FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934*
For the Quarterly Period Ended March 31, 2003 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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
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 May 12, 2003
------------- ------------------
Common Stock $1.00 Par Value 10,000
*Registrant is a voluntary filer under Section 15(a).
AMERICO LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands - unaudited)
March 31, December 31,
2003 2002
---- ----
Assets
Investments:
Fixed maturities:
Held to maturity, at amortized cost (market: $572,016 and $621,096) $ 525,554 $ 574,477
Available for sale, at market (amortized cost: $1,806,201and $1,634,497) 1,917,522 1,736,692
Trading, at market (amortized cost: $57,789 and $37,137) 58,329 38,533
Equity securities, at market (cost: $42,996 and $42,502) 46,840 54,443
Investment in equity subsidiaries 17,930 18,226
Mortgage loans on real estate, net 282,875 288,225
Investment real estate, net 9,391 15,637
Policy loans 180,449 183,072
Other invested assets 31,331 29,895
-------------- --------------
Total investments 3,070,221 2,939,200
Cash and cash equivalents 89,356 225,785
Accrued investment income 36,642 35,106
Amounts receivable from reinsurers 1,107,991 1,100,102
Other receivables 131,841 76,737
Deferred policy acquisition costs 202,387 187,551
Cost of business acquired 115,874 122,042
Amounts due from affiliates 8,057 11,557
Other assets 17,181 19,009
-------------- --------------
Total assets $ 4,779,550 $ 4,717,089
============== ==============
Liabilities and stockholder's equity
Policyholder account balances $ 3,022,592 $ 2,896,628
Reserves for future policy benefits 827,345 821,629
Unearned policy revenues 4,818 5,082
Policy and contract claims 40,419 43,882
Other policyholder funds 149,364 161,722
Notes payable 87,713 94,686
Amounts payable to reinsurers 19,126 26,603
Deferred income taxes 104,336 100,241
Due to brokers 135,068 192,288
Other liabilities 71,576 58,340
-------------- --------------
Total liabilities 4,462,357 4,401,101
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 33,745 33,745
Accumulated other comprehensive income 45,731 48,151
Retained earnings 237,707 234,082
-------------- --------------
Total stockholder's equity 317,193 315,988
-------------- --------------
Commitments and contingencies
Total liabilities and stockholder's equity $ 4,779,550 $ 4,717,089
============== ==============
See notes to consolidated financial statements
AMERICO LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share amounts - unaudited)
Three Months
Ended March 31,
2003 2002
---- ----
Income
Premiums and policy revenues $ 53,290 $ 53,947
Net investment income 55,795 55,280
Net realized investment gains (losses) (2,134) 790
Other income 5,256 2,049
----------- -----------
Total income 112,207 112,066
Benefits and Expenses
Policyholder benefits:
Death benefits 29,946 32,562
Interest credited on policyholder funds 30,439 28,282
Other policyholder benefits 6,699 8,551
Change in reserves for future policy benefits (1,961) (1,603)
Commissions 2,257 1,194
Amortization expense 14,366 15,165
Interest expense 2,031 2,325
Other operating expenses 21,946 18,738
----------- -----------
Total benefits and expenses 105,723 105,214
----------- -----------
Income before provision for income taxes 6,484 6,852
Provision for income taxes 2,264 2,301
----------- -----------
Net income $ 4,220 $ 4,551
=========== ===========
Net income per common share $ 422.00 $ 455.10
=========== ===========
See notes to consolidated financial statements
AMERICO LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands - unaudited)
Three Months
Ended March 31,
---------------
2003 2002
---- ----
Cash flows from operating activities
Net income $ 4,220 $ 4,551
--------- ---------
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation and amortization 9,448 15,815
Deferred policy acquisition costs (25,394) (14,310)
Undistributed earnings of equity subsidiaries (203) (422)
Amortization of unrealized gains (1,723) (972)
(Increase) decrease in assets:
Accrued investment income (1,536) (1,148)
Amounts receivable from reinsurers (7,872) (16,097)
Other receivables (4,067) (2,235)
Affiliate balances 3,500 (9,018)
Other assets, net of amortization expense 1,297 (782)
Increase (decrease) in liabilities:
Policyholder account balances (14,140) (17,662)
Reserves for future policy benefits and unearned policy revenues 10,890 745
Policy and contract claims (3,462) 10,986
Other policyholder funds (12,358) 4,775
Amounts payable to reinsurers (7,477) 5,103
Provision for deferred income taxes 5,399 6,137
Federal income taxes payable 7 (15)
Other liabilities 13,229 8,941
Change in trading securities (19,043) (48,424)
Net realized (gains) losses on investments sold 2,134 (790)
Amortization on bonds and mortgage loans 151 612
Other changes (430) (214)
--------- ---------
Total adjustments (51,650) (58,975)
--------- ---------
Net cash used by operating activities (47,430) (54,424)
--------- ---------
(Continued)
See notes to consolidated financial statements
AMERICO LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(In thousands - unaudited)
Three Months
Ended March 31,
2003 2002
---- ----
Cash flows from investing activities
Purchases of fixed maturity investments $ (269,152) $ (108,726)
Purchases of equity securities (497) (7,470)
Purchases of other investments (2,129) (794)
Mortgage loans originated (3,449) (5,583)
Maturities or redemptions of fixed maturity investments 33,383 13,734
Sales of fixed maturity available for sale investments 111,100 23,756
Sales of fixed maturity held to maturity investments - 7,932
Sales of equity securities 2 1,091
Sales of other investments 9,667 3,056
Repayments from mortgage loans 9,034 6,519
Change in due to brokers (112,087) 53,721
Change in policy loans 2,623 963
----------- -----------
Net cash used by investing activities (221,505) (11,801)
----------- -----------
Cash flows from financing activities
Receipts credited to policyholder account balances 191,271 97,252
Return of policyholder account balances (51,167) (57,169)
Repayment of notes receivable (7,003) -
Dividends paid (595) (591)
----------- -----------
Net cash provided by financing activities 132,506 39,492
----------- -----------
Net decrease in cash and cash equivalents (136,429) (26,733)
----------- -----------
Cash and cash equivalents at beginning of period 225,785 59,714
----------- -----------
Cash and cash equivalents at end of period $ 89,356 $ 32,981
=========== ===========
See notes to consolidated financial statements
AMERICO LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2003 and 2002
(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, 2002 Form 10-K as filed with the Securities and Exchange
Commission.
1. Accounting Policies
The unaudited consolidated financial statements as of March 31, 2003 and
for the three months ended March 31, 2003 and 2002 reflect all adjustments,
consisting of normal recurring adjustments, that 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, 2002 consolidated financial statements. The results of operations for the
three months ended March 31, 2003 and 2002 are not necessarily indicative of the
expected results for the full year 2003, nor the results experienced for the
year 2002.
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 April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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. As permitted by the
adoption provisions of SFAS No. 145, we applied the guidance regarding the
classification of gains from extinguishment of debt to the repurchase of some of
our notes payable in December 2002. These gains were not determined to be
extraordinary.
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.
In November 2002, the FASB issued Interpretation 45 "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 requires a grantor to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. FIN 45 also expands the disclosures
required to be made by a guarantor about its obligations under certain
guarantees that it has issued. The initial recognition and measurement
provisions of FIN 45 are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002. The disclosure requirements of FIN 45 were
effective immediately. The Company has not issued any guarantees that are
currently outstanding.
In January 2003, the FASB issued Interpretation 46 "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 requires companies that control
another entity through interests other than voting interests to consolidate the
controlled entity. FIN 46 applies to variable interest entities created after
January 31, 2003, and to variable interest entities in which an enterprise
obtains an interest after that date. The related disclosure requirements of FIN
46 are effective immediately. The Company does not expect FIN 46 to have a
material impact on its consolidated financial position or results of operations.
Recently issued accounting pronouncements
In February 2003, the FASB's Derivatives Implementation Group issued SFAS
No. 133 Implementation Issue No. B36, "Embedded Derivatives: Modified
Coinsurance Arrangements and Debt Instruments that Incorporate Credit Risk
Exposures that are Unrelated or Only Partially Related to the Creditworthiness
of the Obligor Under Those Instruments", or DIG Issue B36. DIG issue B36 applies
to modified coinsurance and coinsurance with funds withheld reinsurance
agreements where interest is determined by reference to a pool of fixed maturity
assets or a total return debt index. Such arrangements in which funds are
withheld by the ceding insurer cause the reinsurer to recognize a receivable
from the ceding insurer as well as a liability representing reserves for the
insurance coverage assumed under the reinsurance arrangements. The Company has
reinsurance agreements under which it recognizes investment income based upon
the return of a specified block of invested assets held by a reinsurer. DIG
issue B36 considers the receivable from the reinsurer to contain an embedded
derivative that must be bifurcated and accounted for separately under SFAS No.
133. DIG Issue B36 is effective for quarters beginning after September 15, 2003.
Currently, the Company does not account for such reinsurance receivables as
having an embedded derivative that would be bifurcated and accounted for
separately. The Company will continue to evaluate the impacts of implementing
DIG Issue B36; however, at this time, it is unable to estimate the effects on
our consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. SFAS No. 149 clarifies under what circumstances a contract with an
initial net investment meets the characteristic of a derivative. In addition,
SFAS No. 149 amends certain other existing pronouncements to create more
consistent reporting of contracts that are derivatives in their entirety or that
contain embedded derivatives that warrant separate accounting. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003, with
certain exceptions. SFAS No. 149 does not change the accounting for any
derivative instruments to which the Company is currently a party; therefore,
adoption of this statement will not affect the Company's consolidated financial
statements.
2. Stockholder's Equity
Comprehensive income (loss) for the three months ended March 31, 2003 and
2002 is as follows:
2003 2002
---- ----
Net income $ 4,220 $ 4,551
Other comprehensive income (loss) (2,420) (6,711)
-------- --------
Comprehensive income (loss) $ 1,800 $ (2,160)
======== ========
Following are the components of net unrealized investment gains which
comprise accumulated other comprehensive income:
Three Months
March 31, December 31, Ended
2003 2002 March 31, 2003
---- ---- --------------
Investment securities:
Fixed maturities available for sale $ 109,007 $ 99,881 $ 9,126
Fixed maturities reclassified from
available for sale to held to maturity 16,712 18,435 (1,723)
Equity securities 3,844 11,941 (8,097)
----------- ----------- -----------
129,563 130,257 (694)
Effect on other balance sheet accounts (60,348) (57,319) (3,029)
Deferred income taxes (23,484) (24,787) 1,303
----------- ----------- -----------
Net unrealized investment gains $ 45,731 $ 48,151 $ (2,420)
=========== =========== ===========
During both the three months ended March 31, 2003 and 2002, the Company
paid cash dividends on its common stock to Financial Holding Corporation ("FHC")
totaling $500.
During the three months ended March 31, 2003, the Company paid dividends on
its preferred stock of $1,681, consisting of $1,550 of additional shares of
preferred stock and $131 of cash. During the three months ended March 31, 2003,
the Company received dividends on FHC preferred stock of $1,585, consisting of
$1,550 of additional shares of preferred stock and $35 of cash. During the three
months ended March 31, 2002, the Company paid dividends on its preferred stock
of $1,770, consisting of $1,000 of additional shares of preferred stock and $770
of cash. During the three months ended March 31, 2002, the Company received
dividends on FHC preferred stock of $1,679, consisting of $1,000 of additional
shares of preferred stock and $679 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.
3. Notes Payable
On January 31, 2003, one of the Company's subsidiaries purchased $7,000 of
the Company's outstanding senior subordinated notes. The senior subordinated
notes are presented on the consolidated balance sheet net of $15,500 and $8,500
of notes owned by its subsidiaries as of March 31, 2003 and December 31, 2002,
respectively.
On May 5, 2003, the Company issued senior notes (the "Senior Notes") with a
par amount totaling $125,000 and an annual coupon rate of 7.875%. The Senior
Notes were issued at a discount of $1,480 and have an effective interest rate of
8.05%. The Company incurred approximately $2,000 of expenses, including
underwriting fees, to issue the Senior Notes.
The Company has notified holders of the senior subordinated notes that the
senior subordinated notes will be redeemed at par plus accrued interest on May
28, 2003, using proceeds from the issuance of the Senior Notes.
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 (In re
Great Southern Life Insurance Company Sales Practices Litigation, United States
District Court for the Northern District of Texas, MDL No 1214). 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
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 1,600 policyholders owning
approximately 2,800 policies have notified Great Southern that they are
represented by counsel. In early February 2002, Great Southern filed actions in
12 states against approximately 1,300 of these policyholders owning
approximately 2,100 of these policies seeking, among other things, a declaration
of nonliability. Pursuant to Great Southern's request, the Judicial Panel on
Multidistrict Litigation has transferred the actions filed outside of Texas to
the United States District Court for the Northern District of Texas for
consolidated pretrial proceedings as part of MDL No. 1214 referenced above. In
addition, several other policyholders who sent in exclusion notices have filed
separate actions against Great Southern in several states asserting claims
related to allegedly deceptive sales practices and seeking actual and punitive
damages. Approximately nine such individual policyholder actions are pending at
this time, five of which have been transferred or conditionally transferred to
MDL No. 1214 for consolidated pretrial proceedings. Great Southern is unable to
estimate the costs it might incur as a result of the exclusion notices or in the
event the outcomes of these opt-out suits are adverse to it.
On September 5, 2002, a purported class action lawsuit was filed against
Great Southern and another entity, Ohio Life, that is not affiliated with the
Company, in the First Judicial District Court of Santa Fe, New Mexico (Barr v.
Great Southern Life Insurance Company, et al, Case No. D-0101-CV-2002-01927).
The plaintiff, on behalf of herself and all current owners of individual
insurance policies issued by Great Southern who paid premiums on a monthly,
quarterly or semi-annual basis, alleges that Great Southern engaged in unfair,
deceptive and illegal practices by allegedly failing to disclose the dollar
amount and effective annual percentage rate of the extra cost associated with
paying premiums on a modal, or installment, basis. The plaintiff has requested
for herself and the putative class an award of damages, treble damages, punitive
damages, attorneys' fees, interest, injunctive relief and declaratory relief.
Great Southern initially removed the action to federal court; however, on
January 27, 2003 the action was remanded back to state court. Great Southern has
denied all allegations of wrongdoing and is defending itself vigorously.
On November 18, 2002, Penn-Mont Benefit Services, Inc. ("Penn-Mont")
entered a confessed judgment against Great Southern in the amount of $11.5
million in the Pennsylvania Court of Common Pleas, Philadelphia County. A
confessed judgment is similar to a judgment entered by consent and can only be
entered in court when an agreement contains an explicit provision allowing a
party to present the agreement to the court as if the defaulting party had
consented to the judgment against it. Penn-Mont entered the confessed judgment
purportedly pursuant to terms in a confidentiality agreement between Penn-Mont
and Great Southern, which, among other things, prohibits disclosure of
confidential information. Penn-Mont alleges Great Southern disclosed
confidential information and breached other provisions of the confidentiality
agreement. Great Southern denies any breach of the confidentiality agreement,
and has filed a petition with the Court to strike or open the judgment. The
parties are presently awaiting a decision by the Court. Pending the Court's
decision, the Court stayed enforcement of the judgment against Great Southern.
Beginning in March 2000, California's Attorney General raised certain
questions and concerns regarding our retained asset account program and, in
October 2000, the California Attorney General's office notified us that it had
opened an investigation of this program. Under this program, death benefits due
to life insurance beneficiaries are retained by us in an account (referred to as
an "FAA" or financial asset account) that is accessible in whole or in part by
drafts drawn by the beneficiaries. Among other things, the California Attorney
General expressed concern regarding disclosure issues underlying the program,
the absence of settlement options presented to beneficiaries and the fact that
the assets retained by us to pay out the death benefits under the program were
not segregated in an individual insured bank account. Although we believe that
our administration of the FAA program was lawful and in conformity with standard
industry practice, we revised various aspects of the program and sought the
input of the California Attorney General's Office in an attempt to address the
questions and concerns it raised.
Despite these revisions, the California Attorney General's Office advised
us that it would consider resolving its concerns only if we made additional
revisions to the program and stipulated to a judgment with injunctive provisions
that would prohibit us from, among other things, maintaining the opt-out feature
of the program. The Attorney General's Office also indicated that it would
pursue an unspecified monetary civil penalty against us. Accordingly, although
we were not required to do so, we decided to terminate our FAA program in
California effective as of January 31, 2003, because we believed compliance with
the suggested injunctive provisions would have made the program impractical.
Substantially all of our FAA program accounts with California addresses have now
been closed and funds due to beneficiaries have been paid along with applicable
interest accrued. We notified the California Attorney General on March 6, 2003
of our decision to terminate our FAA program in California. The Attorney
General's Office has not yet responded to our notification and we do not know
whether or to what extent the California Attorney General will pursue its
request for a stipulated judgment and a civil penalty. To date, no formal
proceeding has been instituted against us in connection with this investigation.
The Company and its subsidiaries are also named as defendants in other
pending actions, including purported class actions filed against Great Southern
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, and such amounts could be large. There can be no assurance
that any one or more of these matters, if adversely determined, will not exceed
amounts provided for in the Company's consolidated financial statements or will
not 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, 2002 consolidated financial statements. Asset information
by segment is not reported, because the Company does not produce such
information internally.
Asset
Life Insurance Accumulation Corporate Consolidated
Operations Operations Items Totals
---------- ---------- ----- ------
Three Months Ended March 31,
--------------------------------------------------------------------------------
2003 2002 2003 2002 2003 2002 2003 2002
---- ---- ---- ---- ---- ---- ---- ----
Revenues $90,668 $92,864 $20,441 $17,523 $1,098 $1,679 $112,207 $112,066
Income (loss) before income taxes 12,384 10,052 1,843 2,502 (7,743) (5,702) 6,484 6,852
Significant corporate items shown in the above table which are not
allocated to specific segments include interest expense on notes payable, net
investment income generated by invested assets not supporting life insurance or
annuity liabilities, operating expenses not associated with the servicing of
life insurance policies and annuity contracts and net realized investment gains
and losses.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion analyzes significant items affecting the results
of operations and the financial condition of the Company. 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. Forward-looking statements are statements not based on historical
information and which relate to future operations, strategies, financial
results, or other developments. Forward-looking statements can be identified by
terminology such as "may", "will", "should", "expect", "plan", "anticipate",
"believe", "estimate", "predict", "intend", "potential", "continue", or with the
negative of these terms or other comparable terminology. 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. Factors that may
cause results or developments to differ materially from the forward-looking
statements include, but are not limited to the following:
o market, political and legal conditions, including the performance of
financial markets and interest rate fluctuations;
o volatility in the securities markets and investment losses and
defaults;
o re-estimates of our policy and contract liabilities;
o changes in our financial strength or credit ratings;
o the impact of changing regulation, accounting practices or
legislation, including federal income tax law; and
o the quality and price of similar or comparable products offered by
our competitors.
Although the Company believes that the expectations reflected in its forward
looking statements are reasonable, it cannot guarantee its future results,
performance or achievements. The Company disclaims any obligation to update or
revise forward-looking information, whether as a result of new information,
future events or otherwise.
This discussion should be read in conjunction with the accompanying
consolidated financial statements and the notes thereto. Unless the context
otherwise requires, the term "Company" as used herein refers to Americo Life,
Inc. and its consolidated subsidiaries, and the term "Americo" refers to only
Americo Life, Inc.
Critical Accounting Policies
Reference is made to the Company's Form 10-K for the year ended December
31, 2002 for a discussion of the Company's critical accounting policies and the
use of certain judgments and estimates in the preparation of the Company's
consolidated financial statements. There were no changes in estimates during the
three months ended March 31, 2003 which had a significant impact on the
Company's reported results of operations or financial condition.
Results of Operations
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002
Income before income taxes for the three months ended March 31, 2003 was
$6.5 million compared to $6.9 million for the three months ended March 31, 2002.
The primary reasons for the decrease in profits in 2003 compared to 2002 were
(i) net realized investment losses of $2.1 million in 2002 versus net realized
investment gains of $0.8 million in 2001, (ii) a $3.2 million increase in
operating expenses, primarily associated with litigation costs and (iii) a $2.2
million increase in interest credited on policyholder funds. These decreases to
profits in 2003 were partially offset by (i) a $3.2 million increase in other
income, primarily associated with a favorable arbitration ruling and (ii) a $2.6
million decrease in death benefits.
Premiums and policy revenues. Premiums and policy revenues decreased $0.6
million, or 0.1%, to $53.3 million for the three months ended March 31, 2003
from $53.9 million for the three months ended March 31, 2002. Policy revenues
from interest-sensitive life and annuity products decreased $1.3 million from
2002 to 2003, primarily as a result of lower surrender charges in 2003. Premiums
from traditional life insurance business increased $0.7 million for the three
months ended March 31, 2003 compared to the three months ended March 31, 2002. A
$1.1 million increase in premiums from the Company's traditional life insurance
business was partially offset by a $0.4 million decrease in premiums from
preneed whole life insurance products.
The Company made the decision in the first quarter of 2003 to discontinue
selling its preneed whole life insurance products. This decision will have the
effect of reducing premiums in 2003 as compared to 2002. However, policyholder
benefits associated with these products will experience a similar decline. As a
result, we believe our decision to discontinue these sales will not have a
material impact on our future results of operations.
Net investment income. Net investment income increased $0.5 million, or
0.1%, to $55.8 million for the three months ended March 31, 2003 compared to
$55.3 million for the three months ended March 31, 2002. Net investment income
for the three months ended March 31, 2003 and 2002 was comprised of the
following (in millions):
2003 2002
---- ----
Fixed maturity securities $ 39.4 $ 37.1
Mortgage loans 5.6 5.4
Policy loans 2.6 2.7
Reinsurance funds held by reinsurer 10.8 12.1
Derivatives (2.8) (2.6)
Other, net of investment expenses 0.2 0.6
--------- ---------
Net investment income $ 55.8 $ 55.3
========= =========
Investment income from fixed maturity securities increased $2.3 million in
2003 as compared to 2002 because the Company owned more invested assets in 2003
as compared to 2002, as a result of the overall growth in our business.
Partially offsetting the increase in investment income from fixed maturity
securities was a $1.3 million decrease in 2003 in investment income earned on
reinsurance funds held by reinsurer, due to a decrease in the amount of funds
held by reinsurer in 2003. The decrease in reinsurance funds held by reinsurer
in 2003 was consistent with the decrease in policy liabilities related to these
reinsurance funds.
The changes in the fair values of call options and futures contracts owned
by the Company are recorded as a component of investment income. Declines in the
fair value of the Company's call options and futures contracts were $2.8 million
and $2.6 million during the three months ended March 31, 2003 and 2002,
respectively. The decreases in the fair value of these call options and futures
contracts were offset by declines of $3.7 million in 2003 and $2.1 million in
2002 in the fair value of the embedded derivative component of the Company's
equity-indexed annuity liabilities, which is recorded as a component of
policyholder benefits.
Net realized investment losses. Net realized investment losses increased
$2.9 million, to a loss of $2.1 million for the three months ended March 31,
2003 from a gain of $0.8 million for the three months ended March 31, 2002.
During the three months ended March 31, 2003, the Company realized $4.6 million
of losses on fixed maturity security securities and $0.2 million of losses on
other invested assets. Included in the losses on fixed maturity securities in
2003 were $2.2 million of write-downs due to other than temporary impairments.
The realized investment losses in 2003 were partially offset by a $2.7 million
gain on the sale of real estate. During the three months ended March 31, 2002,
the Company realized $0.8 million of gains from sales of fixed maturity
securities.
Other income. Other income was $5.3 million for the three months ended
March 31, 2003 compared to $2.0 million for the three months ended March 31,
2002. The increase in other income in 2003 resulted from $3.5 million of income
as a result of an award from an arbitration proceeding in the first quarter of
2003 involving the sharing of defense and settlement costs of a class action in
which the Company had been a co-defendant.
Policyholder benefits. Policyholder benefits decreased $2.7 million, or
4.0%, to $65.1 million for the three months ended March 31, 2003 from $67.8
million for the three months ended March 31, 2002. The primary reasons for the
decrease in policyholder benefits in 2003 was a $2.6 million decrease in death
benefits and a $1.6 million larger decrease in 2003 in the fair value of the
embedded derivative component of our equity-indexed annuity liabilities. As
discussed above, a decrease in the fair value of the embedded derivative
component is recorded as a reduction to policyholder benefits. The fair values
of the embedded derivative component decreased $3.7 million in 2003 and $2.1
million in 2002. These decreases to policyholder benefits in 2003 were partially
offset by a $2.2 million increase in interest credited on policyholder funds due
to the overall growth of our universal life-type policies and annuity
policyholder funds.
Amortization expense. Amortization expense decreased $0.8 million, or 5.3%,
to $14.4 million for the three months ended March 31, 2003 from $15.2 million
for the three months ended March 31, 2002. The primary reason for the decrease
in amortization expense in 2003 was a $1.5 million decrease in amortization
expense resulting from realized losses in 2003 on fixed maturity securities
supporting our universal life-type liabilities. This decrease in amortization
expense in 2003 was partially offset by increased amortization of deferred
policy acquisition costs related to our annuity liabilities, primarily due to
the overall growth of these liabilities from 2002 to 2003.
Other operating expenses. Other operating expenses increased $3.2 million,
or 17.1%, to $22.0 million for the three months ended March 31, 2003 from $18.7
million for the three months ended March 31, 2002. The increase in other
operating expenses in 2003 resulted from the recording of $3.5 million of losses
associated with litigation settlements.
Segment Results
Our business consists of two operating segments: life insurance operations
and asset accumulation operations. Our life insurance operations segment is
composed of life insurance policies or annuity contracts that we have acquired
or that were sold directly by one of our life insurance subsidiaries, other than
those sold in our asset accumulation operations segment. Our asset accumulation
operations segment is composed of annuity and life insurance products that we
sell to either public school teachers and administrators or to the senior
market.
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 Corporate Consolidated
Operations Operations Items Totals
---------- ---------- ----- ------
Three Months Ended March 31,
------------------------------------------------------------------------------------------
2003 2002 2003 2002 2003 2002 2003 2002
---- ---- ---- ---- ---- ---- ---- ----
Revenues $90.7 $92.9 $20.4 $17.5 $1.1 $1.7 $112.2 $112.1
Income before income
taxes 12.4 10.1 1.8 2.5 (7.7) (5.7) 6.5 6.9
Life insurance operations. Income before income taxes in our life insurance
operations segment increased $2.3 million, or 22.8%, to $12.4 million for the
three months ended March 31, 2003 from $10.1 million for the three months ended
March 31, 2002. The primary reasons for the increase in profits in 2003 were a
$2.4 million decrease in death benefits and a $2.3 million decrease in
amortization expense. The decrease in amortization expense includes a $1.5
million decrease resulting from realized losses on fixed maturity securities
supporting our universal life-type liabilities. This increase in profits
occurred notwithstanding a $2.2 million decrease in net investment income,
primarily resulting from the overall decrease in the policy liabilities and
related invested assets associated with this segment.
Asset accumulation operations. Income before income taxes in our asset
accumulation operations segment decreased $0.7 million, or 28%, to $1.8 million
for the three months ended March 31, 2003 from $2.5 million for the three months
ended March 31, 2002. The decrease in profits in 2003 is primarily due to a $1.6
million increase in amortization expense in 2003, which resulted from the
overall increase in the policy liabilities and deferred policy acquisition costs
associated with this segment.
Corporate 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. Significant corporate items shown
in the above table which are not allocated to specific segments include interest
expense on notes payable, the portion of net investment income generated by
invested assets not supporting life insurance or annuity liabilities, the
portion of operating expenses not associated with the servicing of life
insurance policies and annuity contracts and net realized investment gains and
losses.
Revenues from corporate items were $1.1 million and $1.7 million for the
three months ended March 31, 2003 and 2002, respectively. The decrease in
revenues in 2003 primarily from realized investment losses of $2.1 million in
2003 compared to realized investment gains of $0.8 million in 2002 and a
decrease in investment income generated by corporate invested assets. These
decreased revenues in 2003 were partially offset by a $3.5 million gain from an
arbitration award granted to the Company in the first quarter of 2003, which is
included in other income.
The loss before income taxes from reconciling items increased $2.0 million,
or 35%, to $7.7 million for the three months ended March 31, 2003 from $5.7
million for the three months ended March 31, 2002. The increase in the loss in
2003 compared to 2002 primarily resulted from the realized investment gains and
losses discussed in the preceding paragraph and increased other operating
expenses associated with litigation costs in 2003, partially offset by the
arbitration award discussed above.
Financial Condition and Liquidity
The changes occurring in the Company's consolidated balance sheet from
December 31, 2002 to March 31, 2003 primarily reflect the normal operations of
the Company's life insurance subsidiaries.
The quality of the Company's investment in fixed maturity investments at
March 31, 2003 remained consistent with the quality at December 31, 2002.
Non-investment grade securities totaled approximately 5.7% of the Company's
total fixed maturity investments at March 31, 2003. The Company has not made any
significant changes to its investment philosophy during 2003.
The Company's net unrealized investment gains decreased $2.4 million during
the first three months of 2003. The components of the change during the three
months ended March 31, 2003 were as follows (in millions):
Investment securities:
Fixed maturities available for sale $ 9.1
Fixed maturities reclassified from
available for sale to held to maturity (1.7)
Equity securities (8.1)
-------
(0.7)
Effect on other balance sheet accounts (3.0)
Deferred income taxes 1.3
-------
Net unrealized investment losses $ (2.4)
=======
On January 31, 2003, one of Americo's subsidiaries purchased $7.0 million
of Americo's outstanding senior subordinated notes. The senior subordinated
notes are presented on the consolidated balance sheet net of $15.5 million and
$8.5 million of notes owned by its subsidiaries as of March 31, 2003 and
December 31, 2002, respectively.
On May 5, 2003, Americo issued senior notes (the "Senior Notes") with a par
amount totaling $125.0 million and an annual coupon rate of 7.875%. The Senior
Notes were issued at a discount of $1.5 million and have an effective interest
rate of 8.05%. Americo incurred approximately $2.0 million of expenses,
including underwriting fees, to issue the Senior Notes.
Americo has notified holders of the senior subordinated notes that the
senior subordinated notes will be redeemed at par plus accrued interest on May
28, 2003.
Americo receives principal and interest payments on surplus debentures from
United Fidelity Life Insurance Company ("United Fidelity") as one of its primary
sources of liquidity. United Fidelity currently makes surplus debenture
principal and interest payments to Americo based upon payment schedules that
have been approved by the Texas Department of Insurance. The terms of the
surplus debentures were designed to correspond with payments on Americo's senior
subordinated notes. Accordingly, upon repayment of the senior subordinated
notes, the Company will seek approval of the Texas Department of Insurance to
amend the current payment schedules of the surplus debentures to extend their
maturity dates to more closely correspond to the payment schedule of the Senior
Notes.
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, 2002, included in the Company's Form
10-K for the year ended December 31, 2002. During the three months ended March
31, 2003, changes in the interest rate environment did not adversely affect the
Company's economic position. These rate changes do not materially affect
disclosures included in the Company's December 31, 2002 Form 10-K regarding the
Company's exposure to market risk.
ITEM 4. CONTROLS AND PROCEDURES
The Company, under the direction of the Chief Executive Officer and the
Chief Financial Officer, has established disclosure controls and procedures that
are designed to insure that information required to be disclosed by the Company
in the reports that it files or submits under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms. The disclosure controls and procedures
are also intended to ensure that such information is accumulated and
communicated to the Company's management, including the Chief Executive Officer
and the Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosures.
Within 90 days of the filing of this Report, the Chief Executive Officer
and the Chief Financial Officer have reviewed and evaluated the Company's
disclosure controls and procedures. Based on, and as of the date of, that review
and evaluation, the Chief Executive Officer and the Chief Financial Officer have
concluded that the Company's disclosure controls and procedures are effectively
serving the stated purposes.
In addition, there have been no significant changes in the Company's
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their most recent evaluation. No significant
deficiencies or material weaknesses in the internal controls were identified
during the evaluation and, as a consequence, no corrective action is required to
be taken.
PART II - OTHER INFORMATION
ITEM 2. LEGAL PROCEEDINGS
Reference is made to the Company's Annual Report on Form 10-K for the year
ended December 31, 2002 regarding certain legal proceedings to which the Company
and its subsidiaries are parties.
Included among the matters reported in the Company's Form 10-K for the year
ended December 31, 2003, was an investigation started in October 2000 by the
California Attorney General into our retained asset account program. Under this
program, death benefits due to life insurance beneficiaries are retained by us
in an account (referred to as an "FAA" or financial access account) that is
accessible in whole or in part by drafts drawn by the beneficiaries. Although we
believe that our administration of the FAA program was lawful and in conformity
with standard industry practice, we revised various aspects of the program and
sought the input of the California Attorney General's Office in an attempt to
address the questions and concerns it raised.
Despite these revisions, the California Attorney General's Office advised
us that it would consider resolving its concerns only if we made additional
revisions to the program and stipulated to a judgment with injunctive provisions
that would prohibit us from, among other things, maintaining the opt-out feature
of the program. The Attorney General's Office also indicated that it would
pursue an unspecified monetary civil penalty against us. Accordingly, although
we were not required to do so, we decided to terminate our FAA program in
California effective as of January 31, 2003, because we believed compliance with
the suggested injunctive provisions would have made the program impractical.
Substantially all of our FAA program accounts with California addresses have now
been closed and funds due to beneficiaries have been paid along with applicable
interest accrued. We notified the California Attorney General on March 6, 2003
of our decision to terminate our FAA program in California. The Attorney
General's Office has not yet responded to our notification and we do not know
whether or to what extent the California Attorney General will pursue its
request for a stipulated judgment and a civil penalty. To date, no formal
proceeding has been instituted against us in connection with this investigation.
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).
- ------------------------------- ----------------------------------------------
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed for the three months ended March 31,
2003.
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: May 14, 2003
I, Gary L. Muller, President and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Americo Life, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003
/s/ Gary L. Muller
--------------------------------------------
Gary L. Muller
President and Chief Executive Officer
AMERICO LIFE, INC. AND SUBSIDIARIES
I, Mark K. Fallon, Senior Vice President and Chief Financial Officer, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Americo Life, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003
/s/ Mark K. Fallon
--------------------------------------------
Mark K. Fallon
Senior Vice President and
Chief Financial Officer