<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------------------
FORM 10-Q/A
---------------------------
-----------------------------------------------------
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
or
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1999 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) (Zip Code)
Registrant's telephone number: (402) 361-7300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No [ ]
Shares of common stock outstanding as of: October 28, 1999: 9,267,234
================================================================================
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
Assets 1999 1998
------ ------------- -----------
<S> <C> <C>
Invested assets: (unaudited)
Fixed maturities:
Available-for-sale, at fair value (amortized cost: $883,769 and $865,597)...... $ 862,325 $ 888,363
Held-to-maturity, at amortized cost (fair value: $141,453 and $158,341)........ 141,663 147,180
------------- -----------
1,003,988 1,035,543
Equity securities, at fair value (cost:$24,976 and $20,643)......................... 28,336 23,835
Mortgage loans, net................................................................. 111,649 103,736
Policy loans........................................................................ 32,317 31,767
Investment real estate, net......................................................... 3,202 3,211
Other invested assets, net.......................................................... 35,446 54,970
Closed Block invested assets........................................................ 302,919 314,108
------------- -----------
Total invested assets.................................................................... 1,517,857 1,567,170
Cash and cash equivalents................................................................ 32,484 23,794
Accrued investment income................................................................ 13,911 13,900
Recoverable from reinsurers.............................................................. 96,864 95,511
Accounts receivable, net................................................................. 23,270 19,641
Deferred policy acquisition costs........................................................ 148,470 144,844
Property, plant and equipment, net....................................................... 19,132 19,929
Other assets ............................................................................ 11,796 12,607
Closed Block other assets................................................................ 14,543 16,224
Separate account assets.................................................................. 109,388 78,629
------------- -----------
Total assets ............................................................................ $1,987,715 $1,992,249
============= ===========
Liabilities and Shareholders' Equity
------------------------------------
Future policy benefits................................................................... $ 185,581 $ 178,133
Policyholder account balances............................................................ 791,552 795,820
Policy and contract claims............................................................... 75,444 68,701
Other policyholder funds................................................................. 48,977 43,751
Unearned premium revenue................................................................. 13,538 13,149
Payable to reinsurers.................................................................... 5,191 8,670
Notes payable............................................................................ 116,250 112,500
Other liabilities........................................................................ 31,539 54,846
Closed Block liabilities................................................................. 380,779 386,933
Discontinued operations, net............................................................. 21,826 21,075
Separate account liabilities............................................................. 109,388 78,629
------------- -----------
Total liabilities........................................................................ 1,780,065 1,762,207
------------- -----------
Shareholders' equity:
Common stock $0.01 par value; 30,000,000 shares authorized, 10,315,785 shares
issued ............................................................................ 103 103
Additional paid-in capital.......................................................... 200,799 201,255
Treasury stock, at cost (1,052,597 shares and 1,087,124 shares) .................... (24,156) (25,054)
Retained earnings................................................................... 44,912 33,962
Net unrealized investment gain (loss)............................................... (14,008) 19,776
------------- -----------
Total shareholders' equity............................................................... 207,650 230,042
Commitments and contingencies............................................................ - -
------------- -----------
Total liabilities and shareholders' equity............................................... $1,987,715 $1,992,249
============= ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
-------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Revenues:
Direct and assumed premiums and policyholder assessments.............. $ 116,243 $ 110,629 $ 346,339 $ 295,035
Reinsurance premiums.................................................. (17,707) (19,574) (54,827) (57,491)
--------- --------- ---------- ---------
Net premiums and policyholder assessments............................. 98,536 91,055 291,512 237,544
Investment income, net................................................ 21,090 20,892 63,381 54,387
Realized investment gains/(losses) ................................... 428 985 (645) 1,501
Other income.......................................................... 13 0 1,793 0
Contribution from Closed Block........................................ 677 1,827 2,971 3,434
--------- --------- ---------- ---------
Total revenues........................................................ 120,744 114,759 359,012 296,860
--------- --------- ---------- ---------
Policyholder benefits:
Direct and assumed benefits........................................... 95,573 94,256 279,328 236,610
Reinsurance recoveries................................................ (16,674) (20,234) (47,840) (50,132)
--------- --------- ---------- ---------
Net policyholder benefits............................................. 78,899 74,022 231,488 186,478
--------- --------- ---------- ---------
Expenses:
Policy acquisition costs.............................................. 14,989 16,945 43,543 41,780
Other insurance operating expense..................................... 19,792 19,346 64,334 59,742
--------- --------- ---------- ---------
Total expenses........................................................ 34,781 36,291 107,877 101,522
--------- --------- ----------- ---------
Income from continuing operations before income taxes................. 7,064 4,446 19,647 8,866
--------- --------- ----------- ---------
Income tax expense.................................................... 2,472 1,556 6,876 3,103
--------- --------- ----------- ---------
Net income from continuing operations................................. 4,592 2,890 12,771 5,763
--------- --------- ----------- ---------
Net income (loss) from discontinued operations........................ 44 (8) 123 (37)
--------- --------- ----------- ---------
Net income............................................................ $ 4,636 $ 2,882 $ 12,894 $5,726
========= ========= =========== =========
Basic Earnings per share:
Weighted average shares outstanding.............................. 9,253,263 9,219,303 9,242,454 9,011,663
========= ========= ========== =========
Net income from continuing operations............................ $ 0.49 $ 0.31 $ 1.39 $ 0.64
========= ========= ========== =========
Net income from discontinued operations.......................... $ 0.01 $ 0.00 $ 0.01 $ 0.00
========= ========= ========== =========
Net income....................................................... $ 0.50 $ 0.31 $ 1.40 $ 0.64
========= ========= ========== =========
Diluted Earnings per share:
Weighted average shares outstanding.............................. 9,541,554 9,366,388 9,398,406 9,238,871
========= ========= ========== =========
Net income from continuing operations............................ $ 0.48 $ 0.31 $ 1.36 $ 0.62
========= ========= ========== =========
Net income from discontinued operations.......................... $ 0.01 $ 0.00 $ 0.01 $ 0.00
========= ========= ========== =========
Net income....................................................... $ 0.49 $ 0.31 $ 1.37 $ 0.62
========= ========= ========== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Net income............................................................. $ 4,636 $ 2,882 $ 12,894 $ 5,726
Other comprehensive income, net of tax:
Unrealized appreciation (depreciation) of invested assets......... (9,065) 15,344 (34,201) 18,810
Less reclassification adjustment for gains (losses) included in
net income................................................... (206) 985 (417) 1,501
--------- ---------- --------- ----------
(8,859) 14,359 (33,784) 17,309
--------- ---------- --------- ----------
Comprehensive income (loss)............................................ $(4,223) $17,241 $(20,890) $23,035
========= ========== ========= ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
--------- ---------
<S> <C> <C>
Net cash provided by operating activities...................................................... $ 7,089 $ 6,719
--------- ---------
Cash flows from investing activities:
Purchase of fixed maturities................................................................ (222,779) (210,376)
Sales, maturities, calls and principal reductions of fixed maturities....................... 208,855 248,961
Sale (purchase) of equity securities and short-term investments............................. 13,703 (25,738)
Purchase of mortgage loans.................................................................. (11,975) (18,460)
Proceeds from repayment of mortgage loans................................................... 4,061 4,577
Change in Closed Block invested assets...................................................... 11,189 780
Payment for purchase of Westfield Life Insurance Company, net............................... - (90,863)
Other, net.................................................................................. (1,589) 10,120
--------- ---------
Net cash provided (used) by investing activities.......................................... 1,465 (80,999)
--------- ---------
Cash flows from financing activities:
Deposits to policyholder account balances................................................... 58,751 55,952
Withdrawals from policyholder account balances.............................................. (61,319) (54,153)
Purchase of treasury stock.................................................................. - (3,150)
Options exercised........................................................................... 898 671
Proceeds from issuance of notes payable..................................................... 15,000 130,000
Principal payments on long term debt........................................................ (11,250) (40,000)
Shareholder dividends....................................................................... (1,944) (1,884)
--------- ---------
Net cash provided by financing activities................................................. 136 87,436
--------- ---------
Net increase in cash and cash equivalents...................................................... 8,690 13,156
Cash and cash equivalents at beginning of period............................................... 23,794 8,608
--------- ---------
Cash and cash equivalents at end of period..................................................... $ 32,484 $ 21,764
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
THE GUARANTEE LIFE COMPANIES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 and 1998
(1) Summary of Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements include
The Guarantee Life Companies Inc. and its direct and indirect wholly-owned
subsidiaries. These financial statements have been prepared in conformity with
generally accepted accounting principles for interim financial information and
reflect all adjustments (consisting only of normal recurring items) which are,
in the opinion of management, necessary to present fairly the financial position
and results of operations for the periods presented.
Operating results for the three and nine month periods ended September 30, 1999
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. These financial statements and notes thereto should be
read in conjunction with the audited consolidated financial statements for the
fiscal year ended December 31, 1998, contained in Guarantee Life's annual report
on Form 10-K for the year ended December 31, 1998.
(2) Investments
Fixed maturities at September 30, 1999 (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................. $ 95,676 $ 129 $ 2,214 $ 93,591
Obligations of states and political subdivisions..... 7,567 69 11 7,625
Debt securities issued by foreign governments........ 8,416 9 276 8,149
Corporate securities................................. 491,813 4,880 20,305 476,387
Mortgage-backed securities........................... 204,247 1,350 4,067 201,530
Other asset-backed securities........................ 76,050 268 1,275 75,043
--------- -------- -------- ---------
883,769 6,704 28,148 862,325
Equity securities......................................... 24,976 5,728 2,369 28,336
--------- -------- -------- ---------
$ 908,745 $ 12,432 $ 30,517 $ 890,661
========= ======== ======== =========
Held-to-maturity:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies.............. $ 2,569 $ 7 $ - $ 2,576
Obligations of states and political subdivisions..... 6,859 91 209 6,741
Corporate securities................................. 105,624 3,790 1,563 107,851
Mortgage-backed securities........................... 13,931 2,021 11,910
Other asset-backed securities........................ 12,680 264 569 12,375
--------- -------- -------- ---------
$ 141,663 $ 4,152 $ 4,362 $ 141,453
========= ======== ======== =========
</TABLE>
(3) Closed Block
Summarized condensed financial information of the Closed Block (in thousands) is
as follows:
<TABLE>
<CAPTION>
September 30, December 31,
Assets 1999 1998
------ ------------- -----------
<S> <C> <C>
Invested assets:
Fixed maturities:
Available-for-sale, at fair value (amortized cost: $227,178 and $210,935)...... $224,933 $220,603
Held-to-maturity, at amortized cost (fair value: $33,205 and $48,460).......... 33,304 44,595
-------- --------
258,237 265,198
Policy loans........................................................................ 44,682 46,217
Other invested assets, net.......................................................... - 2,693
-------- --------
Total invested assets.................................................................... 302,919 314,108
Cash and cash equivalents................................................................ 1,992 2,000
Accrued investment income................................................................ 2,352 2,367
Deferred policy acquisition costs........................................................ 9,047 10,476
Other assets............................................................................. 1,152 1,381
-------- --------
Total Closed Block assets................................................................ $317,462 $330,332
======== ========
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
September 30, December 31,
Liabilities 1999 1998
----------- ------------- ------------
<S> <C> <C>
Life future policy benefits.............................................................. $ 297,332 $ 300,254
Policyholder account balances for annuity contracts...................................... 911 885
Policy and contract claims............................................................... 876 839
Other policyholder funds................................................................. 71,943 71,966
Dividends payable to policyholders....................................................... 7,121 7,052
Deferred income taxes.................................................................... (786) 3,384
Other liabilities........................................................................ 3,382 2,553
------------- ------------
Total Closed Block liabilities........................................................... $ 380,779 $ 386,933
============= ============
</TABLE>
Condensed statements of income for the Closed Block for the three and nine
months ended September 30 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ----------------------
1999 1998 1999 1998
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Insurance premiums and policyholder assessments, net of reinsurance.......... $ 4,513 $ 4,938 $ 14,038 $ 15,136
Investment income, net....................................................... 5,545 5,512 16,449 16,473
Realized investment gains.................................................... 25 32 913 663
Other income................................................................. 2 1 7 5
---------- --------- ---------- ---------
Total revenues............................................................... 10,085 10,483 31,407 32,277
---------- --------- ---------- ---------
Policyholder benefits and expenses:
Total policyholder benefits, net of reinsurance.............................. 5,437 4,899 16,020 16,163
Policy acquisition costs..................................................... 490 543 1,624 1,556
Other insurance operating expense............................................ 1,025 1,072 3,069 3,186
---------- --------- ---------- ---------
Total benefits and expenses.................................................. 6,952 6,514 20,713 20,905
Dividends to policyholders................................................... 2,456 2,142 7,723 7,938
---------- --------- ---------- ---------
Contribution from the Closed Block........................................... $ 677 $ 1,827 $ 2,971 $ 3,434
========== ========= ========== =========
</TABLE>
The Closed Block includes only those revenues, benefits, expenses, and dividends
resulting from the policies which were included in the Closed Block on December
26, 1995, the effective date of Guarantee Life Insurance Company's conversion to
a stock life insurance company. The pre-tax income of the Closed Block is
reported as a single line item, Contribution from Closed Block, in Guarantee
Life's condensed consolidated statements of income. Income tax expense
applicable to the Closed Block is reflected as a component of income tax
expense.
The excess of Closed Block liabilities over Closed Block assets as of September
30, 1999 represents the estimated future contribution from Closed Block, which
will be recognized in Guarantee Life's statements of income over the period the
underlying policies and contracts remain in force.
If, over the period the Closed Block remains in existence, the actual cumulative
contribution is greater than the expected cumulative contribution, only such
expected contribution will be recognized in Guarantee Life's statements of
income. The excess will be paid to Closed Block policyholders as additional
policyholder dividends. Alternatively, if the actual cumulative contribution is
less than the expected cumulative contribution, only such actual contribution
will be recognized in Guarantee Life's statements of income. However, dividends
will be changed in the future, to increase actual contributions until the actual
cumulative contributions equal the expected cumulative contributions.
(4) Earnings per common share
Basic earnings per share of common stock have been computed on the basis of the
weighted average number of shares of common stock outstanding. Diluted earnings
per share is based on the weighted average number of shares and common stock
equivalents outstanding. The Company's common stock equivalents relate to common
stock options.
(5) Restricted common shares
Effective May 31, 1998, The Guarantee Life Companies Inc. acquired Westfield
Life Insurance Company (Westfield). As partial consideration, 371,402 shares of
previously authorized, but unissued, common stock were issued. These shares have
a restriction on transfer and are restricted from sale for a period of two
years. They are also restricted for five years from sale to any party who owns
two percent or more of Guarantee Life's issued and outstanding common stock at
the time of transfer or who would own two percent or more after transfer. These
shares also have restricted voting rights. For a period of five years, all
restricted shares of common stock will be voted in concurrence with the
recommendation of the Board of Directors of Guarantee Life in matters submitted
to the shareholders of Guarantee Life for vote or consent.
7
<PAGE>
(6) Sale of Philadelphia Financial Group, Inc., PFG Distribution Company, and
AGL Life Assurance Company
The Guarantee Life Companies Inc. signed a definitive agreement on August 16,
1999 whereby Guarantee Life Insurance Company will assume the term life
insurance and fixed annuity business of AGL Life Assurance Company; and will
sell Philadelphia Financial Group, Inc., PFG Distribution Company, and AGL with
its remaining variable life and variable annuity business. The sale is scheduled
for closing on October 29, 1999. This will be a cash transaction for the price
of $3.9 million, plus the capital and surplus of AGL, which was $18.9 million on
September 30, 1999.
The sale will include the assets and liabilities of AGL's separate account
business, which at September 30, 1999 totaled $109.4 million. The balance of
AGL's inforce business of nearly 28,000 policies will be assumed by Guarantee
Life Insurance Company and will become part of its Individual Division's
operations. The AGL distribution system that currently sells Guarantee Life's
individual life and annuity products will remain a part of Guarantee Life's
distribution system. PFG Distribution Company is the broker dealer for AGL's
variable life and annuity products, and Philadelphia Financial Group, Inc. is
the insurance agency that markets these products.
(7) Jefferson-Pilot Corporation Acquisition of The Guarantee Life Companies
Inc.
On September 19, 1999, Jefferson-Pilot Corporation and The Guarantee Life
Companies Inc. signed a definitive agreement for Jefferson-Pilot Corporation to
acquire The Guarantee Life Companies Inc. The agreement provides for a purchase
price of $32.00 per share of Guarantee Life common stock. The acquisition price
will be payable 50 percent in common stock of Jefferson-Pilot and 50 percent in
cash, with a provision that the purchase price will convert to all cash if
Jefferson-Pilot stock trades shortly before closing at an average price above
$75.00 per share or, at Jefferson-Pilot's option, if shortly before closing the
average price is below $65.00 per share, or under certain other circumstances as
described in the agreement.
Closing of the transaction is subject to several conditions, including the
approval of the shareholders of Guarantee Life, receipt of all appropriate
regulatory approvals, and the effectiveness of a registration statement to be
filed with the Securities and Exchange Commission covering the Jefferson-Pilot
shares that may be issued in the transaction. Shareholders of Guarantee Life
will be provided a proxy statement describing the terms of the transaction prior
to being asked to vote on the transaction at a special meeting of the
shareholders.
8
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following analysis of the consolidated financial condition and results
of operations of Guarantee Life should be read in conjunction with the condensed
consolidated financial statements and the notes thereto included herein.
Forward-looking Statements
This Form 10-Q report contains certain forward-looking statements. All
forward-looking statements are inherently uncertain as they are based on various
management expectations and assumptions concerning future events and they are
subject to numerous known and unknown risks and uncertainties which could cause
actual results to differ materially from those projected. Such statements
reflect the current view of Guarantee Life with respect to future events and are
subject to certain risks, uncertainties and assumptions, including the business
factors described in Guarantee Life's annual report on Form 10-K for the year
ended December 31, 1998. Should one or more of such risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those described herein as believed, estimated or
expected.
Operating Results for the Three and Nine Months Ended September 30, 1999 and
1998
The following table presents the consolidated results of operations
combined with the results of operations of the Closed Block. As part of the
conversion to a stock life insurance company in 1995, Guarantee Life Insurance
established a Closed Block to provide for dividends on certain policies that
were in force on December 26, 1995 (the "Effective Date"). After the Effective
Date, the operating results from the Closed Block are reported on one line,
Contribution from Closed Block, in the consolidated statements of income.
Management's discussion and analysis addresses the combined results of
operations unless noted otherwise.
Combined Results of Operations(in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ----------------------
1999 1998 1999 1998
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Premiums and policyholder assessments, net................... $103,049 $ 95,993 $305,550 $252,680
Investment income, net....................................... 26,635 26,404 79,830 70,860
Realized investment gains.................................... 453 1,017 268 2,164
Other income................................................. 15 -- 1,800 --
---------- --------- --------- ---------
Total revenues.................................................... 130,152 123,414 387,448 325,704
Benefits and expenses:
Policyholder benefits, net of reinsurance.................... 84,336 78,921 247,508 202,641
Expenses..................................................... 36,291 37,899 112,556 106,246
Dividends to policyholders................................... 2,461 2,148 7,737 7,951
---------- --------- --------- ---------
Total policyholder benefits, expenses............................. 123,088 118,968 367,801 316,838
---------- --------- --------- ---------
Income from continuing operations before income taxes............. 7,064 4,446 19,647 8,866
Income taxes...................................................... 2,472 1,556 6,876 3,103
---------- --------- --------- ---------
Net income from continuing operations............................. $ 4,592 $ 2,890 $ 12,771 $ 5,763
========== ========= ========= =========
Net income excluding realized gains............................... $ 4,298 $ 2,229 $ 12,597 $ 4,356
========== ========= ========= =========
</TABLE>
Investment Income, Net. Net investment income increased $0.2 million, or
0.9%, and $9.0 million, or 12.7%, for the three and nine month periods ended
September 30, 1999 over 1998. The increase for the nine months of 1999 over 1998
is due primarily to the acquisition of Westfield on May 31, 1998. The 1998
results reflect only four months of activity for Westfield while the 1999
results reflect the full nine months.
9
<PAGE>
Insurance Operations--Employee Benefits Division(EBD)
The following table sets forth the results of operations for Guarantee
Life's Employee Benefits Division for the three and nine months ended September
30, 1999 and 1998 (in thousands).
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ----------------------
1999 1998 1999 1998
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Insurance premiums........................................... $55,589 $52,808 $164,255 $152,731
Reinsurance premiums ........................................ (896) (1,189) (3,164) (3,689)
---------- --------- --------- ---------
Net earned premiums.......................................... 54,693 51,619 161,091 149,042
Investment income, net....................................... 3,624 3,090 10,129 8,974
Realized investment gains(losses)............................ (33) 82 (351) 510
---------- --------- --------- ---------
Total revenues.................................................... 58,284 54,791 170,869 158,526
Benefits and expenses:
Gross policyholder benefits.................................. 40,305 41,499 116,971 114,291
Recoveries from reinsurers .................................. (1,434) (961) (3,180) (2,890)
---------- --------- --------- ---------
Net benefits................................................. 38,871 40,538 113,791 111,401
Acquisition costs and operating expenses..................... 18,217 17,830 53,997 56,055
---------- --------- --------- ---------
Total policyholder benefits and expenses.......................... 57,088 58,368 167,788 167,456
---------- --------- --------- ---------
Income (loss) from continuing operations before income taxes...... $ 1,196 $(3,577) $ 3,081 $ (8,930)
========== ========= ========= =========
</TABLE>
EBD provides group non-medical products including term life, accidental
death and dismemberment (AD&D), short-term disability (STD), long-term
disability (LTD), and dental; and voluntary (worksite marketed) products.
EBD net earned premiums increased $3.1 million, or 6.0%, for the third
quarter of 1999 over 1998 and $12.0 million, or 8.1 %, for the nine months ended
September 30, 1999 over 1998. The greatest increases in net earned premiums
occurred in the dental, STD, and LTD product lines. Dental net earned premiums
increased $1.1 million, or 6.1%, and $4.0 million, or 8.0%, for the three and
nine month periods ended September 30, 1999 over 1998. STD net earned premiums
increased $0.9 million, or 17.4%, and $1.1 million, or 6.9%, for the three and
nine month periods ended September 30, 1999 over 1998. LTD net earned premiums
increased $0.9 million, or 7.7%, and $4.0 million, or 12.4%, for the three and
nine month periods ended September 30, 1999 over 1998. These increases were the
result of continued new sales growth in excess of policy terminations. The
increase in LTD net earned premiums is also attributable to a decrease in
reinsurance premiums which changed from 5.9% to 2.5% of direct LTD earned
premiums effective April 1, 1999, as Guarantee Life Insurance increased its
retention limits.
EBD net benefits decreased $1.7 million, or 4.1%, for the third quarter of
1999 over 1998 and increased $2.4 million, or 2.2%, for the nine months ended
September 30, 1999 over 1998. The decrease for the quarter relates to
significant improvements in the life and LTD net benefits as compared to third
quarter 1998. Third quarter 1998 claims experience was unusually unfavorable,
particularly in these two product lines. The increase for the nine months of
1999 over 1998 is due to higher premium volumes in all product lines; however,
with the exception of AD&D, all product lines experienced significant loss ratio
improvements for the nine month period ended September 30, 1999 over 1998. Life
net benefits decreased $2.1 million, or 15.7%, and increased $0.1 million, or
0.3%, for the three and nine month periods ended September 30, 1999 over 1998.
LTD net benefits decreased $0.6 million, or 6.5%, and increased $1.0 million, or
4.3%, for the three and nine month periods ended September 30, 1999 over 1998.
Dental net benefits increased $0.4 million, or 3.2%, over third quarter 1998,
and increased $1.0 million, or 2.5%, for the nine month period ended September
30, 1999 over 1998. AD&D net benefits increased $0.4 million, or 49.6%, and $0.4
million, or 16.5%, for the three and nine month periods of 1999 over 1998 due to
a few large claims; however, management does not believe there are significant
trends associated with this increase.
As stated above, with the exception of AD&D, all product lines have
experienced significant loss ratio improvements for the nine month period ended
September 30, 1999 over 1998. Specifically, in 1998, the frequency of dental
claims had increased; therefore, corrective pricing actions were implemented
resulting in improved loss ratios in 1999. The 1999 LTD loss ratio has also
improved over 1998 due to lower claim levels. Furthermore, in 1998, the severity
of life claims had increased. An internal study was conducted and it was
determined that no significant trends had developed that would generate
continued unfavorable claims experience. The life claims experience for 1999 has
improved.
EBD expenses increased $0.4 million, or 2.2%, and decreased $2.1 million,
or 3.7%, for the three and nine month periods ended September 30, 1999 over
1998. The decrease for the nine months of 1999 over 1998 was due to continued
improvement of operating unit expenses as a result of technology, improved
training, internal efforts to reduce expenses and avoid costs, and a higher
deferral of costs associated with the acquisition of new business which will be
amortized over the estimated life of the associated new policies.
10
<PAGE>
Insurance Operations--Group Special Markets Division(GSM)
The following table sets forth the results of operations for Guarantee
Life's Group Special Markets Division for the three and nine months ended
September 30, 1999 and 1998 (in thousands).
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ----------------------
1999 1998 1999 1998
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Insurance premiums........................................... $ 38,963 $ 34,905 $115,157 $ 88,606
Reinsurance premiums ........................................ (12,355) (14,336) (39,185) (43,500)
---------- --------- --------- ---------
Net earned premiums.......................................... 26,608 20,569 75,972 45,106
Investment income, net....................................... 719 146 2,016 1,197
Realized investment gains(losses)............................ (6) 9 (69) 85
---------- --------- --------- ---------
Total revenues.................................................... 27,321 20,724 77,919 46,388
Benefits and expenses:
Gross policyholder benefits.................................. 30,208 28,059 94,447 65,659
Recoveries from reinsurers .................................. (9,450) (14,399) (32,088) (38,135)
---------- --------- --------- ---------
Net benefits................................................. 20,758 13,660 62,359 27,524
Acquisition costs and operating expenses..................... 4,471 6,759 13,544 14,919
---------- --------- --------- ---------
Total policyholder benefits and expenses.......................... 25,229 20,419 75,903 41,943
---------- --------- --------- ---------
Income from continuing operations before income taxes............. $ 2,092 $ 305 $ 2,016 $ 4,445
========== ========= ========= =========
</TABLE>
GSM provides specialty medical products including excess loss insurance,
medical reimbursement insurance for business executives, and group non-medical
products typically sold in conjunction with the excess loss insurance.
GSM net premiums increased $6.0 million, or 29.4%, and $30.9 million, or
68.4%, for the three and nine month periods ended September 30, 1999 over 1998.
The design of the medical reimbursement product was changed so that the product
is an experience rated retro premium product in which the insured pays a fixed
premium initially and experience rated premiums vary based on actual paid
claims. The design change was implemented January 1, 1999 and resulted in
premiums, claims, and commissions being accounted for and reported on a gross
basis. Prior to 1999 and with the previous design of this product, premiums were
accounted for and reported net of claims and commissions, similar to minimum
premium plans. As a result, medical reimbursement net earned premiums increased
$14.9 million and $40.7 million for the three and nine month periods ended
September 30, 1999 over 1998.
The increases in the medical reimbursement net premiums were partially
offset by decreases in excess loss and life net premiums. Excess loss net
premiums decreased $7.3 million, or 60.0%, and $7.2 million, or 33.4%, and life
net premiums decreased $1.0 million, or 22.1%, and $2.0 million, or 14.9%, for
the three and nine month periods ended September 30, 1999 over 1998. In the
second half of 1998, excess loss underwriting guidelines were strengthened;
therefore, the amount of excess loss business written decreased. Since a
considerable amount of life business is sold in conjunction with excess loss,
the decrease in sales of excess loss contributed to a decrease in life premiums
as well.
GSM net benefits increased $7.1 million, or 52.0%, and $34.8 million, or
126.6%, for the three and nine month periods ended September 30, 1999 over 1998.
Due to the design change of the medical reimbursement product, net benefits for
this product increased $14.6 million and $39.4 million for the three and nine
month periods ended September 30, 1999 over 1998. Excess loss net benefits
decreased $4.6 million, or 55.7%, and $2.1 million, or 12.7%, and life net
benefits decreased $2.1 million, or 52.1%, and $2.5 million, or 28.3%, for the
three and nine month periods ended September 30, 1999 over 1998. These decreases
for the excess loss and life product lines are attributable to the decrease in
written business as a result of the revised underwriting guidelines.
The deterioration in loss ratios is attributable to both the excess loss
and medical reimbursement product lines. Loss ratios for excess loss in 1999
have been adversely affected by 1997 and 1998 experience. With the design change
of the medical reimbursement product, premiums and claims are accounted for on a
gross basis; therefore, the loss ratio exceeds 85.0% for both the three and nine
months ended September 30, 1999. In 1998, premiums for the medical reimbursement
product were reported net of claims and commissions resulting in no loss ratio.
GSM net results from continuing operations increased $1.8 million, or
585.9%, for the quarter ended September 30, 1999 over 1998 and decreased $2.4
million, or 54.7%, for the nine months ended September 30, 1999 over 1998. The
decline in profitability for the nine months is primarily attributable to higher
loss ratios for the excess loss product line. Excess loss results in the first
half of 1999 were adversely affected by experience resulting from 1997 and 1998
policy years. Due to the adverse experience which emerged in 1998, the
underwriting standards and procedures were strengthened. As is noticeable in the
third quarter 1999 results, the positive results from the revised underwriting
guidelines are beginning to emerge as the more recently underwritten policies
make up an increasingly greater portion of the in-force business. In addition,
the improved net operating results for the quarter are attributable to a
substantial improvement in the life loss ratio.
Insurance Operations--Individual Division
The following table sets forth the results of operations for Guarantee
Life's Individual Division for the three and nine months ended September 30,
1999 and 1998 (in thousands).
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ----------------------
1999 1998 1999 1998
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Insurance premiums........................................... $26,254 $27,887 $ 81,120 $ 69,014
Reinsurance premiums ........................................ (4,507) (4,082) (12,634) (10,482)
---------- --------- --------- ---------
Net earned premiums.......................................... 21,747 23,805 68,486 58,532
Investment income, net....................................... 22,035 22,589 66,708 59,541
Realized investment gains(losses)............................ 492 911 852 1,640
Other income................................................. 0 0 1,750 0
---------- --------- --------- ---------
Total revenues.................................................... 44,274 47,305 137,796 119,713
Benefits and expenses:
Gross policyholder benefits.................................. 30,640 29,627 84,387 72,887
Recoveries from reinsurers .................................. (5,932) (4,904) (13,029) (9,172)
---------- --------- --------- ---------
Net benefits................................................. 24,708 24,723 71,358 63,715
Acquisition costs and operating expenses..................... 11,265 12,014 37,450 31,972
Dividends to policyholders................................... 2,461 2,148 7,737 7,951
---------- --------- --------- ---------
Total policyholder benefits and expenses.......................... 38,434 38,885 116,545 103,638
---------- --------- --------- ---------
Income from continuing operations before income taxes............. $ 5,840 $ 8,420 $ 21,251 $ 16,075
========== ========= ========= =========
</TABLE>
11
<PAGE>
Effective May 31, 1998, The Guarantee Life Companies Inc. acquired Westfield
from Ohio Farmers Insurance Company. Westfield's results of operations are
included in Guarantee Life's consolidated results beginning June 1, 1998.
Net premiums and policyholder assessments decreased $2.1 million, or 8.7%,
for the quarter ended September 30, 1999 over 1998 and increased $10.0 million,
or 17.0%, for the nine months ended September 30, 1999 over 1998. The decrease
for the quarter is almost entirely attributable to Westfield, which experienced
decreases among most of its product lines. The nine month period ended September
30, 1998 contains only four months of results for Westfield (as indicated above)
due to the acquisition effective May 31, 1998. Therefore, Westfield accounts for
$8.9 million of the increase in net premiums and policyholder assessments for
the nine month period ended September 30, 1999 over 1998. The remaining increase
for the nine months ended September 30, 1999 is a result of increased premium
volumes for Guarantee Life Insurance products, primarily the final expense
product.
Ceding commissions and other income increased $0.7 million, or 121.3%, and
$3.3 million, or 178.5%, for the three and nine month periods ended September
30, 1999 over 1998. The increase for the nine months ended September 30, 1999
over 1998 relates primarily to a $1.75 million death benefit on a director's
policy for which PFG was the beneficiary. The increase for the quarter and the
remaining increase for the nine months are the result of increased sales volume
of Guarantee Life Insurance and AGL term life products.
Individual net policyholder benefits for third quarter 1999 were consistent
with third quarter 1998 and increased $7.6 million, or 12.0%, for the nine
months ended September 30, 1999 over 1998. This increase is due to the Westfield
acquisition, which accounts for $10.3 million of the increase for the nine
months ended September 30, 1999 over 1998. In addition, this increase is
partially offset by a decrease of $2.2 million in claims at Guarantee Life
Insurance.
Individual expenses for third quarter 1999 were consistent with third quarter
1998 and increased $7.1 million, or 20.9%, for the nine month period ended
September 30, 1999 over 1998. This increase for the nine months of 1999 over
1998 relates partially to the increase in operating expenses for Westfield of
$4.6 million for the first nine months of 1999 as compared to the four months
included in 1998 results. Guarantee Life Insurance Individual Division expenses
increased $0.4 million for the nine months ended September 30, 1999 over 1998.
PFG expenses increased $2.1 million for the nine months ended September 30, 1999
over 1998. The increase at PFG for the year-to-date September 30, 1999 expenses
over the same periods in 1998 are attributable to a write-off of goodwill and
allocation of management expenses from Guarantee Life Insurance.
Policyholder dividends increased $0.3 million, or 14.6%, and decreased $0.2
million, or 2.7%, for the three and nine month periods ended September 30, 1999
over 1998. The decrease for the nine months is the result of a reduced dividend
scale.
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 segments and are reflected in their operating results, with the
exception of debt costs and the costs associated with shareholder services.
Revenues for Corporate consist almost entirely of investment income and realized
gains or losses.
The following table sets forth the results of operations of Corporate for
the three and nine months ended September 30, 1999 and 1998 (in thousands).
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total revenues.................................................... $ 273 $ 594 $ 864 $ 1,077
Gross policyholder benefits....................................... (1) - - 1
Total expenses.................................................... 2,338 1,296 7,565 3,801
------- ------ ------- -------
Income before taxes............................................... $(2,064) $ (702) $(6,701) $(2,725)
======= ====== ======= =======
</TABLE>
Total expenses increased $1.0 million, or 80.4%, for the quarter ended
September 30, 1999 over 1998 and $3.8 million, or 99.0%, for the nine months
ended September 30, 1999 over 1998. These increases are attributable primarily
to the interest expense associated with the outstanding debt, as $90.0 million
was issued in conjunction with the Westfield acquisition. In addition, Guarantee
Life has increased its total outstanding debt by $3.8 million since December 31,
1998.
12
<PAGE>
Regulatory Issues
On June 3, 1999, Guarantee Life received notice from the Kansas City office
of the U.S. Department of Labor (the "Department") that it was conducting an
investigation with respect to employee benefit plans of Guarantee Life and its
clients pursuant to Section 504(a)(1) of the Employee Retirement Income Security
Act of 1974 ("ERISA"), to determine whether any person has violated or is about
to violate any provision of Title I of ERISA. Guarantee Life and certain of its
employee benefit plan clients are subject to ERISA in connection with, among
other things, certain policies sold by Guarantee Life's Employee Benefits and
Group Special Markets Divisions. The notice included subpoenas requesting that
certain documents and records be provided to the Department. Guarantee Life
intends to cooperate fully with the Department.
No claims or charges have been asserted against Guarantee Life as a result
of the investigation and the Department states that its investigation should not
be construed as an indication that any violations of ERISA have occurred or as a
reflection upon any persons involved. Management believes that Guarantee Life's
business practices comply in all material respects with ERISA and that the
investigation will not have a material adverse effect on its business, financial
condition, or results of operations.
Liquidity and Capital Resources
The Guarantee Life Companies Inc.'s ability to pay dividends to its
stockholders and meet its obligations, including debt service and operating
expenses, depends primarily upon receiving sufficient funds from its
subsidiaries. The payment of dividends by Guarantee Life Insurance, AGL (a
wholly owned subsidiary of PFG, Inc.), 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 statutory gain
from operations for the previous calendar year. State law gives the Department
of Insurance broad discretion to disapprove requests for dividends in excess of
these limits.
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 this transaction. In September 1998, AGL's Board
of Directors declared and paid a $2.4 million dividend to PFG. In addition,
AGL's Board of Directors declared a $6.0 million dividend to be paid to PFG in
conjunction with the sale scheduled for closing on October 29, 1999, which was
paid on October 28, 1999. In 1999, Guarantee Life Insurance can declare a
dividend of up to $12.5 million without permission from the Nebraska 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 $1.25 million
to $116.25 million during the three months ended September 30, 1999. The total
obligation consists of $71.25 million under the Holding Company's Senior Secured
Term Loan ("Term Loan") and $45.0 million under the Holding Company's Revolving
Credit Facility.
Management believes that the current amortization of the Term Loan ($3.75
million per quarter) and a lack of sustained earnings improvement, particularly
in EBD, could create a liquidity constraint at the Holding Company beyond 1999
unless other actions are taken. As a result, Guarantee Life considered various
actions to take, including strategic alternatives. On September 19, 1999,
Guarantee Life entered into a definitive agreement for Jefferson-Pilot
Corporation to acquire Guarantee Life. Jefferson Pilot's financial strength was
among the factors Guarantee Life considered in reaching its decision to pursue
the acquisition of Guarantee Life by Jefferson-Pilot.
Year 2000 Issues
Guarantee Life recognizes the significance and technological impact that
the Year 2000 (Y2K) challenge will have on organizations worldwide 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. Overall Y2K renovation efforts are complete
across the company. We have focused on our internal systems, and 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.
13
<PAGE>
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 $2.6 million through 2000. This
represents approximately 6% of the total Information Technology (IT) budget over
this time period. The Y2K-related expenses incurred by year are as follows:
<TABLE>
<S> <C>
1997 $ 800,000
1998 $ 1,062,000
1999 (through 9/30) $ 407,000
</TABLE>
Correction of the Y2K issues is a high priority project and other lower-
priority IT projects have been deferred due to Y2K efforts. However, the company
does not believe the deferral of other IT projects has had a material effect on
financial condition or results of operations. The Company's IT staff has
continued to work on other high priority projects concurrent with the Y2K
project.
Infrastructure
Progress of Guarantee Life's core information technology infrastructure and
application areas is measured for the mainframe, midrange and client/server
environments. Over 250 third party application packages and over 130 custom
applications and external interfaces have been inventoried and are being tracked
for compliance.
Renovation
IT Systems - A renovation strategy was defined for each of our mission
----------
critical applications. In some cases, it was decided to upgrade vendor supplied
software with Y2K-compliant releases. In other cases, decisions were made to
replace software altogether taking advantage of new functionality. For most in-
house developed applications, modifications were made to ensure compliance.
Several of our policy administration and claims processing applications
have either been renovated through vendor-supplied upgrades or replaced with
packages that we believe, based on our testing, are Y2K-compliant. Most of the
system replacements had been planned and 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. We believe that all Y2K issues have been addressed and
completed with respect to all mission critical applications in EBD and GSM. The
existing mainframe administration and claims systems were renovated in 1998 for
contingency purposes. We will continue to perform quality assurance testing of
our key systems throughout 1999. As an example, we utilized an external party to
perform a final quality assurance test of one of our primary date modules. No
problems were found.
Our existing general ledger and accounts payable applications were replaced
in 1997 with a new vendor-supplied package that we believe, based on our
testing, is Y2K-compliant. Human Resource administration and payroll systems
were successfully upgraded in 1998. These systems and our vendor-supplied
Investment systems have been tested and are believed to be Y2K-compliant. Other
smaller, non-critical applications were either renovated or replaced in 1999.
Each of our major operating platforms has been upgraded. Our imaging and
fax software were upgraded successfully in April 1998. 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 continues to
be available if needed for testing business software and end user computing
applications. Additional scan software was purchased to perform final audits of
mainframe and end user computing applications. All remaining mainframe system
software and workstation upgrades were completed in the third quarter, 1999.
PFG's core administrative systems were developed to accommodate a four-
digit year. The operating system software was upgraded in 1998. Final
verification of key application systems and infrastructure was completed in
September 1999. Other software/hardware components and business partners'
compliance status continue to be monitored. Existing Westfield Life 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 of our major suppliers and vendors providing services
--------------
related to our facilities have been contacted. Our telephone switch has been
tested and appears to be Y2K-compliant. The voice mail system was upgraded and
tested 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 and climate control software applications passed rollover tests in
March 1999. We have contacted our telecommunications, gas, water and electric
utility companies regarding their Y2K compliance status. They have all
communicated that renovation of their mission critical systems is complete.
14
<PAGE>
Certification
Recognizing that over fifty percent of the effort on Y2K projects is spent
in the testing phases, Guarantee Life is committed to ensuring that our
remediation efforts go through thorough unit, integration, regression and end-
to-end testing. A testing tool was purchased specifically for this effort. To-
date, rollover tests (i.e. changed the CPU date past 2000) have been performed
on our network servers, AS/400, mainframe and HP UNIX platforms. A Y2K-specific
rollover test was successfully conducted at our Business Recovery test site in
December 1998. No Y2K issues were encountered during two particularly sensitive
Y2K dates: 4/9/1999 and 9/9/1999. 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 to ensure no new problems have been introduced.
Completing our Internal Remediation
Our Impact Assessment and Infrastructure & Methods phases are completed.
Overall Y2K renovation efforts are complete across the company. We have made
every effort through our extensive testing of critical hardware and software to
reveal any significant Y2K problems and feel that the Company's software and
hardware will perform substantially as planned when Year 2000 processing begins.
We will continue to perform quality assurance activities and refine contingency
plans as we approach the new millennium.
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. Significant progress was made
this past quarter in testing with our key business partners. All critical
interface testing has been completed.
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
Guarantee Life believes that its most reasonably likely worst case Y2K
scenario will include these elements: (1) one or more of Guarantee Life's third-
party providers will be unable to provide the services expected, and (2) one or
more parts of Guarantee Life's processing software will operate incorrectly. At
this time, we are unable to estimate the potential loss of revenue due to such a
scenario. Guarantee Life 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 Guarantee Life's software and hardware will
perform substantially as planned when Year 2000 processing begins.
Guarantee Life will continue to evaluate situations where indicators point
to a potential risk of failure. In these cases, contingency plans are developed
to identify alternative strategies. We have leveraged our existing business
recovery plan to develop a Y2K-specific contingency plan, identifying proactive
measures and specific contingencies for the transition to the Year 2000. A Y2K
Event Team has been established and a Command Center will be put in place at the
end of the year. Specific policies have been communicated across the company
regarding availability of support resources during this period. Our Y2K
contingency plan is complete. A "mock" Y2K test and walkthroughs will be held in
October and November 1999 to validate these plans.
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
Guarantee Life 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 Guarantee Life, 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
Guarantee Life 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.
15
<PAGE>
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 June 1999, the FASB issued
SFAS 137, deferring SFAS 133 to all fiscal quarters of all fiscal years
beginning after June 15, 2000.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
There have been no material changes in reported market risks faced by
Guarantee Life since the end of the most recent fiscal year end.
PART 11 - OTHER INFORMATION
ITEMS 1, 2, 3, and 4 are either inapplicable or are answered in the
negative and are omitted pursuant to the instructions to Part II.
ITEM 5 - OTHER INFORMATION
(a) The sale of Philadelphia Financial Group, Inc., PFG Distribution
Company, and AGL Life Assurance Company was completed on October 29, 1999 as
scheduled.
(b) In connection with the Jefferson-Pilot acquisition of Guarantee Life,
Guarantee Life has obtained all appropriate regulatory approvals from the
Nebraska Department of Insurance.
ITEM 6 - EXHIBITS AND REPORT ON FORM 8-K
(a) The following exhibits are being filed pursuant to Item 6(a) of
Form 10-Q.
10(hh) Revised Amendment No. 6 to The Guarantee Life Companies Inc.
Long Term Incentive Plan
10(ii) Amendment No. 2 to The Guarantee Life Companies Inc. Executive
Severance Plan
10(jj) Amendment to Stock Option Early Exercise Incentive Program
27 Financial Data Schedule
----------------------------------------------------
(b) A report on Form 8-K dated September 22, 1999 was filed with the
Commission to report under Item 5, the signing of a definitive
agreement for Jefferson-Pilot Corporation to acquire The Guarantee Life
Companies Inc.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE GUARANTEE LIFE COMPANIES INC.
Date: November 23, 1999 /s/ WILLIAM L. BAUHARD
------------------------------------------
William L. Bauhard
Senior Vice President and Chief Financial
Officer
(Principal Financial Officer)
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1999 (UNAUDITED) AND
THE CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 1999 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 862,325
<DEBT-CARRYING-VALUE> 141,663
<DEBT-MARKET-VALUE> 141,453
<EQUITIES> 28,336
<MORTGAGE> 111,649
<REAL-ESTATE> 3,202
<TOTAL-INVEST> 1,517,857
<CASH> 32,484
<RECOVER-REINSURE> 96,864
<DEFERRED-ACQUISITION> 148,470
<TOTAL-ASSETS> 1,987,715
<POLICY-LOSSES> 261,025
<UNEARNED-PREMIUMS> 13,538
<POLICY-OTHER> 791,552
<POLICY-HOLDER-FUNDS> 48,977
<NOTES-PAYABLE> 116,250
0
0
<COMMON> 103
<OTHER-SE> 207,547
<TOTAL-LIABILITY-AND-EQUITY> 1,987,715
291,512
<INVESTMENT-INCOME> 63,381
<INVESTMENT-GAINS> (645)
<OTHER-INCOME> 4,764
<BENEFITS> 231,488
<UNDERWRITING-AMORTIZATION> 43,543
<UNDERWRITING-OTHER> 64,334
<INCOME-PRETAX> 19,647
<INCOME-TAX> 6,876
<INCOME-CONTINUING> 12,771
<DISCONTINUED> 123
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,894
<EPS-BASIC> 1.40
<EPS-DILUTED> 1.37
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
