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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-13654
LIBERTY FINANCIAL COMPANIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------------
MASSACHUSETTS 04-3260640
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
600 ATLANTIC AVENUE 02210-2214
BOSTON, MASSACHUSETTS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 722-6000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
Common Stock, Par Value $.01 per share New York Stock Exchange
Boston Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
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, and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of Common Stock held by non-affiliates of the
registrant as of March 17, 2000 (based on the closing sale price of the Common
Stock on the New York Stock Exchange on such date) was approximately
$278.6 million.
There were 47,726,803 shares of the registrant's Common Stock, $.01 par
value, and 324,759 shares of the registrant's Series A Convertible Preferred
Stock, $.01 par value, outstanding as of March 17, 2000.
------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's 1999 Annual Report to Stockholders are incorporated
into Part II, Items 6, 7, 7A and 8, and Part IV, Item 14(a)1, of this
Form 10-K.
Portions of the Company's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on or about May 8, 2000 are incorporated into Part III,
Items 10, 11, 12, and 13, of this Form 10-K.
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LIBERTY FINANCIAL COMPANIES, INC.
ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
PART I PAGE
- ------ --------
Item 1. Business 1
Executive Officers of the Registrant 19
Item 2. Properties 20
Item 3. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 21
PART II
--------
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 21
Item 6. Selected Financial Data 22
Item 7. Management's Discussion and Analysis of Financial Condition
and
Results of Operations 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 22
Item 8. Financial Statements and Supplementary Data 22
Item 9. Changes in and Disagreements with Accountants on Accounting
and
Financial Disclosure 22
PART III
--------
Item 10. Directors and Executive Officers of the Registrant 22
Item 11. Executive Compensation 22
Item 12. Security Ownership of Certain Beneficial Owners and
Management 23
Item 13. Certain Relationships and Related Transactions 23
PART IV
--------
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K 23
PART I
ITEM 1. BUSINESS
OVERVIEW
Liberty Financial Companies, Inc. ("Liberty Financial" or the "Company") is
an asset accumulation and management company. The Company has two core product
lines--retirement-oriented insurance products and investment management
products. Retirement-oriented insurance products consist substantially of
annuities. Investment management products consist of mutual funds, private
capital management and institutional asset management. The Company sells its
products through multiple distribution channels, including brokerage firms,
banks and other depository institutions, financial planners and insurance
agents, as well as directly to investors. The Company's net operating income
(i.e., net income excluding net realized investment gains and losses and
extraordinary items, net of related income taxes) was $126.7 million in 1999,
$122.6 million in 1998 and $112.4 million in 1997. The following table sets
forth the Company's assets under management as of December 31, 1999, 1998 and
1997, respectively.
ASSETS UNDER MANAGEMENT
--------------------------------------
AS OF DECEMBER 31,
--------------------------------------
1999 1998 1997
-------- -------- --------
(DOLLARS IN BILLIONS)
Retirement-oriented insurance products...................... $13.7 $13.1 $12.8
Mutual funds................................................ 29.8 28.6 26.8
Private capital management.................................. 9.1 7.9 6.6
Institutional asset management.............................. 12.5 11.4 5.3
----- ----- -----
Total....................................................... $65.1 $61.0 $51.5
===== ===== =====
At March 17, 2000, approximately 70.68% of the combined voting power of
Liberty Financial's voting stock was indirectly owned by Liberty Mutual
Insurance Company ("Liberty Mutual").
Liberty Financial's principal executive offices are located at 600 Atlantic
Avenue, Boston, Massachusetts 02210-2214. Its telephone number is
(617) 722-6000.
MULTIPLE ASSET ACCUMULATION PRODUCTS. The Company sells a full range of
retirement-oriented insurance products, grouped by whether they provide fixed,
indexed or variable returns to policyholders. Substantially all of these
products currently are annuities that are written by the Company's wholly-owned
subsidiary, Keyport Life Insurance Company ("Keyport"). Annuities are insurance
products which provide a tax-deferred means of accumulating savings for
retirement needs, as well as a tax-efficient source of income in the payout
period. The Company's principal fixed annuity products are individual single
premium deferred fixed annuities ("SPDAs"), which represented $7.6 billion of
policyholder liabilities as of December 31, 1999. In addition to SPDAs, the
Company also sells equity-indexed and variable annuities. Equity-indexed
annuities are an innovative product first introduced to the marketplace by the
Company when it began selling its KeyIndex-Registered Trademark- product in
1995. The Company's equity-indexed annuities credit interest to the policyholder
at a "participation rate" equal to a portion of the change in value of a
specified equity index (in the case of the Company's equity-indexed products,
the Standard & Poor's 500 Composite Stock Index ("S&P 500 Index")).(*) Under a
variable annuity, the policyholder has the opportunity to select separate
account investment options, consisting of underlying mutual funds, which pass
the investment risk directly to the policyholder in return for the potential of
higher returns. Variable annuities also include guaranteed fixed interest rate
options.
- ------------------------
* "S&P," "S&P 500" and "Standard & Poor's 500" are registered trademarks of The
McGraw-Hill Companies, Inc., and have been licensed for use by Keyport.
1
The Company has seven operating units engaged in investment management:
Liberty Funds Group LLC ("LFG"), Colonial Management Associates, Inc.,
("Colonial"), Stein Roe & Farnham Incorporated ("Stein Roe"), Newport Pacific
Management, Inc. ("Newport"), Crabbe Huson Group, Inc. ("Crabbe Huson"),
Progress Investment Management Company ("Progress") and Liberty Asset Management
Company ("LAMCO"), each of which carries strong brand name recognition in the
markets it serves. As of December 31, 1999, the Company sponsored 85 open-end
mutual funds, as well as 10 closed-end funds. The open-end funds consist of 48
intermediary-distributed funds, 20 direct-marketed funds, and 17 other funds
included among the investment options available under the Company's variable
annuities. The closed-end funds consist of 8 fixed income funds and 2 equity
funds. 65 of the Company's 85 open-end mutual funds are long-term funds (defined
as open-end funds having at least a three-year performance record, excluding
funds that invest solely in money market securities). 41 of those 65 funds
(representing 74% of the total assets in those 65 funds as of December 31, 1999)
were ranked by Lipper Analytical Services, Inc. ("Lipper") in the top two
quartiles of their respective peer groups for the three-year period ended that
date.
MULTIPLE DISTRIBUTION CHANNELS. Liberty Financial sells its products
through multiple distribution channels. The Company distributes its products
through all the major third party intermediary channels, including national and
regional brokerage firms, banks and other depository institutions, financial
planners and insurance agents. To capitalize on the importance of banks and
other depository institutions as intermediaries for its products, the Company
also operates its own distribution unit, Independent Financial Marketing
Group, Inc. ("Independent") which sells annuities and mutual funds through such
entities. Certain of the Company's products also are sold directly to investors,
including its mutual funds sold without a sales load, private capital management
and institutional asset management products. The Company believes that it is one
of the few asset accumulators with a significant presence in both the
intermediary and direct channels. Total product sales for 1999 were
$13.4 billion (including $1.8 billion of reinvested dividends). During 1999, 56%
of sales were made through intermediary distributors, with the balance made
directly to the investor. Over 38,000 individual brokers and other
intermediaries sold Liberty Financial products in 1999.
BUSINESS STRATEGY. The Company's business strategy has four interrelated
elements:
- - DIVERSIFICATION. The Company believes that the diversification in its
products and distribution channels allows it to accumulate assets in
different market cycles, thereby providing more consistent growth potential
and reducing earnings volatility. Within its two core product lines, the
Company sells a range of products that serve individuals at different stages
of their life and earnings cycle. This mix also is designed to include
products that will be in demand under a variety of economic and market
conditions. Similarly, the Company reaches customers through a variety of
distribution channels. Diversification of distribution channels allows the
Company to reach many segments of the marketplace and lessens its dependence
on any one source of assets.
- - INTEGRATION. Liberty Financial actively promotes integration of its operating
units and believes that such efforts will enable it to accumulate additional
assets by leveraging distribution capabilities and to reduce expenses by
consolidating redundant back office functions. The Company has consolidated
under Liberty Funds Group its mutual fund administration and transfer agency
operations and has consolidated under Liberty Funds Distributor the
distribution of the Company's intermediary distributed mutual funds and
annuity insurance products, while retaining the distinctive styles and
processes of its investment management subsidiaries. Stein Roe manages the
majority of Keyport's general account assets and together with Colonial,
Newport and LAMCO manages certain of the funds underlying Keyport's variable
annuity products. Independent was the largest distributor of Keyport's
annuities and the largest distributor of the Company's mutual funds in 1999.
2
- - ACQUISITIONS. Where appropriate, the Company seeks acquisitions that provide
additional assets, new or complementary investment management capabilities,
distribution capabilities or other integration or diversification
opportunities in its core product areas. Acquisitions are an integral part of
Liberty Financial's business strategy. Stein Roe (acquired in 1986), Keyport
(acquired in 1988), LFG (acquired in 1995), Newport (acquired in 1995),
Crabbe Huson (acquired in 1998), Progress (acquired in 1998) and major
components of the Company's bank distribution unit (including Independent,
acquired in 1996) all joined Liberty Financial by acquisition. The Company is
constantly evaluating acquisition opportunities. As of the date of this
Report, the Company has not entered into any definitive agreement for a
material acquisition.
- - INNOVATION. Liberty Financial believes that product and distribution
innovations are essential in order to grow its asset base and meet the ever
changing financial needs of its customers. The Company believes that it has
an impressive track record in such innovations. For example, the Stein Roe
Young Investor-TM- Fund was the first mutual fund to be coupled with an
educational program to teach young people about investing, while offering
parents an excellent device to save for educational and other family needs.
The Company also introduced the first equity-indexed annuity product to the
marketplace, was an early adopter of internet technology to support its
business, and recently began to sell annuities over the internet.
The Company's business strategy is based on its belief that its products
have attractive growth prospects due to important demographic and economic
trends. These trends include the need for the aging baby boom generation to both
increase savings and investment and plan for retirement income, lower public
confidence in the adequacy of government and employer-provided retirement
benefits, longer life expectancies, and rising health care costs. The Company
believes that its product mix and distribution strength are well suited to
exploit these demographic and economic trends and will help the Company maintain
and enhance its position as a leading asset accumulation and management company.
RETIREMENT-ORIENTED INSURANCE PRODUCTS
The Company sells a full range of retirement-oriented insurance products,
grouped by whether they provide fixed, indexed or variable returns to
policyholders. Annuities are insurance products designed to offer individuals
protection against the risk of outliving their financial assets during
retirement. Annuities offer a tax-deferred means of accumulating savings for
retirement needs and provide a tax-efficient source of income in the payout
period. The Company earns spread income from fixed and indexed annuities;
variable annuities primarily produce fee income for the Company. The Company's
primary financial objectives for its annuities business are to increase
policyholder balances through new sales and asset retention and to earn
acceptable investment spreads on its fixed and indexed return products.
PRODUCTS
The Company's principal retirement-oriented insurance products are
categorized as follows:
FIXED ANNUITIES. The Company's principal fixed annuity products are SPDAs.
A SPDA policyholder makes a single premium payment at the time of issuance. The
Company obligates itself to credit interest to the policyholder's account at a
rate that is guaranteed for an initial term (typically one year) and is reset
annually thereafter, subject to a guaranteed minimum rate. Interest crediting
continues until the policy is surrendered or the policyholder dies or turns age
90.
EQUITY-INDEXED ANNUITIES. Equity-indexed annuities are an innovative
product first introduced to the marketplace in 1995 by the Company when it began
selling its KeyIndex product. The Company's equity-indexed annuities credit
interest to the policyholder at a "participation rate" equal to a portion
(ranging for existing policies from 25% to 100%) of the change in value of a
specified equity index. KeyIndex is currently offered for one, five and
seven-year terms with interest earnings based on a
3
percentage of the increase in the S&P 500 Index. With the five and seven-year
terms, the interest earnings are based on the highest policy anniversary date
value of the S&P 500 Index during the term. KeyIndex also provides a guarantee
of principal at the end of the term. Thus, unlike a direct equity investment,
even if the S&P 500 Index declines there is no market risk to the policyholder's
principal. In late 1996, the Company introduced a market value adjusted ("MVA")
annuity product, KeySelect, which offers a choice between an equity-indexed
account similar to KeyIndex and a fixed annuity-type interest account. KeySelect
offers terms for each equity-indexed account of one, three, five, six and seven
years, as well as a ten-year term for the fixed interest account. KeySelect
shifts some investment risk to the policyholder, since surrender of the policy
before the end of the policy term will result in increased or decreased account
values based on the change in rates of designated U.S. Treasury securities since
the beginning of the term. The Company is continuing to develop new versions of
its equity-indexed annuities, including versions registered under the Securities
Act of 1933 (the "Securities Act") which are designed to be sold through major
national brokerage firms.
VARIABLE ANNUITIES. Variable annuities offer a selection of underlying
investment alternatives which may satisfy a variety of policyholder risk/return
objectives. Under a variable annuity, the policyholder has the opportunity to
select separate account investment options (consisting of underlying mutual
funds) which pass the investment risk directly to the policyholder in return for
the potential of higher returns. Variable annuities also include guaranteed
fixed interest options. Keyport has several different variable annuity products
that currently offer from 18 to 24 separate account investment choices,
depending on the product, and four guaranteed fixed-interest options.
INSTITUTIONAL ANNUITIES. Institutional annuity products are principally
single premium deposits made by financial institutions that provide fixed or
variable returns over a specified period.
While the Company currently does not offer traditional life insurance
products, it manages a closed block of single premium whole life insurance
policies ("SPWLs"), a retirement-oriented tax-advantaged life insurance product.
The Company discontinued sales of SPWLs in response to certain tax law changes
in the 1980s. The Company had SPWL policyholder balances of $1.9 billion as of
December 31, 1999.
Under the Internal Revenue Code (the "Code"), returns credited on annuities
and life insurance policies during the accumulation period (the period during
which interest or other returns are credited) are not subject to federal income
tax. Proceeds payable on death from a life insurance policy are also free from
such taxes. At the maturity or payment date of an annuity policy, the
policyholder is entitled to receive the original deposit plus accumulated
returns. The policyholder may elect to take this amount in either a lump sum or
an annualized series of payments over time. The return component of such
payments is taxed at the time of receipt as ordinary income at the recipient's
then applicable tax rate. The demand for the Company's retirement-oriented
insurance products could be adversely affected by changes in the tax law.
4
The following table sets forth certain information regarding Keyport's
retirement-oriented insurance products for the periods indicated.
AS OF OR FOR THE YEAR ENDED
DECEMBER 31,
--------------------------------
1999 1998 1997
--------- --------- --------
(DOLLARS IN MILLIONS,
EXCEPT POLICY DATA)
POLICY AND SEPARATE ACCOUNT LIABILITIES:
Fixed annuities............................................. $ 7,197 $ 7,834 $ 8,417
Equity Indexed annuities.................................... 2,503 2,125 1,527
Variable annuities.......................................... 2,666 1,744 1,277
Institutional annuities..................................... 950 412 --
Life insurance.............................................. 2,095 2,112 2,129
-------- -------- -------
Total....................................................... $ 15,411 $ 14,227 $13,350
======== ======== =======
NUMBER OF IN FORCE POLICIES:
Fixed annuities............................................. 182,858 205,508 222,903
Equity Indexed annuities.................................... 49,691 46,484 39,224
Variable annuities.......................................... 43,677 37,049 27,429
Institutional annuities..................................... 6 2 --
Life insurance.............................................. 21,640 23,097 24,921
-------- -------- -------
Total....................................................... 297,872 312,140 314,477
======== ======== =======
AVERAGE IN FORCE POLICY AMOUNT:
Fixed annuities............................................. $ 39,356 $ 38,122 $37,710
Equity Indexed annuities.................................... $ 50,372 $ 45,720 $38,943
Variable annuities.......................................... $ 61,048 $ 47,070 $46,542
Institutional annuities..................................... $158,342 $205,977 --
Life insurance.............................................. $ 96,789 $ 91,435 $83,709
5
AS OF OR FOR THE YEAR ENDED
DECEMBER 31,
------------------------------
1999 1998 1997
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(DOLLARS IN MILLIONS, EXCEPT
POLICY DATA)
PREMIUMS (STATUTORY BASIS):
Fixed annuities............................................. $ 462 $ 306 $ 426
Equity Indexed annuities.................................... 170 278 524
Variable annuities.......................................... 866 508 173
Institutional annuities..................................... 500 400 --
Life insurance (net of reinsurance)......................... (2) (1) (1)
------ ------ ------
Total....................................................... $1,996 $1,491 $1,122
====== ====== ======
NEW CONTRACTS AND POLICIES:
Fixed annuities............................................. 17,301 10,448 13,744
Equity Indexed annuities.................................... 6,395 9,249 16,076
Variable annuities.......................................... 14,886 12,238 4,333
Institutional annuities..................................... 4 2 --
------ ------ ------
Total....................................................... 38,586 31,937 34,153
====== ====== ======
AGGREGATE AMOUNT SUBJECT TO SURRENDER CHARGES:
Fixed annuities............................................. $5,708 $6,643 $6,982
Equity Indexed annuities.................................... $2,482 $2,125 $1,527
WITHDRAWALS AND TERMINATIONS (STATUTORY BASIS):
Fixed Annuities:
Death....................................................... $ 28 $ 29 $ 60
Maturity.................................................... $ 141 $ 118 $ 110
Surrender................................................... $1,220 $1,135 $ 947
Indexed Annuities:
Death....................................................... $ 11 $ 11 $ 4
Maturity.................................................... -- -- --
Surrender................................................... $ 28 $ 19 $ 10
Variable Annuities:
Death....................................................... $ 17 $ 7 $ 4
Maturity.................................................... $ 223 $ 87 $ 28
Surrender................................................... $ 199 $ 125 $ 97
Life Insurance:
Death....................................................... $ 76 $ 63 $ 66
Surrender................................................... $ 74 $ 77 $ 96
SURRENDER RATES:
Fixed annuities............................................. 15.39% 13.63% 11.11%
Equity Indexed annuities.................................... 1.22% 1.05% 0.86%
Variable annuities.......................................... 8.04% 8.26% 8.18%
Life insurance.............................................. 3.53% 3.65% 4.51%
SALES AND ASSET RETENTION
Product sales are influenced primarily by overall market conditions
affecting the attractiveness of the Company's retirement-oriented insurance
products, and by product features including interest crediting and participation
rates, and innovations and services that distinguish the Company's products from
those of its competitors.
6
The Company's mix of annuity products is designed to include products in
demand under a variety of economic and market conditions. Sales of SPDAs,
variable annuities and equity-indexed annuities tend to be sensitive to
prevailing interest rates. Sales of SPDAs can be expected to increase and
surrenders to decrease in interest rate environments when SPDA rates are higher
than rates offered by competing conservative fixed return investments, such as
bank certificates of deposit. SPDA sales can be expected to decline and
surrenders to increase in interest rate environments when this differential in
rates is not present. SPDA sales also can be adversely affected by low interest
rates. Conversely, sales of variable annuities can be expected to increase and
surrenders of such products to decrease in a rising equity market, low interest
rate environment. While sales of equity-indexed annuities can be expected to
increase and surrenders to decrease in a rising equity market and low interest
rate environment, sales of these products can be affected by the participation
rate credited by the Company which may be reduced in a rising but relatively
volatile equity market (as was the case during 1999 and at the date of filing of
this Report).
The Company's insurance products include important features designed to
promote both sales and asset retention, including crediting rates and surrender
charges. Initial interest crediting and participation rates on fixed and indexed
products significantly influence the sale of new policies. Resetting of rates on
SPDAs impacts retention of SPDA assets, particularly on policies where surrender
penalties have expired. At December 31, 1999, crediting rates on 91.0% of the
Company's in force SPDA policy liabilities were subject to reset during the
succeeding 12 months. In setting crediting and participation rates, the Company
takes into account yield characteristics on its investment portfolio, surrender
rate assumptions and competitive industry pricing. Interest crediting rates on
the Company's in force SPDAs ranged from 3.65% to 7.75% at December 31, 1999.
Such policies had guaranteed minimum rates ranging from 3.0% to 4.5% as of such
date. Initial interest crediting rates on new policies issued in 1999 ranged
from 4.0% to 7.3%. Guaranteed minimum rates on new policies issued during 1999
ranged from 3.0% to 4.5%.
Substantially all of the Company's annuity insurance products permit the
policyholder at anytime to withdraw all or any part of the accumulated policy
value. Premature termination of a policy results in the loss by the Company of
anticipated future earnings related to the premium deposit and the accelerated
recognition of the expenses related to policy acquisition (principally
commissions), which otherwise are deferred and amortized over the life of the
policy. Surrender charges provide a measure of protection against premature
withdrawal of policy values. Substantially all of the Company's insurance
products currently are issued with surrender charges or similar penalties. Such
surrender charges for all policies, except KeyIndex, typically start at 7% of
the policy premium and then decline to zero over a five- to seven-year period.
KeyIndex imposes a penalty on surrender of up to 10% of the premium deposit for
the life of the policy. At December 31, 1999, 76% of the Company's fixed annuity
policyholder balances remained in the surrender charge period. Surrender charges
generally do not apply to withdrawals by policyholders of, depending on the
policy, either up to 10% per year of the then accumulated value or the
accumulated returns. In addition, certain policies may provide for charge-free
withdrawals in certain circumstances and at certain times. All policies except
for certain variable annuities also are subject to "free look" risk (the legal
right of the policyholder to cancel the policy and receive back the initial
premium deposit, without interest, for a period ranging from ten days to one
year, depending upon the policy). To the extent a policyholder exercises the
"free look" option, the Company may realize a loss as a result of any investment
losses on the underlying assets during the free look period, as well as the
commissions paid on the sale of the policy. While SPWLs also permit withdrawal,
the withdrawal generally would produce significant adverse tax consequences to
the policyholder.
Keyport's financial ratings are important to its ability to accumulate and
retain assets. Keyport is rated "A" (excellent) by A.M. Best, "AA-" (strong) by
S&P, "A2" (good) by Moody's and AA- (very high claims paying ability) by Duff &
Phelps. Rating agencies periodically review the ratings they issue. S&P reduced
Keyport's rating from "AA" to "AA-" in December 1999. In January 1999, A.M. Best
reduced
7
Keyport's rating from "A+" to "A". These ratings reflect the opinion of the
rating agency as to the relative financial strength of Keyport and Keyport's
ability to meet its contractual obligations to its policyholders. Such ratings
are not "market" ratings or recommendations to use or invest in Keyport or
Liberty Financial and should not be relied upon when making a decision to invest
in the Company. Many financial institutions and broker-dealers focus on the
claims-paying ability rating of an insurer in determining whether to market the
insurer's annuities. If any of Keyport's ratings were downgraded from their
current levels or if the ratings of Keyport's competitors improved and Keyport's
did not, sales of Keyport's products, the level of surrenders on existing
policies and the Company's relationships with distributors could be materially
adversely affected. No assurance can be given that Keyport will be able to
maintain its financial ratings.
Customer service also is essential to asset accumulation and retention. The
Company believes Keyport has a reputation for excellent service to its
distributors and its policyholders. Keyport has developed advanced technology
systems for immediate response to customer inquiries, and rapid processing of
policy issuances and commission payments (often at the point of sale). These
systems also play an important role in controlling costs. Keyport's annualized
operating expenses for 1999 were 0.40% of assets, which reflects Keyport's low
cost operations.
GENERAL ACCOUNT INVESTMENTS
Premium deposits on fixed and indexed annuities are credited to the
Company's general account investments (which at December 31, 1999 totaled
$13.1 billion) and to certain separate account investments (which at
December 31, 1999 totaled $0.6 billion). Total general account investments
include cash and cash equivalents. To maintain its investment spreads at
acceptable levels, the Company must earn returns on its general account
sufficiently in excess of the fixed or indexed returns credited to
policyholders. The key element of this investment process is asset/liability
management. Successful asset/liability management requires both a quantitative
assessment of overall policy liabilities (including maturities, surrenders and
crediting of interest) and prudent investment of general account assets. The two
most important tools in managing policy liabilities are setting crediting rates
and establishing surrender periods. The investment process requires portfolio
techniques that earn acceptable yields while effectively managing both interest
rate risk and credit risk. The Company emphasizes a conservative approach to
asset/liability management, which is oriented toward reducing downside risk in
adverse markets, as opposed to maximizing spread in favorable markets. The
approach is also designed to reduce earnings volatility. Various factors can
impact the Company's investment spread, including changes in interest rates and
other factors affecting the Company's general account investments.
The bulk of the Company's general account and certain separate account
investments are invested in fixed maturity securities (81.0% at December 31,
1999). The Company's principal strategy for managing interest rate risk is to
closely match the duration of its general account investment portfolio and its
policyholder balances. The Company also employs hedging strategies to manage
this risk, including interest rate swaps and caps. In the case of equity-indexed
products, the Company purchases S&P 500 Index call options, futures and certain
total return swaps to hedge its obligations to provide returns based upon this
index. Credit risk is managed by careful credit analysis and monitoring. A
portion of general account and certain separate account investments (8.9% at
December 31, 1999) is invested in below investment grade fixed maturity
securities to enhance overall portfolio yield. Below investment grade securities
pose greater risks than investment grade securities. The Company actively
manages its
8
below investment grade portfolio in an effort to optimize its risk/return
profile. At December 31, 1999, the carrying value of fixed maturity investments
that were non-income producing was $22.6 million, which constituted 0.2% of the
Company's general account investments. For a more detailed description of the
management of the Company's general account investments see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Quantitative and Qualitative Disclosures About Market Risk"
beginning at page 33 of the Company's 1999 Annual Report To Shareholders (the
"1999 Annual Report").
As of December 31, 1999, the Company owned approximately $3.4 billion of
mortgage-backed securities (24.8% of its general account and certain separate
account investments), 96.7% of which were investment grade. Mortgage-backed
securities are subject to prepayment and extension risks, since the underlying
mortgages may be repaid more or less rapidly than scheduled.
As of December 31, 1999, approximately $3.4 billion (24.8% of the Company's
general account and certain separate account investments) were invested in
securities which were sold without registration under the Securities Act and
were not freely tradeable under the Securities Act or which were otherwise
illiquid. These securities may be resold pursuant to an exemption from
registration under the Securities Act. If the Company sought to sell such
securities, it might be unable to do so at the then current carrying values and
might have to dispose of such securities over extended periods of time at
uncertain levels.
Stein Roe manages the majority ($6.9 billion at December 31, 1999) of the
Company's general account investments. In addition, several unaffiliated parties
manage portions of its general account investments in order to obtain
diversification of investment styles and asset classes.
The Company's general account investments, all of which pertain to the
Company's annuity insurance operations, were comprised of the following as of
the dates indicated (in millions):
DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
Fixed maturities.......................................... $10,516.1 $11,277.2 $11,246.5
Policy loans.............................................. 599.5 578.9 554.7
Other invested assets..................................... 894.5 717.6 501.5
Equity securities......................................... 37.9 24.6 40.8
--------- --------- ---------
Investments............................................. 12,048.0 12,598.3 12,343.5
Cash and cash equivalents................................. 1,075.9 719.6 1,162.4
--------- --------- ---------
General account investments............................... $13,123.9 $13,317.9 $13,505.9
========= ========= =========
INVESTMENT MANAGEMENT
Liberty Financial has three types of investment management product lines:
mutual funds, private capital management, and institutional asset management.
The Company has seven separate operating units engaged in investment management:
LFG, Colonial, Stein Roe, Newport, Crabbe Huson, Progress and LAMCO. The
Company's primary financial objectives with respect to its investment management
businesses are to increase assets under management in each of its three core
product lines, and to improve operating margins through increasing scale and
cost savings produced by integration.
PRODUCTS AND SERVICES
MUTUAL FUNDS. As of December 31, 1999 the Company sponsored 85 open-end
mutual funds, as well as 10 closed-end funds. The open-end funds include 48
intermediary-distributed mutual funds, 20 direct-marketed funds, and 17 other
funds included among the investment options available under the Company's
variable annuities. The closed-end funds include 8 fixed income funds and 2
equity funds. At December 31, 1999, total mutual fund assets were
$29.8 billion. At December 31, 1999, 56.1% of these
9
assets were invested in equity funds, 25.3% in taxable fixed income funds and
18.6% in tax-exempt fixed income funds. The Company seeks to increase equity
mutual fund assets, which generally carry higher fees than funds that invest in
fixed income securities.
PRIVATE CAPITAL MANAGEMENT. At December 31, 1999, the Company managed
$9.1 billion in investment portfolios for high net worth individuals and
families and smaller institutional investors, all of which are managed by Stein
Roe.
INSTITUTIONAL ASSET MANAGEMENT. At December 31, 1999, the Company managed
$12.5 billion of investment portfolios for institutional investors such as
insurance companies, public and private retirement funds, endowments,
foundations and other institutions. These assets are managed by Stein Roe, LFG,
Crabbe Huson, Newport and Progress. In addition, Stein Roe manages the majority
of Keyport's general account assets supporting Keyport's insurance products. See
"--Retirement-Oriented Insurance Products--General Account Investments."
The Company's investment management business focuses on managing the
investments of each client's portfolios in accordance with the client's
investment objectives and policies. The Company also provides related
administrative and support services to clients, such as portfolio pricing,
accounting and reporting. Investment management fees and related administrative
and support fees generally are charged as a percentage of assets under
management. Client accounts are managed pursuant to a written agreement which,
with limited exceptions, is terminable at any time upon relatively short notice
(typically 30-60 days).
In the case of mutual fund clients, all services provided by the Company are
subject to the supervision of the fund's Board of Trustees. Additional
administrative services provided to mutual funds include provision of office
space, other facilities and personnel, marketing and distribution services, and
transfer agency and other shareholder support services. Investment management
fees paid by a mutual fund must be approved annually by the fund's Board of
Trustees, including a majority of the independent Trustees. Any increases in
such fees also must be approved by fund shareholders. Most of the Company's
mutual fund assets are held in open-end funds. Shareholders of open-end funds
generally can redeem their shares on any business day.
The Company's direct-market mutual funds are sold without a sales load. The
Company's intermediary-distributed mutual funds generally offer investors a
choice of three pricing options: (1) a traditional front-end load option, in
which the investor pays a sales charge at the time of purchase; (2) a contingent
deferred sales charge, in which the investor pays no sales charge at the time of
purchase, but is subject to an asset-based sales charge paid by the fund
generally for eight years after purchase and a declining contingent deferred
sales charge paid by the investor if shares are redeemed generally within six
years after purchase; and (3) a level-load option, in which the investor pays a
small initial sales charge, and is subject to an on-going asset-based sales
charge paid by the fund and a small contingent deferred sales charge paid by the
investor if shares are redeemed within one year after purchase.
The following tables present certain information regarding the Company's
assets under management for each year in the three-year period ended
December 31, 1999. Such information includes Keyport's assets (including its
general account investments managed by Stein Roe, as well as loans to
10
policyholders and Keyport's general account investments managed by unaffiliated
investment managers). In addition, certain information is provided separately
for mutual fund assets.
AS OF DECEMBER 31,
------------------------------
TOTAL ASSETS UNDER MANAGEMENT 1999 1998 1997
- ------------------------------------------------------------ -------- -------- --------
(DOLLARS IN BILLIONS)
Mutual funds:
Intermediary-distributed.................................. $18.3 $17.9 $16.1
Direct-marketed........................................... 6.7 6.8 7.2
Closed-end................................................ 2.7 2.4 2.2
Variable annuity.......................................... 2.1 1.5 1.3
----- ----- -----
Total mutual funds...................................... 29.8 28.6 26.8
Private capital management.................................. 9.1 7.9 6.6
Institutional asset management.............................. 12.5 11.4 5.3
Retirement-oriented insurance products...................... 13.7 13.1 12.8
----- ----- -----
Total............................................... $65.1 $61.0 $51.5
===== ===== =====
AS OF DECEMBER 31,
------------------------------
TOTAL ASSETS UNDER MANAGEMENT BY ASSET CLASS (1) 1999 1998 1997
- ------------------------------------------------------------ -------- -------- --------
(DOLLARS IN BILLIONS)
Fee-based assets:
Equity.................................................... $29.1 $26.0 $18.2
Fixed-income.............................................. 22.3 21.9 20.5
----- ----- -----
Total fee-based assets.................................. 51.4 47.9 38.7
Retirement-oriented insurance products...................... 13.7 13.1 12.8
----- ----- -----
Total............................................... $65.1 $61.0 $51.5
===== ===== =====
- ------------------------
(1) Balanced funds are classified as equity funds; all categories include cash
and other short-term investments in applicable portfolios.
AS OF DECEMBER 31,
------------------------------
TOTAL MUTUAL FUND ASSETS UNDER MANAGEMENT BY ASSET CLASS (1) 1999 1998 1997
- ------------------------------------------------------------ -------- -------- --------
(DOLLARS IN BILLIONS)
Equity funds................................................ $16.7 $15.0 $13.3
Fixed-income funds:
Taxable................................................... 7.5 7.3 7.0
Tax-exempt................................................ 5.6 6.3 6.5
----- ----- -----
Total............................................... $29.8 $28.6 $26.8
===== ===== =====
- ------------------------
(1) Balanced funds are classified as equity funds; all categories include cash
and other short-term investments in applicable portfolios.
11
FOR THE YEAR ENDED
DECEMBER 31,
------------------------------
TOTAL ASSETS UNDER MANAGEMENT--ASSET FLOW SUMMARY 1999 1998 1997
- ------------------------------------------------------------ -------- -------- --------
(DOLLARS IN BILLIONS)
Assets under management--beginning.......................... $61.0 $51.5 $48.0
Sales and reinvestments..................................... 13.4 9.6 7.5
Redemptions and withdrawals................................. (12.2) (8.2) (7.8)
Asset acquisitions.......................................... -- 5.4 --
Net insurance cash flows.................................... 0.5 0.6 0.7
Market appreciation......................................... 2.4 2.1 3.1
----- ----- -----
Assets under management--ending............................. $65.1 $61.0 $51.5
===== ===== =====
SALES AND ASSET RETENTION
The Company believes that the most important factors in accumulating and
retaining investment management assets are investment performance, customer
service and brand name recognition. Strong investment performance is crucial to
asset accumulation and retention, regardless of the product or distribution
channel. Performance is particularly important for mutual funds, whether
intermediary-distributed or direct-marketed. Sixty-five of the Company's 85
open-end mutual funds were long-term funds as of December 31, 1999 (defined as
open-end funds having at least a three-year performance record, excluding funds
that invest solely in money market securities). Forty-one of those 65 funds
(representing 74% of the total assets in those 65 funds as of December 31, 1999)
were ranked by Lipper in the top two quartiles of their respective peer groups
for the three-year period ended that date. The Company believes that over time,
more sophisticated tools, such as those employed by consultants to institutional
investors, will become available to consumers for analyzing mutual fund
performance and risk. The Company's investment performance must remain
competitive for the Company to continue to grow investment management product
sales and assets.
The Company believes that, in light of the proliferation of mutual funds and
investment managers, strong brand name recognition in relevant distribution
channels is essential to asset accumulation and retention, particularly with
respect to mutual funds. The Company believes that the Colonial name carries
strong brand name recognition among brokers and other intermediaries selling
mutual funds, and that the Stein Roe name carries similar recognition in the
direct sales channel. Similarly, the Company believes that Stein Roe has a
franchise presence in the private capital management market and that Newport is
a recognized leader in investments in the Asian markets. The Company believes
that Crabbe Huson is a leader in its specialty area of contrarian value
investing and that Progress and LAMCO have strong reputations in the selection
and management of multiple investment managers.
Sales of mutual funds and other investment management products are subject
to market forces, such as changes in interest rates and stock market
performance. Changes in the financial markets, including significant increases
or decreases in interest rates or stock prices, can increase or decrease fund
sales and redemptions, as well as the values of assets in such portfolios, all
of which impact investment management fees. The competitiveness of the Company's
investment management products (both in terms of new sales and asset retention)
also is dependent on the relative attractiveness of their underlying investment
philosophies and methods.
DISTRIBUTION
Liberty Financial sells its products through multiple distribution channels.
Total product sales during 1999 were $13.4 billion (including $1.8 billion of
reinvested dividends and similar reinvested returns). During 1999, 56% of these
sales were made through intermediary distributors, with the balance made
12
directly to the investor. Over 38,000 individual brokers and other
intermediaries sold Liberty Financial products in 1999.
DISTRIBUTION THROUGH INTERMEDIARIES
The Company sells both annuities and mutual funds through various
intermediaries, including national and regional brokerage firms, banks and other
depository institutions, financial planners and insurance agents. The Company's
annuities and mutual funds are most often sold to middle and upper-middle class
investors and savers. Many of these individuals seek the help of an investment
professional in selecting investment and retirement income and savings products.
In each of these intermediary channels, the Company provides products, as well
as promotional materials and other support services.
Reflecting its diversification strategy, the Company maintains distribution
relationships with several different types of intermediaries.
Intermediary-distributed mutual funds and annuities historically have been
distributed through brokerage firms and insurance agents. Banks and financial
planners also have become significant distributors of these products.
The Company employs wholesalers and other sales professionals to promote
sales of its intermediary-distributed products. These representatives meet with
intermediaries' sales forces to educate them on matters such as product
objectives, features, performance records and other key selling points. The
Company also produces marketing material designed to help intermediaries sell
the Company's products, and provides after-sale support to both the
intermediaries and their customers. The degree and mix of these services vary
with the requirements of the particular intermediary.
The Company was a pioneer in selling through banks, both in terms of helping
banks develop marketing programs and in establishing wholesaling relationships
with banks. Liberty Financial operates a sales unit, Independent, that sells
mutual funds and annuities through banks. The Company acquired Independent in
March, 1996. Since the acquisition, the Company has consolidated its prior bank
sales unit, the Liberty Financial Bank Group, with Independent. These businesses
design and implement programs that sell annuities and mutual funds through their
client banks, license and train sales personnel, and provide related financial
services and administrative support. Program structures and the degree of the
Company's involvement vary widely depending upon the particular needs of each
bank. Products sold include the Company's proprietary products, as well as
non-proprietary products (including in some cases the bank's proprietary mutual
funds). At December 31, 1999, Independent had 55 bank relationships involving
over 575 registered salespersons and over 2,100 licensed bank branch employees.
The proliferation of competing products and the market presence of certain
large competitors requires the Company to compete to establish and maintain
distribution relationships and to maintain "shelf space" with distributors. Many
of the larger distributors have begun to reduce the number of companies for whom
they distribute. Product features, relative performance, pricing and support
services to distributors and their customers are important factors in competing
for distribution relationships. Some distributors assess fee sharing payments or
similar charges as additional compensation for fund sales. The Company can be
confronted with the choice of absorbing these charges or limiting its access to
certain distributors. An interruption in the Company's continuing relationship
with certain of these distributors could materially adversely affect the
Company's ability to sell its products. There can be no assurance that the
Company would be able to find alternative sources of distribution in a timely
manner.
The sales practices and support needs of the Company's distributors are
constantly evolving. The Company must respond to these changes in order to
maintain and grow its intermediary distribution relationships. Pricing
structures in these channels, particularly with respect to mutual funds, have
expanded in recent years from one-time up-front sales loads to additional
options that shift investors' payments over time and move somewhat toward
fee-based pricing. The Company's intermediary-
13
distributed mutual funds now are sold with alternate pricing structures.
Intermediaries also increasingly demand that product providers supply new
value-added services.
DIRECT DISTRIBUTION
The Company's direct-marketed mutual funds, as well as its private capital
management and institutional asset management services, are sold directly to
investors. The Company's direct-marketed mutual funds are purchased
predominantly by middle and upper-middle class investors and savers who choose
to select their own funds and who wish to avoid paying sales loads and similar
fees. Private capital management clients typically are high net worth
individuals and families. Institutional asset management clients typically are
larger institutional investors managed by in-house professional staffs that
select and oversee asset managers, often with the advice of third party
consultants.
In each of the direct sales markets served by the Company, investment
performance is essential to generating sales and retaining customers. Mutual
fund sales also require robust marketing campaigns using print, radio and
television advertising and direct mail that highlight performance and other
selling points. The Company believes that certain technology-based customer
service and support tools it is developing, including on-line account access and
interactive illustrative investment tools, can become important devices in
accumulating and retaining assets in the direct distribution channels. The
reputation of the Company's high quality asset managers is an important factor
in generating new private capital and institutional asset management clients.
Active management of the client relationship, including frequent personal
contacts, is necessary to retain these clients.
So-called "mutual fund supermarkets," such as Charles Schwab & Co., Inc.'s
OneSource-TM-, have become an important source of customers for direct-marketed
mutual funds. To access these marketplaces, the Company pays the supermarket
sponsor a fee based upon a percentage of mutual fund assets held by supermarket
customers in return for certain services provided by the supermarket sponsor,
such as omnibus shareholder accounting. Financial planners and similar
unaffiliated advisors sometimes serve as sources of referrals for private
capital management clients, in some cases in return for referral fees or other
compensation.
INDUSTRY SEGMENT INFORMATION
Liberty Financial conducts its business in two industry segments: annuity
insurance and asset management. Annuity insurance operations relate primarily to
the Company's fixed, indexed and variable annuities and its closed-block of
SPWLs. Asset management operations relate to its mutual funds, private capital
management and institutional asset management products. For information on these
reportable segments, see Note 12 of Notes to the Consolidated Financial
Statements of the Company contained in the 1999 Annual Report.
REGULATION
OVERVIEW
The Company's business activities are extensively regulated. The following
briefly summarizes the principal regulatory requirements and certain related
matters. The regulatory requirements applicable to the Company include, among
other things, (i) regulation of the form and in certain cases the content of the
Company's products, (ii) regulation of the manner in which those products are
sold and (iii) compliance oversight of the Company's business units, including
frequent reporting obligations to and inspections by regulators. Changes in or
the failure by the Company to comply with applicable law and regulations could
have a material adverse effect on the Company.
14
ANNUITY INSURANCE
The Company's retirement-oriented insurance products generally are issued to
individuals. The policy is a contract between the issuing insurance company and
the policyholder. Policy forms, including all principal contract terms, are
regulated by state law. In most cases, the policy form must be approved by the
insurance department or similar agency of a state in order for the policy to be
sold in that state.
Keyport issues most of the Company's retirement-oriented insurance products.
Independence Life & Annuity Company ("Independence Life") and Keyport Benefit
Life Insurance Company ("Keyport Benefit"), Keyport subsidiaries, also issue
certain policies. Keyport and Independence Life are each chartered in the state
of Rhode Island, and the Rhode Island Insurance Department is their primary
oversight regulator. Keyport Benefit is chartered in the state of New York, and
the New York Department of Insurance is its primary oversight regulator. Keyport
Benefit, acquired by Keyport in January, 1998, operates exclusively in New York
and Rhode Island. Keyport and Independence Life also must be licensed by the
state insurance regulators in each other jurisdiction in which they conduct
business. They currently are licensed to conduct business in 49 states (the
exception being New York) and in the District of Columbia and the Virgin
Islands. State insurance laws generally provide regulators with broad powers
related to issuing licenses to transact business, regulating marketing and other
trade practices, operating guaranty associations, regulating certain premium
rates, regulating insurance holding company systems, establishing reserve
requirements, prescribing the form and content of required financial statements
and reports, performing financial and other examinations, determining the
reasonableness and adequacy of statutory capital and surplus, regulating the
type and amount of investments permitted, limiting the amount of dividends that
can be paid and the size of transactions that can be consummated without first
obtaining regulatory approval, and other related matters. The regulators also
make periodic examinations of individual companies and review annual and other
reports on the financial condition of all companies operating within their
respective jurisdictions. The Rhode Island Insurance Department has commenced a
periodic examination of Keyport for the period ended December 31, 1988. The
Rhode Island Insurance Department has not communicated the results of their
examination as of the date of this Report.
Keyport and Independence Life prepare their statutory-basis financial
statements in accordance with accounting practices prescribed or permitted by
the Rhode Island Insurance Department. Keyport Benefit prepares its
statutory-basis financial statements in accordance with accounting practices
prescribed or permitted by the New York Department of Insurance. Certain
statutory accounting practices are prescribed by state law. Permitted statutory
accounting practices encompass all accounting practices that are not proscribed;
such practices may differ between the states and companies within a state. The
National Association of Insurance Commissioners (the "NAIC") is currently in the
process of codifying statutory accounting practices, the result of which is
expected to constitute the only source of prescribed statutory accounting
practices. That project, which is expected to be completed in 2000, may result
in changes to the accounting practices that Keyport uses to prepare its
statutory-basis financial statements. The impact of any such changes on
Keyport's statutory surplus cannot be determined at this time. No assurance can
be given that such changes would not have a material adverse effect on the
Company.
15
RISK-BASED CAPITAL REQUIREMENTS. In recent years, various states have
adopted new quantitative standards promulgated by the NAIC. These standards are
designed to reduce the risk of insurance company insolvencies in part by
providing an early warning of financial or other difficulties. These standards
include the NAIC's risk-based capital ("RBC") requirements. RBC requirements
attempt to measure statutory capital and surplus needs based on the risks in a
company's mix of products and investment portfolio. The requirements provide for
four different levels of regulatory attention which implement increasing levels
of regulatory control (ranging from development of an action plan to mandatory
receivership). As of December 31, 1999, Keyport's capital and surplus exceeded
the level at which the least severe of these regulatory attention levels would
be triggered.
GUARANTY FUND ASSESSMENTS. Under the insurance guaranty fund laws existing
in each state, insurers can be assessed for certain obligations of insolvent
insurance companies to policyholders and claimants. Because assessments
typically are not made for several years after an insurer fails, Keyport cannot
accurately determine the precise amount or timing of its exposure to known
insurance company insolvencies at this time. For certain information regarding
Keyport's historical and estimated future assessments in respect of insurance
guaranty funds, see Note 16 to the Notes to the Consolidated Financial
Statements contained in the 1999 Annual Report. The insolvency of large life
insurance companies in future years could result in material assessments to
Keyport by state guaranty funds. No assurance can be given that such assessments
would not have a material adverse effect on the Company.
INSURANCE HOLDING COMPANY REGULATION. Current Rhode Island insurance law
imposes prior approval requirements for certain transactions with affiliates and
generally regulates dividend payments by a Rhode Island-chartered insurance
subsidiary to its parent company. Keyport may not make distributions or dividend
payments to Liberty Financial which, together with distributions and dividends
paid during the preceding 12 months, exceed the lesser of (i) 10% of its
statutory surplus as of the preceding December 31 or (ii) its statutory net gain
from operations for the preceding fiscal year, without prior approval by the
Rhode Island Commissioner of Insurance. As of December 31, 1999, such
restriction would limit dividends without such approval to $57.8 million.
Keyport paid $30.0 million in dividends during 1999. In addition, no person or
group may acquire, directly or indirectly, 10% or more of the voting stock or
voting power of Liberty Financial unless such person has provided certain
required information to the Rhode Island Department of Business Regulation and
such acquisition is approved by the Department.
GENERAL REGULATION AT FEDERAL LEVEL AND CERTAIN RELATED MATTERS. Although
the federal government generally does not directly regulate the insurance
business, federal initiatives often have an impact on the business in a variety
of ways. Current and proposed federal measures that may significantly affect the
insurance business include limitations on antitrust immunity, minimum solvency
requirements and the removal of barriers restricting banks from engaging in the
insurance business. In particular, several proposals to repeal or modify the
Bank Holding Company Act of 1956 (which prohibits banks from being affiliated
with insurance companies) have been made by members of Congress and the Clinton
Administration. Moreover, the United States Supreme Court held in 1995 in
NATIONSBANK OF NORTH CAROLINA V. VARIABLE ANNUITY LIFE INSURANCE COMPANY that
annuities are not insurance for purposes of the National Bank Act. In addition,
the Supreme Court also held in 1995 in BARNETT BANK OF MARION CITY V. NELSON
that state laws prohibiting national banks from selling insurance in small town
locations are preempted by federal law. The Office of the Comptroller of the
Currency adopted a ruling in November 1996 that permits national banks, under
certain circumstances, to expand into other financial services, thereby
increasing competition for the Company. At present, the extent to which banks
can sell insurance and annuities without regulation by state insurance
departments is being litigated in various courts in the United States. Although
the effect of these recent developments on the Company and its competitors is
uncertain, there can be no assurance that such developments would not have a
material adverse effect on the Company.
16
On November 12, 1999, the Gramm-Leach-Bliley Act of 1999 was signed into
law. The major provisions of this new law took effect on March 12, 2000. While
the Gramm-Leach-Bliley Act eliminates legal barriers to affiliates among banks,
insurance companies and other financial services companies and therefor
effectively repeals the Glass-Steagall Act of 1933 (which restricted banks from
engaging in securities-related businesses), the effect on the Company and its
competitors is uncertain.
DISTRIBUTION
Sales of the Company's annuities and mutual funds are also subject to
extensive regulation. Annuities must be sold through an entity registered as an
insurance agency in the particular state. The sales person must be properly
licensed under state insurance law. Variable annuities and certain indexed
annuities also require the sales person to be registered with the National
Association of Securities Dealers ("NASD") and the applicable state securities
commission. Mutual fund shares must be sold through an entity registered as a
broker-dealer under the Exchange Act and applicable state law. The sales person
must be registered with the NASD and the applicable state securities commission.
Various business units of the Company are registered as broker-dealers.
These include certain units which operate the Company's bank marketing business,
as well as other units through which mutual fund and certain annuities are sold.
Certain bank marketing units also are registered as insurance agencies in states
where they sell annuities. These laws regulate the licensing of sales personnel
and sales practices. They impose minimum net capital requirements. They also
impose reporting, records maintenance, and other requirements, and provide for
penalties in the event of non-compliance, similar in scope to the regulations
applicable to asset managers.
Certain securities sales through the Company's bank marketing units are
conducted in accordance with the provisions of a "no-action" letter issued by
the staff of the SEC requiring, among other things, that securities sales
activities be conducted by sales personnel who are registered representatives of
the Company and are subject to its supervision and control. The letter limits
the functions of non-registered bank personnel to ministerial duties. The letter
is not binding on the courts, however, and no assurance can be given that the
SEC will not change its position.
Banks are an important distribution channel for the Company's annuities and
mutual funds. The recent growth in sales of mutual funds, annuities and other
investment and insurance products through or at banks and similar institutions
has prompted increased scrutiny by federal bank regulators, the SEC and other
regulators. Regulations promulgated by federal banking authorities impose
additional restrictions and duties with respect to bank sales practices,
including obligations to disclose that the products are not subject to deposit
insurance.
ASSET MANAGEMENT PRODUCTS
The primary sources of regulation of the Company's asset management
operations are the federal securities laws. Asset management products are
subject to the Investment Advisers Act (the "Advisers Act"). The mutual funds
and closed-end funds sponsored by the Company also are subject to the Investment
Company Act of 1940 (the "Investment Company Act"). Mutual fund shares are
securities, and, as such, must be registered under the federal securities laws.
The foregoing laws impose various restrictions on the Company's asset management
products, including fee structures, the timing and content of advertising, and,
in the case of the funds, certain investment restrictions. Mutual funds also
must be managed to comply with certain other investment restrictions imposed by
the Internal Revenue Code. Accounts subject to the Employee Retirement Income
Security Act of 1974 ("ERISA") must comply with certain investment and other
restrictions imposed by ERISA.
The Company's subsidiaries directly engaged in asset management (including
LFG, Colonial, Stein Roe, Newport, Crabbe Huson, Progress and LAMCO) are
registered with the Securities and Exchange Commission (the "SEC") as investment
advisers under the Advisers Act. They also are subject to the
17
Investment Company Act insofar as it relates to investment advisers to
registered investment companies. These securities laws and the related
regulations of the SEC require reporting, maintenance of books and records in
prescribed forms, mandatory custodial arrangements, approval of employees and
representatives and other compliance procedures. Possible sanctions in the event
of noncompliance include the suspension of individual employees, limitations on
the firm's engaging in business for specified periods of time, revocation of the
firm's registrations, censures and fines.
In the ordinary course of its investment management business, the Company
enters into investment advisory agreements with mutual funds and others. As
required by the Investment Company Act and the Advisers Act, Liberty Financial's
investment advisory agreements provide that the agreements terminate
automatically upon their "assignment." The Investment Company Act and the
Advisers Act define the term "assignment" to include any "direct or indirect
transfer" of a "controlling block of the voting securities" of the issuer's
outstanding voting securities. The Investment Company Act presumes that any
person holding more than 25% of the voting stock of any person "controls" such
person. Sales by Liberty Mutual or other stockholders or new issuances of
capital stock by Liberty Financial, among other things, may raise issues
relating to assignments of the Company's investment advisory agreements. The
Company's Restated Articles of Organization include provisions limiting the
voting power of shares of the Company's Voting Stock (as defined in the
Company's Restated Articles of Organization) held by holders of 20% or more of
such Voting Stock in certain circumstances. These provisions do not apply to
Liberty Mutual, subsidiaries or affiliates of Liberty Mutual, direct or indirect
subsidiaries of the Company and certain employee plans established or to be
established by the Company or certain of its subsidiaries. Liberty Financial's
Board of Directors may approve the exemption of other persons or groups from the
provisions described above. While this voting limitation is in place to reduce
the likelihood, under certain circumstances, of inadvertent terminations of
Liberty Financial's advisory agreements as a result of "assignments" thereof,
there can be no assurance that this limitation will prevent such a termination
from occurring. In addition, such limitation could be deemed to have an
anti-takeover effect and to make changes in management more difficult.
COMPETITION
The Company's businesses operate in extremely competitive markets. These
markets are highly fragmented, although in the case of annuities and mutual
funds, a few companies do have relatively substantial market shares. Certain of
the Company's competitors are significantly larger and have access to
significantly greater financial and other resources.
The Company's products compete with every other investment or savings
vehicle available to a prospective customer, including those offered by other
insurance companies, investment management firms and banks. The Company believes
that the most important competitive factor affecting the marketability of its
products is the degree to which they meet customer expectations, both in terms
of returns (after fees and expenses) and service. These competitive pressures
apply to competition for customers in general, as well as competition to access
and maintain distribution relationships in the case of products sold through
intermediaries. Product and service innovations also are important devices for
generating new sales and maintaining distribution relationships. Sales of
particular products may be affected by conditions in the financial markets, such
as increases or decreases in interest rates or stock prices.
Product features of particular relevance to annuities include interest
crediting and participation rates, surrender charges and innovation in product
design. Maintenance of Keyport's financial ratings at a high level also is
important. The Company believes that the most important factors affecting
competition for investment management clients are investment performance,
customer service and brand name recognition. Pricing policies and product
innovations also are important competitive factors. The Company's ability to
increase and retain clients' assets could be materially adversely affected if
client accounts underperform the market or competing products or if key
investment managers leave the
18
Company. The ability of the Company's asset management subsidiaries to compete
with other asset management products also is dependent, in part, on the relative
attractiveness of their underlying investment philosophies and methods under
prevailing market conditions.
EMPLOYEES
As of December 31, 1999, the Company had 2,038 full-time employees
summarized by activity as follows: 420 in annuity insurance operations; 1,197 in
asset management activities; 371 in marketing and distribution operations; and
50 in general corporate. The Company provides its employees with a broad range
of employee benefit programs. The Company believes that its relations with its
employees are excellent.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages at March 31, 2000, and principal
occupations for the last five years of each executive officer of the Company.
All such persons have been elected to serve until the next annual election of
officers and their successors are elected or until their earlier resignation or
removal.
Executive Officers of the Registrant
NAME AGE POSITION
---- -------- --------
Gary L. Countryman 60 Chairman, President and Chief Executive
Officer
John V. Carberry 52 Senior Vice President
Lindsay Cook 48 Executive Vice President
Frank A. Faggiano 60 Senior Vice President, Human Resources
Stephen E. Gibson 46 President, Liberty Funds Group
J. Andrew Hilbert 41 Senior Vice President, Chief Financial Officer
and Treasurer
C. Allen Merritt, Jr. 59 Chief Operating Officer
Porter P. Morgan 59 Senior Vice President, Marketing
Philip Polkinghorn 42 President, Keyport Life Insurance Company
Mr. Countryman has been Chairman (since 1991) and Chief Executive Officer
(from 1986 until April 1998) of Liberty Mutual and Liberty Mutual Fire Insurance
Company (an affiliate of Liberty Mutual). He currently serves as a director of
the Company, Liberty Mutual and certain of its affiliates, FleetBoston Financial
Corporation, NSTAR and Harcourt General, Inc. Mr. Countryman became President
and Chief Executive Officer of the Company on January 13, 2000.
Mr. Carberry joined Liberty Financial as Senior Vice President in February,
1998. Prior to that time he was a Managing Director of Salomon Brothers Inc.
Mr. Cook became Executive Vice President of Liberty Financial in February,
1997. He became a Senior Vice President of Liberty Financial in February, 1994,
having been a Vice President prior to that time.
Mr. Faggiano became Senior Vice President, Human Resources in August, 1997.
Prior to that time he was Vice President, Human Resources.
Mr. Gibson became President of Liberty Funds Group, a subsidiary of Liberty
Financial, in January, 1997. He was Executive Vice President of Liberty Funds
Group from July, 1996 to January, 1997. Prior to that, he was Managing Director
of Marketing at Putnam Investments from 1995 to July, 1996, and prior thereto
was Executive Vice President of Putnam Mutual Funds.
19
Mr. Hilbert joined the Company as Senior Vice President and Chief Financial
Officer in March, 1997. He became Treasurer in March, 1998. From October 1995
until that time, he was Senior Vice President and Chief Financial Officer of
Paul Revere Corporation. Prior to joining Paul Revere, Mr. Hilbert was a partner
at Price Waterhouse.
Mr. Merritt became Chief Operating Officer of Liberty Financial in March,
1998. From February, 1997 to March, 1998 he was Executive Vice President. He was
Senior Vice President of Liberty Financial prior to that time.
Mr. Morgan has been Senior Vice President, Marketing of Liberty Financial
since 1991.
Mr. Polkinghorn became President of Keyport Life Insurance Company in May,
1999. From December, 1996 to April, 1999 he was Senior Vice President and Chief
Marketing Officer of American General Life Insurance Company. From March to
December, 1996 he was Vice President Products of First Colony Life Insurance
Company, and prior to that time he was Chief Marketing Officer of Allmerica
Insurance Company.
Mr. John A. Benning, age 65, retired as Senior Vice President and General
Counsel of the Company on December 31, 1999, having served in that role since
October, 1989. Mr. Benning is currently employed by Liberty Mutual, and is
serving as Acting General Counsel of the Company.
ITEM 2. PROPERTIES
As of December 31, 1999, the Company leased its various office facilities.
The Company's principal leasing arrangements can be summarized as follows: The
Company's principal executive offices occupy approximately 30,300 square feet in
a single facility in downtown Boston under a lease which expires in 2002.
Keyport leases approximately 96,500 square feet in two buildings in downtown
Boston under leases which expire in 2008, approximately 19,800 square feet in a
single facility in Lincoln, Rhode Island under a lease which expires in 2007,
and 13,300 square feet in a single facility in Lake Mary, Florida under a lease
which expires in 2004. LFG leases approximately 219,000 square feet in two
buildings in downtown Boston under leases which expire in 2006 and approximately
31,200 square feet in Aurora, Colorado under a lease which expires in 2000.
Stein Roe leases 141,300 square feet in downtown Chicago under a lease which
expires in 2009. Newport leases approximately 10,400 square feet in downtown San
Francisco under a lease which expires in 2004. Crabbe Huson leases approximately
17,700 square feet in downtown Portland, Oregon under a lease which expires in
2003. Progress leases approximately 9,000 square feet in downtown San Francisco
under a lease which expires in 2005. Independent leases approximately 29,500
square feet in Purchase, New York under a lease which expires in 2007.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time involved in litigation incidental to its
businesses. In the opinion of Liberty Financial's management, the resolution of
such litigation is not expected to have a material adverse effect on the
Company's financial condition or results of operations.
20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on the New York Stock Exchange ("NYSE")
under the symbol "L". The Company's Common Stock is also listed on the Boston
Stock Exchange. On December 31, 1999, the closing price of the Company's Common
Stock on the NYSE was $22 15/16 per share. As of March 17, 2000 there were
approximately 225 shareholders of record. In addition, the Company estimates
that there are approximately 4,000 beneficial shareholders whose shares are held
in street name. The high and low sales prices for each quarter during 1999 and
1998, as traded on the NYSE Composite Tape, were as follows:
1999
QUARTER HIGH LOW
- --------------------------------------------------------------------
January-March $28 $21 3/16
April-June 29 11/16 20 1/8
July-September 29 20 15/16
October-December 26 11/16 20 7/16
1998
QUARTER HIGH LOW
- --------------------------------------------------------------------
January-March $39 3/4 $33
April-June 40 5/8 32 3/4
July-September 38 9/16 25 3/4
October-December 30 5/8 20 1/8
The Company currently has a policy of paying quarterly cash dividends of
$0.10 per share and has paid such quarterly dividends regularly since becoming a
public company in 1995. The declaration and payment of any dividends on the
Common Stock are dependent upon the Company's results of operations, financial
condition, cash requirements, capital requirements, regulatory considerations
and other relevant factors, and in all events are subject to the discretion of
the Board of Directors and to any preferential dividend rights of the
outstanding Series A Convertible Preferred Stock ("Preferred Stock") of Liberty
Financial. The holders of the issued and outstanding shares of Preferred Stock
are entitled to receive cumulative cash dividends at the rate of $2.875 per
annum per share, payable in equal quarterly installments. The terms of the
Preferred Stock preclude the payment of any dividends on the Common Stock unless
cumulative dividends on the outstanding Preferred Stock have been paid or
declared and set aside in full. Accordingly, there is no requirement, and no
assurances can be given, that dividends will be paid on the Common Stock.
The Company's Board of Directors established an optional dividend
reinvestment plan ("DRIP") for holders of Common Stock and Preferred Stock.
Liberty Mutual has participated in the DRIP since its inception. Such
participation may be terminated at any time.
For a further discussion of the Company's ability to pay dividends in cash
on its Common Stock, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity" in the 1999 Annual Report.
21
SALES OF UNREGISTERED SECURITIES
Liberty Financial issued shares of its Common Stock since the beginning of
1999 without registration under the Securities Act of 1933 (the "Securities
Act") in the transaction described below:
On January 30, 2000, the Company reserved 66,051 shares of Common Stock for
issuance to the former shareholders of IFMG, pursuant to the February 1996
Merger Agreement pursuant to which the Company acquired the business of IFMG.
The IFMG shareholders made customary investment representations to the Company,
and the issuance of these shares will be exempt from registration pursuant to
Section 4(2) of the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA
Selected Consolidated Financial Data, which appears on page 27 in the 1999
Annual Report, are incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations, which appears beginning on page 28 in the 1999 Annual Report, is
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Quantitative and Qualitative Disclosure About Market Risk is included in
Management's Discussion and Analysis of Financial Condition and Results of
Operations beginning at page 33 of the 1999 Annual Report, and is incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements which appear beginning on
page 40 in the 1999 Annual Report, and the report thereon of Ernst & Young LLP
as of and for the year ended December 31, 1999, which appears on page 63 in the
1999 Annual Report, are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the executive officers of the Company appears under
the caption "Executive Officers of the Registrant" in Part I of this Form 10-K
on page 19.
Information relating to the directors of the Company is incorporated herein
by reference from Liberty Financial's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on or about May 8, 2000 (the "Proxy
Statement") under the caption "Election of Directors."
In addition, the information appearing in the Proxy Statement under the
caption "Security Ownership of Management and Certain Beneficial
Owners--Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation is incorporated herein by
reference from the Proxy Statement under the following captions: "Compensation
of Executive Officers" (excluding, however, the
22
portions thereof under the subcaptions "Compensation Committee Report on
Executive Compensation" and "Stockholder Return Comparisons") and "Election of
Directors--1999 Meetings and Standard Fee Arrangements."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to security ownership of certain beneficial owners and
management is incorporated herein by reference from the Proxy Statement under
the caption "Security Ownership of Management and Certain Beneficial Owners"
(excluding the material under the sub-caption "Section 16(a) Beneficial
Ownership Reporting Compliance").
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to Certain Relationships and Related Transactions is
incorporated herein by reference from the Proxy Statement under the captions
"Certain Relationships and Related Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The following Consolidated Financial Statements of the Company, which appear
beginning on page 40 of the 1999 Annual Report, are incorporated herein by
reference:
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Income Statements for the Years Ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
The following financial statement schedules are included as part of this
Report:
I Summary of Investments
II Condensed Financial Information of Registrant
III Supplementary Insurance Information
All other schedules are omitted because they are not applicable or are not
required, or because the required information is included in the Consolidated
Financial Statements or notes thereto.
3. EXHIBITS
The exhibits filed as part of this Report are listed on the Exhibit Index
immediately following the financial statement schedules included in this Report.
The following exhibits are management contracts or compensatory plans or
arrangements: 10.4 through 10.14.2, 10.22, 10.28, 10.29, and 10.32.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Registrant during the fourth
quarter of 1999.
23
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Boston and the
Commonwealth of Massachusetts on March 30, 2000.
LIBERTY FINANCIAL COMPANIES, INC.
By: /s/ GARY L. COUNTRYMAN
-----------------------------------------
Gary L. Countryman
Chief Executive Officer, President and
Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and as of the dates stated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ GARY L. COUNTRYMAN Chief Executive Officer,
------------------------------------------- President and Chairman March 30, 2000
Gary L. Countryman
Senior Vice President, Chief
/s/ J. ANDREW HILBERT Financial Officer and
------------------------------------------- Treasurer (Principal Financial March 30, 2000
J. Andrew Hilbert and Accounting Officer)
/s/ GERALD E. ANDERSON Director
------------------------------------------- March 30, 2000
Gerald E. Anderson
/s/ MICHAEL J. BABCOCK Director
------------------------------------------- March 30, 2000
Michael J. Babcock
/s/ CHARLES I. CLOUGH Director
------------------------------------------- March 30, 2000
Charles I. Clough
/s/ WILLIAM F. CONNELL Director
------------------------------------------- March 30, 2000
William F. Connell
/s/ PAUL J. DARLING, II Director
------------------------------------------- March 30, 2000
Paul J. Darling, II
/s/ JOHN P. HAMILL Director
------------------------------------------- March 30, 2000
John P. Hamill
/s/ MARIAN L. HEARD Director
------------------------------------------- March 30, 2000
Marian L. Heard
24
SIGNATURE TITLE DATE
--------- ----- ----
/s/ EDMUND F. KELLY Director
------------------------------------------- March 30, 2000
Edmund F. Kelly
/s/ SABINO MARINELLA Director
------------------------------------------- March 30, 2000
Sabino Marinella
/s/ THOMAS J. MAY Director
------------------------------------------- March 30, 2000
Thomas J. May
/s/ RAY B. MUNDT Director
------------------------------------------- March 30, 2000
Ray B. Mundt
/s/ KENNETH L. ROSE Director
------------------------------------------- March 30, 2000
Kenneth L. Rose
/s/ GLENN P. STREHLE Director
------------------------------------------- March 30, 2000
Glenn P. Strehle
25
SCHEDULE I
LIBERTY FINANCIAL COMPANIES, INC.
SUMMARY OF INVESTMENTS
(IN MILLIONS)
DECEMBER 31, 1999
----------------------------------
BALANCE
AMORTIZED SHEET
TYPE OF INVESTMENT COST FAIR VALUE AMOUNT
- ------------------ --------- ---------- ---------
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies.................. $ 1,236.5 $ 1,221.8 $ 1,221.8
Foreign governments..................................... 169.4 178.2 178.2
Corporate and other securities.......................... 7,114.8 6,863.4 6,863.4
Mortgage backed securities.............................. 2,325.7 2,252.7 2,252.7
--------- --------- ---------
Total fixed maturity securities..................... 10,846.4 10,516.1 10,516.1
Equity securities:
Common stocks:
Industrial, miscellaneous and all other............... 31.0 37.9 37.9
Policy loans.............................................. 599.5 599.5 599.5
Other long term investments............................... 1,041.6 1,145.1 1,041.6
--------- --------- ---------
Total investments................................... $12,518.5 $12,298.6 $12,195.1
========= ========= =========
26
SCHEDULE II
LIBERTY FINANCIAL COMPANIES, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(IN MILLIONS, EXCEPT PER SHARE DATA)
BALANCE SHEETS
DECEMBER 31
-------------------
1999 1998
-------- --------
ASSETS:
Investments............................................... $ 147.1 $ --
Cash and cash equivalents................................. 81.0 180.4
Investments in subsidiaries............................... 1,368.6 1,357.4
Notes receivable--subsidiaries............................ 31.5 152.1
Accounts receivable--subsidiaries......................... 17.0 16.3
Other assets.............................................. 63.0 50.9
-------- --------
$1,708.2 $1,757.1
======== ========
LIABILITIES:
Note payable.............................................. $ 447.0 $ 446.9
Accounts payable and accrued expenses..................... 59.3 23.6
-------- --------
506.3 470.5
-------- --------
Redeemable convertible preferred stock...................... 16.0 15.3
-------- --------
STOCKHOLDERS' EQUITY:
Common stock.............................................. 0.5 0.5
Additional paid-in capital................................ 923.0 901.5
Retained earnings......................................... 425.2 346.4
Accumulated other comprehensive income.................... (158.1) 27.2
Unearned compensation..................................... (4.7) (4.3)
-------- --------
Total stockholders' equity............................ 1,185.9 1,271.3
-------- --------
$1,708.2 $1,757.1
======== ========
INCOME STATEMENTS
YEAR ENDED DECEMBER 31
------------------------------
1999 1998 1997
-------- -------- --------
Interest expense, net....................................... $(16.7) $ (2.6) $ (1.8)
Realized investment gains (losses).......................... (0.7) 0.3 (0.6)
Operating expenses.......................................... (0.6) (0.6) (0.8)
------ ------ ------
Loss before income taxes.................................... (18.0) (2.9) (3.2)
Benefit for income taxes.................................... 5.1 7.5 19.2
Equity in net income of subsidiaries........................ 112.2 119.9 113.5
------ ------ ------
Income before extraordinary item............................ 99.3 124.5 129.5
Extraordinary loss on extinguishment of debt, net of tax.... -- (9.7) --
------ ------ ------
Net Income.................................................. $ 99.3 $114.8 $129.5
====== ====== ======
Net income per share--basic:
Income before extraordinary item.......................... $ 2.11 $ 2.72 $ 2.94
====== ====== ======
Net income................................................ $ 2.11 $ 2.51 $ 2.94
====== ====== ======
Net income per share--assuming dilution:
Income before extraordinary item.......................... $ 2.07 $ 2.63 $ 2.77
====== ====== ======
Net income................................................ $ 2.07 $ 2.42 $ 2.77
====== ====== ======
See Notes to Consolidated Financial Statements contained in the 1999 Annual
Report incorporated herein by reference.
27
SCHEDULE II (CONTINUED)
LIBERTY FINANCIAL COMPANIES, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(IN MILLIONS)
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
------------------------------
1999 1998 1997
-------- -------- --------
Cash flows from operating activities:
Net income................................................ $ 99.3 $ 114.8 $ 129.5
Adjustments to reconcile net income to net cash provided
by operating activities:
Extraordinary loss on extinguishment of debt, net of
tax................................................. -- 9.7 --
Equity in net income of subsidiaries.................. (112.2) (119.9) (113.5)
Net change in accounts receivable--subsidiaries, other
assets and accounts payable......................... 33.0 13.7 (9.2)
------ ------- -------
Net cash provided by operating activities................. 20.1 18.3 6.8
------ ------- -------
Cash flows from investing activities:
Investments purchased available for sale.................. (157.7) -- --
Acquisitions, net of cash acquired........................ (94.7) --
----
Capital contributions to subsidiaries..................... (131.6) (29.1) (25.0)
------ ------- -------
Net cash used in investing activities..................... (289.3) (123.8) (25.0)
------ ------- -------
Cash flows from financing activities:
Change in notes payable to affiliates..................... -- (244.0) --
Change in notes receivable from subsidiaries.............. 120.6 (13.0) (0.7)
Change in notes payable................................... 0.1 446.9 --
Exercise of stock options................................. 5.5 7.4 7.6
Dividends, net............................................ 43.6 69.2 23.3
------ ------- -------
Net cash provided by financing activities................. 169.8 266.5 30.2
------ ------- -------
Increase (decrease) in cash and cash equivalents............ (99.4) 161.0 12.0
Cash and cash equivalents at beginning of year.............. 180.4 19.4 7.4
------ ------- -------
Cash and cash equivalents at end of year.................... $ 81.0 $ 180.4 $ 19.4
====== ======= =======
See Notes to Consolidated Financial Statements contained in the 1999 Annual
Report incorporated herein by reference.
28
SCHEDULE III
LIBERTY FINANCIAL COMPANIES, INC.
SUPPLEMENTARY INSURANCE INFORMATION
(IN MILLIONS)
THREE YEARS ENDED DECEMBER 31, 1999
- ------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H
- -------- ---------- ------------- ---------- ------------- --------- ---------- -------------
DEFERRED POLICYHOLDER UNEARNED POLICY INSURANCE NET INTEREST
POLICY ACCOUNT PREMIUMS CONTRACT REVENUES INVESTMENT CREDITED TO
ACQUISITION BALANCES AND CLAIMS AND INCOME POLICYHOLDERS
COSTS FUTURE POLICY OTHER AND POLICY
BENEFITS POLICYHOLDERS' BENEFITS AND
FUNDS CLAIMS
DECEMBER 31, 1999
Interest sensitive
products........... $739.2 $12,040.0 NA $69.6 $51.2 $810.3 $530.2
====== ========= == ===== ===== ====== ======
DECEMBER 31, 1998
Interest sensitive
products........... $407.6 $12,446.0 NA $58.1 $38.1 $820.9 $565.1
====== ========= == ===== ===== ====== ======
DECEMBER 31, 1997
Interest sensitive
products........... $285.3 $12,031.8 NA $54.3 $33.1 $853.1 $598.0
====== ========= == ===== ===== ====== ======
THREE YEARS ENDED DECEMBER 31, 1999
- --------------------- --------------------------------------
COLUMN A COLUMN I COLUMN J COLUMN K
- -------- ------------ ---------- ----------
AMORTIZATION OTHER PREMIUMS
OF DEFERRED OPERATING WRITTEN
POLICY EXPENSES
ACQUISITION
COSTS
DECEMBER 31, 1999
Interest sensitive
products........... $97.4 $55.7 NA
===== ===== ==
DECEMBER 31, 1998
Interest sensitive
products........... $77.4 $54.8 NA
===== ===== ==
DECEMBER 31, 1997
Interest sensitive
products........... $86.4 $51.1 NA
===== ===== ==
29
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
3.1 (1) Form of Restated Articles of Organization of the Company
3.2 (1) Form of Certificate of Designation of Series A Convertible
Preferred Stock of the Company
3.3 (2) Restated By-laws of the Company, as amended
4.1 (1) Form of Certificate for Common Stock of the Company
4.2 (1) Form of Certificate for Series A Convertible Preferred Stock
of the Company
4.3 (3) Form of Indenture between the Company and State Street Bank
and Trust Company as Trustee
4.4 (3) Form of Senior Note
10.1 (1) Form of Intercompany Agreement between Liberty Mutual and
the Company
10.2 (4) Form of Registration Rights Agreement between Liberty Mutual
and the Company
10.3 (4) Form of Tax Sharing Agreement between Liberty Mutual and the
Company
10.4 (1) Form of 1990 Stock Option Plan of the Company, together with
amendments 1 and 2 thereto
10.5 (10) Form of Restated Savings and Investment Plan of the Company
10.6 (1) Form of Amended and Restated Supplemental Savings Plan of
the Company
10.7 (1) Form of Stein Roe Profit Sharing Plan and amendments thereto
10.8 (10) Form of Amended and Restated Pension Plan of the Company
10.9 (1) Form of Amended and Restated Supplemental Pension Plan of
the Company
10.10 (5) Form of Amended and Restated 1995 Stock Incentive Plan of
the Company
10.11 (4) Form of 1995 Employee Stock Purchase Plan of the Company
10.12 (1) Form of Deferred Compensation Plan of the Company
10.12.1 (1) Letters from the Company, setting forth additional
retirement benefits for John A. Benning and Sabino
Marinella
10.13 (1) Form of Keyport Deferred Compensation Plan
10.14 (1) Form of Stein Roe Deferred Compensation Plan
10.14.1 (1) Form of Stein Roe Non-Qualified Supplemental Retirement Plan
10.14.2 (1) Form of Stein Roe Long Term Incentive Plan
10.16 (1) Lease Agreement with respect to 600 Atlantic Avenue, Boston,
Massachusetts
10.17 (1) Lease Agreement with respect to 125 High Street, Boston,
Massachusetts, as amended
10.17.1 (10) Third and Fourth Amendments to 125 High Street Lease
10.18 (1) Lease Agreement with respect to One South Wacker Drive,
Chicago, Illinois, as amended
10.19 (1) Unconditional Guarantee Agreement dated November 7, 1991
executed by Liberty Mutual and related Mortgage Maintenance
Agreement by and among LRE Properties, Inc., Atlantic Real
Estate Limited Partnership and Keyport Life Insurance
Company
10.20 (1) Administrative Services Agreement dated as of June 9, 1993
between Liberty Life Assurance Company of Boston and Keyport
Life Insurance Company
10.21 (6) Lease Agreement with respect to One Financial Center,
Boston, Massachusetts
10.22 (10) Agreement between the Company and Stephen E. Gibson,
President and Chief Executive Officer of Colonial
10.23 (7) Revolving Credit Agreement dated as of April 12, 1999 among
Liberty Funds Group LLC, Corporate Receivables Corporation,
Citibank, N.A. and Citicorp North America, Inc.
30
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
10.23.1 (7) Undertaking Agreement dated as of April 12, 1999 among the
Company, Colonial Management Associates, Inc., Newport Fund
Management, Inc., Crabbe Huson Group, Inc., Stein Roe &
Farnham Incorporated and Citicorp North America, Inc.
10.23.2 (7) Pledge and Security Agreement dated as of April 12, 1999
between Liberty Funds Distributor, Inc. and Citicorp North
America, Inc.
10.23.3 Agreement of Amendment dated as of January 31, 2000 amending
the Pledge and Security Agreement dated as of April 12,
1999.
10.28 (8) Colonial Profit Sharing Plan (and Amendment Nos. 1-3
thereto)
10.29 (8) Colonial Split-Dollar Insurance Coverage description
10.30 (9) Coinsurance Agreement between Fidelity and Guaranty Life
Insurance Company and Keyport Life Insurance Company, and
first and second amendments thereto
10.31 (9) Dividend Reinvestment Plan of the Company
10.32 Settlement Agreement and General Release between the Company
and Kenneth R. Leibler
12 Statement re computation of ratios
13 Portions of Annual Report to Stockholders incorporated by
reference into this Report
21 Subsidiaries of the Company
23 Consent of Ernst & Young LLP
27 Financial Data Schedule
99.3 (1) Form of Stockholders' Agreement among the Company, Liberty
Mutual Insurance Company and certain holders of the
Company's Series A Convertible Preferred Stock
- ------------------------
(1) Incorporated by reference to the same Exhibit Number in the Company's
Registration Statement on Form S-4 (filed under the name NEW LFC, INC.)
(Registration No. 33-88824).
(2) Incorporated by reference to the same Exhibit Number in the Company's 1997
Annual Report on Form 10-K filed March 31, 1998.
(3) Incorporated by reference to the same Exhibit number in the Company's
Registration Statement on Form S-3 (Registration No. 333-63349).
(4) Incorporated by reference to the same Exhibit Number in the Company's 1994
Annual Report on Form 10-K filed March 30, 1995.
(5) Incorporated by reference to the same Exhibit Number in the Company's
Registration Statement on Form S-3 (Registration Number 333-29315).
(6) Incorporated by reference to the same Exhibit Number in the Company's 1996
Annual Report on Form 10-K filed March 28, 1997.
(7) Incorporated by reference to Exhibits 10.1, 10.2 and 10.3, in the Company's
Quarterly Report on Form 10-Q filed May 14, 1999.
(8) Incorporated by reference to the same Exhibit Number in the Company's 1995
Annual Report on Form 10-K filed March 29, 1996.
(9) Incorporated by reference to Prospectus contained in the Company's
Registration Statement on Form S-3 (Registration Number 333-20067).
(10) Incorporated by reference to the same Exhibit Number in the Company's 1998
Annual Report on Form 10-K filed March 30, 1999.
31