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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1996
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)
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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
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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, 1997 (based on the closing sale price of the
Common Stock on the New York Stock Exchange on such date) was approximately
$214.4 million.
There were 28,885,456 shares of the registrant's Common Stock, $.01 par
value, and 327,340 shares of the registrant's Series A Convertible Preferred
Stock, $0.01 par value, outstanding as of March 17, 1997.
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Documents Incorporated by Reference
Portions of the Company's 1996 Annual Report to Stockholders (Part I, Item
1(b), Part II, Items 6, 7 and 8, and Part IV - Item 14(a)1).
Portions of the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held on or about May 13, 1997 (Part III, Items 10, 11,
12, and 13).
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LIBERTY FINANCIAL COMPANIES, INC.
ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
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Part I Page
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Item 1. Business 1
Item 2. Properties 15
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Executive Officers of the Registrant 16
Part II
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Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 18
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 19
Item 8. Financial Statements and Supplementary Data 19
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 19
Part III
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Item 10. Directors and Executive Officers of the Registrant 19
Item 11. Executive Compensation 20
Item 12. Security Ownership of Certain Beneficial Owners and Management 20
Item 13. Certain Relationships and Related Transactions 20
Part IV
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Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 20
PART I
Item 1. Business
Overview
Liberty Financial Companies, Inc. ("Liberty Financial" or the "Company")
is an asset accumulation and management company--that is, Liberty Financial
earns revenues by accumulating financial assets from investors and savers and
managing those assets. Liberty Financial accumulates assets by offering
multiple investment management and retirement-oriented insurance products
through multiple distribution channels.
The Company has two core product lines--retirement-oriented insurance
products (principally annuities) and investment management products (most
significantly mutual funds, as well as wealth management and institutional
asset management). The Company's insurance products primarily produce spread
income; the investment management products produce fee income. The Company
believes that these products have attractive growth prospects due to
important demographic and economic trends. These trends include the need for
the aging baby boom generation to increase savings and investment, lower
public confidence that government and employer-provided retirement benefits
will be adequate for future retirees, longer life expectancies, and rising
health care costs.
Liberty Financial's efforts to exploit these growth prospects are guided
by four interrelated strategies:
(bullet) Diversification. 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. The Company
believes that the diversification in its products and distribution
channels allows it to grow assets in different market cycles,
thereby reducing earnings volatility.
(bullet) 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 has an impressive track record in such innovations.
(bullet) Integration. Liberty Financial is a holding company that conducts
business through several operating units that are wholly owned
subsidiaries. Liberty Financial promotes integration of its
operating units, with a view toward accumulating additional assets
or reducing expenses.
(bullet) Acquisition. Where appropriate, the Company seeks acquisitions that
provide additional assets, investment management capabilities,
distribution capabilities or other integration or diversification
opportunities in its core product areas.
The Company had total product sales of $8.6 billion in 1996 (including $1.0
billion of reinvested dividends and similar reinvested returns). Sixty-one
percent of these product sales were made through intermediary distributors
(including brokerage firms, banks, financial planners and insurance agents),
with the balance made directly to the investor.
At December 31, 1996, assets under management were $48.0 billion, consisting
of the following:
(bullet) $12.1 billion in annuities and other insurance products;
(bullet) $25.7 billion in mutual funds;
(bullet) $5.3 billion attributable to wealth management; and
(bullet) $4.9 billion attributable to institutional asset management.
Products producing spread income accounted for 65% of the Company's
operating earnings during 1996, while products producing fee income accounted
for the remaining 35%. Liberty Financial seeks to balance the spread and fee
components of its operating earnings. The Company has made progress in
achieving this goal since its acquisitions of The Colonial Group, Inc. and
Newport Pacific Management, Inc. in the first half of 1995.
1
At March 17, 1997, approximately 80.6% 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 and its telephone number is (617)
722-6000.
Industry Segment Information
Liberty Financial conducts business in two industry segments: annuity
insurance and asset management. For information on these industry segments,
see Note 11 to Liberty Financial's Consolidated Financial Statements in
Liberty Financial's 1996 Annual Report to Stockholders (the "1996 Annual
Report"), which information hereby is incorporated by reference into this
Report.
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. Substantially all of these products currently are annuities
that are written by Keyport Life Insurance Company ("Keyport"), an operating
unit of the Company. Annuities are insurance products designed to offer
individuals protection against the risk of outliving their income during
retirement. In addition to offering a tax-favored source of lifetime income,
annuities also are a tax-efficient means of accumulating savings for
retirement needs. The Company earns spread income from fixed and indexed
annuities; variable annuities primarily produce fee income for the Company.
Products
The Company's principal retirement-oriented insurance products are
categorized as follows:
(bullet) Fixed Annuities. The Company's principal fixed annuity products are
individual single premium deferred fixed annuities ("SPDAs"). An
SPDA policyholder typically 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 retires or
turns age 90. At December 31, 1996, the Company's fixed annuity
policyholder balances were $8.6 billion. The Company's SPDA sales
in 1996 were $492.6 million. The average premium payment for an
SPDA sold by the Company in 1996 was $32,353. In addition, in July,
1996 the Company completed a coinsurance agreement with Fidelity
and Guaranty Life Insurance Company under which the Company
acquired a $954 million block of SPDAs.
(bullet) 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(r) product. An
equity-indexed annuity credits interest to the policyholder at a
"participation rate" equal to a portion 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 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 risk to the policyholder's principal. In
1996, the Company introduced a market value adjusted ("MVA")
annuity product which offers a choice between an equity-indexed
account similar to KeyIndex and a fixed annuity-type interest
account. The MVA product offers terms for each account of one,
three, five, six and seven years, as well as a 10-year term for the
fixed interest account. The MVA 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 Treasury securities
since the beginning of the term. At December 31, 1996, the
Company's indexed annuity policyholder balances were $787.8
million. The Company's equity-indexed annuity sales in 1996 were
$655.2 million. The average premium payment for an indexed annuity
product sold by the Company in 1996 was $30,623. The Company is
continuing to develop new versions of the equity-indexed annuity.
2
(bullet) Variable Annuities. Variable annuities offer a selection of
underlying investment alternatives which may satisfy a variety of
policyholder objectives. In a variable annuity, the policyholder
has the opportunity to select separate account investment options
(similar to mutual funds) which pass the investment risk directly
to the policyholder in return for the potential of higher returns.
Guaranteed fixed interest options also are available. The Company's
Keyport Advisor variable annuity currently offers 17 separate
account investment choices and four guaranteed fixed-interest
options. At December 31, 1996, the Company's variable annuity
policyholder balances were $1.1 billion (including $193.8 million
of fixed interest liabilities). The Company's variable annuity
sales in 1996 were $97.4 million. The average premium payment for a
variable annuity policy sold by the Company in 1996 was $47,154.
While the Company currently does not offer traditional life insurance
products, it manages a closed block of single premium whole life insurance
policies ("SPWLs"). SPWLs are a retirement-oriented tax- advantaged life
insurance product. The Company discontinued sales of SPWLs in response to
certain tax law changes. The Company had SPWL policyholder balances of $2.0
billion at December 31, 1996. In addition, at that date the Company had
variable life insurance policyholder balances of $170.9 million. SPWLs
produce spread income, and variable life policies produce fee income.
Under current law, returns credited on annuities and life insurance policies
during the accumulation period (the period during which interest is credited)
are not subject to federal or state 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 annuitized series of payments
over time. The return component of such payments is taxed at the time of
receipt as ordinary income.
The Company has two primary financial objectives for its retirement-oriented
insurance products: to increase policyholder balances through new sales and
asset retention and to earn required investment spreads on its fixed and
indexed return products.
The following table sets forth certain information regarding Keyport's
retirement-oriented insurance products and its reserves for the periods
indicated.
3
As of or for the Year Ended
December 31,
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1996 1995 1994
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(dollars in millions, except
policy data)
Fixed Annuities in Force:
Aggregate amount $ 8,630 $ 7,761 $ 7,061
Average policy amount $ 36,479 $ 34,611 $ 33,247
Number of policies 236,574 224,238 212,390
Aggregate amount subject to surrender charges $ 7,371 $ 6,904 $ 6,168
Indexed Annuities in Force:
Aggregate amount $ 788 $ 84 --
Average policy amount $ 32,591 $ 30,207 --
Number of policies 24,174 2,778 --
Aggregate amount subject to surrender charges $ 788 $ 84 --
Variable Annuities in Force:
Aggregate amount $ 1,083 $ 950 $ 812
Average policy amount $ 43,035 $ 37,941 $ 31,985
Number of policies 25,177 25,037 25,400
Life Insurance in Force:
Aggregate amount $ 2,127 $ 2,157 $ 2,217
Average policy amount $ 79,207 $ 75,728 $ 72,756
Number of policies 26,850 28,489 30,465
Premiums (statutory basis):
Fixed annuities $ 493 $ 977 $ 1,156
Indexed annuities $ 655 $ 84 --
Variable annuities $ 97 $ 80 $ 156
Life insurance (net of reinsurance) $ (0.4) $ (0.6) $ (0.5)
New Contracts and Policies:
Fixed annuities 11,358 30,043 45,557
Indexed annuities 21,396 2,778 --
Variable annuities 1,814 1,789 4,117
Withdrawals and Terminations (statutory basis):
Fixed annuities:
Death $ 25 $ 15 $ 16
Maturity $ 87 $ 76 $ 65
Surrender $ 966 $ 693 $ 826
Indexed annuities:
Death $ 0.1 -- --
Maturity -- -- --
Surrender $ 3 $ -- --
Variable Annuities:
Death $ 2 $ 0.4 $ 0.6
Maturity $ 21 $ 14 $ 16
Surrender $ 77 $ 92 $ 76
Life Insurance:
Death $ 53 $ 54 $ 49
Surrender $ 98 $ 95 $ 89
Policy and Separate Account Liabilities:
Fixed annuities $ 8,641 $ 7,772 $ 7,072
Indexed annuities $ 788 $ 84 --
Variable annuities $ 1,083 $ 950 $ 812
Life Insurance $ 2,142 $ 2,168 $ 2,224
4
As of or for the Year Ended
December 31,
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1996 1995 1994
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(dollars in millions, except
policy data)
Surrender Rates:
Fixed annuities 11.79% 9.34% 12.34%
Indexed annuities 0.69% 0.12% --
Variable annuities 7.55% 10.46% 9.54%
Life Insurance 4.58% 4.36% 3.73%
Sales and Asset Retention
New product sales are influenced primarily by overall market conditions
impacting the attractiveness of these 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. Sales of SPDAs tend to be sensitive to prevailing interest
rates. Sales can be expected to increase 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 in interest rate environments when this
differentiation in rates is not present.
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, 1996,
crediting rates on 92% 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
4.0% to 8.0% at December 31, 1996. Such policies had guaranteed minimum rates
ranging from 3.0% to 4.5%. Initial interest crediting rates on new policies
issued in 1996 ranged from 4.65% to 7.15%. Guaranteed minimum rates on 1996
new policies ranged from 3.0% to 4.5%.
All of the Company's annuities permit the policyholder at anytime to
withdraw all or any part of the accumulated policy value. Premature
termination of an annuity policy results in the loss of anticipated future
earnings related to the annuity 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. All of the Company's SPDAs currently are issued
with surrender charges. Such surrender charges typically start at 7% and then
decline to zero over a five- to seven-year period. At December 31, 1996,
85.4% of the Company's SPDAs remained in the surrender charge period.
Surrender charges generally do not apply to withdrawals by policyholders of
up to 10% per year of the then accumulated value. In addition, certain SPDAs
allow the policyholder to withdraw accumulated returns without a surrender
charge or may provide for charge-free withdrawals in certain circumstances.
SPDAs 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 up to one year, depending
upon the state). While SPWLs also permit withdrawal, the withdrawal generally
would produce significant adverse tax consequences to the policyholder.
Keyport's strong financial ratings are important to its ability to
accumulate and retain assets. Keyport is rated "A+" (Superior) by A.M. Best,
"AA-" (excellent financial security) by Standard & Poor's, "A1" (good
financial strength) by Moody's and AA- (very high claims paying ability) by
Duff & Phelps. "A+" is A.M. Best's second highest rating. The S&P and Duff &
Phelps "-" modifier signifies that Keyport is at the lower end of the AA
category. These ratings are based upon information supplied to the rating
agency by Keyport. These ratings merely 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; they are not
directed toward investors.
5
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 1996 were 0.44% of assets, making Keyport
one of the lowest cost operators in the annuity business.
General Account Investments
Premium deposits on fixed and indexed annuities are credited to Keyport's
general account investments (which at December 31, 1996 totaled $12.3
billion, including certain cash and cash equivalents). To achieve its
required investment spreads, 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 asset
side of the investment process requires portfolio techniques that earn
required 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.
The bulk of the Company's general account is invested in fixed maturity
securities (87.1% at December 31, 1996). The Company's principal strategy for
managing interest rate risk is to closely match the duration of its
investment portfolio and its policyholder balances. At December 31, 1996, the
duration of its fixed income portfolio was 2.8 years. 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 call options to hedge its obligations to provide participation rate
returns. Credit risk is managed by careful credit analysis and monitoring. At
December 31, 1996, the Company's fixed maturity portfolio had an overall
average S&P rating of A+ and 92.0% of the Company's general account portfolio
consisted of investment grade securities. The balance was invested in below
investment grade securities to enhance overall portfolio yield. Below
investment grade securities pose greater risks than investment grade
securities. The Company actively manages its below investment grade portfolio
to optimize its risk/return profile. There were no non-income producing
investments in the Company's fixed maturity portfolio at December 31, 1996.
Investment Management
Liberty Financial has three core types of investment management products:
mutual funds, wealth management, and institutional asset management. The
Company has four separate operating units engaged in investment management:
The Colonial Group, Inc. ("Colonial"), Stein Roe & Farnham Incorporated
("Stein Roe"), Newport Pacific Management, Inc. ("Newport") and Liberty Asset
Management Company ("LAMCO").
Products and Services
(bullet) Mutual Funds. The Company sponsors 64 open-end mutual funds, as
well as seven closed-end funds. The open-end funds include the 35
intermediary-distributed Colonial mutual funds, the 18
direct-marketed Stein Roe funds and 11 other funds included among
the investment options under the Company's variable annuities. The
closed-end funds include five Colonial funds and two LAMCO funds.
At December 31, 1996, total mutual fund assets were $25.7 billion.
At that date 46.9% of these assets were invested in equity funds
(compared to 36.9% at December 31, 1995), 27.2% in taxable fixed
income funds and 25.9% in tax-exempt fixed income funds. The
Company seeks to continue to increase equity mutual fund assets.
(bullet) Wealth Management. At December 31, 1996, the Company managed $5.3
billion in investment portfolios for high net worth individuals and
families, all of which are managed by Stein Roe.
(bullet) Institutional Asset Management. At December 31, 1996, the Company
managed $4.9 billion of investment portfolios for institutional
investors such as insurance companies, public and private
6
retirement funds, endowments, foundations and other institutions.
Most of these assets are managed by Stein Roe. At December 31, 1996
Stein Roe also managed $9.5 billion of Keyport's general account
assets supporting Keyport's insurance products.
The Company's investment management services center 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. 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). Investment management fees
and related administrative and support fees generally are charged as a
percentage of assets under management.
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.
The Company's direct-market mutual funds are sold without a sales load. Most
of the Company's intermediary-distributed mutual funds offer investors a
choice of two pricing options: a traditional front- end load option, in which
the investor pays a sales charge at the time of purchase, and a back-end load
option, 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 for eight
years after purchase and a declining contingent deferred sales charge paid by
the investor if shares are redeemed within six years after purchase. Certain
funds also offer 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 as of or for each year in the three-year period ended
December 31, 1996. Such information includes Keyport's assets (including its
general account assets managed by Stein Roe, as well as loans to
policyholders and Keyport's general account assets managed by unaffiliated
investment managers). In addition, certain information is provided separately
for mutual fund assets.
7
Total Assets Under Management
By Product Type
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as of December 31,
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1996 1995 1994
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Mutual Funds (dollars in billions)
Intermediary-distributed $16.1 $15.7 $ 1.3
Direct-marketed 6.6 4.8 4.5
Closed-End 1.9 1.8 0.8
Variable Annuity 1.1 1.0 0.8
------- --------- --------
Total Mutual Funds 25.7 23.3 7.4
Wealth Management 5.3 4.5 4.1
Institutional 4.9 4.1 4.8
Retirement-Oriented Insurance Products 12.1 10.6 9.3
------- --------- --------
Total $48.0 $42.5 $25.6
======= ========= ========
Total Assets Under Management
By Asset Class(1)
------------------------------
as of December 31,
------------------------------
1996 1995 1994
--------- --------- ---------
(dollars in billions)
Equity Funds $16.1 $11.4 $ 7.2
Fixed Income Funds:
Taxable 25.2 23.8 17.1
Tax-Exempt 6.7 7.3 1.3
------- --------- --------
Total $48.0 $42.5 $25.6
======= ========= ========
(1) Balance funds are classified as equity funds; all categories include cash
and other short-term investments.
Total Mutual Fund Assets Under
Management
By Asset Class(1)
------------------------------
as of December 31,
------------------------------
1996 1995 1994
--------- --------- ---------
(dollars in billions)
Equity Funds $12.1 $ 8.6 $3.6
Fixed Income Funds:
Taxable 7.0 7.4 2.5
Tax-Exempt 6.6 7.3 1.3
------- --------- --------
Total $25.7 $23.3 $7.4
======= ========= ========
(1) Balance funds are classified as equity funds; all categories include cash
and other short-term investments.
Total Assets Under Management
Asset Flow Summary
------------------------------
1996 1995 1994
--------- --------- ---------
(dollars in billions)
Beginning Assets Under Management $42.5 $25.6 $30.6
Sales and Reinvestments 8.6 5.8 3.7
Redemptions and Withdrawals (6.9) (9.4) (7.7)
Asset Acquisitions 1.2 14.9 --
General Account Investment Earnings 0.7 0.6 0.5
Market Action 1.9 5.0 (1.5)
------- --------- --------
Ending Assets Under Management $48.0 $42.5 $25.6
======= ========= ========
8
Sales and Asset Retention
The Company's financial objectives with respect to its investment management
businesses are to increase assets under management in each of its three core
products, and to improve operating margins through increasing scale and cost
savings produced by integration. The investment management business,
particularly with respect to mutual funds, offers excellent opportunities to
grow operating profits and to achieve and attain attractive operating margins
for those participants whose asset base and investment and service
infrastructure reach critical mass. As a result of its acquisitions of
Colonial and Newport and subsequent integration steps, the Company generated
annual cost savings of $13.5 million through the consolidation of various
support and service functions in its mutual fund business.
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. The Company believes
that currently the most important measure of performance influencing sales
(particular sales through intermediaries) is peer group rankings compiled by
Lipper Analytical Services, Inc. ("Lipper"). In the case of the Stein Roe
funds, 14 funds were in the top two quartiles of their respective Lipper peer
groups for the 12 months ended December 31, 1996. Based on figures for Class
A (front-end load) shares (or equivalents), 16 of the open-end Colonial funds
were in the top two quartiles of their respective Lipper peer groups for the
same period. The Company believes that another important performance measure
influencing sales (particularly in the direct channel) is the mutual fund
ratings published by Morningstar. Of the 11 Stein Roe funds rated by
Morningstar at March 1, 1997, five funds had an overall four-star rating and
one fund had the maximum overall five-star rating. Morningstar also named
Colonial as the "best overall manager of taxable bond funds" for 1996. The
Company believes that over time, more sophisticated tools, such as those
employed by consultants to institutional investors, will become available 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.
Excellent service to investors and distributors is a prerequisite to asset
retention. The Company acquired Colonial in part because of its reputation
for excellent service to its distributors. In November, 1996, Dalbar, Inc.,
an independent research and publishing company covering the mutual fund
industry, named Colonial the top-ranked mutual fund group for marketing and
operational support in its annual survey of broker-dealers.
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 wealth management market, and that Newport is a
recognized leader in investments in the Asian markets.
Sales of mutual funds and other investment management products are subject
to market forces, such as changes in interest rates and stock market
performance. Sales of the Company's equity mutual funds benefited in 1996
from the continued strong performance of the U.S. stock market. Sales of the
Company's fixed income mutual funds were more modest in 1996, given
prevailing market conditions. 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
fund portfolios, all of which can impact investment management fees.
9
Distribution
Liberty Financial sells its products through multiple distribution channels.
Total product sales for 1996 were $8.6 billion (including $1.0 billion of
reinvested dividends and similar reinvested returns). Sixty-one percent of
these sales were made through intermediaries and the remaining 39% of sales
were made directly to the investor. Over 35,000 individual brokers and other
intermediaries sold Liberty Financial products in 1996.
Distribution Through Intermediaries
The Company sells both annuities and mutual funds through various
intermediaries, including national and regional brokerage firms, banks,
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, busy with their own careers, families and
other interests, 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. In recent years
banks and financial planners also have become significant distributors of
these products. 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. Fee-based financial planners also have
emerged as an important distribution channel.
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.
Liberty Financial operates a sales unit, Independent Financial Marketing
Group, Inc. ("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 mutual funds and annuities products 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. In some cases, the bank provides space in its branches
and the Company places its own sales representatives in that space and fully
operates the program. Products sold include the Company's proprietary
products, as well as non-proprietary products (including in some cases the
bank's proprietary mutual funds). In other cases, the Company's role may be
limited to functions such as licensing and training the bank's employees and
wholesaling products. At December 31, 1996, Independent had over 150 bank
relationships involving over 3,100 registered salespersons.
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, are
evolving from one-time up-front sales loads to options that shift investors'
payments over time and move toward fee-based pricing. The Company's
intermediary-distributed mutual funds now are sold with alternate pricing
structures. Intermediaries also increasingly demand that product providers
supply new value-added services. The Company is developing innovative new
technology-based service and support tools, such as interactive asset
allocation models and on-line customer account management systems, designed
to provide value-added services to intermediaries and their customers. Some
distributors have begun to assess fee sharing payments or similar charges as
additional compensation for fund sales. The Company may be confronted with
the choice of absorbing these charges or limiting its access to certain
distributors.
10
Direct Distribution
The Company's direct-marketed mutual funds, as well as its wealth management
and institutional asset management services, are sold directly to investors.
The Company's directed-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. Wealth
management clients typically are high net worth individuals and families and
smaller institutional investors. 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 of the technology-based
customer service and support tools it is developing, such as on-line account
access and interactive illustrative investment tools, can become important
devices in accumulating and retaining assets in the direct distribution
channels. Stein Roe's reputation as a high quality asset manager is the most
important factor in generating new wealth 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" have become an important source of
customers for direct-marketed mutual funds. In 1996, 60% of the total new
sales of the Stein Roe mutual funds were through mutual fund supermarkets and
similar arrangements. To gain access to 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 wealth management clients, in some cases, in return for
referral fees or other compensation.
Diversification
The appeal of the Company's products varies according to an individual's
age, income, risk tolerance and financial goals. The Company's products vary
widely in financial objectives and risks. The Company's product diversity is
designed in part to serve individuals at various stages of their life and
earnings cycles, with an emphasis on retirement savings and income needs. The
Company also believes that its product mix will appeal to customers under a
variety of economic and market conditions. This diversification is designed
to smooth out the ebbs and flows of the financial markets. There are times
when equity mutual funds will sell more briskly than fixed income funds or
annuities, and vice versa. Similarly, diversification of distribution
channels allows the Company to reach many distinct segments of the
marketplace and lessens its dependence on any one source of assets. The
Company believes that the diversification in its products and distribution
channels allows it to grow assets in different market cycles, thereby
reducing earnings volatility.
Innovation
The Company believes that innovations creating new or enhanced products or
accessing new markets are essential in order to grow its asset base and meet
the ever-changing needs of its customers. Successful product innovation has
been critical to growth throughout the financial services industry. The
Company believes that, aside from excellent investment performance, new
products with compelling innovations are the best devices for generating new
sales. In addition, the Company believes that the distinctions which have
separated intermediary and direct distribution channels are blurring as a
result of the trend in intermediary channels toward fee-based pricing, the
introduction of asset allocation and other new value-added services and the
emergence of new sales mediums (such as mutual fund supermarkets and the
internet). This is particularly the case for products such as mutual funds
that are purchased by individual investors. To succeed in the future in
maintaining and expanding its client base and distribution relationships, the
Company will need to respond by developing new products, pricing structures
and technology-driven tools.
11
The Company has an impressive record in product and distribution
innovations. Keyport developed the first single premium whole life insurance
product. Liberty Financial was a pioneer in the business of distributing
mutual funds and annuities through banks. The Colonial Newport Tiger Fund was
the first U.S.-based mutual fund to focus exclusively on the "Tiger"
countries of Asia. The Stein Roe Young Investor Fund was the first mutual
fund to be coupled with an educational program to teach younger people about
investing, while at the same time offering parents an excellent device to
save for educational and other family needs. The Liberty ALL-STAR Equity Fund
was the first fund to bring institutional-style multiple management
techniques to retail investors. The Company's ability to create new products
continued with its introduction in 1995 of KeyIndex, the first equity-indexed
annuity introduced into the marketplace. In the first quarter of 1997 Liberty
Financial became the first mutual fund company to allow shareholders to
access accounts and conduct transactions on-line using digital certificate
security technology.
Integration
Liberty Financial is a holding company that conducts business through
several operating units that are wholly owned subsidiaries. Integration of
Liberty Financial's operating companies is a fundamental operating
philosophy. Leveragable talents and resources include product development and
design, distribution relationships, investment management, investor
servicing, and technology development and support. Where appropriate, the
Company seeks to leverage those resources across multiple operating units,
with a view toward accumulating additional assets or reducing expenses.
Examples of successfully implemented integration efforts include the
following:
(bullet) Upon the Company's acquisition of Newport in April, 1995, Colonial
assumed the marketing, sales, service and administration of
Newport's flagship Tiger Fund, which was re-branded under the
Colonial name. The Fund's asset growth has been exceptional, more
than tripling from $700 million in April, 1995 to $2.4 billion at
December 31, 1996. Colonial also has benefited because the
availability of the Colonial Newport Tiger Fund has facilitated
establishing new distribution arrangements with intermediaries.
(bullet) Stein Roe manages most of Keyport's general account fixed income
portfolio, and together with Colonial and Newport manages certain
of the funds underlying Keyport's variable annuity products.
(bullet) Colonial's transfer agency operations also perform these functions
for the Stein Roe funds.
(bullet) During 1996, the Company's bank distribution units were the largest
distributor of Keyport's annuities and the fourth largest
distributor of the Colonial funds, accounting for 11.3% and 5.1%,
respectively, of total sales of those products.
Acquisitions
Acquisitions are an integral part of Liberty Financial's business
strategy. Keyport, Colonial, Stein Roe, Newport, and, most recently,
Independent all joined Liberty Financial through acquisition. Where
appropriate, the Company continues to seek acquisitions that can provide
additional assets, investment management capabilities, distribution
capabilities, or other integration or diversification opportunities in its
core product areas. Current areas of focus for the Company's acquisition
efforts include the following:
(bullet) Mutual funds, with particular focus on equities and foreign
markets;
(bullet) Other new investment skills;
(bullet) Additional distribution capabilities;
(bullet) Wealth management firms that can become part of Stein Roe, and can
leverage and expand Stein Roe's franchise in the wealth management
market; and
(bullet) Blocks of annuity assets that can be purchased or co-insured.
12
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.
Annuity Insurance
The Company's retirement-oriented insurance products generally are issued
as individual policies. 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"), a
Keyport subsidiary, also issues certain policies. Keyport and Independence
Life are each charted in the state of Rhode Island, and the Rhode Island
Department of Business Regulation is their primary oversight regulator.
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. 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.
In recent years, various states have adopted new quantitative standards
promulgated by the National Association of Insurance Commissioners ("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, 1996, Keyport's capital was 2.3 times the level at which the
lowest of these regulatory attention levels would be triggered.
Under the insurance guaranty fund laws existing in each state, insurers
can be assessed for certain obligations of insolvent insurance companies.
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 15 to Liberty
Financial's Consolidated Financial Statements included in the 1996 Annual
Report.
Rhode Island 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 dividend payments in excess of 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 Department of Business Regulation. As of December 31, 1996,
such restriction would limit dividends without such approval to $42.5
million. Keyport
13
has not paid any dividends since its acquisition in December, 1988. 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 such required information to the Rhode Island Department of
Business Regulation and such acquisition is approved by the Department.
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 of 1940 (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
Colonial, Stein Roe, Newport and LAMCO) are registered with the Securities
and Exchange Commission ("SEC") as investment advisers under the Advisers
Act. They are subject to the Investment Company Act insofar as it relates to
investment advisers to registered investment companies. These securities laws
and the 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.
The Advisers Act and the Investment Company Act provide, in substance,
that if a change in control of the Company were to occur, each client
investment management agreement would terminate, unless the client consents
to the continuation of the agreement. In the case of mutual fund clients,
this would require approval of the fund's Board of Trustees (including a
majority of the independent Trustees) and shareholders. A person holding more
than 25% of the Company's voting stock is presumed to control the Company.
Sales by Liberty Mutual or other stockholders or new issuances of equity
securities by Liberty Financial, among other things, may raise issues
relating to a deemed assignment of the Company's investment advisory
agreements. The Restated Articles of Organization of the Company (the
"Restated Articles") provide that no person or group deemed to be a
beneficial owner (as defined therein) of Liberty Financial's Voting Stock (as
defined therein) may vote more than 20% of the total voting power of such
Voting Stock outstanding. These provisions of the Restated Articles do not
apply to Liberty Mutual, subsidiaries or affiliates of Liberty Mutual, direct
or indirect subsidiaries of the Company and certain employee plans maintained
by the Company. The Company's Board of Directors also may approve the
exemption of other persons or groups from these provisions. There can be no
assurance that this limitation would have the desired legal effect.
Distribution
Sale of the Company's annuities and mutual funds is subject to regulation
at the point of sale. Annuities must be sold through an entity registered as
an insurance agency in the particular state. The sales person must be an
insurance agent properly licensed under state law. Mutual fund shares must be
sold through an entity registered as a broker-dealer under the Securities
Exchange Act of 1934 and applicable state law. The sales person must be
registered with the National Association of Securities Dealers, Inc. ("NASD")
and the applicable state.
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
annuity sales are processed. 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
14
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.
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, however, on the courts 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 and
the SEC. 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.
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. The Company believes that, aside from excellent
investment performance, new products with compelling innovations are the best
devices for generating new sales. Sales of particular products may be
affected by conditions in the financial markets, such as increases or
decreases in interest rates or stock prices, as discussed above.
Product features of particular relevance to annuities include interest
crediting and participation rates, surrender charges, product flexibility and
innovation in product design. Maintenance of Keyport's strong financial
ratings 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 if key
investment managers leave the Company. The ability of the Company's
management subsidiaries to compete with other asset management firms also is
dependent, in part, on the relative attractiveness of their investment
philosophies and methods under prevailing market conditions.
Employees
As of December 31, 1996, the Company had 1,957 full-time employees
summarized by activity as follows: 358 in annuity insurance operations; 1,127
in asset management activities; 419 employees in marketing and distribution
operations; and 53 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.
Item 2. Properties
As of December 31, 1996, 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
15
approximately 30,300 square feet in a single facility in downtown Boston
pursuant to a lease which expires in 2002. Keyport leases approximately
76,000 square feet in a single facility in downtown Boston pursuant to a
lease which expires in 2002. Colonial leases approximately 149,000 square
feet of office space in a single facility in downtown Boston under a lease
which expires in 2006 and approximately 21,700 square feet in Aurora,
Colorado under a lease which expires in November, 2000. Stein Roe leases
142,000 square feet in downtown Chicago pursuant to a lease which expires in
2009. Independent leases approximately 23,200 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.
Item 4. Submission of Matters to a Vote of Security Holders
None
Executive Officers of the Registrant
Name Age Position
---- --- --------
Gary L. Countryman 57 Chairman and Director
Kenneth R. Leibler 47 Chief Executive Officer, President and Director
John A. Benning 62 Senior Vice President, General Counsel and Clerk
Harold W. Cogger 61 Executive Vice President
Lindsay Cook 44 Executive Vice President
Stephen E. Gibson 43 President, The Colonial Group, Inc.
J. Scott Hansen 44 Senior Vice President, Corporate Development
J. Andy Hilbert 38 Senior Vice President and Chief Financial Officer
Denis Kaplan 53 Chief Executive Officer of Independent
C. Allen Merritt, Jr. 56 Executive Vice President and Treasurer
Porter P. Morgan 56 Senior Vice President, Marketing
John W. Rosensteel 56 President and Chief Executive Officer of Keyport
Hans P. Ziegler 56 Chief Executive Officer of Stein Roe
Mr. Countryman has been Chief Executive Officer of Liberty Mutual and
Liberty Mutual Fire Insurance Company (an affiliate of Liberty Mutual) since
1986, and has been Chairman of both companies since 1991. He currently serves
as a director of the Company, Liberty Mutual and certain of its affiliates,
BankBoston Corporation, The First National Bank of Boston, Boston Edison
Company and Harcourt General, Inc.
Mr. Leibler became Chief Executive Officer of Liberty Financial on January
1, 1995, has been President of Liberty Financial since August, 1990, and was
Chief Operating Officer from August, 1990, until December, 1994. Mr. Leibler
currently serves as a director of the Company and the Boston Stock Exchange.
Mr. Benning has been Senior Vice President, General Counsel and Clerk of
Liberty Financial since October, 1989.
Mr. Cogger became an Executive Vice President and director of Liberty
Financial at the time it acquired Colonial in March, 1995. He was President
of Colonial from November, 1994 to December, 1996 and Chief Executive Officer
from March, 1995 to December, 1996. He was President of its principal
subsidiary, Colonial Management Associates, Inc. from 1993 to December, 1996,
and Chief Executive Officer from March, 1995 to December, 1996.
Mr. Cook became an 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.
16
Mr. Gibson joined Colonial in July, 1996 as Executive Vice President,
becoming President and Chief Executive Officer in December, 1996. Prior to
joining Colonial, Mr. Gibson held various senior marketing positions at
Putnam Investments.
Mr. Hansen became Senior Vice President, Corporate Development in May, 1996.
Prior to that time he was Vice President, Corporate Development.
Mr. Hilbert joined the Company as Senior Vice President and Chief Financial
Officer in March, 1997. 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. Kaplan has been Chief Executive Officer of Independent since 1990.
Mr. Merritt became an Executive Vice President of Liberty Financial in
February, 1997. From March, 1993 until that time, he was Senior Vice
President of Liberty Financial. Prior to that time, he served as Senior Vice
President of its subsidiary, Liberty Financial Services, Inc.
Mr. Morgan has been Senior Vice President, Marketing of Liberty Financial
since 1991.
Mr. Rosensteel joined Keyport in 1992 as Chief Operating Officer. He was
appointed President and Chief Executive Officer of Keyport effective January
1, 1993.
Mr. Ziegler has been Chief Executive Officer of Stein Roe since June, 1994.
Mr. Ziegler was President of Stein Roe's Investment Counsel division from
July, 1993 to July, 1994. Prior to joining Stein Roe, Mr. Ziegler was
President and Chief Executive Officer of the Pitcairn Trust Company.
17
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 Common Stock began trading on the NYSE on
March 27, 1995. The Common Stock is also listed on the Boston Stock Exchange.
Prior to March 27, 1995, there was no public market for the Company's Common
Stock.
The following table sets forth the high and low sales price for each
quarter during 1996 and 1995.
1996
Quarter High Low
----------------- ------------
January-March $32 3/8 $30
April-June 34 30 3/4
July-September 33 7/8 26 1/8
October-December 39 30 7/8
1995
Quarter High Low
----------------- ------------
January-March* $29 $27
April-June 27 1/2 23 7/8
July-September 29 1/4 25 3/8
October-December 30 1/4 27 1/8
* For period from March 27, 1995 (initial public trading day) through March
31, 1995.
The approximate number of stockholders of record of the Company's Common
Stock as of March 17, 1997 was 156.
The Company's practice has been to pay quarterly cash dividends of $0.15 per
share. 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 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 during 1995 and 1996. Such
participation may be terminated at any time. Based upon Liberty Financial's
current expectations as to its liquidity and cash needs, Liberty Financial's
ability to pay dividends on the Common Stock may be dependent upon Liberty
Mutual's continued participation in the DRIP. See "Management's Discussion
and Analysis of Results of Operations and Financial Condition--Liquidity" in
the 1996 Annual Report.
For a discussion of certain restrictions on the Company's ability to pay
dividends in cash on its Common stock, see "Management's Discussion and
Analysis of Results of Operations and Financial Condition--Liquidity" in the
1996 Annual Report.
Sales of Unregistered Securities
Liberty Financial issued shares of its Common Stock during 1996 without
registration under the Securities Act of 1933 (the "Securities Act") in the
transactions described below.
On March 7, 1996, Liberty Financial issued an aggregate of 237,009 shares to
four individuals who were the shareholders of Independent (consisting of
Denis Kaplan, President and CEO of Independent
18
and an executive officer of Liberty Financial, and three other senior
executives of Independent) and one institution which cancelled an option to
acquire shares of Independent as consideration for Liberty Financial's
acquisition of Independent. The acquisition agreement provides for various
subsequent payments of additional shares based upon certain conditions. On
July 16, 1996, Liberty Financial issued an additional 31,600 shares in the
aggregate to such persons in satisfaction of the first such payment. Such
issuances were exempt from registration under the Securities Act pursuant to
Section 4(2) thereof.
In addition, as of each of March 13, June 5, August 28 and November 27,
1996, Liberty Financial issued 111,579, 108,954, 111,656 and 95,466 shares of
Common Stock, respectively, to LFC Holdings, Inc., an indirect subsidiary of
Liberty Mutual, at prices of $30.975, $31.875, $31.25 and $36.725 per share,
respectively, as re-investments of cash dividends otherwise payable to LFC
Holdings, Inc. under Liberty Financial's former Dividend Reinvestment Plan.
Such issuances were exempt from registration under the Securities Act
pursuant to Section 4(2) thereof.
Item 6. Selected Financial Data
The Selected Consolidated Financial Data, which appears on page 23 in the
1996 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 Results of Operations and
Financial Condition, which appears beginning on page 24 in the 1996 Annual
Report, is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The Company's Consolidated Financial Statements which appear beginning on
page 34 in the 1996 Annual Report, and the report thereon of Ernst & Young,
LLP as of and for the year ended December 31, 1996, which appears on page 55
in the 1996 Annual Report, are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
The consolidated financial statements of Liberty Financial for the year
ended December 31, 1996 have been audited and reported upon by Ernst & Young
("E&Y"). Similarly, E&Y will serve as the independent auditors of Liberty
Financial for 1997.
For fiscal years prior to 1996, the consolidated financial statements of
Liberty Financial were audited and reported on by KPMG Peat Marwick LLP
("KPMG"). On March 13, 1996, following a competitive proposal process,
Liberty Financial's Audit Committee terminated KPMG's appointment as Liberty
Financial's independent accountants effective March 14, 1996, and voted to
recommend to the Board of Directors that E&Y be appointed as Liberty
Financial's independent accountants for fiscal 1996. The Board of Directors
approved this recommendation on April 10, 1996.
In connection with the audits of Liberty Financial's consolidated
financial statements for the two fiscal years in the period ended December
31, 1995, and the subsequent interim period through March 14, 1996, there
were no disagreements between Liberty Financial and KPMG on any matter of
accounting principles or practices, financial statement disclosure, or
auditing scope or procedures, which disagreements if not resolved to KPMG's
satisfaction would have caused KPMG to make reference to the subject matter
of the disagreement in connection with KPMG's audit report on the
consolidated financial statements of Liberty Financial. In addition, the
audit reports of KPMG on the consolidated financial statements of Liberty
Financial as of and for the two fiscal years ended December 31, 1995 did not
contain any adverse opinion or disclaimer of opinion, nor were such reports
qualified or modified as to uncertainty, audit scope, or accounting
principles.
Part III
Item 10. Directors and Executive Officers of the Registrant
Information relating to the executive officers of the registrant appears
under the caption "Executive Officers of the Registrant" included in Part I
of this Form 10-K following Item 4.
19
Information relating to the directors of the registrant 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 13, 1997 to be
mailed during April, 1997 (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 portions
thereof under the subcaptions "Compensation Committee Report on Executive
Compensation" and "Stockholder Return Comparisons") and "Election of
Directors--1996 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" and "Compensation of
Executive Officers--Certain Additional Information Regarding Executive
Officer Compensation--Employment Contract."
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 34 of the 1996 Annual Report, are incorporated herein by
reference:
Consolidated Balance Sheets, December 31, 1996 and 1995
Consolidated Income Statements for the Years Ended December 31, 1996, 1995
and 1994
Consolidated Statements of Stockholders' Equity for the Years Ended December
31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996,
1995 and 1994
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
V Valuation and Qualifying Accounts
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.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Registrant during the fourth
quarter of 1996.
20
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 24, 1997.
LIBERTY FINANCIAL COMPANIES, INC.
By: /s/ Kenneth R. Leibler
----------------------------------------
Kenneth R. Leibler
Chief Executive Officer,
President and Director
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/ Kenneth R. Leibler
------------------------------- Chief Executive Officer, President and
Kenneth R. Leibler Director March 24, 1997
/s/ C. Allen Merritt, Jr. Executive Vice President and Treasurer
------------------------------- (Principal Financial and Accounting
C. Allen Merritt, Jr. Officer) March 24, 1997
/s/ Gary L. Countryman
-------------------------------
Gary L. Countryman Director March 24, 1997
/s/ Gregory H. Adamian
-------------------------------
Gregory J. Adamian Director March 24, 1997
/s/ Gerald E. Anderson
-------------------------------
Gerald E. Anderson Director March 24, 1997
-------------------------------
Michael J. Babcock Director March 24, 1997
/s/ Harold W. Cogger
-------------------------------
Harold W. Cogger Director March 24, 1997
/s/ Paul J. Darling, II
-------------------------------
Paul J. Darling, II Director March 24, 1997
/s/ C. Herbert Emilson
-------------------------------
C. Herbert Emilson Director March 24, 1997
/s/ David F. Figgins
-------------------------------
David F. Figgins Director March 24, 1997
/s/ John B. Gray
-------------------------------
John B. Gray Director March 24, 1997
21
Signature Title Date
------------------------------- ----------------------------------------- --------------------
/s/ John P. Hamill
-------------------------------
John P. Hamill Director March 24, 1997
/s/ Marian L. Heard
-------------------------------
Marian L. Heard Director March 24, 1997
/s/ Raymond H. Hefner, Jr.
-------------------------------
Raymond H. Hefner, Jr. Director March 24, 1997
/s/ Edmund F. Kelly
-------------------------------
Edmund F. Kelly Director March 24, 1997
/s/ Sabino Marinella
-------------------------------
Sabino Marinella Director March 24, 1997
/s/ Ray B. Mundt
-------------------------------
Ray B. Mundt Director March 24, 1997
/s/ Richard A. Smith
-------------------------------
Richard A. Smith Director March 24, 1997
/s/ Glenn P. Strehle
-------------------------------
Glenn P. Strehle Director March 24, 1997
/s/ Stephen J. Sweeney
-------------------------------
Stephen J. Sweeney Director March 24, 1997
/s/ Michael von Clemm
-------------------------------
Michael von Clemm Director March 24, 1997
/s/ Stanley A. Wainer
-------------------------------
Stanley A. Wainer Director March 24, 1997
22
Schedule I
LIBERTY FINANCIAL COMPANIES, INC.
SUMMARY OF INVESTMENTS
(in millions)
December 31, 1996
--------------------------------------
Balance
Amortized Sheet
Type of Investment Cost Fair Value Amount
----------------- ------------ ------------- -----------
Fixed Maturities:
U.S. Treasury securities and obligations of U.S. government
corporations and agencies $ 1,701.4 $ 1,734.3 $ 1,734.3
Obligations of states and political subdivisions 23.9 24.2 24.2
Foreign governments 246.3 257.5 257.5
Corporate and other securities 6,115.8 6,266.0 6.266.0
Mortgage backed securities 2,413.0 2,436.6 2,436.6
------- ------------- ---------
Total fixed maturities 10,500.4 10,718.6 10,718.6
Equity securities:
Common stocks:
Industrial, miscellaneous and all other 19.4 35.9 35.9
Mortgage loans on real estate (1) 67.0 73.4 67.0
Policy loans 532.8 532.8 532.8
Other long term investments 183.6 183.6 183.6
------------ ------------ ---------
Total investments $11,303.2 $11,544.3 $11,537.9
============ ============ =========
1 Includes mortgage notes relating to certain investment property owned by
Liberty Mutual in the amount of $39.5 million at December 31, 1996.
23
Schedule II
LIBERTY FINANCIAL COMPANIES, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(in millions, except per share data)
Balance Sheets
December 31
-----------------------
1996 1995
----------- -----------
Assets:
Cash and cash equivalents $ 7.4 $ 9.7
Investments in subsidiaries 1,060.3 1,004.4
Notes receivable--subsidiaries 160.2 159.0
Accounts receivable--subsidiaries 15.2 1.8
Other assets 33.7 --
--------- -----------
$1,276.8 $1,174.9
========= ===========
Liabilities:
Note payable to parent $ 199.0 $ 199.0
Accounts payable and accrued expenses 12.6 6.5
--------- -----------
211.6 205.5
--------- -----------
Redeemable convertible preferred stock 13.8 13.0
--------- -----------
Stockholders' Equity:
Common stock 0.3 0.3
Additional paid-in capital 835.3 810.5
Net unrealized investment gains 74.4 87.1
Retained earnings 141.4 59.4
Unearned compensation -- (0.9)
--------- -----------
Total stockholders' equity 1,051.4 956.4
--------- -----------
$1,276.8 $1,174.9
========= ===========
Income Statements
Year Ended December 31
--------------------------
1996 1995 1994
-------- ----------------
Interest income, principally from subsidiaries $ 12.1 $ 12.0 $11.6
Operating expenses 16.3 15.1 12.4
------- -------- -----
Loss before income taxes (4.2) (3.1) (0.8)
Benefit for income taxes (21.9) (15.7) -
Equity in net income of subsidiaries 83.0 61.3 51.6
------- -------- -----
Net income $100.7 $ 73.9 $50.8
======= ======== =====
Earnings per share $ 3.36 $ 2.64 $2.15
======= ======== =====
See Notes to Consolidated Financial Statements contained in the 1996 Annual
Report incorporated herein by reference.
24
Schedule II (continued)
LIBERTY FINANCIAL COMPANIES, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(in millions)
Statements of Cash Flows
Year Ended December 31
----------------------------
1996 1995 1994
-------- --------- --------
Cash flows from operating activities:
Net income $100.7 $ 73.9 $ 50.8
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in net income of subsidiaries (83.0) (61.3) (51.6)
Increase in notes receivable--subsidiaries (1.2) (24.6) (0.5)
Net change in accounts receivable--subsidiaries,
other assets and accounts payable (41.2) 8.6 8.1
------- --------- ------
Net cash provided by (used in) operating activities (24.7) (3.4) 6.8
------- --------- ------
Cash flows from investing activities:
Acquisitions (8.1) (106.4) --
Capital contributions to subsidiaries (8.0) (36.0) --
------- --------- ------
Net cash used in investing activities (16.1) (142.4) --
------- --------- ------
Cash flows from financing activities:
Dividends, net 36.1 20.1 --
Exercise of stock options 2.4 0.7 0.1
Debt borrowing from parent -- 124.0 --
------- --------- ------
Net cash provided by financing activities 38.5 144.8 0.1
------- --------- ------
Increase (decrease) in cash and cash equivalents (2.3) (1.0) 6.9
Cash and cash equivalents at beginning of year 9.7 10.7 3.8
------- --------- ------
Cash and cash equivalents at end of year $ 7.4 $ 9.7 $ 10.7
======= ========= ======
See Notes to Consolidated Financial Statements contained in the 1996 Annual
Report incorporated herein by reference.
25
Schedule III
LIBERTY FINANCIAL COMPANIES, INC.
SUPPLEMENTARY INSURANCE INFORMATION
(in millions)
Three Years Ended December 31, 1996
Column A Column B Column C Column D Column E Column F Column G
- -------- -------- -------- -------- -------- -------- --------
Deferred Policyholder Unearned Policy Insurance Net
policy account premiums contract revenues investment
acquisition balances and claims and income
costs future policy other
benefits policyholders'
funds
December 31, 1996
Interest sensitive
products $250.4 $11,610.4 NA $27.1 $30.9 $796.4
====== ========= ===== ===== ======
December 31, 1995
Interest sensitive
products $179.7 $10,063.3 NA $21.1 $27.9 $761.8
====== ========= ===== ===== ======
December 31, 1994
Interest sensitive
products $439.2 $ 9,326.0 NA $18.1 $24.0 $695.1
====== ========= ===== ===== ======
Column A Column H Column I Column J Column K
- -------- -------- -------- -------- --------
Interest Amortization Other Premiums
credited to of deferred operating written
policyholders policy expenses
and policy acquisition
benefits and costs
claims
December 31, 1996
Interest sensitive
products $576.2 $60.2 $55.1 NA
====== ===== =====
December 31, 1995
Interest sensitive
products $560.2 $58.5 $55.1 NA
====== ===== =====
December 31, 1994
Interest sensitive
products $486.8 $52.2 $72.4 NA
====== ===== =====
26
Schedule V
LIBERTY FINANCIAL COMPANIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
Three Years Ended December 31, 1996
(in millions)
Balance at
Beginning of Balance at
Description Year Additions Deductions End of Year
- ----------- ------------ --------- ---------- -----------
Years Ended:
December 31, 1996
Fixed maturities:
Investment valuation reserve $ -- $-- $ -- $--
===== === ===== ===
December 31, 1995
Fixed maturities:
Investment valuation reserve $ -- $-- $ -- $--
===== === ===== ===
December 31, 1994(1)
Fixed maturities:
Investment valuation reserve $33.5 $-- $33.5 $--
===== === ===== ===
1 Investment valuation reserve balance was eliminated upon adoption of SFAS
No. 115 as of January 1, 1994.
27
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 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
10.1(1) Form of Intercompany Agreement between Liberty Mutual and the Company
10.2(2) Form of Registration Rights Agreement between Liberty Mutual and the Company
10.3(2) 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(1) Form of Savings and Investment Plan and Trust of the Company
10.5.1(3) Amendment No. 1 to Savings and Investment Plan
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(1) Form of Pension Plan of the Company
10.8.1(3) Amendment No. 1 to Pension Plan
10.9(1) Form of Amended and Restated Supplemental Pension Plan of the Company
10.10(1) Form of 1995 Stock Incentive Plan of the Company
10.11(2) 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
10.15 Form of Promissory Note in the principal amount of $99.0 million dated April 5, 1995
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
10.18(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 Lease Agreement with respect to One Financial Center, Boston, Massachusetts
10.22(1) $100 Million of Mortgage Notes owned by Keyport issued by indirect subsidiaries of Liberty
Mutual
10.23(2) Promissory Notes dated March 24, 1995 of the Company issued to Liberty Mutual and two of
its affiliates in the aggregate principal amount of $100.0 million
10.24(1) Form of Promissory Note dated January 29, 1995 of SteinRoe Services, Inc. in the principal
amount of $30.0 million
10.25(2) Form of Registration Rights Agreement among John A. McNeice, Jr., C. Herbert Emilson and
the Company
10.26(2) Form of Employment Agreement among the Company, Colonial and Harold W. Cogger
28
Exhibit
Number Description
- ------- -----------
10.27(2) Credit agreement among Colonial and The First National Bank of Boston, as agent for itself
and certain other lenders named therein (and Amendments No. 1 and 2 thereto)
10.27.1(3) Amendment No. 3 to Credit Agreement
10.27.2 Amendment No. 4 to Credit Agreement
10.28(3) Colonial Profit Sharing Plan (and Amendment Nos. 1-3 thereto)
10.29(3) Colonial Split-Dollar Insurance Coverage description
10.30 Coinsurance Agreement between Fidelity and Guaranty Life Insurance Company and Keyport Life
Insurance Company, and first and second amendments thereto
11 Statement re computation of per share earnings
12 Statement re computation of ratios
13 Portions of Annual Report to Stockholders incorporated by reference into this Report
21 Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP
23.2 Report and Consent of KPMG Peat Marwick 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
1994 Annual Report on Form 10-K filed March 30, 1995.
(3) Incorporated by reference to the same Exhibit Number in the Company's
1995 Annual Report on Form 10-K filed March 29, 1996.
29