FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2002 or
TRANSITION REPORT PURSUANT TO SECTION
13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number: 33-64820
AMERICO LIFE, INC.
(exact name of registrant as specified in its charter)
MISSOURI
(State of other jurisdiction of incorporation or organization)
43-1627599
(I.R.S. Employer Identification No.)
1055 BROADWAY
KANSAS CITY, MISSOURI 64105
(Address of principal executive offices)
(816) 391-2000
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since
last report)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class and Title of Shares Outstanding
Capital Stock as of August 13, 2002
------------- ---------------------
Common Stock $1.00 Par Value 10,000
AMERICO LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands - unaudited)
June 30, December 31,
2002 2001
---- ----
Assets
Investments:
Fixed maturities:
Held to maturity, at amortized cost (market: $671,018 and $712,314) $ 641,836 $ 694,889
Available for sale, at market (amortized cost: $1,396,923 and $1,308,773) 1,433,167 1,321,040
Trading, at market (amortized cost: $53,565 and $57,747) 53,464 57,760
Equity securities, at market (cost: $58,966 and $48,598) 77,435 74,531
Investment in equity subsidiaries 7,372 7,518
Mortgage loans on real estate, net 280,969 269,910
Investment real estate, net 28,139 28,196
Policy loans 186,320 189,683
Other invested assets 33,472 41,602
------------ ------------
Total investments 2,742,174 2,685,129
Cash and cash equivalents 53,769 59,714
Accrued investment income 33,341 34,050
Amounts receivable from reinsurers 1,118,362 1,125,586
Other receivables 157,995 55,353
Deferred policy acquisition costs 235,948 242,170
Cost of business acquired 136,616 149,679
Amounts due from affiliates 6,794 7,980
Other assets 20,070 19,375
------------ ------------
Total assets $ 4,505,069 $ 4,379,036
============ ============
Liabilities and stockholder's equity
Policyholder account balances $ 2,784,995 $ 2,729,865
Reserves for future policy benefits 811,432 811,355
Unearned policy revenues 43,921 50,907
Policy and contract claims 32,212 38,068
Other policyholder funds 164,102 151,946
Notes payable 101,300 101,547
Amounts payable to reinsurers 34,903 39,489
Deferred income taxes 80,272 65,825
Due to brokers 137,152 70,588
Other liabilities 55,308 67,138
------------ ------------
Total liabilities 4,245,597 4,126,728
------------ ------------
Stockholder's equity:
Common stock ($1 par value; 30,000 shares authorized, 10,000 shares issued
and outstanding) 10 10
Preferred stock, net of investment in parent company preferred stock - -
Additional paid-in capital 3,745 3,745
Accumulated other comprehensive income 32,439 30,757
Retained earnings 223,278 217,796
------------ ------------
Total stockholder's equity 259,472 252,308
------------ ------------
Commitments and contingencies
Total liabilities and stockholder's equity $ 4,505,069 $ 4,379,036
============ ============
AMERICO LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share amounts - unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
2002 2001 2002 2001
---- ---- ---- ----
Income
Premiums and policy revenues $ 52,318 $ 50,954 $ 106,265 $ 104,357
Net investment income 46,958 56,269 102,159 99,560
Net realized investment losses (5,644) (881) (5,475) (4,215)
Other income 2,450 2,100 4,499 4,220
------------- ------------- ------------- -------------
Total income 96,082 108,442 207,448 203,922
Benefits and Expenses
Policyholder benefits:
Death benefits 28,067 28,792 60,629 57,443
Interest credited on policyholder funds 29,268 27,860 57,550 55,645
Other policyholder benefits 909 8,914 9,460 7,986
Change in reserves for future policy benefits (3,255) (2,081) (4,858) (4,977)
Commissions 1,558 2,902 2,752 5,154
Amortization expense 15,393 9,133 30,558 23,837
Interest expense 2,362 2,403 4,687 4,805
Other operating expenses 18,511 19,883 36,549 40,634
Restructuring expenses - 4,696 - 4,696
------------- ------------- ------------- -------------
Total benefits and expenses 92,813 102,502 197,327 195,223
------------- ------------- ------------- -------------
Income before provision for income taxes and
cumulative effect of a change in accounting
principle 3,269 5,940 10,121 8,699
Provision for income taxes 1,155 1,981 3,456 2,899
------------- ------------- ------------- -------------
Income before cumulative effect of a change in
accounting principle 2,114 3,959 6,665 5,800
Cumulative effect of a change in accounting
principle - - - 832
------------- ------------- ------------- -------------
Net income $ 2,114 $ 3,959 $ 6,665 $ 6,632
============= ============= ============= =============
Net income per common share:
Income before cumulative effect of a change in
accounting principle $ 211.40 $ 395.90 $ 666.50 $ 580.00
Cumulative effect of a change in accounting
principle - - - 83.20
------------ ------------- ------------ ------------
Net income $ 211.40 $ 395.90 $ 666.50 $ 663.20
============ ============ ============ ============
AMERICO LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands - unaudited)
Six Months
Ended June 30,
2002 2001
---- ----
Cash flows from operating activities
Net income $ 6,665 $ 6,632
----------- -----------
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation and amortization 32,574 31,186
Deferred policy acquisition costs (29,848) (32,401)
Undistributed earnings of equity subsidiaries (583) 769
Amortization of unrealized gains (1,883) (1,425)
(Increase) decrease in assets:
Accrued investment income 709 (2,193)
Amounts receivable from reinsurers 7,509 47,046
Other receivables (4,346) 3,356
Other assets, net of amortization expense (1,153) (3,297)
Increase (decrease) in liabilities:
Policyholder account balances (41,561) (38,588)
Reserves for future policy benefits and unearned policy revenues 345 9,132
Policy and contract claims (5,857) 4,612
Other policyholder funds 12,156 6,512
Amounts payable to reinsurers (4,586) (18,264)
Provision for deferred income taxes 13,515 629
Federal income taxes payable 20 (122)
Change in affiliated balances 1,186 (5,053)
Other liabilities (11,850) (16,929)
Change in trading securities 5,302 (5,357)
Net realized losses on investments sold 5,475 4,215
Amortization on bonds and mortgage loans 379 1,119
Other changes (50) 2,852
------------ ------------
Total adjustments (22,547) (12,201)
------------ ------------
Net cash used by operating activities (15,882) (5,569)
------------ ------------
(Continued)
AMERICO LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(In thousands - unaudited)
Six Months
Ended June 30,
2002 2001
---- ----
Cash flows from investing activities
Purchases of fixed maturity investments $ (590,452) $ (936,968)
Purchases of equity securities (15,113) (34,629)
Purchases of other investments (3,006) (17,891)
Mortgage loans originated (22,358) (9,029)
Maturities or redemptions of fixed maturity investments 93,623 6,508
Sales of fixed maturity available for sale investments 442,114 631,231
Sales of fixed maturity held to maturity investments 16,856 -
Sales of equity securities 2,219 22,978
Sales of other investments 9,686 1,520
Repayments from mortgage loans 11,501 10,206
Change in due to brokers (33,609) 171,553
Change in policy loans 3,363 2,454
------------ ------------
Net cash used by investing activities (85,176) (152,067)
------------ ------------
Cash flows from financing activities
Receipts credited to policyholder account balances 207,563 213,202
Return of policyholder account balances (110,871) (120,513)
Repayments of notes payable (396) (346)
Dividends paid (1,183) (1,000)
------------ ------------
Net cash provided by financing activities 95,113 91,343
------------ ------------
Net decrease in cash and cash equivalents (5,945) (66,293)
------------ ------------
Cash and cash equivalents at beginning of period 59,714 110,260
------------ ------------
Cash and cash equivalents at end of period $ 53,769 $ 43,967
============ ============
AMERICO LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2002 and 2001
(In thousands, except per share amounts - unaudited)
The following notes should be read in conjunction with the notes to the
consolidated financial statements contained in the Americo Life, Inc. ("the
Company") December 31, 2001 Form 10-K as filed with the Securities and Exchange
Commission.
1. ACCOUNTING POLICIES
The unaudited consolidated financial statements as of June 30, 2002 and for
the three and six months ended June 30, 2002 and 2001 reflect all adjustments,
consisting of normal recurring adjustments, which are necessary for a fair
statement of financial position and results of operations on a basis consistent
with accounting principles described fully in Note 1 of the Company's December
31, 2001 consolidated financial statements. The results of operations for the
three and six months ended June 30, 2002 and 2001 are not necessarily indicative
of the expected results for the full year 2002, nor the results experienced for
the year 2001.
Use of Estimates
The preparation of financial statements 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 these estimates.
Reclassifications
Previously reported amounts for the prior year have in some instances been
reclassified to conform to the current year presentation.
Newly adopted accounting pronouncements
In 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141 "Business Combinations" and
SFAS No. 142 "Goodwill and Other Intangible Assets." SFAS No. 141 supersedes
previously issued guidance on accounting for business combinations. SFAS No. 141
eliminates the pooling-of-interests method of accounting for business
combinations initiated after July 1, 2001 and also changes the criteria used to
recognize intangible assets apart from goodwill.
SFAS No. 142 supersedes the current accounting guidance for goodwill and
intangible assets. Under SFAS No. 142, goodwill and indefinite-lived intangible
assets will no longer be amortized but will be reviewed for impairment.
Intangible assets with finite lives will continue to be amortized over their
useful lives. The amortization provisions of SFAS No. 142 apply to goodwill and
intangible assets acquired after June 30, 2001. For all other goodwill and
intangible assets, the amortization provisions are effective upon adoption of
SFAS No. 142. The impairment provisions of SFAS No. 142 are effective upon
adoption of the statement. The Company's adoption of SFAS No. 142 on January 1,
2002 did not have a significant effect on its consolidated financial position or
results of operations.
During 2001, the FASB issued SFAS No. SFAS No. 144 "Accounting for
Impairment or Disposal of Long-Lived Assets" which provides guidance on the
accounting for the impairment or disposal of long-lived assets. SFAS No. 144
supersedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" and amends Accounting Principles Board
Opinion No. 30 ("APB No. 30") "Reporting Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business." SFAS No. 144 requires that
long-lived assets that are to be disposed of by sale be measured at the lower of
book value or fair value less cost to sell. Additionally, entities are no longer
required to include under "discontinued operations" operating losses that have
not yet occurred. The Company's adoption of SFAS No. 144 on January 1, 2002 did
not have a significant effect on its consolidated financial position or results
of operations.
During 2001, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position No. 01-06 ("SOP 01-06") "Accounting by
Certain Entities (Including Entities with Trade Receivables) That Lend to or
Finance the Activities of Others." The guidance in SOP 01-06 relating to
financing and lending activities is explicitly applicable to insurance
companies. SOP 01-06 reconciles and conforms the accounting and financial
reporting guidance presently contained in other accounting guidance. The
Company's accounting practices for its lending activities are already consistent
with the guidance contained in SOP 01-06. Therefore, adoption of SOP 01-06 on
January 1, 2002 did not have a significant effect on the Company's financial
statements.
Recently issued accounting pronouncements
During 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations" which requires that obligations associated with the retirement of a
tangible long-lived asset be recorded as a liability when those obligations are
incurred. The liability is initially measured at fair value and the cost is
capitalized by increasing the carrying amount of the related long-lived asset.
SFAS No. 143 will be effective for financial statements for fiscal years
beginning after June 15, 2002. The Company does not own long-lived assets of the
type that will generally create retirement obligations. Therefore, adoption of
SFAS No. 143 will not affect the Company's consolidated financial statements.
During 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements
No. 4,44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 rescinds prior Statements that required the classification of gains
or losses from the extinguishment of debt as extraordinary. As a result, gains
or losses from extinguishments of debt will only be classified as extraordinary
if they meet existing accounting criteria. SFAS No. 145 also rescinds SFAS No.
44 "Accounting for Intangible Assets of Motor Carriers" and amends SFAS No.13
"Accounting for Leases" to require sale-leaseback accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. SFAS No. 145 also makes various technical corrections to existing
pronouncements. SFAS No. 145 is effective for fiscal years beginning after May
15, 2002. The Company's consolidated financial statements will not be affected
by the adoption of SFAS No. 145.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement provides
guidance on the recognition and measurement of liabilities associated with
disposal activities. SFAS No. 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. Consequently, the
Company's consolidated financial statements will not be affected by the
adoption of SFAS No. 146.
2. INVESTMENTS
Certain circumstances during the six months ended June 30, 2002 caused the
Company to change its intent to hold specific securities to maturity. Due to
evidence of significant deterioration in several issuers' creditworthiness,
$16,856 of held-to-maturity securities were sold. The sales resulted in realized
gains of $406.
Net realized investment losses for the six months ended June 30, 2002
includes $5,879 of write-downs on fixed maturity securities to reflect an other
than temporary impairment.
3. STOCKHOLDER'S EQUITY
Comprehensive income (loss) for the three and six months ended June 30,
2002 and 2001 is as follows:
Three Months Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
---- ---- ---- ----
Net income $ 2,114 $ 3,959 $ 6,665 $ 6,632
Other comprehensive income (loss) 8,393 (4,016) 1,682 (7,025)
--------- --------- --------- ---------
Comprehensive income (loss) $ 10,507 $ (57) $ 8,347 $ (393)
========= ========= ========= =========
Following are the components of net unrealized investment gains which
comprise accumulated other comprehensive income:
Six Months Ended
June 30, December 31, June 30,
2002 2001 2002
---- ---- ----
Investment securities:
Fixed maturities available for sale $ 33,930 $ 9,966 $ 23,964
Fixed maturities reclassified from
available for sale to held to maturity 20,707 22,590 (1,883)
Equity securities 18,475 25,939 (7,464)
----------- ----------- -----------
73,112 58,495 14,617
Effect on other balance sheet accounts (24,347) (12,391) (11,956)
Deferred income taxes (16,326) (15,347) (979)
----------- ----------- -----------
Net unrealized investment gains $ 32,439 $ 30,757 $ 1,682
=========== =========== ===========
During the six months ended June 30, 2002 and 2001, the Company paid cash
dividends on its common stock to Financial Holding Corporation ("FHC") totaling
$1,000 and $1,000, respectively.
During the six months ended June 30, 2002, the Company paid dividends on
its preferred stock of $3,613, consisting of the issuance of 27,500 shares of
preferred stock with a stated value of $100 per share and the payment of $863 of
cash. During the six months ended June 30, 2002, the Company received dividends
on FHC preferred stock of $3,430, consisting of 27,500 shares of preferred stock
with a stated value of $100 per share and $680 of cash. The Company has
accounted for its investment in the FHC preferred stock as an offset to its own
preferred stock in stockholder's equity. Dividends on the Company's preferred
stock and the dividends receivable on the FHC preferred stock are both recorded
directly to retained earnings.
4. COMMITMENTS AND CONTINGENCIES
On January 15, 2002, the United States District Court for the Northern
District of Texas approved a class-wide settlement and dismissed with prejudice
the claims of the class members in a certified class action in which Great
Southern Life Insurance Company ("Great Southern") had been a defendant. The
class consists of certain present and former policyholders who purchased
interest-sensitive whole life and universal life insurance policies issued or
acquired by Great Southern between January 1, 1982 and December 31, 1999. The
orders approving the settlement are now final, as no appeals were filed. The
Company has accounted for the terms of the settlement in its consolidated
financial statements.
Under the terms of the settlement, potential class members were given an
opportunity to exclude themselves from the class by sending a written exclusion
notice to the settlement administrator. Of those present and former
policyholders who filed such notices, approximately 1,300 have notified Great
Southern that they have retained an attorney to represent them. In early
February 2002, Great Southern filed actions in twelve states against
substantially all of these policyholders seeking, among other things, a
declaration of nonliability. Pursuant to Great Southern's request, the Judicial
Panel ("Panel") on Multidistrict Litigation issued an order on March 27, 2002
conditionally transferring the actions filed outside of Texas to the United
States District Court for the Northern District of Texas for consolidated
pretrial proceedings. Several objections to the conditional transfer order have
been filed which have the effect of staying the transfer order until the Panel
rules on the objections. In addition, several other policyholders who sent in
exclusion notices have filed separate actions against Great Southern in several
states asserting claims related to sales practices and seeking actual and
punitive damages. Great Southern is unable to estimate the costs it might incur
as a result of the exclusion notices or if the outcomes of the above-referenced
actions are adverse to it.
On January 25, 2002, the 111th District Court of Webb County, Texas
approved a class-wide settlement and dismissed with prejudice the claims of the
class members in a certified class action in which Americo Financial Life and
Annuity Insurance Company ("Americo Financial"), as well as certain affiliates
of the Company, had been defendants. The class consists of certain present and
former owners of certain annuities and interest-sensitive life insurance
policies issued or acquired by Americo Financial between January 1, 1993 and
October 1, 2001. The orders approving the settlement are now final, as no
appeals were filed. The Company has accounted for the anticipated costs of the
settlement in its consolidated financial statements.
The Company and its subsidiaries are also named as defendants in other
pending actions, including but not limited to purported class actions filed
against Great Southern, Americo Financial and Ohio State Life Insurance Company
asserting claims related to sales practices and premiums charged in connection
with certain life insurance products and sales practices in connection with
annuity products. Plaintiffs in these actions generally are seeking
indeterminate amounts, including punitive and treble damages. Although there
can be no assurances, at the present time the Company does not anticipate that
the ultimate liability arising from such pending litigation, after consideration
of amounts provided for in the consolidated financial statements, will have a
material adverse effect on the financial condition of the Company.
5. SEGMENT INFORMATION
The table below presents information about the reported revenues and income
before provision for income taxes and cumulative effect of a change in
accounting principle for the Company's reportable segments as defined in the
Company's December 31, 2001 Form 10-K. Asset information by segment is not
reported, because the Company does not produce such information internally.
Life Insurance Asset Accumulation Reconciling Consolidated
Operations Operations Items Totals
---------- ---------- ----- ------
Six months ended June 30,
- ---------------------------------------------------------------------------------------------------------------------
2002 2001 2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ---- ---- ----
Revenues $183,405 $183,298 $36,493 $31,100 $(12,450) $(10,476) $207,448 $203,922
Income (loss) before
income taxes 22,043 33,432 4,688 (2,636) (16,610) (22,097) 10,121 8,699
Three months ended June 30,
- ----------------------------------------------------------------------------------------------------------------------
2002 2001 2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ---- ---- ----
Revenues $90,541 $91,205 $18,970 $16,018 $(13,429) $1,219 $96,082 $108,442
Income (loss) before
income taxes 11,991 20,633 2,186 (3,284) (10,908) (11,409) 3,269 5,940
Significant reconciling items shown in the above table which are not
allocated to specific segments include interest expense, gains or losses from
changes in fair values of the Company's asset and liability derivatives and a
portion of (i) net investment income, (ii) operating expenses and (iii) net
realized investment gains (losses). Prior to 2002, the Company reported a
non-life insurance investments segment. The Company has determined that the
investments that comprised this segment are no longer significant enough for
separate reporting as a segment. These investments are now reported with the
other reconciling items for all periods presented.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion analyzes significant items affecting the results
of operations and the financial condition of the Company. This discussion should
be read in conjunction with the accompanying consolidated financial statements
and the notes thereto.
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions readers regarding certain
forward-looking statements contained in this report and in any other statements
made by, or on behalf of, the Company, whether or not in future filings with the
Securities and Exchange Commission (the "SEC"). Forward-looking statements are
statements not based on historical information and which relate to future
operations, strategies, financial results, or other developments. Statements
using verbs such as "plan", "anticipate", "believe", "expect" or words of
similar import generally involve forward-looking statements. Without limiting
the foregoing, forward-looking statements include statements which represent the
Company's beliefs concerning future levels of sales and surrenders of the
Company's products, investment spreads and yields, or the earnings and
profitability of the Company's activities.
Forward-looking statements are necessarily based on estimates and
assumptions that are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which are beyond the
Company's control and many of which are subject to change. Whether or not actual
results differ materially from forward-looking statements may depend on numerous
foreseeable and unforeseeable developments. Some may be national in scope, such
as general economic conditions, changes in tax law and changes in interest
rates. Some may be related to the insurance industry generally, such as pricing
competition, regulatory developments and industry consolidation. Others may
relate to the Company specifically, such as credit, volatility and other risks
associated with the investment portfolio. Investors are also directed to
consider other risks and uncertainties discussed in documents filed by the
Company with the SEC. The Company disclaims any obligation to update
forward-looking information.
CRITICAL ACCOUNTING POLICIES
Reference is made to the Company's Form 10-K for the year ended December
31, 2001 for a discussion of the Company's critical accounting policies and the
use of estimates and judgement in the preparation of the Company's consolidated
financial statements. There were no changes in estimates during the six months
ended June 30, 2002 which had a significant impact on the Company's reported
results of operations or financial condition.
SEGMENT RESULTS
Revenues and income before provision for income taxes for the Company's
operating segments, as defined by Statement of Financial Accounting Standard No.
131, "Financial Reporting for Segments of a Business Enterprise", are summarized
as follows (in millions):
Life Insurance Asset Accumulation
Operations Operations
------------------------ -----------------------
Six months ended June 30,
2002 2001 2002 2001
---- ---- ---- ----
Revenues $183.4 $183.3 $36.5 $31.1
Income before income taxes 22.0 33.4 4.7 (2.6)
Three months ended June 30,
2002 2001 2002 2001
---- ---- ---- ----
Revenues $90.5 $91.2 $19.0 $16.0
Income before income taxes 12.0 20.6 2.2 (3.3)
Prior to 2002, the Company reported a non-life insurance investments
segment. The Company has determined that the investments that comprised this
segment are no longer significant enough for separate reporting as a segment.
These investments are now reported with the other reconciling items for all
periods presented.
Life insurance operations. Income before income taxes for the six months
ended June 30, 2002 was $22.0 million compared to $33.4 million for the six
months ended June 30, 2001. The decrease in profits from 2001 to 2002 is
primarily due to (i) a $2.4 million increase in death benefits, net of reserves
for future policy benefits released on traditional life insurance death
benefits, and (ii) a $9.5 million increase in amortization expense on universal
life-type policies in 2002 compared to 2001.
Income before income taxes for the three months ended June 30, 2002 was
$12.0 million compared to $20.6 million for the three months ended June 30,
2001. The decrease in profits from 2001 to 2002 is primarily due to the higher
amortization expense in 2002 discussed in the preceding paragraph.
Asset accumulation operations. Income before income taxes for the six
months ended June 30, 2002 was $4.7 million compared to a $2.6 million loss for
the same period in 2001. This increase in income was due to increased interest
spreads on the Company's annuities and lower amortization expense in 2002.
Income before income taxes for the three months ended June 30, 2002 was
$2.2 million compared to a $3.3 million loss for the same period in 2001. The
increase in income is due to lower amortization expense in 2002.
Reconciling items. The difference between the segment revenues and income
before income taxes shown above and the consolidated financial statements result
from items not allocated to specific segments. The significant reconciling items
are interest expense, gains or losses from changes in fair values of the
Company's asset and liability derivatives and a portion of (i) net investment
income, (ii) operating expenses and (iii) net realized investment gains
(losses).
The loss before income taxes from reconciling items decreased $5.5 million
for the six months ended June 30, 2002 from the same period in 2001 primarily
due to a $4.7 million write down of goodwill associated with certain marketing
subsidiaries of the Company in 2001.
The loss before income taxes from reconciling items was $10.9 million and
$11.4 million for the three months ended June 30, 2002 and 2001, respectively.
The reduction in the loss in 2002 compared to 2001 primarily resulted from the
goodwill write down discussed in the preceding paragraph, offset by $4.8 million
higher realized investment losses in 2002.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
Income before income taxes and cumulative effect of a change in accounting
principle for the six months ended June 30, 2002 was $10.1 million compared to
$8.7 million for the six months ended June 30, 2001. The primary reasons for the
increase in profits in 2002 compared to 2001 were (i) higher investment income,
(ii) a decrease in commissions, (iii) restructuring expenses recorded in 2001,
and (iv) a decrease in other operating expenses. These factors were partially
offset by (i) an increase in death benefits, (ii) an increase in amortization
expense, and (iii) higher net realized investment losses.
Premiums and policy revenues. Premiums and policy revenues totaled $106.3
million for the six months ended June 30, 2002 compared to $104.4 million for
the six months ended June 30, 2001. Premiums from preneed business increased
$2.6 million for the six months ended June 30, 2002 compared to the six months
ended June 30, 2001. This increase was partially offset by a decrease in
premiums from the Company's inforce traditional life insurance business of $1.4
million. Policy revenues from interest-sensitive life and annuity products
increased $0.9 million from 2001 to 2002, primarily due to the overall growth in
the Company's universal-life type policies and annuities.
Net investment income. Net investment income totaled $102.2 million for the
six months ended June 30, 2002 compared to $99.6 million for the six months
ended June 30, 2001. Net investment income for the six months ended June 30,
2002 and 2001 was comprised of the following (in millions):
2002 2001
---- ----
Fixed maturities $ 76.8 $ 70.8
Mortgage loans 10.8 10.5
Policy loans 5.3 4.5
Reinsurance funds held by reinsurer 23.8 24.3
Derivatives (13.8) (12.7)
Other, net of investment expenses (0.7) 2.2
--------- --------
Net investment income $ 102.2 $ 99.6
========= ========
Fixed maturities income was higher in 2002 compared to 2001 due primarily
to larger amounts of fixed maturity investments in 2002 compared to 2001. The
increase in investments is consistent with the increase in the Company's
liabilities. In addition, a bond owned by the Company was called in 2002 at a
premium, generating an additional $0.8 million of investment income. The changes
in the fair values of call options and futures contracts owned by the Company
are recorded as a component of investment income. The fair value of the
Company's call options and futures contracts decreased $13.8 million and $12.7
million during the six months ended June 30, 2002 and 2001, respectively. The
decrease in the fair value of these call options and futures contracts was
offset by the decline in value of the options embedded in the Company's
equity-indexed annuity liabilities, which is recorded as a component of
policyholder benefits.
Net realized investment losses. Net realized investment losses totaled $5.5
million for the six months ended June 30, 2002 compared to net realized
investment losses of $4.2 million for the six months ended June 30, 2001. During
the six months ended June 30, 2002 and 2001, the Company realized losses on
common stocks of $2.4 million and $0.9 million, respectively. The Company also
recorded losses on fixed maturity investments of $3.1 million and $3.2 million,
respectively, during the six months ended June 30, 2002 and 2001. Net realized
investment losses for the six months ended June 30, 2002 includes $5.9 million
of write-downs on fixed maturity investments to reflect an other than temporary
impairment.
Policyholder benefits. Policyholder benefits totaled $122.8 million for the
six months ended June 30, 2002 compared to $116.1 million for the six months
ended June 30, 2001. The primary reasons for the increase in 2002 compared to
2001 were (i) an increase in death benefits of $3.2 million, (ii) higher
interest credited on policyholder funds due to the overall growth of the
Company's universal life-type policies and annuities, and (iii) an increase in
other policy benefits of $1.5 million. As discussed above, included in
policyholder benefits is the change in the fair value of issued options embedded
in the Company's equity-indexed annuity liabilities. During the six months ended
June 30, 2002 and 2001, the fair values of the issued options decreased $13.6
million and $14.4 million, respectively.
Commissions. Commission expense was $2.8 million and $5.2 million for the
six months ended June 30, 2002 and 2001, respectively. The decrease in
commission expense from 2001 to 2002 is due to higher amounts of nondeferrable
commissions during the first six months of 2001.
Amortization expense. Amortization expense totaled $30.6 million for the
six months ended June 30, 2002 compared to $23.8 million for the six months
ended June 30, 2001. During the six months ended June 30, 2001, the Company
revised its estimates of the future gross profits on certain of its universal
life-type and annuity products. The revisions primarily consisted of changes in
estimated policy revenues and benefits paid to policyholder account balances.
The net effect of these revisions was to decrease amortization expense for the
six months ended June 30, 2001 by $4.5 million. During 2001, the Company revised
its estimate of future gross profits on the asset accumulation business, which
had the effect of increasing its deferred policy acquisition cost assets at
December 31, 2001. Consequently, amortization expense related to deferred policy
acquisition cost assets was higher during the six months ended June 30, 2002 as
compared to the same period in 2001.
Other operating expenses. Other operating expenses totaled $36.5 million
for the six months ended June 30, 2002 compared to $40.6 million for the six
months ended June 30, 2001. The Company has realized significant cost savings in
2002 as a result of the Company's decision to cease operations in the third
quarter of 2001 of an entity that previously provided administration for
retirement and cafeteria plans to school districts and other clients. Included
in other operating expenses for the six months ended June 30, 2001 was $0.5
million related to the costs of mailing notices to policyholders to comply with
recently issued federal regulations. Partially offsetting the decreases in
operating expenses in 2002 are approximately $1.0 million of expenses associated
with the transition of the operations from the Company's offices in Austin,
Texas to its Kansas City, Missouri offices. These transition expenses were not
eligible for inclusion in the exit costs recorded by the Company in the fourth
quarter of 2001.
Restructuring expenses. During 2001, the Company made certain changes to
its administrative and sales operations involved in the sale of insurance
products to the tax-qualified market. During the second quarter of 2001, the
Company determined that a portion of the goodwill related to the entities
involved in such operations had become impaired. Based upon the Company's best
estimate of the future results of operations of these entities, the goodwill
asset was reduced by $4.7 million.
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
Income before income taxes and cumulative effect of a change in accounting
principle for the three months ended June 30, 2002 was $3.3 million compared to
$5.9 million for the three months ended June 30, 2001. The primary reasons for
the decrease in profits in 2002 compared to 2001 were (i) higher net realized
investment losses in 2002 and (ii) higher amortization expense in 2002. Factors
which partially offset these decreases in profits were (i) the recording of
restructuring expenses in 2001 and (ii) lower commissions in 2002.
Premiums and policy revenues. Premiums and policy revenues totaled $52.3
million for the three months ended June 30, 2002 compared to $51.0 million for
the three months ended June 30, 2001. Premiums from preneed business increased
$1.3 million for the three months ended June 30, 2002 compared to the three
months ended June 30, 2001. This increase was partially offset by a decrease in
premiums from the Company's inforce traditional life insurance business of $1.0
million. Policy revenues from interest-sensitive life and annuity products
increased $0.4 million from 2001 to 2002.
Net investment income. Net investment income totaled $47.0 million for the
three months ended June 30, 2002 compared to $56.3 million for the three months
ended June 30, 2001. Net investment income for the three months ended June 30,
2002 and 2001 was comprised of the following (in millions):
2002 2001
---- ----
Fixed maturities $ 39.1 $ 36.0
Mortgage loans 5.4 5.3
Policy loans 2.6 2.7
Reinsurance funds held by reinsurer 11.7 12.6
Derivatives (11.2) (0.9)
Other, net of investment expenses (0.6) 0.6
--------- --------
Net investment income $ 47.0 $ 56.3
========= ========
Fixed maturities income was higher in 2002 compared to 2001 due primarily
to higher amounts of fixed maturity investments in 2002 compared to 2001. The
increase in investments is consistent with the increase in the Company's
liabilities. In addition, a bond owned by the Company was called in 2002 at a
premium, generating an additional $0.8 million of investment income. The changes
in the fair values of call options and futures contracts owned by the Company
are recorded as a component of investment income. The fair value of the
Company's call options and futures contracts decreased $11.2 million and $0.9
million during the three months ended June 30, 2002 and 2001, respectively. The
decrease in the fair value of these call options and futures contracts was
offset by the decline in value of the options embedded in the Company's
equity-indexed annuity liabilities, which is recorded as a component of
policyholder benefits.
Net realized investment losses. Net realized investment losses totaled $5.6
million for the three months ended June 30, 2002 compared to net realized
investment losses of $0.9 million for the three months ended June 30, 2001.
During the three months ended June 30, 2002 and 2001, the Company realized gains
(losses) on common stocks of $(2.3) million and $1.1 million, respectively. The
Company also recorded losses on fixed maturity investments of $3.3 million and
$2.0 million, respectively, during the three months ended June 30, 2002 and
2001. Net realized investment losses for the three months ended June 30, 2002
includes $5.9 million of write-downs on bonds to reflect an other than temporary
impairment.
Policyholder benefits. Policyholder benefits totaled $55.0 million for the
three months ended June 30, 2002 compared to $63.5 million for the three months
ended June 30, 2001. As discussed above, included in policyholder benefits is
the change in the fair value of issued options embedded in the Company's
equity-indexed annuity liabilities. During the three months ended June 30, 2002
and 2001, the fair values of the issued options decreased $11.5 million and $2.1
million, respectively. This decrease in policyholder benefits was partially
offset by a $1.4 million increase in interest credited on policyholder funds.
Commissions. Commission expense for the three months ended June 30, 2002
and 2001 was $1.6 million and $2.9 million, respectively. The decrease in
commission expense from 2001 to 2002 is due to higher amounts of nondeferrable
commissions in 2001.
Amortization expense. Amortization expense totaled $15.4 million for the
three months ended June 30, 2002 compared to $9.1 million for the three months
ended June 30, 2001. The increase in amortization expense in 2002 over 2001 was
partially due to revisions of gross profit estimates on certain universal
life-type and annuity products in 2001 as discussed above in the comparison of
the six months results of operations. During 2001, the Company revised its
estimate of future gross profits on the asset accumulation business, which had
the effect of increasing its deferred policy acquisition cost assets at December
31, 2001. Consequently, amortization expense related to deferred policy
acquisition cost assets was higher during the three months ended June 30, 2002
as compared to the same period in 2001.
Restructuring expenses. During 2001, the Company made certain changes to
its administrative and sales operations involved in the sale of insurance
products to the tax-qualified market. During the second quarter of 2001, the
Company determined that a portion of the goodwill related to the entities
involved in the operations had become impaired. Based upon the Company's best
estimate of the future results of operations of the entities, the goodwill asset
was reduced by $4.7 million.
FINANCIAL CONDITION AND LIQUIDITY
The changes occurring in the Company's consolidated balance sheet from
December 31, 2001 to June 30, 2002 primarily reflect the normal operations of
the Company's life insurance subsidiaries.
The quality of the Company's fixed maturity investments at June 30, 2002
remained consistent with the quality at December 31, 2001. Non-investment grade
securities totaled 4% of the Company's total fixed maturity investments at June
30, 2002. The Company has not made any significant changes to its investment
philosophy during 2002.
The Company's net unrealized investment gains increased $1.7 million during
the first six months of 2002. The components of the change during the six months
ended June 30, 2002 were as follows (in millions):
Investment securities:
Fixed maturities available for sale $ 24.0
Fixed maturities reclassified from
available for sale to held to maturity (1.9)
Equity securities (7.5)
-------
14.6
Effect on other balance sheet accounts (12.0)
Deferred income taxes (0.9)
-------
Net unrealized investment gains $ 1.7
=======
The increase in unrealized gains on fixed maturities available for sale is
due to the general decline in market interest rates during the first six months
of 2002.
Recently issued accounting pronouncements
The FASB recently issued SFAS No. 143 "Accounting for Asset Retirement
Obligations" which requires that obligations associated with the retirement of a
tangible long-lived asset be recorded as a liability when those obligations are
incurred. The liability is initially measured at fair value and the cost is
capitalized by increasing the carrying amount of the related long-lived asset.
SFAS No. 143 will be effective for financial statements for fiscal years
beginning after June 15, 2002. The Company does not own long-lived assets of the
type that will generally create retirement obligations. Therefore, adoption of
SFAS No. 143 will not affect the Company's consolidated financial statements.
During 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 rescinds prior Statements that required the
classification of gains or losses from the extinguishment of debt as
extraordinary. As a result, gains or losses from extinguishments of debt
will only be classified as extraordinary if they meet existing accounting
criteria. SFAS No. 145 also rescinds SFAS No. 44 "Accounting for Intangible
Assets of Motor Carriers" and amends SFAS No. 13 "Accounting for Leases" to
require sale-leaseback accounting for certain lease modifications
that have economic effects that are similar to sale-leaseback transactions.
SFAS No. 145 also makes various technical corrections to existing
pronouncements. SFAS No. 145 is effective for fiscal years beginning after
May 15, 2002. The Company's consolidated financial statements will not be
affected by the adoption of SFAS No. 145.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement provides
guidance on the recognition and measurement of liabilities associated with
disposal activities. SFAS No. 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. Consequently, the
Company's consolidated financial statements will not be affected by the
adoption of SFAS No. 146.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The quantitative and qualitative disclosures about market risk are
summarized in Management's Discussion and Analysis of Financial Condition and
Results of Operations as of December 31, 2001, included in the Company's Form
10-K for the year ended December 31, 2001. During the six months ended June 30,
2002, changes in the interest rate environment did not materially affect the
Company's economic position. These rate changes do not materially affect
disclosures included in the Company's December 31, 2001 Form 10-K regarding the
Company's exposure to market risk.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the Company's Annual Report on Form 10-K for the year
ended December 31, 2001 and the Quarterly Report on Form 10-Q for the period
ended March 31, 2002 regarding certain legal proceedings to which the Company
and/or certain of its subsidiaries are parties.
Included among the matters reported in the Form 10-K was a purported class
action lawsuit (Pritzker v. College Life Insurance Company of America (now
Americo Financial) and Loyalty Life Insurance Company, U.S. District Court for
the District of Massachusetts), in which Plaintiff alleged misrepresentations,
breach of contract and other wrongful conduct in connection with the imposition
of increased cost of insurance charges and the calculation of interest due under
certain universal life policies assumed by defendants. This suit sought actual
and punitive damages, restitutionary and injunctive relief and an accounting.
The suit was settled in July, 2002 by the payment of a nominal amount to the
individual named plaintiff and the filing of a stipulation of dismissal with
prejudice.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1 Restated Articles of Incorporation, as amended December 28, 2001, of
the Registrant (incorporated by reference from Exhibit 3.1 to Registrant's
Form 10-K [File No. 33-64820] for the year ended December 31, 2001.
3.2 Bylaws, as amended, of the Registrant (incorporated by reference from
Exhibit 3.2 to Registrant's Form S-4 [File No. 33-64820] filed June 22,
1993).
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
- ------------------------------- -----------------------------------------------
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed for the three months ended June 30,
2002.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
AMERICO LIFE, INC.
BY: /s/ Mark K. Fallon
---------------------
Name: Mark K. Fallon
Title: Senior Vice President and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
Date: August 14, 2002