations as reported
to regulatory authorities $ 26,035 $ 15,078 $ 5,077
Pre-acquisition statutory earnings (10,131) -- --
Change in deferred acquisition costs (3,437) (3,210) (6,742)
Deferred federal income taxes 6,317 2,996 1,780
Differences in statutory and GAAP reserves (1,332) 1,074 1,589
Other, net (8,423) 506 13,311
-------- -------- --------
Net income as reported herein $ 9,029 $ 16,444 $ 15,015
======== ======== ========
53
<PAGE>
Guarantee Life 1998 Annual Report
A reconciliation of statutory surplus for Guarantee Life determined under
statutory accounting practices to shareholders' equity reflected herein (in
thousands and including Closed Block and discontinued operations):
Year Ended December 31,
-------------------------
1998 1997
--------- ---------
Statutory surplus as reported to
regulatory authorities $ 165,650 $ 106,950
Deferred policy acquisition costs 155,319 114,929
Deferred federal income taxes 6,251 2,747
Asset valuation and interest
maintenance reserves 29,175 17,921
Fixed maturities available-for-sale
unrealized appreciation 32,568 24,534
Insurance reserves (45,193) (46,525)
Shareholders' equity in Holding Company (110,016) (20,105)
Other, net (3,712) 8,747
--------- ---------
Shareholders' equity as reported herein $ 230,042 $ 209,198
========= =========
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, 1998, Guarantee Life
Insurance, Guarantee Protective, AGL, and Westfield exceeded the established
minimums in the RBC program. In addition, Guarantee Life Insurance, Guarantee
Protective, AGL, and Westfield 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, AGL and Westfield are subject to
restrictions set forth in the insurance laws and regulations of Nebraska and
Pennsylvania. Under state law, Guarantee Life Insurance, AGL, and Westfield may
pay, within a twelve-month period, dividends only from the earned surplus
arising from its business and must receive the prior approval of the state
departments to pay a dividend, if such dividend would exceed the greater of (i)
10% of statutory capital and surplus as of the preceding year end and (ii) the
net gain from operations for the previous calendar year. State law gives the
broad discretion to disapprove requests for dividends in excess of these limits.
The Board of Directors of Guarantee Life Insurance Company declared a $15
million extraordinary dividend to the Holding Company in November 1997, which
was paid in January 1998. In December 1998, the Board of Directors of Westfield
declared and paid a $20 million extraordinary distribution of excess capital to
the Holding Company. The State of Nebraska approved both of these transactions.
In September 1998, AGL's Board of Directors declared and paid a $2.4 million
dividend to PFG, Inc. In 1999, Guarantee Life can declare a dividend of up to
$12.5 million without permission from the Nebraska Department of Insurance. AGL
can declare a dividend of up to $1.9 million without permission from the
Pennsylvania Department of Insurance. Westfield cannot declare a dividend in
1999 without permission from the Nebraska Department of Insurance.
(13) Segment Data
Employee Benefits Division
The Employee Benefits Division targets businesses with fewer than 500
employees by providing group non-medical products including term life,
accidental death and dismemberment, short-term disability, long-term disability,
and dental; and voluntary (worksite marketed) products including 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.
Group Special Markets Division
The Group Special Markets Division targets employer groups of 50 to 500
lives with self-funded medical plans by providing specialty medical products
including excess loss insurance and medical reimbursement insurance for business
executives, and group non-medical 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.
54
<PAGE>
Building Relationships for Life(R)
Individual Insurance Division
The Individual Insurance Division primarily targets individuals with a
family income of up to $150,000 and small business owners by providing universal
life, term life, interest-sensitive whole life insurance, and annuities.
Guarantee Life markets its individual insurance products primarily through
independent agents, as well as through Regional Marketing Organizations (RMOs),
who in turn develop relationships with producers. The Individual Insurance
Division includes the operations of PFG and Westfield. 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 EBD, GSM,
and Individual Divisions.
The following table presents information about Guarantee Life's operations
by business segment (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues from continuing operations:
Employee Benefits Division $ 214,231 $ 166,193 $ 109,058
Group Special Markets Division 80,078 61,962 66,052
Individual Insurance Division
(including contribution from
Closed Block) 131,016 82,191 75,832
Corporate 157 (70) 1,057
----------- ----------- -----------
Total $ 425,482 $ 310,276 $ 251,999
=========== =========== ===========
Income from continuing operations before
income taxes:
Employee Benefits Division $ (9,151) $ (1,849) $ (633)
Group Special Markets Division 7,503 11,178 10,798
Individual Insurance Division 23,108 18,250 13,570
Corporate (7,064) (1,842) (1,089)
----------- ----------- -----------
Total $ 14,396 $ 25,737 $ 22,646
=========== =========== ===========
Identifiable assets:
Employee Benefits Division $ 132,212 $ 141,936 $ 126,202
Group Special Markets Division 101,621 113,806 97,982
Individual Insurance Division 1,693,049 1,187,444 1,029,529
Corporate 44,292 54,850 19,147
Discontinued operations 21,075 20,997 32,362
----------- ----------- -----------
Total $ 1,992,249 $ 1,519,033 $ 1,305,222
=========== =========== ===========
</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, 1998, Guarantee Life had debt obligations outstanding
totaling $112.5 million from available credit totaling $132.5 million. This debt
consisted of a six-year Senior Secured Term Loan Facility with a balance of
$82.5 million and a five-year Senior Secured Revolving Credit Facility with a
balance of $30 million. These Facilities are part of a credit agreement dated
May 28, 1998 with eleven banks including Chase Manhattan Bank, who acts as
lender and administrative agent. The interest rate is computed as LIBOR plus a
margin based upon Guarantee Life's leverage ratio and A.M. Best Rating. This
rate was 6.75% at December 31, 1998.
55
<PAGE>
Guarantee Life 1998 Annual Report
The Revolving Credit Facility requires interest only payments prior to
maturity on May 31, 2003. The Term Loan Facility requires quarterly sinking fund
payments of $3.75 million and matures on May 31, 2004. Maturity and sinking fund
payments for each of the five years succeeding December 31, 1998 are as follows
(in thousands):
Revolving Term Loan
Year Credit Facility Facility Total
---- --------------- -------- -----
1999 -- $15,000 $15,000
2000 -- 15,000 15,000
2001 -- 15,000 15,000
2002 -- 15,000 15,000
2003 $30,000 15,000 45,000
Guarantee Life's credit agreement contains certain restrictions and
covenants related to, among other, minimum net worth, leverage ratio, interest
coverage ratio and Risk-Based Capital ratio. At December 31, 1998, 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 on 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 right (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.
(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.
56
<PAGE>
Building Relationships for Life(R)
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,
---------------------
1998 1997
-------- --------
Ceded reinsurance recoverables $ 29,758 $ 57,693
Policy and contract claims (51,042) (78,578)
Amounts payable to reinsurers 209 (112)
-------- --------
Net liabilities relating to discontinued operations $(21,075) $(20,997)
======== ========
The results of operations for the discontinued segment are as follows:
Year Ended December 31,
-------------------------------
1998 1997 1996
------- ------- -------
Net premiums $ 28 $ (581) $ 4,207
Investment income, net and
realized investment gains 2,937 1,634 2,899
Ceding commissions 14 241 1,455
------- ------- -------
Total revenues 2,979 1,294 8,561
Net policyholder benefits 3,015 (1,307) 4,062
Policy acquisition costs and
other operating expense 469 2,903 4,045
------- ------- -------
Income (loss) before income taxes (505) (302) 454
Income tax expense (benefit) (177) (107) 159
------- ------- -------
Net income (loss) from
discontinued operations $ (328) $ (195) $ 295
======= ======= =======
(16) Quarterly Results (unaudited)
<TABLE>
<CAPTION>
(in thousands except per share data)
1998
-------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 93,082 $ 99,914 $ 120,390 $ 112,096
========== ========== =========== ===========
Net income $ 357 $ 2,484 $ 2,885 $ 3,303
========== ========== =========== ===========
Earnings per share, basic $ 0.04 $ 0.28 $ 0.31 $ 0.36
========== ========== =========== ===========
Earnings per share, diluted $ 0.04 $ 0.27 $ 0.31 $ 0.36
========== ========== =========== ===========
<CAPTION>
(in thousands except per share data)
1997
------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 69,223 $ 75,776 $ 79,864 $ 85,413
========== ========== =========== ===========
Net income $ 3,200 $ 4,346 $ 4,719 $ 4,179
========== ========== =========== ===========
Earnings per share, basic $ 0.32 $ 0.45 $ 0.51 $ 0.47
========== ========== =========== ===========
Earnings per share, diluted $ 0.32 $ 0.44 $ 0.50 $ 0.45
========== ========== =========== ===========
</TABLE>
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.
57
<PAGE>
Guarantee Life 1998 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 13, 1999, 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
- --------------------------------------------------------------------------------
1998 High Low Close Dividends Declared
- --------------------------------------------------------------------------------
First Quarter $31.250 $24.750 $29.750 $0.07
Second Quarter $33.000 $19.750 $21.875 $0.07
Third Quarter $22.875 $17.750 $18.125 $0.07
Fourth Quarter $20.250 $13.625 $18.500 $0.07
- --------------------------------------------------------------------------------
1997
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
On February 26, 1999, there were 49,787 shareholders of record and the closing
price was $17.688.
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.
58
<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
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
TTI Technologies, 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
Robert D. Bates
Chairman of the Board, President
and Chief Executive Officer
Theodore C. Cooley
Executive Vice President - Individual Division
William L. Bauhard
Senior Vice President, Chief Financial Officer
and Treasurer
Richard A. Spellman
Senior Vice President, General Counsel
and Secretary
Michael G. Allen
Senior Vice President - Strategic Planning
C. E. "Duffy" Boyle
Senior Vice President -
Information Systems and Services
Mary G. Rahal
Senior Vice President - Human Resources
and Corporate Services
Gary H. Rittenhouse
Senior Vice President - Strategic Initiatives
and Group Special Markets
John W. Neppl
Vice President and Controller
Richard C. Easton1
Senior Vice President - Employee Benefits
Division Marketing
Alan D. Brinkman1
Vice President and Corporate Actuary
/1/ Designates executive officers of Guarantee Life Insurance Company
only
Special
Thanks from
Bob Bates
John R. Cochran resigned from Guarantee Life's Board of Directors in November
1998 in order for him to serve as a member of the Board of Directors of the
Cleveland District of the Federal Reserve Board. We would like to thank Mr.
Cochran for his years of leadership and service to our Company. His immeasurable
influence and wise counsel will be evident in our operations for years to come.
59
<PAGE>
[LOGO OF THE GUARANTEE LIFE
COMPANIES INC. APPEARS HERE]
Building Relationships For Life(R)
Guarantee Centre
8801 Indian Hills Drive
Omaha, Nebraska 68114-4066
402-361-7300
http://www.guar.com
<PAGE>
Exhibit 21
Subsidiaries of the Registrant
Subsidiaries of The Guarantee Life Companies Inc. as of December 31, 1998
- -------------------------------------------------------------------------
. Guarantee Life Insurance Company, a Nebraska stock insurance company
. Guarantee Protective Life Company, a Nebraska stock insurance company
. Westfield Life Insurance 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
The Board of Directors
The Guarantee Life Companies Inc.
We consent to incorporation by reference in the registration statement (No.
333-41729) on Form S-3/A and registration statements (No.'s 333-17863 and
333-22461) on Form S-8 of The Guarantee Life Companies Inc. of our report dated
February 16, 1999, relating to the consolidated balance sheets of The Guarantee
Life Companies Inc. and subsidiaries as of December 31, 1998 and 1997, 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, 1998, and all related schedules, which report appears in the
December 31, 1998, annual report on Form 10-K of The Guarantee Life Companies
Inc.
KPMG Peat Marwick LLP
Omaha, Nebraska
February 16, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998 AND 1997, AND THE
CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1998 AND 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-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<DEBT-HELD-FOR-SALE> 888,363 582,700
<DEBT-CARRYING-VALUE> 147,180 172,167
<DEBT-MARKET-VALUE> 158,341 184,480
<EQUITIES> 23,835 3,735
<MORTGAGE> 103,736 85,849
<REAL-ESTATE> 3,211 3,394
<TOTAL-INVEST> 1,567,170 1,211,491
<CASH> 23,794 8,608
<RECOVER-REINSURE> 95,511 82,568
<DEFERRED-ACQUISITION> 144,844 102,696
<TOTAL-ASSETS> 1,992,249 1,519,033
<POLICY-LOSSES> 246,834 196,655
<UNEARNED-PREMIUMS> 13,149 11,866
<POLICY-OTHER> 795,820 542,038
<POLICY-HOLDER-FUNDS> 43,751 20,754
<NOTES-PAYABLE> 112,500 40,000
0 0
0 0
<COMMON> 103 99
<OTHER-SE> 229,939 209,099
<TOTAL-LIABILITY-AND-EQUITY> 1,992,249 1,519,033
322,006 230,928
<INVESTMENT-INCOME> 74,651 58,449
<INVESTMENT-GAINS> 1,978 1,270
<OTHER-INCOME> 26,847 19,629
<BENEFITS> 213,655 140,332
<UNDERWRITING-AMORTIZATION> 77,964 57,364
<UNDERWRITING-OTHER> 83,055 61,191
<INCOME-PRETAX> 14,396 25,737
<INCOME-TAX> 5,039 9,098
<INCOME-CONTINUING> 9,357 16,639
<DISCONTINUED> (328) (195)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 9,029 16,444
<EPS-PRIMARY> 1.00 1.74
<EPS-DILUTED> .98 1.70
<RESERVE-OPEN> 66,452 55,413
<PROVISION-CURRENT> 125,296 79,739
<PROVISION-PRIOR> 5,936 1,151
<PAYMENTS-CURRENT> 74,045 48,590
<PAYMENTS-PRIOR> 39,654 21,261
<RESERVE-CLOSE> 83,985 66,452
<CUMULATIVE-DEFICIENCY> 0 0
</TABLE>
