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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, 1997
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
- ------------------------------------------- ------------------------
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 February 27, 1998 (based on the closing sale price of the
Common Stock on the New York Stock Exchange on such date) was approximately
$428 million.
There were 44,876,928 shares of the registrant's Common Stock, $.01 par
value, and 326,236 shares of the registrant's Series A Convertible Preferred
Stock, $0.01 par value, outstanding as of February 27, 1998.
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Documents Incorporated by Reference
Portions of the Company's 1997 Annual Report to Stockholders (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 11, 1998 (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, 1997
TABLE OF CONTENTS
Page
----
Part I
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Item 1. Business 1
Item 2. Properties 16
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Executive Officers of the Registrant 17
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 7A. Quantitative and Qualitative Disclosures About Market Risk 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 19
Item 12. Security Ownership of Certain Beneficial Owners and Management 19
Item 13. Certain Relationships and Related Transactions 19
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 a leading 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, wealth 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, net of
related income taxes) was $112.4 million in 1997; $94.8 million in 1996 and
$76.5 million in 1995. The following table sets forth the Company's assets
under management as of December 31, 1997, 1996 and 1995:
Assets Under Management
------------------------------------
As of December 31,
------------------------------------
1997 1996 1995
---------- ---------- ----------
(dollars in billions)
Retirement-oriented insurance
products .............................. $ 12.8 $ 12.1 $ 10.6
Mutual funds ........................... 26.8 25.7 23.3
Wealth management ...................... 6.6 5.3 4.5
Institutional asset management ......... 5.3 4.9 4.1
------- ------- -------
Total ................................ $ 51.5 $ 48.0 $ 42.5
======= ======= =======
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"), one of the country's
leading and most innovative annuity companies. 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 $8.4 billion of
policyholder liabilities as of December 31, 1997. 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[RegTM] 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")).*
The Company has four 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"), each of which carries strong brand name
recognition in the markets it serves. As of December 31, 1997, the Company
sponsored 67 open-end mutual funds, as well as seven closed-end funds. The
open-end funds consist of 37 intermediary-distributed Colonial mutual funds, 18
direct-marketed Stein Roe funds and 12 other funds included among the
investment options available under the Company's variable annuities. The
closed-end funds consist of five Colonial funds and two LAMCO funds.
Fifty-three of the Company's 67 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). Thirty-eight of
those 53 funds (representing 81% of the total assets in those 53 funds as of
December 31, 1997) 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.
- ----------
*"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
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 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, wealth
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 1997 were
$7.5 billion (including $1.0 billion of reinvested dividends). During 1997, 59%
of sales were made through intermediary distributors, with the balance made
directly to the investor. Over 34,000 individual brokers and other
intermediaries sold Liberty Financial products in 1997.
Business Strategy. The Company's business strategy has four interrelated
elements:
[bullet] Diversification. The Company believes that the
diversification in its products and distribution channels allows it
to accumulate assets in different market cycles, thereby 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.
[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 believes that it has an impressive track record in such
innovations. For example, Newport created the first U.S.-based
mutual fund to focus exclusively on the "Tiger" countries of Asia.
This fund had $1.0 billion of assets under management as of December
31, 1997. 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 Stein Roe Young Investor
Fund had $533.2 million of assets under management and over 107,000
shareholders of record as of December 31, 1997. The Company
introduced the first equity-indexed annuity product to the
marketplace. At December 31, 1997, the Company's equity-indexed
annuity policyholder balances were $1.5 billion. The Company is also
recognized as a leader in electronic commerce on the Internet. For
example, in early 1997, the Company introduced a new Web site for
the Stein Roe funds which incorporates state-of-the-art security and
customization features.
[bullet] 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. For example, upon the Company's
acquisition of Newport in April, 1995, Colonial assumed the
marketing, sales, service and administration of Newport's flagship
Tiger Fund. The availability of the Newport Tiger Fund has
facilitated new intermediary distribution relationships for
Colonial, including approximately 6,000 new broker relationships.
Stein Roe manages the majority of Keyport's general account assets
and together with Colonial and Newport manages certain of the funds
underlying Keyport's variable annuity products. Colonial's transfer
agency operations perform these functions for the Stein Roe funds.
Independent Financial Marketing Group, Inc. ("Independent"), the
Company's bank distribution unit, was the largest distributor of
Keyport's annuities and the second largest distributor of the
Colonial funds in 1997.
[bullet] 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), Colonial (acquired in 1995), Newport (acquired
in 1995) and major components of the Company's
2
bank distribution unit (including Independent, acquired in 1996) all
joined Liberty Financial by acquisition. The Company has also made
asset acquisitions, including most recently a coinsurance agreement
with respect to a $954.0 million block of SPDAs entered into in
August, 1996. While the Company is constantly evaluating acquisition
opportunities, as of the date it filed this Report with the
Securities and Exchange Commission, the Company has not entered into
any definitive agreement for a material acquisition.
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 increase
savings and investment, 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.
At March 20, 1998, approximately 72.3% 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.
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 are annuities that are
written by Keyport. 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:
[bullet] Fixed Annuities. The Company's principal fixed annuity
products are SPDAs. A 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.
[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 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 60% to 95%) 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 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 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 which are designed to be sold through major national
brokerage firms.
3
[bullet] 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. The Company's Keyport Advisor
variable annuity currently offers 18 separate account investment
choices (substantially all of the assets of which are managed by the
Company) and four guaranteed fixed-interest options.
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 $2.0 billion as of
December 31, 1997.
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 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 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 this tax
treatment.
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 tend to be
sensitive to prevailing interest rates. Sales 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 (as is the case at the date of filing of this Report).
SPDA sales also can be adversely affected by low interest rates (as is the case
at the date of filing of this Report).
The following table sets forth certain information regarding Keyport's
retirement-oriented insurance products and its reserves for the periods
indicated.
As of or for the Year Ended
December 31,
------------------------------------
1997 1996 1995
---------- ---------- ----------
(dollars in millions, except policy
data)
Policy and Separate Account Liabilities:
Fixed annuities ........................ $ 8,417 $ 8,641 $ 7,772
Indexed annuities ...................... 1,527 788 84
Variable annuities ..................... 1,277 1,083 950
Life insurance ......................... 2,129 2,142 2,168
------- ------- -------
Total ................................. $13,350 $12,654 $10,974
======= ======= =======
Number of In Force Policies:
Fixed annuities ........................ 222,903 236,574 224,238
Indexed annuities ...................... 39,224 24,174 2,778
Variable annuities ..................... 27,429 25,177 25,037
Life insurance ......................... 24,921 26,850 28,489
------- ------- -------
Total ................................. 314,477 312,775 280,542
======= ======= =======
Average In Force Policy Amount:
Fixed annuities ........................ $37,710 $36,479 $34,611
Indexed annuities ...................... $38,943 $32,591 $30,207
Variable annuities ..................... $46,542 $43,035 $37,941
Life insurance ......................... $83,709 $79,207 $75,728
4
As of or for the Year Ended
December 31,
------------------------------------------
1997 1996 1995
------------- ----------- ------------
(dollars in millions, except policy data)
Premiums (statutory basis):
Fixed annuities ................................. $ 425 $ 493 $ 977
Indexed annuities ............................... 524 655 84
Variable annuities .............................. 173 97 80
Life insurance (net of reinsurance) ............. (1) -- (1)
--------- -------- ---------
Total .......................................... $1,121 $ 1,245 $1,140
======== ======== =========
New Contracts and Policies:
Fixed annuities ................................. 13,744 11,358 30,043
Indexed annuities ............................... 16,076 21,396 2,778
Variable annuities .............................. 4,333 1,814 1,789
-------- -------- ---------
Total .......................................... 34,153 34,568 34,610
======== ======== =========
Aggregate Amount Subject to Surrender Charges and
Similar Penalties:
Fixed annuities ................................. $6,982 $ 7,371 $6,904
Indexed annuities ............................... $1,527 $ 788 $ 84
Withdrawals and Terminations (statutory basis):
Fixed Annuities:
Death .......................................... $ 60 $ 25 $ 15
Maturity ....................................... $ 110 $ 87 $ 76
Surrender ...................................... $1,000 $ 966 $ 693
Indexed Annuities:
Death .......................................... $ 4 $ 0.1 --
Maturity ....................................... -- -- --
Surrender ...................................... $ 19 $ 3 --
Variable Annuities:
Death .......................................... $ 4 $ 2 $ 0.4
Maturity ....................................... $ 28 $ 21 $ 14
Surrender ...................................... $ 105 $ 77 $ 92
Life Insurance:
Death .......................................... $ 66 $ 53 $ 54
Surrender ...................................... $ 96 $ 98 $ 95
Surrender Rates:
Fixed annuities ................................. 11.74% 11.79% 9.34%
Indexed annuities ............................... 1.68% 0.69% 0.12%
Variable annuities .............................. 8.86% 7.55% 10.46%
Life insurance .................................. 4.57% 4.58% 4.36%
Sales and Asset Retention
Product sales are influenced primarily by overall market conditions
impacting 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.
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, 1997, crediting rates on
95.0% of the Company's in force SPDA policy liabilities
5
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
4.30% to 7.94% at December 31, 1997. Such policies had guaranteed minimum rates
ranging from 3.0% to 5.5% as of such date. Initial interest crediting rates on
new policies issued in 1997 ranged from 4.60% to 7.94%. Guaranteed minimum
rates on new policies issued during 1997 ranged from 3.0% to 5.5%.
All of the Company's 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, 1997, 83.0% of the Company's SPDAs 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 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 S&P, "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. S&P raised Keyport's rating from "AA-" to
"AA" in February, 1998. These ratings are based upon information supplied to
the rating agency by Keyport. 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 1997 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, 1997 totaled $13.5
billion). 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
6
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 investments are invested in
fixed maturity securities (83.3% at December 31, 1997). 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. At
December 31, 1997, the duration of its fixed maturity portfolio was
approximately 2.9. 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 to hedge its
obligations to provide participation rate returns. Credit risk is managed by
careful credit analysis and monitoring. At December 31, 1997, the Company's
fixed maturity portfolio had an overall average S&P rating of A+. A portion of
general account investments (7.9% at December 31, 1997) are 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 below investment grade portfolio
in an effort to optimize its risk/return profile. There were no non-income
producing investments in the Company's fixed maturity portfolio at December 31,
1997. For a more detailed description of the management of the Company's
general account investments see "Management's Discussion and Analysis of
Results of Operations and Financial Condition--Management of the Company's
Investments" beginning at page 31 of the Company's 1997 Annual Report To
Shareholders (the "1997 Annual Report").
Stein Roe manages the majority ($7.7 billion at December 31, 1997) 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):
As of
December 31,
----------------------------
1997 1996
------------- ------------
Fixed maturities available for sale ......... $11,246.5 $10,718.6
Mortgage loans .............................. 60.7 67.0
Policy loans ................................ 554.7 532.8
Other invested assets ....................... 440.8 183.6
Equity securities ........................... 40.8 35.9
--------- ---------
Investments ............................... 12,343.5 11,537.9
Cash and cash equivalents ................... 1,162.4 767.4
--------- ---------
General account investments ................. $ 13,505.9 $ 12,305.3
========== ==========
As of December 31, 1997, the Company owned approximately $3.5 billion of
mortgage-backed securities (26.2% of its general account investments), 97.4% of
which were investment grade. Mortgage-backed securities are subject to
significant prepayment and extension risks, since the underlying mortgages may
be repaid more or less rapidly than scheduled.
As of December 31, 1997, approximately $3.2 billion (23.8% of the
Company's general 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
7
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.
Investment Management
Liberty Financial has three types of investment management products:
mutual funds, wealth management, and institutional asset management. The
Company has four separate operating units engaged in investment management:
Colonial, Stein Roe, Newport 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 products, and to improve
operating margins through increasing scale and cost savings produced by
integration.
Products and Services
[bullet] Mutual Funds. As of December 31, 1997 the Company sponsors 67
open-end mutual funds, as well as seven closed-end funds. The
open-end funds include the 37 intermediary-distributed Colonial
mutual funds, 18 direct-marketed Stein Roe funds and 12 other funds
included among the investment options available under the Company's
variable annuities. The closed-end funds include five Colonial funds
and two LAMCO funds. At December 31, 1997, total mutual fund assets
were $26.8 billion. At December 31, 1997, 49.5% of these assets were
invested in equity funds, 26.3% in taxable fixed income funds and
24.2% 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.
[bullet] Wealth Management. At December 31, 1997, the Company managed $6.6
billion in investment portfolios for high net worth individuals and
families and smaller institutional investors, all of which are
managed by Stein Roe.
[bullet] Institutional Asset Management. At December 31, 1997, the Company
managed $5.3 billion of investment portfolios for institutional
investors such as insurance companies, public and private retirement
funds, endowments, foundations and other institutions. Most of these
assets are managed by Stein Roe. Stein Roe also 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
8
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. Colonial is a party to a revolving
credit facility with certain lenders, pursuant to which such lenders have
agreed to lend up to $60.0 million to Colonial to finance the sale of shares of
the mutual funds sponsored by Colonial which have contingent deferred sales
charges.
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, 1997. Such information includes Keyport's assets (including its
general account investments managed by Stein Roe, as well as loans to
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,
------------------------------------
1997 1996 1995
Total Assets Under Management ---------- ---------- ----------
(dollars in billions)
Mutual funds:
Intermediary-distributed ...................... $ 16.1 $ 16.1 $ 15.7
Direct-marketed ............................... 7.2 6.6 4.8
Closed-end .................................... 2.2 1.9 1.8
Variable annuity .............................. 1.3 1.1 1.0
------- ------- -------
Total mutual funds ........................... 26.8 25.7 23.3
Wealth management .............................. 6.6 5.3 4.5
Institutional asset management ................. 5.3 4.9 4.1
Retirement-oriented insurance products ......... 12.8 12.1 10.6
------- ------- -------
Total ...................................... $ 51.5 $ 48.0 $ 42.5
======= ======= =======
As of December 31,
---------------------------------------
Total Assets Under Management 1997 1996 1995
By Asset Class (1) ---------- ---------- ----------
(dollars in billions)
Fee-based assets:
Equity ........................................ $ 18.2 $ 16.1 $ 11.4
Fixed-income .................................. 20.5 19.8 20.5
------- ------- -------
Total fee-based assets ....................... 38.7 35.9 31.9
Retirement-oriented insurance products ......... 12.8 12.1 10.6
------- ------- -------
Total ...................................... $ 51.5 $ 48.0 $ 42.5
======= ======= =======
- ----------------
(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 1997 1996 1995
Management By Asset Class (1) ---------- ---------- ---------
(dollars in billions)
Equity funds ................... $ 13.3 $ 12.1 $ 8.6
Fixed-income funds:
Taxable ....................... 7.0 7.0 7.4
Tax-exempt .................... 6.5 6.6 7.3
------- ------- ------
Total ........................ $ 26.8 $ 25.7 $ 23.3
======= ======= ======
- ----------------
(1) Balanced funds are classified as equity funds; all categories include cash
and other short-term investments in applicable portfolios.
9
For the Year Ended December 31,
------------------------------------
Total Assets Under Management-- 1997 1996 1995
Asset Flow Summary ---------- ---------- ----------
(dollars in billions)
Assets under management--beginning ......... $ 48.0 $ 42.5 $ 25.6
Sales and reinvestments .................... 7.5 8.6 5.8
Redemptions and withdrawals ................ ( 7.8) ( 6.9) ( 9.4)
Asset acquisitions ......................... -- 1.2 14.9
Net insurance cash flows ................... 0.7 0.7 0.6
Market appreciation ........................ 3.1 1.9 5.0
------- ------- -------
Assets under management--ending ............ $ 51.5 $ 48.0 $ 42.5
======= ======= =======
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. Fifty-three of the Company's 67
open-end mutual funds were long-term funds as of December 31,1997 (defined as
open-end funds having at least a three-year performance record, excluding funds
that invest solely in money market securities). Thirty-eight of those 53 funds
(representing 81% of the total assets in those 53 funds as of December 31,
1997) 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.
Excellent service to investors and distributors is a prerequisite to asset
retention. Excellent service to its distributors was a factor in the Company's
decision to acquire Colonial. In November, 1997, 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.
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.
Distribution
Liberty Financial sells its products through multiple distribution
channels. Total product sales during 1997 were $7.5 billion (including $1.0
billion of reinvested dividends and similar reinvested returns). During 1997
59% of these sales were made through intermediary distributors, with the
balance made directly to the investor. Over 34,000 individual brokers and other
intermediaries sold Liberty Financial products in 1997.
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
10
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. 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, 1997, Independent had over 100 bank
relationships involving over 3,100 registered salespersons.
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 add options that
shift investors' payments over time and move somewhat 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.
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
11
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. 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. 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," such as Charles Schwab & Co., Inc.'s
OneSource[RegTM], have become an important source of customers for
direct-marketed mutual funds. During 1997, 38% of the total new sales of the
Stein Roe mutual funds were through mutual fund supermarkets and similar
arrangements. 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 wealth
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, wealth
management and institutional asset management products. For information on
these industry segments, see Note 11 of Notes to the Consolidated Financial
Statements of the Company contained in the 1997 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.
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") and
American Benefit Life Insurance Company, to be renamed "Keyport Benefit Life
Insurance Company" on or about April 1, 1998 ("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 Department of
Business Regulation is their primary oversight regulator. Keyport Benefit is
chartered in the state of New York, and the New York Department
12
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. 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 conditions of
all companies operating within their respective jurisdictions.
Keyport prepares its statutory-basis financial statements in accordance
with accounting practices prescribed or permitted by the Rhode Island
Department of Business Regulation. 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 1998 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.
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, 1997, 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. 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, together with distributions and dividends paid during the
preceding 12 months, 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, 1997, such
restriction would limit dividends without such approval to $70.3 million.
However, Keyport has not paid any dividends since its acquisition in December,
1988. In addition, no person or group may acquire, directly or indirectly, 10%
13
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.
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.
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 Advisers Act. The mutual funds and closed-end funds sponsored by
the Company also are subject to 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 (the "SEC") as investment advisers under the Advisers Act.
They also are subject to the 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 Restated Articles include provisions limiting the voting power of shares of
the Company's Voting Stock 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
14
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 assurances 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.
Several proposals to repeal or modify the Glass-Steagall Act of 1933
(which restricts banks from engaging in securities-related businesses) have
been made by members of Congress and the Clinton Administration. Although the
effect that any such proposals if adopted would have on the Company and its
competitors is uncertain, there can be no assurance that such proposals if
adopted would not have a material adverse effect on the Company.
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 Commission 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 Commission 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.
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
15
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 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 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, 1997, the Company had 2,050 full-time employees
summarized by activity as follows: 412 in annuity insurance operations; 1,130
in asset management activities; 459 in marketing and distribution operations;
and 49 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, 1997, 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 76,000 square feet in a single facility in
downtown Boston under a lease which expires in 2002, and approximately 19,800
square feet in Lincoln, Rhode Island under a lease which expires in 2007.
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 2000. Stein Roe leases 141,300 square feet in downtown Chicago under
to a lease which expires in 2009. 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.
Item 4. Submission of Matters to a Vote of Security Holders
None
16
Executive Officers of the Registrant
Name Age Position
- ----------------------- ----- ------------------------------------------------
Gary L. Countryman 58 Chairman and Director
Kenneth R. Leibler 48 Chief Executive Officer, President and Director
John A. Benning 63 Senior Vice President, General Counsel and
Clerk
John V. Carbery 50 Senior Vice President
Harold W. Cogger 62 Executive Vice President
Lindsay Cook 45 Executive Vice President
J. Scott Hansen 45 Senior Vice President, Corporate Development
J. Andy Hilbert 39 Senior Vice President, Chief Financial Officer
and Treasurer
C. Allen Merritt, Jr. 57 Chief Operating Officer
Porter P. Morgan 57 Senior Vice President, Marketing
John W. Rosensteel 57 President and Chief Executive Officer of
Keyport
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, 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. Carbery joined Liberty Financial as Senior Vice President in February,
1998. Prior to that time he was a Managing Director of Salomon Brothers Inc.
Mr. Cogger became 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 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. 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. 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. Rosensteel has been President and Chief Executive Officer of Keyport
since 1993.
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 is also listed on the Boston
Stock Exchange. On December 31, 1997, the closing price of the Company's Common
Stock on the NYSE was $37.75 per share. Per share amounts have been adjusted to
reflect the Company's 3 for 2 common stock split effected in the form of a 50
percent stock dividend on December 10, 1997. As of February 28, 1998 there were
approximately 217 shareholders of record. In addition, the Company estimates
that there are approximately 2,500 beneficial shareholders whose shares are
held in street name. The high and low sales prices for each quarter during 1997
and 1996, as traded on the NYSE Composite Tape, were as follows:
1997
Quarter High Low
- -------------------- ---------- ----------
January-March $30-7/16 $ 25-3/4
April-June 34-1/16 25-1/4
July-September 37-1/8 32-13/16
October-December 38-1/4 33-5/16
1996
Quarter High Low
- -------------------- ---------- ---------
January-March $ 21-9/16 $ 20
April-June 22-11/16 20-1/2
July-September 22-9/16 17-7/16
October-December 26 20-9/16
The Company's practice has been to pay quarterly cash dividends of $0.10
per share (adjusted for such stock split). 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 since its inception. 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
1997 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
1997 Annual Report.
Sales of Unregistered Securities
Liberty Financial issued shares of its Common Stock during 1997 without
registration under the Securities Act of 1933 (the "Securities Act") in the
transactions described below.
On March 7, 1996, Liberty Financial acquired Independent in a
stock-for-stock exchange with four individuals who were the shareholders of
Independent. The acquisition agreement provides for certain subsequent payments
of additional shares based upon certain conditions. In July, 1997, Liberty
Financial issued an additional 115,383 shares in the aggregate (as adjusted for
the stock split described above)
18
to such persons in satisfaction of certain of such payments. 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 24 in the
1997 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 25 in the 1997 Annual
Report, is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
The Company's Consolidated Financial Statements which appear beginning on
page 35 in the 1997 Annual Report, and the report thereon of Ernst & Young LLP
as of and for the year ended December 31, 1997, which appears on page 55 in the
1997 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 registrant appears
under the caption "Executive Officers of the Registrant" included in Part I of
this Form 10-K following Item 4.
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 11, 1998 to be mailed
prior to March 31, 1998 (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--1997 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."
19
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 35 of the 1997 Annual Report, are incorporated herein
by reference:
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Income Statements for the Years Ended December 31, 1997,
1996 and 1995
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995
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.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Registrant during the fourth
quarter of 1997.
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 23, 1998.
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 March 23, 1998
- ------------------------- and Director
Kenneth R. Leibler
/s/ J. Andy Hilbert Senior Vice President and Chief March 23, 1998
- ------------------------- Financial Officer (Principal Financial
J. Andy Hilbert and Accounting Officer)
/s/ Gary L. Countryman Director March 23, 1998
- -------------------------
Gary L. Countryman
/s/ Gregory H. Adamian Director March 23, 1998
- -------------------------
Gregory H. Adamian
/s/ Gerald E. Anderson Director March 23, 1998
- -------------------------
Gerald E. Anderson
/s/ Michael J. Babcock Director March 23, 1998
- -------------------------
Michael J. Babcock
/s/ Harold W. Cogger Director March 23, 1998
- -------------------------
Harold W. Cogger
/s/ Paul J. Darling, II Director March 23, 1998
- -------------------------
Paul J. Darling, II
/s/ David F. Figgins Director March 23, 1998
- -------------------------
David F. Figgins
/s/ John B. Gray Director March 23, 1998
- -------------------------
John B. Gray
/s/ John P. Hamill Director March 23, 1998
- -------------------------
John P. Hamill
21
Signature Title Date
- ----------------------------- ---------- ---------------
/s/ Marian L. Heard Director March 23, 1998
- -------------------------
Marian L. Heard
/s/ Raymond H. Hefner, Jr. Director March 23, 1998
- -------------------------
Raymond H. Hefner, Jr.
/s/ Edmund F. Kelly Director March 23, 1998
- -------------------------
Edmund F. Kelly
/s/ Sabino Marinella Director March 23, 1998
- -------------------------
Sabino Marinella
/s/ Thomas J. May Director March 23, 1998
- -------------------------
Thomas J. May
/s/ Ray B. Mundt Director March 23, 1998
- -------------------------
Ray B. Mundt
/s/ Glenn P. Strehle Director March 23, 1998
- -------------------------
Glenn P. Strehle
/s/ Stephen J. Sweeney Director March 23, 1998
- -------------------------
Stephen J. Sweeney
22
Schedule I
LIBERTY FINANCIAL COMPANIES, INC.
SUMMARY OF INVESTMENTS
(in millions)
December 31, 1997
--------------------------------------------
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 ................................ $ 1,218.4 $ 1,267.4 $ 1,267.4
Foreign governments ....................................... 272.5 280.2 280.2
Corporate and other securities ............................ 7,164.8 7,293.7 7,293.7
Mortgage backed securities ................................ 2,325.9 2,405.2 2,405.2
---------- ---------- ----------
Total fixed maturities ................................... 10,981.6 11,246.5 11,246.5
Equity securities:
Common stocks:
Industrial, miscellaneous and all other ................... 21.9 40.8 40.8
Mortgage loans on real estate (1) ........................... 60.7 63.0 60.7
Policy loans ................................................ 554.7 554.7 554.7
Other long term investments ................................. 444.4 462.7 440.8
---------- ---------- ----------
Total investments ........................................ $ 12,063.3 $ 12,367.7 $ 12,343.5
========== ========== ==========
- ------------
1 Includes mortgage notes relating to certain investment property owned by
Liberty Mutual in the amount of $39.5 million at December 31, 1997.
23
Schedule II
LIBERTY FINANCIAL COMPANIES, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(in millions, except per share data)
Balance Sheets
December 31
--------------------------
1997 1996
------------ -----------
Assets:
Cash and cash equivalents ...................... $ 19.4 $ 7.4
Investments in subsidiaries .................... 1,183.4 1,060.3
Notes receivable--subsidiaries ................. 160.9 160.2
Accounts receivable--subsidiaries .............. 20.8 15.2
Other assets ................................... 44.0 33.7
--------- ---------
$ 1,428.5 $ 1,276.8
========= =========
Liabilities:
Note payable to parent ......................... $ 199.0 $ 199.0
Accounts payable and accrued expenses .......... 16.0 12.6
--------- ---------
215.0 211.6
--------- ---------
Redeemable convertible preferred stock ......... 14.6 13.8
--------- ---------
Stockholders' Equity:
Common stock ................................... 0.4 0.3
Additional paid-in capital ..................... 866.5 835.3
Net unrealized investment gains ................ 83.0 74.4
Retained earnings .............................. 251.5 141.4
Cost of common stock held in treasury .......... ( 0.3) --
Unearned compensation .......................... ( 2.2) --
--------- ---------
Total stockholders' equity .................... 1,198.9 1,051.4
--------- ---------
$ 1,428.5 $ 1,276.8
========= =========
Income Statements
Year Ended December 31
------------------------------------
1997 1996 1995
---------- ---------- ----------
Interest income, principally from subsidiaries ......... $ 13.0 $ 12.1 $ 12.0
Realized investment losses ............................. 0.6 -- --
Operating expenses ..................................... 15.6 16.3 15.1
-------- -------- -------
Loss before income taxes ............................... (3.2) (4.2) ( 3.1)
Benefit for income taxes ............................... (19.2) (21.9) (15.7)
Equity in net income of subsidiaries ................... 113.5 83.0 61.3
-------- -------- -------
Net income ............................................. $ 129.5 $ 100.7 $ 73.9
======== ======== =======
Net income per share--basic ............................ $ 2.94 $ 2.36 $ 1.85
======== ======== =======
Net income per share--assuming dilution ................ $ 2.77 $ 2.24 $ 1.76
======== ======== =======
See Notes to Consolidated Financial Statements contained in the 1997 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
--------------------------------------
1997 1996 1995
----------- ----------- ----------
Cash flows from operating activities:
Net income .................................................. $ 129.5 $ 100.7 $ 73.9
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in net income of subsidiaries ..................... (113.5) ( 83.0) ( 61.3)
Increase in notes receivable--subsidiaries ............... ( 0.7) ( 1.2) ( 24.6)
Net change in accounts receivable--subsidiaries,
other assets and accounts payable ...................... ( 9.2) ( 41.2) 8.6
-------- -------- --------
Net cash provided by (used in) operating activities ......... ( 6.1) ( 24.7) ( 3.4)
-------- -------- --------
Cash flows from investing activities:
Acquisitions ................................................ -- ( 8.1) (106.4)
Capital contributions to subsidiaries ....................... ( 25.0) ( 8.0) ( 36.0)
-------- -------- --------
Net cash used in investing activities ....................... ( 25.0) ( 16.1) (142.4)
-------- -------- --------
Cash flows from financing activities:
Dividends, net .............................................. 23.3 36.1 20.1
Exercise of stock options ................................... 7.5 2.4 0.7
Common stock issued to 401(k) plan .......................... 0.1 -- --
Debt borrowing from parent .................................. -- -- 124.0
-------- -------- --------
Net cash provided by financing activities ................... 30.9 38.5 144.8
-------- -------- --------
Increase (decrease) in cash and cash equivalents ............ 12.0 ( 2.3) ( 1.0)
Cash and cash equivalents at beginning of year .............. 7.4 9.7 10.7
-------- -------- --------
Cash and cash equivalents at end of year .................... $ 19.4 $ 7.4 $ 9.7
======== ======== ========
See Notes to Consolidated Financial Statements contained in the 1997 Annual
Report incorporated herein by reference.
25
Schedule III
LIBERTY FINANCIAL COMPANIES, INC.
SUPPLEMENTARY INSURANCE INFORMATION
(in millions)
Three Years Ended December 31, 1997
Column A Column B Column C Column D Column E
- ------------------- ------------- --------------- ---------- ----------------
Policy
Policyholder contract
Deferred account claims and
policy balances and other
acquisition future policy Unearned policyholders'
costs benefits premiums funds
December 31, 1997
Interest sensitive
products ......... $ 232.0 $ 12,031.8 NA $ 54.3
======= ========== ======
December 31, 1996
Interest sensitive
products ......... $ 250.4 $ 11,610.4 NA $ 27.1
======= ========== ======
December 31, 1995
Interest sensitive
products ......... $ 179.7 $ 10,063.3 NA $ 21.1
======= ========== ======
Column A Column F Column G Column H Column I Column J Column K
- ------------------- ----------- ------------ --------------- -------------- ----------- ---------
Interest
credited to Amortization
policyholders of deferred
Net and policy policy Other
Insurance investment benefits and acquisition operating Premiums
revenues income claims costs expenses written
December 31, 1997
Interest sensitive
products ......... $ 33.1 $ 853.1 $ 598.0 $ 75.9 $ 61.6 NA
====== ======= ======= ====== ======
December 31, 1996
Interest sensitive
products ......... $ 30.9 $ 796.4 $ 576.2 $ 60.2 $ 55.1 NA
====== ======= ======= ====== ======
December 31, 1995
Interest sensitive
products ......... $ 27.9 $ 761.8 $ 560.2 $ 58.5 $ 55.1 NA
====== ======= ======= ====== ======
26
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(4) Form of Amended and Restated 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(5) 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(5) 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
10.26(2) Form of Employment Agreement among the Company, Colonial and Harold W.
Cogger
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)
27
Exhibit
Number Description
- ------------------ ------------------------------------------------------------------------------
10.27.1 (3) Amendment No. 3 to Credit Agreement
10.27.2 (5) 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(5) Coinsurance Agreement between Fidelity and Guaranty Life Insurance Company
and Keyport Life Insurance Company, and first and second amendments thereto
10.31(6) Dividend Reinvestment Plan of the Company
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
27.1 Article 7 FDS for 1997 10-K
27.2 Restated Article 7 FDS for 1996 10-K Filing
27.3 Restated Article 7 FDS for 1996 10-Q Filings
27.4 Restated Article 7 FDS for 1997 10-Q Filings
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.
(4) Incorporated by reference to the same Exhibit Number in the Company's
Registration Statement on Form S-3 (Registration Number 333-29315).
(5) Incorporated by reference to the same Exhibit Number in the Company's 1996
Annual Report on Form 10-K filed March 28, 1997.
(6) Incorporated by reference to Prospectus contained in the Company's
Registration Statement on Form S-3 (Registration Number 333-20067).
28
Selected Exhibits
29
LFC-10K-98