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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, 1998
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
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of Common Stock held by non-affiliates of the
registrant as of March 19, 1999 (based on the closing sale price of the Common
Stock on the New York Stock Exchange on such date) was approximately $281.0
million.
There were 46,675,377 shares of the registrant's Common Stock, $.01 par
value, and 324,759 shares of the registrant's Series A Convertible Preferred
Stock, $0.01 par value, outstanding as of March 19, 1999.
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Documents Incorporated by Reference
Portions of the Company's 1998 Annual Report to Stockholders are incorporated
into Part II, Items 6, 7, 7A and 8, and Part IV, Item 14(a)1, of this Form
10-K.
Portions of the Company's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on or about May 10, 1999 are incorporated into Part
III, Items 10, 11, 12, and 13, of this Form 10-K.
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LIBERTY FINANCIAL COMPANIES, INC.
ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
Part I Page
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Item 1. Business 1
Executive Officers of the Registrant 17
Item 2. Properties 18
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Part II
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Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 19
Item 6. Selected Financial Data 20
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 20
Item 8. Financial Statements and Supplementary Data 20
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 20
Part III
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Item 10. Directors and Executive Officers of the Registrant 20
Item 11. Executive Compensation 20
Item 12. Security Ownership of Certain Beneficial Owners and Management 20
Item 13. Certain Relationships and Related Transactions 20
Part IV
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Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 21
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, private capital management and institutional asset management. The
Company sells its products through multiple distribution channels, including
brokerage firms, banks and other depository institutions, financial planners
and insurance agents, as well as directly to investors. The Company's net
operating income (i.e., net income excluding net realized investment gains and
losses, net of related income taxes) was $122.6 million in 1998, $112.4 million
in 1997 and $94.8 million in 1996. The following table sets forth the Company's
assets under management as of December 31, 1998, 1997 and 1996, respectively.
Assets Under Management
------------------------------
As of December 31,
------------------------------
1998 1997 1996
-------- -------- --------
(dollars in billions)
Retirement-oriented insurance
products .............................. $13.1 $12.8 $12.1
Mutual funds ........................... 28.6 26.8 25.7
Private capital management ............. 7.9 6.6 5.3
Institutional asset management ......... 11.4 5.3 4.9
----- ----- -----
Total ................................ $61.0 $51.5 $48.0
===== ===== =====
At March 19, 1999, approximately 71.0% 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.
Recent Developments. On August 31, 1998, the Company acquired certain
assets and assumed certain liabilities of Progress Investment Management
Company, Inc. ("Progress"), a registered investment adviser to institutional
accounts with approximately $2.1 billion in assets under management as of that
date. On September 30, 1998, Liberty Financial acquired certain assets and
assumed certain liabilities of The Crabbe Huson Group, Inc. ("Crabbe Huson"), a
registered investment adviser with approximately $3.3 billion of assets under
management as of that date. The combined purchase price for these transactions
was approximately $104.0 million and consisted of $95.1 million in cash and
$8.9 million in the Company's Common Stock. In addition, the Company has agreed
to pay up to an additional $71.5 million in cash and Common Stock over five
years, contingent upon the attainment of certain earnings objectives. The
acquisitions were recorded using the purchase method of accounting.
In November, 1998, the Company issued $450.0 million of senior debt
securities. The offering consisted of $300.0 million of 6-3/4% 10-year notes and
$150.0 million of 7-5/8% 30-year debentures. The Company used the proceeds of
the offering to refinance $90.0 million of bank debt incurred in connection
with the Crabbe Huson acquisition and to repay debt owed to affiliates of
Liberty Mutual in the aggregate principal amount of $229.0 million. The Company
will use the balance of the proceeds for general corporate purposes.
In March, 1999, the Company reached a mutual agreement with Societe
Generale Asset Management S.A. to terminate the previously announced
acquisition of Societe Generale Asset Management Corp.
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.
1
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 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 $8.2 billion of
policyholder liabilities as of December 31, 1998. 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")).* Under a
variable annuity, the policyholder has the opportunity to select separate
account investment options, consisting of underlying mutual funds, which pass
the investment risk directly to the policyholder in return for the potential of
higher returns. Variable annuities also include guaranteed fixed interest rate
options.
The Company has six operating units engaged in investment management: The
Colonial Group ("Colonial"), Stein Roe & Farnham Incorporated ("Stein Roe"),
Newport Pacific Management, Inc. ("Newport"), Crabbe Huson, Progress and
Liberty Asset Management Company ("LAMCO"), each of which carries strong brand
name recognition in the markets it serves. As of December 31, 1998, the Company
sponsored 78 open-end mutual funds, as well as seven closed-end funds. The
open-end funds consist of 46 intermediary-distributed funds, 19 direct-marketed
funds, and 13 other funds included among the investment options available under
the Company's variable annuities. The closed-end funds consist of five fixed
income funds and two equity funds. Fifty-eight of the Company's 78 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). Forty of those 58 funds (representing 81% of the total
assets in those 58 funds as of December 31, 1998) were ranked by Lipper
Analytical Services, Inc. ("Lipper") in the top two quartiles of their
respective peer groups for the three-year period ended that date.
Multiple Distribution Channels. Liberty Financial sells its products
through multiple distribution channels. The Company distributes its products
through all the major third party intermediary channels, including national and
regional brokerage firms, banks and other depository institutions, financial
planners and insurance agents. To capitalize on the importance of banks and
other depository institutions as intermediaries for its products, the Company
also operates its own distribution unit, Independent Financial Marketing Group,
Inc. ("Independent"), which sells annuities and mutual funds through such
entities. Certain of the Company's products also are sold directly to
investors, including its mutual funds sold without a sales load, private
capital management and institutional asset management products. The Company
believes that it is one of the few asset accumulators with a significant
presence in both the intermediary and direct channels. Total product sales for
1998 were $9.6 billion (including $1.3 billion of reinvested dividends). During
1998, 54% of sales were made through intermediary distributors, with the
balance made directly to the investor. Over 35,000 individual brokers and other
intermediaries sold Liberty Financial products in 1998.
Business Strategy. The Company's business strategy has four interrelated
elements:
o Diversification. The Company believes that the diversification in its
products and distribution channels allows it to accumulate assets in
different market cycles, thereby providing more consistent growth potential
and reducing earnings volatility. Within its two core product lines, the
Company sells a range of products that serve individuals at different stages
of their life and earnings cycle. This mix also is designed to include
products that will be in demand under a variety of economic and market
conditions. Similarly, the Company reaches customers through a variety of
distribution channels. Diversification of distribution channels allows the
Company to reach many segments of the marketplace and lessens its dependence
on any one source of assets.
- ----------
*"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.
2
o Integration. Liberty Financial actively promotes integration of its operating
units and believes that such efforts will enable it to accumulate additional
assets by leveraging distribution capabilities and to reduce expenses by
consolidating redundant back office functions. The Company has consolidated
its mutual fund administration and transfer agency operations as well as the
distribution of all of the Company's intermediary-distributed mutual funds,
while retaining the distinctive styles of its investment management
subsidiaries. Stein Roe manages the majority of Keyport's general account
assets and together with Colonial, Newport and LAMCO manages certain of the
funds underlying Keyport's variable annuity products. Independent 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 1998.
o 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),
Crabbe Huson (acquired in 1998), Progress (acquired in 1998) and major
components of the Company's bank distribution unit (including Independent,
acquired in 1996) all joined Liberty Financial by acquisition. The Company is
constantly evaluating acquisition opportunities. As of the date of this
Report, the Company has not entered into any definitive agreement for a
material acquisition.
o 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, and the Company recently began to sell Colonial fixed
income funds in Japan in a distribution venture with a Japanese brokerage
firm. The Stein Roe Young Investor[SM] Fund was the first mutual fund to be
coupled with an educational program to teach young people about investing,
while offering parents an excellent device to save for educational and other
family needs. The Company also introduced the first equity-indexed annuity
product to the marketplace.
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.
Retirement-Oriented Insurance Products
The Company sells a full range of retirement-oriented insurance products,
grouped by whether they provide fixed, indexed or variable returns to
policyholders. Annuities are insurance products designed to offer individuals
protection against the risk of outliving their financial assets during
retirement. Annuities offer a tax-deferred means of accumulating savings for
retirement needs and provide a tax-efficient source of income in the payout
period. The Company earns spread income from fixed and indexed annuities;
variable annuities primarily produce fee income for the Company. The Company's
primary financial objectives for its annuities business are to increase
policyholder balances through new sales and asset retention and to earn
acceptable investment spreads on its fixed and indexed return products.
Products
The Company's principal retirement-oriented insurance products are
categorized as follows:
Fixed Annuities. The Company's principal fixed annuity products are SPDAs.
A SPDA policyholder makes a single premium payment at the time of issuance. The
Company obligates itself to credit interest to the policyholder's account at a
rate that is guaranteed for an initial term (typically one year) and is reset
annually thereafter, subject to a guaranteed minimum rate. Interest crediting
continues until the policy is surrendered or the policyholder dies or turns age
90.
3
Equity-Indexed Annuities. Equity-indexed annuities are an innovative
product first introduced to the marketplace in 1995 by the Company when it
began selling its KeyIndex product. The Company's equity-indexed annuities
credit interest to the policyholder at a "participation rate" equal to a
portion (ranging for existing policies from 25% to 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 U.S. Treasury securities since the
beginning of the term. The Company is continuing to develop new versions of its
equity-indexed annuities, including versions registered under the Securities
Act of 1933 (the "Securities Act") which are designed to be sold through major
national brokerage firms.
Variable Annuities. Variable annuities offer a selection of underlying
investment alternatives which may satisfy a variety of policyholder risk/return
objectives. Under a variable annuity, the policyholder has the opportunity to
select separate account investment options (consisting of underlying mutual
funds) which pass the investment risk directly to the policyholder in return
for the potential of higher returns. Variable annuities also include guaranteed
fixed interest options. Keyport has several different variable annuity products
that currently offer from 18 to 21 separate account investment choices,
depending on the product, 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, 1998.
Under the Internal Revenue Code (the "Code"), returns credited on
annuities and life insurance policies during the accumulation period (the
period during which interest or other returns are credited) are not subject to
federal income tax. Proceeds payable on death from a life insurance policy are
also free from such taxes. At the maturity or payment date of an annuity
policy, the policyholder is entitled to receive the original deposit plus
accumulated returns. The policyholder may elect to take this amount in either a
lump sum or an annualized series of payments over time. The return component of
such payments is taxed at the time of receipt as ordinary income at the
recipient's then applicable tax rate. The demand for the Company's
retirement-oriented insurance products could be adversely affected by changes
in the tax law.
The following table sets forth certain information regarding Keyport's
retirement-oriented insurance products for the periods indicated.
As of or for the Year Ended
December 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
(dollars in millions, except
policy
data)
Policy and Separate Account Liabilities:
Fixed annuities ........................ $ 8,246 $ 8,417 $ 8,641
Equity indexed annuities ............... 2,125 1,527 788
Variable annuities ..................... 1,744 1,277 1,083
Life insurance ......................... 2,112 2,129 2,142
------- ------- -------
Total ................................. $14,227 $13,350 $12,654
======= ======= =======
4
As of or for the Year Ended
December 31,
--------------------------------------------
1998 1997 1996
------------- ------------- ------------
(dollars in millions, except policy data)
Number of In Force Policies:
Fixed annuities ............................... 205,510 222,903 236,574
Equity indexed annuities ...................... 46,484 39,224 24,174
Variable annuities ............................ 37,049 27,429 25,177
Life insurance ................................ 23,097 24,921 26,850
-------- -------- -------
Total ........................................ 312,140 314,477 312,775
======== ======== =======
Average In Force Policy Amount:
Fixed annuities ............................... $40,126 $37,710 $ 36,479
Equity indexed annuities ...................... $45,720 $38,943 $ 32,591
Variable annuities ............................ $47,070 $46,542 $ 43,035
Life insurance ................................ $91,435 $83,709 $ 79,207
Premiums (statutory basis):
Fixed annuities ............................... $ 706 $ 425 $ 493
Equity indexed annuities ...................... 278 524 655
Variable annuities ............................ 508 173 97
Life insurance (net of reinsurance) ........... (1) (1) --
---------- ---------- ---------
Total ........................................ $ 1,491 $ 1,121 $ 1,245
========= ========= =========
New Contracts and Policies:
Fixed annuities ............................... 10,450 13,744 11,358
Equity indexed annuities ...................... 9,249 16,076 21,396
Variable annuities ............................ 12,238 4,333 1,814
--------- --------- ---------
Total ........................................ 31,937 34,153 34,568
========= ========= =========
Aggregate Amount Subject to Surrender Charges:
Fixed annuities ............................... $ 6,643 $ 6,982 $ 7,371
Equity indexed annuities ...................... $ 2,125 $ 1,527 $ 788
Withdrawals and Terminations (statutory basis):
Fixed Annuities:
Death ........................................ $ 29 $ 60 $ 25
Maturity ..................................... $ 118 $ 110 $ 87
Surrender .................................... $ 1,226 $ 1,000 $ 966
Indexed Annuities:
Death ........................................ $ 11 $ 4 $ 0.1
Maturity ..................................... -- -- --
Surrender .................................... $ 39 $ 19 $ 3
Variable Annuities:
Death ........................................ $ 7 $ 4 $ 2
Maturity ..................................... $ 87 $ 28 $ 21
Surrender .................................... $ 141 $ 105 $ 77
Life Insurance:
Death ........................................ $ 63 $ 66 $ 53
Surrender .................................... $ 77 $ 96 $ 98
Surrender Rates:
Fixed annuities ............................... 14.73% 11.74% 11.79%
Equity indexed annuities ...................... 2.13% 1.68% 0.69%
Variable annuities ............................ 9.31% 8.86% 7.55%
Life insurance ................................ 3.73% 4.57% 4.58%
5
Sales and Asset Retention
Product sales are influenced primarily by overall market conditions
affecting the attractiveness of the Company's retirement-oriented insurance
products, by product features including interest crediting and participation
rates, and by innovations and services that distinguish the Company's products
from those of its competitors.
The Company's mix of annuity products is designed to include products in
demand under a variety of economic and market conditions. Sales of SPDAs,
variable annuities and equity-indexed annuities tend to be sensitive to
prevailing interest rates. Sales of SPDAs can be expected to increase and
surrenders to decrease in interest rate environments when SPDA rates are higher
than rates offered by competing conservative fixed return investments, such as
bank certificates of deposit. SPDA sales can be expected to decline and
surrenders to increase in interest rate environments when this differential in
rates is not present (as was the case during 1998 and at the date of filing of
this Report). SPDA sales also can be adversely affected by low interest rates
(as was the case during 1998 and at the date of filing of this Report).
Conversely, sales of variable annuities can be expected to increase and
surrenders of such products to decrease in a rising equity market, low interest
rate environment. While sales of equity-indexed annuities can be expected to
increase and surrenders to decrease in a rising equity market, low interest
rate environment, sales of these products can be affected by the participation
rate credited by the Company, which may be reduced in a rising but relatively
volatile equity market.
The Company's insurance products include important features designed to
promote both sales and asset retention, including crediting rates and, in most
cases, 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, 1998,
crediting rates on 97.0% of the Company's in force SPDA policy liabilities were
subject to reset during the succeeding 12 months. In setting crediting and
participation rates, the Company takes into account yield characteristics on
its investment portfolio, surrender rate assumptions and competitive industry
pricing. Interest crediting rates on the Company's in force SPDAs ranged from
3.50% to 7.75% at December 31, 1998. Such policies had guaranteed minimum rates
ranging from 3.0% to 6.35% as of such date. Initial interest crediting rates on
new policies issued in 1998 ranged from 4.30% to 7.20%. Guaranteed minimum
rates on new policies issued during 1998 ranged from 3.0% to 4.5%.
Substantially all of the Company's annuity insurance products permit the
policyholder at anytime to withdraw all or any part of the accumulated policy
value. Premature termination of a policy results in the loss by the Company of
anticipated future earnings related to the premium deposit and the accelerated
recognition of the expenses related to policy acquisition (principally
commissions), which otherwise are deferred and amortized over the life of the
policy. Surrender charges provide a measure of protection against premature
withdrawal of policy values. Substantially all of the Company's insurance
products currently are issued with surrender charges or similar penalties. Such
surrender charges for all policies, except KeyIndex, typically start at 7% of
the policy premium and then decline to zero over a five- to seven-year period.
KeyIndex imposes a penalty on surrender of up to 10% of the premium deposit for
the life of the policy. At December 31, 1998, 80.6% of the Company's fixed
annuity policyholder balances remained in the surrender charge period.
Surrender charges generally do not apply to withdrawals by policyholders of,
depending on the policy, either up to 10% per year of the then accumulated
value or the accumulated returns. In addition, certain policies may provide for
charge-free withdrawals in certain circumstances and at certain times. All
policies except for certain variable annuities also are subject to "free look"
risk (the legal right of the policyholder to cancel the policy and receive back
the initial premium deposit, without interest, for a period ranging from ten
days to one year, depending upon the policy). To the extent a policyholder
exercises the "free look" option, the Company may realize a loss as a result of
any investment losses on the underlying assets during the free look period, as
well as the commissions paid on the sale of the policy. While SPWLs also permit
withdrawal, the withdrawal generally would produce significant adverse tax
consequences to the policyholder.
Keyport's financial ratings are important to its ability to accumulate and
retain assets. Keyport is rated "A" (excellent) by A.M. Best, "AA" (very strong
financial security) by S&P, "A2" (good) by Moody's and AA- (very high claims
paying ability) by Duff & Phelps. Rating agencies periodically review the
ratings
6
they issue. S&P raised Keyport's rating from "AA-" to "AA" in March, 1998 and
reaffirmed that rating in January, 1999. In September 1998, Moody's reduced
Keyport's rating from "A1" to "A2". In January 1999, A.M. Best reduced
Keyport's rating from "A+" to "A". These ratings reflect the opinion of the
rating agency as to the relative financial strength of Keyport and Keyport's
ability to meet its contractual obligations to its policyholders. Such ratings
are not "market" ratings or recommendations to use or invest in Keyport or
Liberty Financial and should not be relied upon when making a decision to
invest in the Company. Many financial institutions and broker-dealers focus on
the claims-paying ability rating of an insurer in determining whether to market
the insurer's annuities. If any of Keyport's ratings were downgraded from their
current levels or if the ratings of Keyport's competitors improved and
Keyport's did not, sales of Keyport's products, the level of surrenders on
existing policies and the Company's relationships with distributors could be
materially adversely affected. No assurance can be given that Keyport will be
able to maintain its financial ratings. Keyport has been advised that its S&P
rating was placed under credit watch with negative implications as a
consequence of an acquisition announced by Liberty Mutual in January, 1999.
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 1998 were 0.42% 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, 1998 totaled $13.3
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 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 (84.7% at December 31, 1998). The Company's principal
strategy for managing interest rate risk is to closely match the duration of
its general account investment portfolio and its policyholder balances. The
Company also employs hedging strategies to manage this risk, including interest
rate swaps and caps. In the case of equity-indexed products, the Company
purchases S&P 500 Index call options and futures to hedge its obligations to
provide participation rate returns. Credit risk is managed by careful credit
analysis and monitoring. A portion of general account investments (8.1% at
December 31, 1998) is invested in below investment grade fixed maturity
securities to enhance overall portfolio yield. Below investment grade
securities pose greater risks than investment grade securities. The Company
actively manages its below investment grade portfolio in an effort to optimize
its risk/return profile. At December 31, 1998, the carrying value of fixed
maturity investments that were non-income producing was $30.0 million, which
constituted 0.2% of the Company's general account investments. For a more
detailed description of the management of the Company's general account
investments, see "Management's Discussion and Analysis of Results of Operations
and Financial Condition--Quantitative and Qualitative Disclosures About Market
Risk" beginning at page 33 of the Company's 1998 Annual Report To Shareholders
(the "1998 Annual Report").
7
As of December 31, 1998, the Company owned approximately $3.3 billion of
mortgage-backed securities (24.8% of its general account investments), 97.3% 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, 1998, approximately $3.6 billion (26.7% 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 to sell such securities, it might be
unable to do so at the then current carrying values and might have to dispose
of such securities over extended periods of time at uncertain levels.
Stein Roe manages the majority ($7.8 billion at December 31, 1998) of the
Company's general account investments. In addition, several unaffiliated
parties manage portions of its general account investments in order to obtain
diversification of investment styles and asset classes.
The Company's general account investments, all of which pertain to the
Company's annuity insurance operations, were comprised of the following as of
the dates indicated (in millions):
December 31,
----------------------------------------
1998 1997 1996
----------- ----------- ------------
Fixed maturities .................... $11,277.2 $11,246.5 $10,718.6
Policy loans ........................ 578.9 554.7 532.8
Other invested assets ............... 717.6 501.5 250.6
Equity securities ................... 24.6 40.8 35.9
----- ----- -----
Investments ........................ 12,598.3 12,343.5 11,537.9
Cash and cash equivalents ........... 719.6 1,162.4 767.4
-------- -------- --------
General account investments ......... $13,317.9 $13,505.9 $12,305.3
========= ========= =========
Investment Management
Liberty Financial has three types of investment management products:
mutual funds, private capital management, and institutional asset management.
The Company has six separate operating units engaged in investment management:
Colonial, Stein Roe, Newport, Crabbe Huson, Progress and LAMCO. The Company's
primary financial objectives with respect to its investment management
businesses are to increase assets under management in each of its three core
products, and to improve operating margins through increasing scale and cost
savings produced by integration.
Products and Services.
Mutual Funds. As of December 31, 1998 the Company sponsored 78 open-end
mutual funds, as well as seven closed-end funds. The open-end funds include 46
intermediary-distributed mutual funds, 19 direct-marketed funds, and 13 other
funds included among the investment options available under the Company's
variable annuities. The closed-end funds include five fixed income funds and
two equity funds. At December 31, 1998, total mutual fund assets were $28.6
billion. At December 31, 1998, 52.6% of these assets were invested in equity
funds, 25.4% in taxable fixed income funds and 22.0% in tax-exempt fixed income
funds. The Company seeks to increase equity mutual fund assets, which generally
carry higher fees than funds that invest in fixed income securities.
Private Capital Management. At December 31, 1998, the Company managed $7.9
billion in investment portfolios for high net worth individuals and families
and smaller institutional investors, all of which are managed by Stein Roe.
Institutional Asset Management. At December 31, 1998, the Company managed
$11.4 billion of investment portfolios for institutional investors such as
insurance companies, public and private retirement funds, endowments,
foundations and other institutions. These assets are managed by Stein Roe,
Colonial, Crabbe Huson and Progress. In addition, Stein Roe manages the
majority of Keyport's general account assets supporting Keyport's insurance
products. See "--Retirement-Oriented Insurance Products--General Account
Investments."
8
The Company's investment management business focuses on managing the
investments of each client's portfolios in accordance with the client's
investment objectives and policies. The Company also provides related
administrative and support services to clients, such as portfolio pricing,
accounting and reporting. Investment management fees and related administrative
and support fees generally are charged as a percentage of assets under
management. Client accounts are managed pursuant to a written agreement which,
with limited exceptions, is terminable at any time upon relatively short notice
(typically 30-60 days).
In the case of mutual fund clients, all services provided by the Company
are subject to the supervision of the fund's Board of Trustees. Additional
administrative services provided to mutual funds include provision of office
space, other facilities and personnel, marketing and distribution services, and
transfer agency and other shareholder support services. Investment management
fees paid by a mutual fund must be approved annually by the fund's Board of
Trustees, including a majority of the independent Trustees. Any increases in
such fees also must be approved by fund shareholders. Most of the Company's
mutual fund assets are held in open-end funds. Shareholders of open-end funds
generally can redeem their shares on any business day.
The Company's direct-market mutual funds are sold without a sales load.
The Company's intermediary-distributed mutual funds generally offer investors a
choice of three pricing options: (1) a traditional front-end load option, in
which the investor pays a sales charge at the time of purchase; (2) a
contingent deferred sales charge, in which the investor pays no sales charge at
the time of purchase, but is subject to an asset-based sales charge paid by the
fund generally for eight years after purchase and a declining contingent
deferred sales charge paid by the investor if shares are redeemed generally
within six years after purchase; and (3) a level-load option, in which the
investor pays a small initial sales charge, and is subject to an ongoing
asset-based sales charge paid by the fund and a small contingent deferred sales
charge paid by the investor if shares are redeemed within one year after
purchase.
The following tables present certain information regarding the Company's
assets under management as of or for each year in the three-year period ended
December 31, 1998. 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,
------------------------------
1998 1997 1996
Total Assets Under Management -------- -------- --------
(dollars in billions)
Mutual funds:
Intermediary-distributed ...................... $17.9 $16.1 $16.1
Direct-marketed ............................... 6.8 7.2 6.6
Closed-end .................................... 2.4 2.2 1.9
Variable annuity .............................. 1.5 1.3 1.1
----- ----- -----
Total mutual funds ........................... 28.6 26.8 25.7
Private capital management ..................... 7.9 6.6 5.3
Institutional asset management ................. 11.4 5.3 4.9
Retirement-oriented insurance products ......... 13.1 12.8 12.1
----- ----- -----
Total ...................................... $61.0 $51.5 $48.0
===== ===== =====
9
As of December 31,
------------------------------
Total Assets Under Management 1998 1997 1996
By Asset Class (1) -------- -------- --------
(dollars in billions)
Fee-based assets:
Equity ........................................ $26.0 $18.2 $16.1
Fixed-income .................................. 21.9 20.5 19.8
----- ----- -----
Total fee-based assets ....................... 47.9 38.7 35.9
Retirement-oriented insurance products ......... 13.1 12.8 12.1
----- ----- -----
Total ...................................... $61.0 $51.5 $48.0
===== ===== =====
- ----------------
(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 1998 1997 1996
Management By Asset Class (1) -------- -------- --------
(dollars in billions)
Equity funds ................... $15.0 $13.3 $12.1
Fixed-income funds:
Taxable ....................... 7.3 7.0 7.0
Tax-exempt .................... 6.3 6.5 6.6
----- ----- -----
Total ...................... $28.6 $26.8 $25.7
===== ===== =====
- ----------------
(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 Assets Under Management -- 1998 1997 1996
Asset Flow Summary -------- -------- --------
(dollars in billions)
Assets under management--beginning ......... $ 51.5 $ 48.0 $ 42.5
Sales and reinvestments .................... 9.6 7.5 8.6
Redemptions and withdrawals ................ (8.2) (7.8) (6.9)
Asset acquisitions ......................... 5.4 -- 1.2
Net insurance cash flows ................... 0.6 0.7 0.7
Market appreciation ........................ 2.1 3.1 1.9
------ ------ ------
Assets under management--ending ............ $ 61.0 $ 51.5 $ 48.0
====== ====== ======
10
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-eight of the Company's 78
open-end mutual funds were long-term funds as of December 31, 1998 (defined as
open-end funds having at least a three-year performance record, excluding funds
that invest solely in money market securities). Forty of those 58 funds
(representing 81% of the total assets in those 58 funds as of December 31,
1998) were ranked by Lipper in the top two quartiles of their respective peer
groups for the three-year period ended that date. The Company believes that
over time, more sophisticated tools, such as those employed by consultants to
institutional investors, will become available to consumers for analyzing
mutual fund performance and risk. The Company's investment performance must
remain competitive for the Company to continue to grow investment management
product sales and assets.
The Company believes that, in light of the proliferation of mutual funds
and investment managers, strong brand name recognition in relevant distribution
channels is essential to asset accumulation and retention, particularly with
respect to mutual funds. The Company believes that the Colonial name carries
strong brand name recognition among brokers and other intermediaries selling
mutual funds, and that the Stein Roe name carries similar recognition in the
direct sales channel. Similarly, the Company believes that Stein Roe has a
franchise presence in the private capital management market and that Newport is
a recognized leader in investments in the Asian markets. The Company believes
that Crabbe Huson is a recognized leader in its specialty area of contrarian
investing and that Progress has a strong reputation in the selection and
management of multiple investment managers.
Sales of mutual funds and other investment management products are subject
to market forces, such as changes in interest rates and stock market
performance. Changes in the financial markets, including significant increases
or decreases in interest rates or stock prices, can increase or decrease fund
sales and redemptions, as well as the values of assets in such portfolios, all
of which impact investment management fees. The competitiveness of the
Company's investment management products (both in terms of new sales and asset
retention) also is dependent on the relative attractiveness of their underlying
investment philosophies and methods.
Distribution
Liberty Financial sells its products through multiple distribution
channels. Total product sales during 1998 were $9.6 billion (including $1.3
billion of reinvested dividends and similar reinvested returns). During 1998,
54% of these sales were made through intermediary distributors, with the
balance made directly to the investor. Over 35,000 individual brokers and other
intermediaries sold Liberty Financial products in 1998.
Distribution Through Intermediaries
The Company sells both annuities and mutual funds through various
intermediaries, including national and regional brokerage firms, banks and
other depository institutions, financial planners and insurance agents. The
Company's annuities and mutual funds are most often sold to middle and upper-
middle class investors and savers. Many of these individuals seek the help of
an investment professional in selecting investment and retirement income and
savings products. In each of these intermediary channels, the Company provides
products, as well as promotional materials and other support services.
Reflecting its diversification strategy, the Company maintains
distribution relationships with several different types of intermediaries.
Intermediary-distributed mutual funds and annuities historically have been
distributed through brokerage firms and insurance agents. Banks and financial
planners also have become significant distributors of these products.
The Company employs wholesalers and other sales professionals to promote
sales of its intermediary-distributed products. These representatives meet with
intermediaries' sales forces to educate them on matters such as product
objectives, features, performance records and other key
11
selling points. The Company also produces marketing material designed to help
intermediaries sell the Company's products, and provides after-sale support to
both the intermediaries and their customers. The degree and mix of these
services vary with the requirements of the particular intermediary.
The Company was a pioneer in selling through banks, both in terms of
helping banks develop marketing programs and in establishing wholesaling
relationships with banks. Liberty Financial operates a sales unit, Independent,
that sells mutual funds and annuities through banks. The Company acquired
Independent in March, 1996. Since the acquisition, the Company has consolidated
its prior bank sales unit, the Liberty Financial Bank Group, with Independent.
These businesses design and implement programs that sell annuities and mutual
funds through their client banks, license and train sales personnel, and
provide related financial services and administrative support. Program
structures and the degree of the Company's involvement vary widely depending
upon the particular needs of each bank. Products sold include the Company's
proprietary products, as well as non-proprietary products (including in some
cases the bank's proprietary mutual funds). At December 31, 1998, Independent
had over 60 bank relationships involving over 2,500 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 additional
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 private capital
management and institutional asset management services, are sold directly to
investors. The Company's direct-marketed mutual funds are purchased
predominantly by middle and upper-middle class investors and savers who choose
to select their own funds and who wish to avoid paying sales loads and similar
fees. Private capital management clients typically are high net worth
individuals and families. Institutional asset management clients typically are
larger institutional investors managed by in-house professional staffs that
select and oversee asset managers, often with the advice of third party
consultants.
In each of the direct sales markets served by the Company, investment
performance is essential to generating sales and retaining customers. Mutual
fund sales also require robust marketing campaigns using print, radio and
television advertising and direct mail that highlight performance and other
selling points. The Company believes that certain technology-based customer
service and support tools it is developing, including on-line account access
and interactive illustrative investment tools, can become important devices in
accumulating and retaining assets in the direct distribution channels. The
reputation of the Company's high quality asset managers is an important factor
in generating new private capital and institutional asset management clients.
Active management of the client relationship, including frequent personal
contacts, is necessary to retain these clients.
So-called "mutual fund supermarkets," such as Charles Schwab & Co., Inc.'s
OneSource[TM], have become an important source of customers for direct-marketed
mutual funds. During 1998, 40% of the
12
total new sales of the Company's direct-marketed 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 private capital management clients,
in some cases in return for referral fees or other compensation.
Industry Segment Information
Liberty Financial conducts its business in two industry segments: annuity
insurance and asset management. Annuity insurance operations relate primarily
to the Company's fixed, indexed and variable annuities and its closed block of
SPWLs. Asset management operations relate to its mutual funds, private capital
management and institutional asset management products. For information on
these reportable segments, see Note 12 of Notes to the Consolidated Financial
Statements of the Company contained in the 1998 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 Keyport
Benefit Life Insurance Company ("Keyport Benefit"), Keyport subsidiaries, also
issue certain policies. Keyport and Independence Life are each chartered in the
state of Rhode Island, and the Rhode Island Insurance Department is their
primary oversight regulator. Keyport Benefit is chartered in the state of New
York, and the New York Department of Insurance is its primary oversight
regulator. Keyport Benefit, acquired by Keyport in January, 1998, operates
exclusively in New York and Rhode Island. Keyport and Independence Life also
must be licensed by the state insurance regulators in each other jurisdiction
in which they conduct business. They currently are licensed to conduct business
in 49 states (the exception being New York) and in the District of Columbia and
the Virgin Islands. State insurance laws generally provide regulators with
broad powers related to issuing licenses to transact business, regulating
marketing and other trade practices, operating guaranty associations,
regulating certain premium rates, regulating insurance holding company systems,
establishing reserve requirements, prescribing the form and content of required
financial statements and reports, performing financial and other examinations,
determining the reasonableness and adequacy of statutory capital and surplus,
regulating the type and amount of investments permitted, limiting the amount of
dividends that can be paid and the size of transactions that can be consummated
without first obtaining regulatory approval, and other related matters. The
regulators also make periodic examinations of individual companies and review
annual and other reports on the financial condition of all companies operating
within their respective jurisdictions.
Keyport and Independence Life prepare their statutory-basis financial
statements in accordance with accounting practices prescribed or permitted by
the Rhode Island Insurance Department. Keyport Benefit prepares its
statutory-basis financial statements in accordance with accounting practices
13
prescribed or permitted by the New York Department of Insurance. Certain
statutory accounting practices are prescribed by state law. Permitted statutory
accounting practices encompass all accounting practices that are not
proscribed; such practices may differ between the states and companies within a
state. The National Association of Insurance Commissioners (the "NAIC") is
currently in the process of codifying statutory accounting practices, the
result of which is expected to constitute the only source of prescribed
statutory accounting practices. That project, which is expected to be completed
in 1999, 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, 1998, Keyport's capital and surplus
exceeded the level at which the least severe of these regulatory attention
levels would be triggered.
Guaranty Fund Assessments. Under the insurance guaranty fund laws existing
in each state, insurers can be assessed for certain obligations of insolvent
insurance companies to policyholders and claimants. Because assessments
typically are not made for several years after an insurer fails, Keyport cannot
accurately determine the precise amount or timing of its exposure to known
insurance company insolvencies at this time. For certain information regarding
Keyport's historical and estimated future assessments in respect of insurance
guaranty funds, see Note 16 to the Notes to the Consolidated Financial
Statements contained in the 1998 Annual Report. The insolvency of large life
insurance companies in future years could result in material assessments to
Keyport by state guaranty funds. No assurance can be given that such
assessments would not have a material adverse effect on the Company.
Insurance Holding Company Regulation. Current Rhode Island insurance law
imposes prior approval requirements for certain transactions with affiliates
and generally regulates dividend payments by a Rhode Island-chartered insurance
subsidiary to its parent company. Keyport may not make distributions or
dividend payments to Liberty Financial which, together with distributions and
dividends paid during the preceding 12 months, exceed the lesser of (i) 10% of
its statutory surplus as of the preceding December 31 or (ii) its statutory net
gain from operations for the preceding fiscal year without prior approval by
the Rhode Island Commissioner of Insurance. As of December 31, 1998, such
restriction would limit dividends without such approval to $59.1 million.
Keyport paid $20.0 million in dividends during 1998, but had not previously
paid any dividends since its acquisition in December, 1988. In addition, no
person or group may acquire, directly or indirectly, 10% or more of the voting
stock or voting power of Liberty Financial unless such person has provided
certain required information to the Rhode Island Department of Business
Regulation and such acquisition is approved by the Department.
General Regulation at Federal Level and Certain Related Matters. Although
the federal government generally does not directly regulate the insurance
business, federal initiatives often have an impact on the business in a variety
of ways. Current and proposed federal measures that may significantly affect
the insurance business include limitations on antitrust immunity, minimum
solvency requirements and the removal of barriers restricting banks from
engaging in the insurance business. In particular, several proposals to repeal
or modify the Bank Holding Company Act of 1956 (which prohibits banks from
being affiliated with insurance companies) have been made by members of
Congress and the Clinton Administration. Moreover, the United States Supreme
Court held in 1995 in NationsBank of North Carolina v. Variable Annuity Life
Insurance Company that annuities are not insurance for purposes of the National
Bank Act. In addition, the Supreme Court also held in 1995 in Barnett Bank of
Marion City v. Nelson that state laws prohibiting national banks from selling
insurance in small town locations are preempted by
14
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 Investment Advisers Act (the "Advisers Act"). The mutual funds
and closed-end funds sponsored by the Company also are subject to the
Investment Company Act of 1940 (the "Investment Company Act"). Mutual fund
shares are securities, and, as such, must be registered under the federal
securities laws. The foregoing laws impose various restrictions on the
Company's asset management products, including fee structures, the timing and
content of advertising, and, in the case of the funds, certain investment
restrictions. Mutual funds also must be managed to comply with certain other
investment restrictions imposed by the Internal Revenue Code. Accounts subject
to the Employee Retirement Income Security Act of 1974 ("ERISA") must comply
with certain investment and other restrictions imposed by ERISA.
The Company's subsidiaries directly engaged in asset management (including
Colonial, Stein Roe, Newport, Crabbe Huson, Progress and LAMCO) are registered
with the Securities and Exchange Commission (the "SEC") as investment advisers
under the Advisers Act. They also are subject to the Investment Company Act
insofar as it relates to investment advisers to registered investment
companies. These securities laws and the related regulations of the SEC require
reporting, maintenance of books and records in prescribed forms, mandatory
custodial arrangements, approval of employees and representatives and other
compliance procedures. Possible sanctions in the event of noncompliance include
the suspension of individual employees, limitations on the firm's engaging in
business for specified periods of time, revocation of the firm's registrations,
censures and fines.
In the ordinary course of its investment management business, the Company
enters into investment advisory agreements with mutual funds and others. As
required by the Investment Company Act and the Advisers Act, Liberty
Financial's investment advisory agreements provide that the agreements
terminate automatically upon their "assignment." The Investment Company Act and
the Advisers Act define the term "assignment" to include any "direct or
indirect transfer" of a "controlling block of the voting securities" of the
issuer's outstanding voting securities. The Investment Company Act presumes
that any person holding more than 25% of the voting stock of any person
"controls" such person. Sales by Liberty Mutual or other stockholders or new
issuances of capital stock by Liberty Financial, among other things, may raise
issues relating to assignments of the Company's investment advisory agreements.
The Company's Restated Articles of Organization include provisions limiting the
voting power of shares of the Company's Voting Stock (as defined in the
Company's Restated Articles of Organization) held by holders of 20% or more of
such Voting Stock in certain circumstances. These provisions do not apply to
Liberty Mutual, subsidiaries or affiliates of Liberty Mutual, direct or
indirect subsidiaries of the Company and certain employee plans established or
to be established by the Company or certain of its subsidiaries. Liberty
Financial's Board of Directors may approve the exemption of other persons or
groups from the provisions described above. While this voting limitation is in
place to reduce the likelihood, under certain circumstances, of inadvertent
terminations of Liberty Financial's advisory agreements as a result of
"assignments" thereof, there can be no assurance that this limitation will
prevent such a termination from occurring. In addition, such limitation could
be deemed to have an anti-takeover effect and to make changes in management
more difficult.
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.
15
Distribution
Sales of the Company's annuities and mutual funds are also subject to
extensive regulation. Annuities must be sold through an entity registered as an
insurance agency in the particular state. The sales person must be properly
licensed under state insurance law. Variable annuities and certain indexed
annuities also require the sales person to be registered with the National
Association of Securities Dealers ("NASD") and the applicable state securities
commission. Mutual fund shares must be sold through an entity registered as a
broker-dealer under the Exchange Act and applicable state law. The sales person
must be registered with the NASD and the applicable state securities
commission.
Various business units of the Company are registered as broker-dealers.
These include certain units which operate the Company's bank marketing
business, as well as other units through which mutual fund and certain
annuities are sold. Certain bank marketing units also are registered as
insurance agencies in states where they sell annuities. These laws regulate the
licensing of sales personnel and sales practices. They impose minimum net
capital requirements. They also impose reporting, records maintenance, and
other requirements, and provide for penalties in the event of non-compliance,
similar in scope to the regulations applicable to asset managers.
Certain securities sales through the Company's bank marketing units are
conducted in accordance with the provisions of a "no-action" letter issued by
the staff of the SEC requiring, among other things, that securities sales
activities be conducted by sales personnel who are registered representatives
of the Company and are subject to its supervision and control. The letter
limits the functions of non-registered bank personnel to ministerial duties.
The letter is not binding on the courts, however, and no assurance can be given
that the SEC will not change its position.
Banks are an important distribution channel for the Company's annuities
and mutual funds. The recent growth in sales of mutual funds, annuities and
other investment and insurance products through or at banks and similar
institutions has prompted increased scrutiny by federal bank regulators, the
SEC and other regulators. Regulations promulgated by federal banking
authorities impose additional restrictions and duties with respect to bank
sales practices, including obligations to disclose that the products are not
subject to deposit insurance.
Competition
The Company's businesses operate in extremely competitive markets. These
markets are highly fragmented, although in the case of annuities and mutual
funds, a few companies do have relatively substantial market shares. Certain of
the Company's competitors are significantly larger and have access to
significantly greater financial and other resources.
The Company's products compete with every other investment or savings
vehicle available to a prospective customer, including those offered by other
insurance companies, investment management firms and banks. The Company
believes that the most important competitive factor affecting the marketability
of its products is the degree to which they meet customer expectations, both in
terms of returns (after fees and expenses) and service. These competitive
pressures apply to competition for customers in general, as well as competition
to access and maintain distribution relationships in the case of products sold
through intermediaries. Product and service innovations also are important
devices for generating new sales and maintaining distribution relationships.
Sales of particular products may be affected by conditions in the financial
markets, such as increases or decreases in interest rates or stock prices.
Product features of particular relevance to annuities include interest
crediting and participation rates, surrender charges and innovation in product
design. Maintenance of Keyport's financial ratings at a high level also is
important. The Company believes that the most important factors affecting
competition for investment management clients are investment performance,
customer service and brand name recognition. Pricing policies and product
innovations also are important competitive factors. The Company's ability to
increase and retain clients' assets could be materially adversely affected if
client accounts underperform the market or competing products or if key
investment managers leave the Company. The ability of the Company's asset
management subsidiaries to compete with other asset
16
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, 1998, the Company had 2,125 full-time employees
summarized by activity as follows: 408 in annuity insurance operations; 1,292
in asset management activities; 374 in marketing and distribution operations;
and 51 in general corporate. The Company provides its employees with a broad
range of employee benefit programs. The Company believes that its relations
with its employees are excellent.
Executive Officers of the Registrant
Set forth below are the names, ages at March 31, 1999, and principal
occupations for the last five years of each executive officer of the Company.
All such persons have been elected to serve until the next annual election of
officers and their successors are elected or until their earlier resignation or
removal.
Name Age Position
- ----------------------- ----- ------------------------------------------------
Gary L. Countryman 59 Chairman and Director
Kenneth R. Leibler 50 Chief Executive Officer, President and Director
John A. Benning 64 Senior Vice President, General Counsel and
Clerk
John V. Carberry 51 Senior Vice President
Lindsay Cook 47 Executive Vice President
Frank A. Faggiano 59 Senior Vice President, Human Resources
Stephen E. Gibson 45 President and Chief Executive Officer, The
Colonial Group
J. Scott Hansen 45 Senior Vice President, Corporate Development
J. Andy Hilbert 40 Senior Vice President, Chief Financial Officer
and Treasurer
C. Allen Merritt, Jr. 58 Chief Operating Officer
Porter P. Morgan 58 Senior Vice President, Marketing
Mr. Countryman has been Chairman (since 1991) and Chief Executive Officer
(from 1986 until April, 1998) of Liberty Mutual and Liberty Mutual Fire
Insurance Company (an affiliate of Liberty Mutual). He currently serves as a
director of the Company, Liberty Mutual and certain of its affiliates,
BankBoston Corporation, Boston Edison Company, Harcourt General, Inc. and
Unisource Worldwide, 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, Keyport Life Insurance Company,
an indirect wholly-owned subsidiary of Liberty Financial, ISO New England, Inc.
and the Boston Stock Exchange.
Mr. Benning has been Senior Vice President, General Counsel and Clerk of
Liberty Financial since October, 1989.
Mr. Carberry joined Liberty Financial as Senior Vice President in
February, 1998. Prior to that time he was a Managing Director of Salomon
Brothers Inc.
Mr. Cook became Executive Vice President of Liberty Financial in February,
1997. He became a Senior Vice President of Liberty Financial in February, 1994,
having been a Vice President prior to that time.
Mr. Faggiano became Senior Vice President, Human Resources in August,
1997. Prior to that time he was Vice President, Human Resources.
Mr. Gibson became President and Chief Executive Officer of The Colonial
Group, a subsidiary of Liberty Financial, in January, 1997. He was Executive
Vice President of The Colonial Group from July,
17
1996 to January, 1997. Prior to that, he was Managing Director of Marketing at
Putnam Investments from 1995 to July, 1996, and prior thereto was Executive
Vice President of Putnam Mutual Funds.
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.
Item 2. Properties
As of December 31, 1998, the Company leased its various office facilities.
The Company's principal leasing arrangements can be summarized as follows: The
Company's principal executive offices occupy approximately 30,300 square feet
in a single facility in downtown Boston under a lease which expires in 2002.
Keyport leases approximately 96,500 square feet in two buildings in downtown
Boston under leases which expire in 2008, approximately 19,800 square feet in a
single facility in Lincoln, Rhode Island under a lease which expires in 2007,
and 7,700 square feet in a single facility in Maitland, Florida under a lease
which expires in 1999. Colonial leases approximately 219,000 square feet in two
buildings in downtown Boston under leases which expire in 2006 and
approximately 31,200 square feet in Aurora, Colorado under a lease which
expires in 2000. Stein Roe leases 141,300 square feet in downtown Chicago under
a lease which expires in 2009. Newport leases approximately 6,900 square feet
in downtown San Francisco under a lease which expires in 2000. Crabbe Huson
leases approximately 17,700 square feet in downtown Portland, Oregon under a
lease which expires in 2003. Progress leases approximately 9,000 square feet in
downtown San Francisco under a lease which expires in 2005. Independent leases
approximately 29,500 square feet in Purchase, New York under a lease which
expires in 2007.
Item 3. Legal Proceedings
The Company is from time to time involved in litigation incidental to its
businesses. In the opinion of Liberty Financial's management, the resolution of
such litigation is not expected to have a material adverse effect on the
Company's financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None
18
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock is listed on the New York Stock Exchange
("NYSE") under the symbol "L". The Company's Common Stock is also listed on the
Boston Stock Exchange. On December 31, 1998, the closing price of the Company's
Common Stock on the NYSE was $27 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 March 19, 1999
there were approximately 253 shareholders of record. In addition, the Company
estimates that there are approximately 4,000 beneficial shareholders whose
shares are held in street name. The high and low sales prices for each quarter
during 1998 and 1997, as traded on the NYSE Composite Tape, were as follows:
1998
Quarter High Low
- -------------------- ----------------- ----------
January-March $ 39-3/4 $ 33
April-June 40-5/8 32-3/4
July-September 38-9/16 25-3/4
October-December 30-5/8 20-1/8
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
The Company currently has a policy of paying quarterly cash dividends of
$0.10 per share and has paid such quarterly dividends regularly since becoming
a public company in 1995. The declaration and payment of any dividends on the
Common Stock are dependent upon the Company's results of operations, financial
condition, cash requirements, capital requirements, regulatory considerations
and other relevant factors, and in all events are subject to the discretion of
the Board of Directors and to any preferential dividend rights of the
outstanding Series A Convertible Preferred Stock ("Preferred Stock") of Liberty
Financial. The holders of the issued and outstanding shares of Preferred Stock
are entitled to receive cumulative cash dividends at the rate of $2.875 per
annum per share, payable in equal quarterly installments. The terms of the
Preferred Stock preclude the payment of any dividends on the Common Stock
unless cumulative dividends on the outstanding Preferred Stock have been paid
or declared and set aside in full. Accordingly, there is no requirement, and no
assurances can be given, that dividends will be paid on the Common Stock.
The Company's Board of Directors established an optional dividend
reinvestment plan ("DRIP") for holders of Common Stock and Preferred Stock.
Liberty Mutual has participated in the DRIP since its inception. Such
participation may be terminated at any time.
For a further discussion of the Company's ability to pay dividends in cash
on its Common Stock, see "Management's Discussion and Analysis of Results of
Operations and Financial Condition--Liquidity" in the 1998 Annual Report.
Sales of Unregistered Securities
Liberty Financial issued shares of its Common Stock during 1998 without
registration under the Securities Act of 1933 (the "Securities Act") in the
transaction described below:
On September 30, 1998, Liberty Financial acquired Crabbe Huson for cash
and 252,969 shares of Common Stock issued to Crabbe Huson. The stock was
distributed to the shareholders of Crabbe Huson, with 221,196 of such shares
issued on September 30, 1998, and 31,773 of such shares issued on December 23,
1998. Crabbe Huson's shareholders made customary investment representations to
the Company, and such issuances were exempt from registration pursuant to
Section 4(2) of the Securities Act.
19
Item 6. Selected Financial Data
Selected Consolidated Financial Data, which appears on page 27 in the 1998
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 28 in the 1998 Annual
Report, is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Quantitative and Qualitative Disclosure About Market Risk is included in
Management's Discussion and Analysis of Results of Operations and Financial
Condition beginning at page 33 of the 1998 Annual Report, and is incorporated
herein by reference.
Item 8. Financial Statements and Supplementary Data
The Company's Consolidated Financial Statements which appear beginning on
page 42 in the 1998 Annual Report, and the report thereon of Ernst & Young LLP
as of and for the year ended December 31, 1998, which appears on page 67 in the
1998 Annual Report, are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
Information relating to the executive officers of the Company appears
under the caption "Executive Officers of the Registrant" in Part I of this Form
10-K on page 17.
Information relating to the directors of the Company is incorporated
herein by reference from Liberty Financial's definitive Proxy Statement for the
Annual Meeting of Stockholders to be held on or about May 10, 1999 (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 Comparison") and "Election of Directors--1998 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 caption
"Certain Relationships and Related Transactions."
20
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 42 of the 1998 Annual Report, are incorporated herein
by reference:
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Income Statements for the Years Ended December 31, 1998,
1997 and 1996
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
The following financial statement schedules are included as part of this
Report:
I Summary of Investments
II Condensed Financial Information of Registrant
III Supplementary Insurance Information
All other schedules are omitted because they are not applicable or are not
required, or because the required information is included in the Consolidated
Financial Statements or notes thereto.
3. Exhibits
The exhibits filed as part of this Report are listed on the Exhibit Index
immediately following the financial statement schedules included in this
Report. The following exhibits are management contracts or compensatory plans
or arrangements: 10.4 through 10.14.2, 10.22, 10.28 and 10.29.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Registrant during the fourth
quarter of 1998.
21
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Boston and the
Commonwealth of Massachusetts on March 30, 1999.
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 30, 1999
- --------------------------- and Director
Kenneth R. Leibler
/s/ J. Andrew Hilbert Senior Vice President and Chief March 30, 1999
- --------------------------- Financial Officer (Principal Financial
J. Andrew Hilbert and Accounting Officer)
/s/ Gary L. Countryman Director March 30, 1999
- ---------------------------
Gary L. Countryman
/s/ Gerald E. Anderson Director March 30, 1999
- ---------------------------
Gerald E. Anderson
/s/ Michael J. Babcock Director March 30, 1999
- ---------------------------
Michael J. Babcock
/s/ William F. Connell Director March 30, 1999
- ---------------------------
William F. Connell
/s/ Paul J. Darling, II Director March 30, 1999
- ---------------------------
Paul J. Darling, II
/s/ David F. Figgins Director March 30, 1999
- ---------------------------
David F. Figgins
/s/ John B. Gray Director March 30, 1999
- ---------------------------
John B. Gray
/s/ Marian L. Heard Director March 30, 1999
- ---------------------------
Marian L. Heard
/s/ Raymond H. Hefner, Jr. Director March 30, 1999
- ---------------------------
Raymond H. Hefner, Jr.
22
Signature Title Date
- --------------------------- ---------- ---------------
/s/ Edmund F. Kelly Director March 30, 1999
- -------------------------
Edmund F. Kelly
/s/ Sabino Marinella Director March 30, 1999
- -------------------------
Sabino Marinella
/s/ Thomas J. May Director March 30, 1999
- -------------------------
Thomas J. May
/s/ Ray B. Mundt Director March 30, 1999
- -------------------------
Ray B. Mundt
/s/ Kenneth L. Rose Director March 30, 1999
- -------------------------
Kenneth L. Rose
/s/ Glenn P. Strehle Director March 30, 1999
- -------------------------
Glenn P. Strehle
/s/ Stephen J. Sweeney Director March 30, 1999
- -------------------------
Stephen J. Sweeney
23
Schedule I
LIBERTY FINANCIAL COMPANIES, INC.
SUMMARY OF INVESTMENTS
(in millions)
December 31, 1998
----------------------------------------
Balance
Amortized Sheet
Type of Investment Cost Fair Value Amount
- ------------------------------------------------------------- ----------- ------------ -----------
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S. government
corporations and agencies ................................ $ 1,030.9 $ 1,059.3 $ 1,059.3
Foreign governments ....................................... 251.1 244.3 244.3
Corporate and other securities ............................ 7,606.1 7,641.4 7,641.4
Mortgage backed securities ................................ 2,286.6 2,332.2 2,332.2
--------- --------- ---------
Total fixed maturity securities .......................... 11,174.7 11,277.2 11,277.2
Equity securities:
Common stocks:
Industrial, miscellaneous and all other ................... 21.8 24.6 24.6
Mortgage loans on real estate (1) ........................... 55.1 56.6 55.1
Policy loans ................................................ 578.9 578.9 578.9
Other long term investments ................................. 662.5 730.4 662.5
--------- --------- ---------
Total investments ........................................ $12,493.0 $12,667.7 $12,598.3
========= ========= =========
------------
(1) Includes mortgage notes relating to certain investment property owned by an
affiliate of Liberty Mutual in the amount of $39.5 million at December 31,
1998. These notes were paid in January, 1999.
24
Schedule II
LIBERTY FINANCIAL COMPANIES, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(in millions, except per share data)
Balance Sheets
December 31
--------------------------
1998 1997
----------- ------------
Assets:
Cash and cash equivalents ...................... $ 180.4 $ 19.4
Investments in subsidiaries .................... 1,357.4 1,183.4
Notes receivable--subsidiaries ................. 152.1 160.9
Accounts receivable--subsidiaries .............. 16.3 20.8
Other assets ................................... 50.9 44.0
-------- --------
$1,757.1 $1,428.5
======== ========
Liabilities:
Notes payable to affiliates .................... $ -- $ 199.0
Notes payable .................................. 446.9 --
Accounts payable and accrued expenses .......... 23.6 16.0
-------- --------
470.5 215.0
-------- --------
Redeemable convertible preferred stock .......... 15.3 14.6
-------- --------
Stockholders' Equity:
Common stock ................................... 0.5 0.4
Additional paid-in capital ..................... 901.5 866.2
Retained earnings .............................. 346.4 251.5
Accumulated other comprehensive income ......... 27.2 83.0
Unearned compensation .......................... (4.3) (2.2)
-------- --------
Total stockholders' equity .................... 1,271.3 1,198.9
-------- --------
$1,757.1 $1,428.5
======== ========
Income Statements
Year Ended December 31
------------------------------------
1998 1997 1996
---------- ---------- ----------
Interest income, principally from subsidiaries ................... $ 15.1 $ 13.0 $ 12.1
Realized investment gains (losses) ............................... 0.3 (0.6) --
Operating expenses ............................................... (18.3) (15.6) (16.3)
------- ------- -------
Loss before income taxes ......................................... (2.9) (3.2) (4.2)
Benefit for income taxes ......................................... 7.5 19.2 21.9
Equity in net income of subsidiaries ............................. 119.9 113.5 83.0
------- ------- -------
Income before extraordinary item ................................. 124.5 129.5 100.7
Extraordinary loss on extinguishment of debt, net of tax ......... (9.7) -- --
------- ------- -------
Net Income ....................................................... $ 114.8 $ 129.5 $ 100.7
======= ======= =======
Net income per share--basic:
Income before extraordinary item ................................ $ 2.72 $ 2.94 $ 2.36
======= ======= =======
Net income ...................................................... $ 2.51 $ 2.94 $ 2.36
======= ======= =======
Net income per share--assuming dilution:
Income before extraordinary item ................................ $ 2.63 $ 2.77 $ 2.24
======= ======= =======
Net income ...................................................... $ 2.42 $ 2.77 $ 2.24
======= ======= =======
See Notes to Consolidated Financial Statements contained in the 1998 Annual
Report incorporated herein by reference.
25
Schedule II (continued)
LIBERTY FINANCIAL COMPANIES, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(in millions)
Statements of Cash Flows
Year Ended December 31
-------------------------------------
1998 1997 1996
----------- ----------- ---------
Cash flows from operating activities:
Net income .................................................. $ 114.8 $ 129.5 $ 100.7
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Extraordinary loss on extinguishment of debt, net
of tax .................................................. 9.7 -- --
Equity in net income of subsidiaries ...................... (119.9) (113.5) (83.0)
Increase in notes receivable--subsidiaries ................ (13.0) (0.7) (1.2)
Net change in accounts receivable--subsidiaries,
other assets and accounts payable ....................... 13.7 (9.2) (41.2)
-------- -------- -------
Net cash provided by (used in) operating activities ......... 5.3 6.1 (24.7)
-------- -------- -------
Cash flows from investing activities:
Acquisitions, net of cash acquired .......................... (94.7) -- (8.1)
Capital contributions to subsidiaries ....................... (29.1) (25.0) (8.0)
-------- -------- -------
Net cash used in investing activities ....................... (123.8) (25.0) (16.1)
-------- -------- -------
Cash flows from financing activities:
Repayment of notes payable to affiliates .................... (244.0) -- --
Issuance of notes payable ................................... 446.9 -- --
Exercise of stock options ................................... 7.4 7.6 2.4
Dividends, net .............................................. 69.2 23.3 36.1
-------- -------- -------
Net cash provided by financing activities ................... 279.5 30.9 38.5
-------- -------- -------
Increase (decrease) in cash and cash equivalents ............. 161.0 12.0 (2.3)
Cash and cash equivalents at beginning of year ............... 19.4 7.4 9.7
-------- -------- -------
Cash and cash equivalents at end of year ..................... $ 180.4 $ 19.4 $ 7.4
======== ======== =======
See Notes to Consolidated Financial Statements contained in the 1998 Annual
Report incorporated herein by reference.
26
Schedule III
LIBERTY FINANCIAL COMPANIES, INC.
SUPPLEMENTARY INSURANCE INFORMATION
(in millions)
Three Years Ended December 31, 1998
Column A Column B Column C Column D Column E
- ------------------- ------------- --------------- ---------- -----------------
Policyholder Policy contract
Deferred account claims and
policy balances and other
acquisition future policy Unearned policyholders'
costs benefits premiums funds
December 31, 1998
Interest sensitive
products ......... $341.0 $12,446.0 NA $58.1
====== ========= ========== =====
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
====== ========= ========== =====
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, 1998
Interest sensitive
products ......... $38.1 $820.9 $565.1 $69.2 $63.0 NA
===== ====== ====== ===== ===== ==========
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
===== ====== ====== ===== ===== ==========
27
Exhibit Index
Exhibit
Number Description
- ------------- --------------------------------------------------------------------------------------
3.1 (1) Form of Restated Articles of Organization of the Company
3.2 (1) Form of Certificate of Designation of Series A Convertible Preferred Stock of the
Company
3.3 (2) Restated By-laws of the Company, as amended
4.1 (1) Form of Certificate for Common Stock of the Company
4.2 (1) Form of Certificate for Series A Convertible Preferred Stock of the Company
4.3 (3) Form of Indenture between the Company and State Street Bank and Trust Company
as Trustee
4.4 (3) Form of Senior Note
10.1 (1) Form of Intercompany Agreement between Liberty Mutual and the Company
10.2 (4) Form of Registration Rights Agreement between Liberty Mutual and the Company
10.3 (4) Form of Tax Sharing Agreement between Liberty Mutual and the Company
10.4 (1) Form of 1990 Stock Option Plan of the Company, together with amendments 1 and 2
thereto
10.5 Form of Restated Savings and Investment Plan of the Company
10.6 (1) Form of Amended and Restated Supplemental Savings Plan of the Company
10.7 (1) Form of Stein Roe Profit Sharing Plan and amendments thereto
10.8 Form of Amended and Restated Pension Plan of the Company
10.9 (1) Form of Amended and Restated Supplemental Pension Plan of the Company
10.10 (5) Form of Amended and Restated 1995 Stock Incentive Plan of the Company
10.11 (4) Form of 1995 Employee Stock Purchase Plan of the Company
10.12 (1) Form of Deferred Compensation Plan of the Company
10.12.1 (1) Letters from the Company, setting forth additional retirement benefits for John A.
Benning and Sabino Marinella
10.13 (1) Form of Keyport Deferred Compensation Plan
10.14 (1) Form of Stein Roe Deferred Compensation Plan
10.14.1 (1) Form of Stein Roe Non-Qualified Supplemental Retirement Plan
10.14.2 (1) Form of Stein Roe Long Term Incentive Plan
10.16 (1) Lease Agreement with respect to 600 Atlantic Avenue, Boston, Massachusetts
10.17 (1) Lease Agreement with respect to 125 High Street, Boston, Massachusetts, as
amended
10.17.1 Third and Fourth Amendments to 125 High Street Lease
10.18 (1) Lease Agreement with respect to One South Wacker Drive, Chicago, Illinois, as
amended
10.19 (1) Unconditional Guarantee Agreement dated November 7, 1991 executed by Liberty
Mutual and related Mortgage Maintenance Agreement by and among LRE
Properties, Inc., Atlantic Real Estate Limited Partnership and Keyport Life Insurance
Company
10.20 (1) Administrative Services Agreement dated as of June 9, 1993 between Liberty Life
Assurance Company of Boston and Keyport Life Insurance Company
10.21 (6) Lease Agreement with respect to One Financial Center, Boston, Massachusetts
10.22 Agreement between the Company and Stephen E. Gibson, President and Chief
Executive Officer of Colonial
10.23 Credit Agreement dated as of April 10, 1998 among Colonial and BankBoston, N.A.,
as agent for itself and certain other lenders named therein (and Amendment No. 1 to
Credit Agreement)
10.28 (7) Colonial Profit Sharing Plan (and Amendment Nos. 1-3 thereto)
10.29 (7) Colonial Split-Dollar Insurance Coverage description
10.30 (6) Coinsurance Agreement between Fidelity and Guaranty Life Insurance Company and
Keyport Life Insurance Company, and first and second amendments thereto
10.31 (8) Dividend Reinvestment Plan of the Company
12 Statement re computation of ratios
28
Exhibit
Number Description
- ---------- -------------------------------------------------------------------------------------
13 Portions of Annual Report to Stockholders incorporated by reference into this Report
21 Subsidiaries of the Company
23 Consent of Ernst & Young LLP
27 Financial Data Schedule
99.3 (1) Form of Stockholders' Agreement among the Company, Liberty Mutual Insurance
Company and certain holders of the Company's Series A Convertible Preferred Stock
- ------------
(1) Incorporated by reference to the same Exhibit Number in the Company's
Registration Statement on Form S-4 (filed under the name NEW LFC, INC.)
(Registration No. 33-88824).
(2) Incorporated by reference to the same Exhibit Number in the Company's 1997
Annual Report on Form 10-K filed
March 31, 1998.
(3) Incorporated by reference to the same Exhibit number in the Company's
Registration Statement on Form S-3 (Registration No. 333-63349).
(4) Incorporated by reference to the same Exhibit Number in the Company's 1994
Annual Report on Form 10-K filed
March 30, 1995.
(5) Incorporated by reference to the same Exhibit Number in the Company's
Registration Statement on Form S-3 (Registration Number 333-29315).
(6) Incorporated by reference to the same Exhibit Number in the Company's 1996
Annual Report on Form 10-K filed
March 28, 1997.
(7) Incorporated by reference to the same Exhibit Number in the Company's 1995
Annual Report on Form 10-K filed
March 29, 1996.
(8) Incorporated by reference to Prospectus contained in the Company's
Registration Statement on Form S-3 (Registration Number 333-20067).
29