10-Q 1 march10q.txt AMERICO LIFE, INC. MARCH 31, 2001 FORM 10-Q FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 2001 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission file number: 33-64820 AMERICO LIFE, INC. (exact name of registrant as specified in its charter) MISSOURI (State of other jurisdiction of incorporation or organization) 43-1627599 (I.R.S. Employer Identification No.) 1055 BROADWAY KANSAS CITY, MISSOURI 64105 (Address of principal executive offices) (816) 391-2000 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class and Title of Shares Outstanding Capital Stock as of May 11, 2001 ------------- ------------------ Common Stock $1.00 Par Value 10,000 AMERICO LIFE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Dollars in thousands - unaudited) March 31, December 31, 2001 2000 ---- ---- Assets Investments: Fixed maturities: Held to maturity, at amortized cost (market: $745,323 and $737,496) $ 739,425 $ 742,618 Available for sale, at market (amortized cost: $1,249,859 and $1,050,421) 1,250,674 1,032,937 Equity securities, at market (cost: $55,135 and $57,920) 86,446 104,771 Investment in equity subsidiaries 14,198 14,259 Mortgage loans on real estate, net 251,065 268,902 Investment real estate, net 30,455 30,398 Policy loans 192,540 194,651 Other invested assets 42,175 32,345 ------------- ------------- Total investments 2,606,978 2,420,881 Cash and cash equivalents 33,105 110,260 Accrued investment income 32,462 31,730 Amounts receivable from reinsurers 1,124,805 1,139,673 Other receivables 104,769 101,148 Deferred policy acquisition costs 226,209 228,679 Cost of business acquired 156,341 166,458 Amounts due from affiliates 2,514 - Other assets 29,827 42,325 ------------- ------------- Total assets $ 4,317,010 $ 4,241,154 ============= ============= Liabilities and stockholder's equity Policyholder funds $ 2,618,321 $ 2,623,747 Reserves for future policy benefits 834,621 819,943 Unearned policy revenues 52,080 54,599 Policy and contract claims 39,134 32,612 Other policyholder funds 115,135 113,496 Notes payable 102,627 102,297 Amounts payable to reinsurers 34,491 39,056 Deferred income taxes 56,023 56,897 Due to broker 138,293 66,899 Amounts due to affiliates - 2,744 Other liabilities 72,461 74,202 ------------- ------------- Total liabilities 4,063,186 3,986,492 ------------- ------------- Stockholder's equity: Common stock ($1 par value; 30,000 shares authorized, 10,000 shares issued and outstanding) 10 10 Additional paid-in capital 3,745 3,745 Accumulated other comprehensive income 32,626 35,635 Retained earnings 217,443 215,272 ------------- ------------- Total stockholder's equity 253,824 254,662 ------------- ------------- Commitments and contingencies Total liabilities and stockholder's equity $ 4,317,010 $ 4,241,154 ============= =============

See notes to consolidated financial statements AMERICO LIFE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (Dollars in thousands, except per share amounts - unaudited) Three Months Ended March 31, 2001 2000 ---- ---- Income Premiums and policy revenues $ 53,402 $ 59,745 Net investment income 43,291 59,831 Net realized investment losses (3,334) (5,253) Other income 2,120 1,617 ---------- ---------- Total income 95,479 115,940 ---------- ---------- Benefits and expenses Policyholder benefits: Death benefits 28,651 32,669 Interest credited on policyholder funds 27,785 29,073 Other policyholder benefits (927) 15,082 Change in reserves for future policy benefits (2,895) (4,459) Commissions 2,252 2,896 Amortization expense 14,704 17,652 Interest expense 2,402 2,705 Other operating expenses 20,749 18,203 ---------- ---------- Total benefits and expenses 92,721 113,821 ---------- ---------- Income before provision for income taxes and cumulative effect of a change in accounting principle 2,758 2,119 Provision for income taxes 918 656 ---------- ---------- Income before cumulative effect of a change in accounting principle 1,840 1,463 Cumulative effect of a change in accounting principle 832 - ---------- ---------- Net income $ 2,672 $ 1,463 ========== ========== Earnings per share: Income before cumulative effect of a change in accounting principle $ 184.00 $ 146.30 Cumulative effect of a change in accounting principle 83.20 - ---------- --------- Net income $ 267.20 $ 146.30 ========= =========

See notes to consolidated financial statements AMERICO LIFE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in thousands - unaudited) Three Months Ended March 31, 2001 2000 ---- ---- Cash flows from operating activities Net income $ 2,672 $ 1,463 ---------- ---------- Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization 15,844 18,605 Deferred policy acquisition costs (15,692) (21,141) Undistributed earnings of equity subsidiaries 117 (255) Amortization of unrealized gains (654) 774 (Increase) decrease in assets: Accrued investment income (732) 1,319 Amounts receivable from reinsurers 14,803 27,835 Other receivables 2,323 (1,054) Other assets, net of amortization expense (2,783) 1,006 Increase (decrease) in liabilities: Policyholder account balances (25,169) (18,184) Reserves for future policy benefits and unearned policy revenues 16,312 (1,476) Policy and contract claims 6,521 1,032 Other policyholder funds 1,640 1,999 Amounts payable to reinsurers (4,565) (23,214) Provision for deferred income taxes 285 (3,151) Federal income tax payable (135) 4 Change in affiliated balances (5,259) (263) Other liabilities 620 6,723 Change in trading securities 820 - Net realized losses on investments sold 3,334 5,253 Amortization on bonds and mortgage loans 585 332 Other changes (1,797) (1,363) ------------ ----------- Total adjustments 6,418 (5,219) ----------- ----------- Net cash provided (used) by operating activities 9,090 (3,756) ----------- -----------

See notes to consolidated financial statements (Continued) AMERICO LIFE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Continued) (In thousands - unaudited) Three Months Ended March 31, 2001 2000 ---- ---- Cash flows from investing activities Purchases of fixed maturity investments $ (275,094) $ (254,041) Purchases of equity securities (21,817) (59,456) Purchases of other investments (13,029) (86) Mortgage loans originated (4,306) (4,383) Maturities or redemptions of fixed maturity investments 2,759 12,392 Sales of fixed maturity available for sale investments 91,922 189,425 Sales of equity securities 20,620 56,364 Sales of other investments 249 1,118 Repayments from mortgage loans 5,300 4,714 Change in due to broker 65,397 (30,268) Change in policy loans 2,111 1,698 ----------- ----------- Net cash used by investing activities (125,888) (82,523) ----------- ----------- Cash flows from financing activities Receipts credited to policyholder account balances 103,168 131,196 Return of policyholder account balances (63,025) (87,019) Dividends paid (500) (500) ----------- ----------- Net cash provided by financing activities 39,643 43,677 ----------- ----------- Net decrease in cash and cash equivalents (77,155) (42,602) ----------- ----------- Cash and cash equivalents at beginning of period 110,260 122,788 ----------- ----------- Cash and cash equivalents at end of period $ 33,105 $ 80,186 =========== ===========

See notes to consolidated financial statements AMERICO LIFE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Three Months Ended March 31, 2001 and 2000 (In thousands, except per share amounts - unaudited) The following notes should be read in conjunction with the notes to the consolidated financial statements contained in the Americo Life, Inc. ("the Company") December 31, 2000 Form 10-K as filed with the Securities and Exchange Commission. 1. ACCOUNTING POLICIES The unaudited consolidated financial statements as of March 31, 2001 and for the three months ended March 31, 2001 and 2000 reflect all adjustments, consisting of normal recurring adjustments, which are necessary for a fair statement of financial position and results of operations on a basis consistent with accounting principles described fully in Note 1 of the Company's December 31, 2000 consolidated financial statements. The results of operations for the three months ended March 31, 2001 and 2000 are not necessarily indicative of the expected results for the full year 2001, nor the results experienced for the year 2000. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Adoption of SFAS No. 133 The Company adopted Statement of Financial Accounting Standards ("SFAS') No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment of FASB Statement No. 133", on January 1, 2001. In accordance with the transition provisions of SFAS No. 133, the Company recorded a net-of-tax cumulative-effect-type gain of $832 in earnings to record all of its derivatives on the balance sheet at fair value. Accounting for Derivatives The Company's equity-indexed annuity (EIA) products credit interest to the policyholder's account balance based on a percentage (the "participation rate") of the change in an external index over a two year period (the "index period"). At the end of each index period, a new index period begins using the then-current account balance and external index value. The Company has the discretionary ability to change the participation rate at the beginning of each index period, subject to contractually guaranteed minimums. The Company accounts for the option issued to the policyholder for the current index period and for all forward-starting periods as embedded derivatives as defined by SFAS No. 133. The Company records the change in the value of the embedded derivatives in current earnings as a component of other policyholder benefits. The host contract accretes interest to a maturity value over a projected term. The interest accretion of the host contract is included in interest credited on policyholder funds on the consolidated statement of income. The Company manages its exposure to changes in the fair value of EIA embedded derivatives by purchasing exchange-traded and over-the-counter indexed call options and futures contracts on the same external index. Neither these assets nor the related EIA embedded derivatives are eligible for hedge accounting treatment under SFAS No. 133. The Company recognizes the change in fair values of these assets as a component of net investment income. At March 31, 2001, the total liability for EIA products, included in policyholder funds on the consolidated balance sheet, was $275,162. The change in fair value of the derivative assets and derivative liabilities for the three months ended March 31, 2001 were decreases of $11,844 and $12,278, respectively. Reclassifications Previously reported amounts for the prior year have in some instances been reclassified to conform to the current year presentation. 2. STOCKHOLDER'S EQUITY Comprehensive income (loss) for the three months ended March 31, 2001 and 2000 is as follows: 2001 2000 ---- ---- Net income $ 2,672 $ 1,463 Other comprehensive income (loss) (3,009) 2,097 -------- -------- Comprehensive income (loss) $ (337) $ 3,560 ======== ========

Following are the components of net unrealized investment gains which comprise accumulated other comprehensive income: Three Months March 31, December 31, Ended 2001 2000 March 31, 2001 ---- ---- -------------- Investment securities: Fixed maturities available for sale $ (1,498) $ (19,347) $ 17,849 Fixed maturities reclassified from available for sale to held to maturity 26,058 26,712 (654) Equity securities 32,675 46,752 (14,077) ----------- ----------- ----------- 57,235 54,117 3,118 Effect on other balance sheet accounts (8,256) (509) (7,747) Deferred income taxes (16,353) (17,973) 1,620 ----------- ----------- ----------- Net unrealized investment gains $ 32,626 $ 35,635 $ (3,009) =========== =========== ===========

During both the three months ended March 31, 2001 and 2000, the Company paid dividends to Financial Holding Corporation (FHC) totaling $500. 3. COMMITMENTS AND CONTINGENCIES Great Southern Life Insurance Company ("Great Southern") is a defendant in a certified class action (In re Great Southern Life Insurance Company Sales Practice Litigation, U.S. District Court for the Northern District of Texas) in which it is pursuing settlement with plaintiffs. Any such settlement will require court approval. Great Southern and two other subsidiaries, Americo Financial Life and Annuity Insurance Company (formerly The College Life Insurance Company of America) ("Americo Financial") and Ohio State Life Insurance Company, also are defendants in lawsuits filed as purported class actions asserting claims related to sales practices and premiums charged in connection with certain life insurance products and sales practices in connection with annuity products. The Company and certain subsidiaries, including Americo Financial, also are defendants in a purported class action asserting claims in connection with the marketing and administration of deferred annuity and life insurance products sold to schoolteachers and others. The Company and its subsidiaries named in the pending actions referred to above deny any allegations of wrongdoing and are defending the actions vigorously. Plaintiffs in these actions generally are seeking indeterminate amounts, including punitive and treble damages, and such amounts could be large. Although there can be no assurances, at the present time the Company does not anticipate that the ultimate liability arising from such pending litigation, after consideration of amounts provided for in the consolidated financial statements, will have a material adverse effect on the financial condition of the Company. 4. SEGMENT INFORMATION The table below presents information about the reported revenues and income before provision for income taxes and cumulative effect of a change in accounting principle for the Company's reportable segments as defined in the Company's December 31, 2000 Form 10-K. Asset information by segment is not reported, because the Company does not produce such information internally. Life Insurance Asset Non-Life Reconciling Consolidated Operations Accumulation Insurance Items Totals ---------- Products Investments ----- ------ Operations ----------- ---------- Three months ended March 31, ------------------------------------------------------------------------------------------------- 2001 2000 2001 2000 2001 2000 2001 2000 2001 2000 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Revenues $92,093 $99,783 $15,082 $13,507 $1,048 $1,533 $(12,744) $1,117 $95,479 $115,940 Income (loss) before income 12,799 10,578 648 1,612 381 835 (11,070) (10,906) 2,758 2,119 taxes

Significant reconciling items shown in the above table which are not allocated to specific segments include interest expense and a portion of (i) net investment income, (ii) operating expenses and (iii) net realized investment gains (losses). 5. STATUTORY SURPLUS Effective January 1, 2001, the state of Texas, in which all the Company's insurance subsidiaries are domiciled, adopted the Codification of Statutory Accounting Principles for life insurers. The implementation of these standardized accounting principles, which increased the statutory surplus of the Company's life insurance subsidiaries by approximately $11.0 million, did not adversely impact the ability of the subsidiaries to make payments on the surplus debentures or to pay dividends to the Company. 6. RELATED PARTIES During the three months ended March 31, 2001, the Company purchased $10.0 million of notes issued by PFS Holding Company, a wholly-owned subsidiary of FHC. These notes bear interest at 9.35% and mature in March 2006. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following discussion analyzes significant items affecting the results of operations and the financial condition of the Company. This discussion should be read in conjunction with the accompanying consolidated financial statements and the notes thereto. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company cautions readers regarding certain forward-looking statements contained in this report and in any other statements made by, or on behalf of, the Company, whether or not in future filings with the Securities and Exchange Commission (the "SEC"). Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results, or other developments. Statements using verbs such as "plan", "anticipate", "believe", "expect" or words of similar import generally involve forward-looking statements. Without limiting the foregoing, forward-looking statements include statements which represent the Company's beliefs concerning future levels of sales and surrenders of the Company's products, investment spreads and yields, or the earnings and profitability of the Company's activities. Forward-looking statements are necessarily based on estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company's control and many of which are subject to change. Whether or not actual results differ materially from forward-looking statements may depend on numerous foreseeable and unforeseeable developments. Some may be national in scope, such as general economic conditions, changes in tax law and changes in interest rates. Some may be related to the insurance industry generally, such as pricing competition, regulatory developments and industry consolidation. Others may relate to the Company specifically, such as credit, volatility and other risks associated with the investment portfolio. Investors are also directed to consider other risks and uncertainties discussed in documents filed by the Company with the SEC. The Company disclaims any obligation to update forward-looking information. Adoption of SFAS No. 133 The Company adopted Statement of Financial Accounting Standards ("SFAS') No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment of FASB Statement No. 133", on January 1, 2001. In accordance with the transition provisions of SFAS No. 133, the Company recorded a net-of-tax cumulative-effect-type gain of $0.8 million in earnings to record all of its derivatives on the balance sheet at fair value. Accounting for Derivatives The Company's equity-indexed annuity (EIA) products credit interest to the policyholder's account balance based on a percentage (the "participation rate") of the change in an external index over a two year period (the "index period"). At the end of each index period, a new index period begins using the then-current account balance and external index value. The Company has the discretionary ability to change the participation rate at the beginning of each index period, subject to contractually-guaranteed minimums. The Company accounts for the option issued to the policyholder for the current index period and for forward-starting periods as embedded derivatives as defined by SFAS No. 133. The Company records the changes in the values of the embedded derivatives in current earnings as a component of policyholder benefits. The host contract accretes interest to a maturity value over a projected term. The interest accretion of the host contract is included in interest credited on policyholder funds on the consolidated statement of income. The Company manages its exposure to changes in the fair value of EIA embedded derivatives by purchasing exchange-traded and over-the-counter indexed call options and futures contracts on the same external index. Neither these assets nor the related EIA embedded derivatives are eligible for hedge accounting treatment under SFAS No. 133. The Company recognizes the change in fair values of these assets as a component of net investment income. The adoption of SFAS No. 133 during the first quarter of 2001 has a significant impact on the comparability of income statement components versus 2000. The impact on individual income statement components is addressed in the discussion of the results of the three months ended March 31, 2001 below. In May 2000, the Company entered into an agreement to permanently reinsure a block of payroll-deduction life insurance business to an unaffiliated company on an indemnity coinsurance basis using an effective date of January 1, 2000. The policy liabilities remain as direct liabilities of the Company in the accompanying consolidated financial statements. As of the effective date, liabilities associated with these policies totaled $138.5 million. Under the reinsurance agreement, the Company transferred cash assets totaling $100.0 million and miscellaneous assets totaling $17.1 million to the unaffiliated reinsurer. In addition, the Company removed deferred policy acquisition costs totaling $20.3 million from its consolidated financial statements in conjunction with this disposition. In order to fund the cash transfer, the Company sold fixed maturity held to maturity investments with an amortized cost of $54.6 million and realized net investment losses of $0.3 million on those sales. The Company will continue to service these policies for a fee paid by the reinsurer for a period of time defined in the related servicing agreement. This transaction had no significant effect on the Company's consolidated financial position or results of operations. The results of operations from the payroll-deduction business were included in the Company's results of operations for the three months ended March 31, 2000. The following table summarizes the effects of this business on components of the Company's income statement during the three months ended March 31, 2000 (in millions): Premiums and policy revenues $ 3.6 Net investment income 2.2 Policyholder benefits 4.0 Amortization expense 0.9 SEGMENT RESULTS Revenues and income before provision for income taxes for the Company's operating segments, as defined by Statement of Financial Accounting Standard No. 131, "Financial Reporting for Segments of a Business Enterprise", are summarized as follows (in millions): Life Insurance Asset Accumulation Non-Life Operations Products Operations Insurance Investments ------------------------ ----------------------- ----------------------- March 31, March 31, March 31, 2001 2000 2001 2000 2001 2000 ---- ---- ---- ---- ---- ---- Revenues $92.1 $99.8 $15.1 $13.5 $1.0 $1.5 Income before income taxes 12.8 10.6 0.6 1.6 0.4 0.8

Life insurance operations. Income before income taxes for the three months ended March 31, 2001 was $12.8 million compared to $10.6 million for the three months ended March 31, 2000. Excluding the effect of the payroll-deduction business, this increase in profits is primarily due to (i) a $1.7 million decrease in death benefits, net of reserves for future policy benefits released on traditional life insurance death benefits, and (ii) increased profits from the Company's preneed business. This increase in profits is offset by the normal runoff of profits on the Company's in force life insurance business. Asset accumulation products operations. Income before income taxes for the three months ended March 31, 2001 was $0.6 million compared to $1.6 million for the same period in 2000. This decrease in profits is due to (i) a $0.3 million increase in death benefits and (ii) a $0.8 million increase in amortization expense. Non-life insurance investments. Income before income taxes was $0.4 million for the three month period ended March 31, 2001 compared to $0.8 million for the same period in 2000. Reconciling items. The difference between the segment revenues and income before income taxes shown above and the consolidated financial statements result from items not allocated to specific segments. The significant reconciling items are interest expense and a portion of (i) net investment income, (ii) operating expenses and (iii) net realized investment gains (losses). The reconciling items for the three months ended March 31, 2001 were not significantly different from the reconciling items for the three months ended March 31, 2000. THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000 Income before income taxes and cumulative effect of a change in accounting principle for the three months ended March 31, 2001 was $2.8 million compared to $2.1 million for the three months ended March 31, 2000. The primary reasons for the increase in profits in 2001 compared to 2000 were (i) lower net realized investment losses in 2001, (ii) a decrease in death benefits and (iii) an increase in profits from the Company's preneed business. These increases in profits were partially offset by (i) lower investment income from the amortization of unrealized gains, (ii) an increase in the allowance for uncollectible balances due from agents, and (iii) increased amortization expense in the asset accumulation business. Premiums and policy revenues. Premiums and policy revenues totaled $53.4 million for the three months ended March 31, 2001 compared to $59.7 million for the three months ended March 31, 2000. Excluding the effect of the payroll-deduction business, premiums and policy revenues decreased $2.7 million over this same period. Premiums from traditional life insurance business decreased $1.4 million for the three months ended March 31, 2001 compared to the three months ended March 31, 2000. A decrease in premiums from the Company's inforce traditional life insurance business was partially offset by a $1.5 million increase in preneed premiums. Policy revenues from interest-sensitive life and annuity products decreased $1.3 million from 2000 to 2001. This decrease was primarily due to lower surrender charge revenue in 2001 as a result of lower surrenders in closed blocks of annuities and the asset accumulation business. Net investment income. Net investment income totaled $43.3 million for the three months ended March 31, 2001 compared to $59.8 million for the three months ended March 31, 2000. Part of this reduction in net investment income in 2001 was due to an $11.8 million decrease in fair value of call options and futures contracts owned by the Company. The decrease in the fair value of these call options and futures contracts was offset by the decline in value of the options embedded in the Company's equity-indexed annuity liabilities. Net investment income also decreased from 2001 to 2000 due to (i) a $2.2 million decrease related to the transfer of invested assets which supported the payroll deduction business and (ii) a $1.3 million decrease in the recognition of bond investment income generated by the amortization of unrealized gains on held to maturity bonds previously transferred from an available for sale classification. Net realized investment losses. Net realized investment losses totaled $3.3 million for the three months ended March 31, 2001 compared to net realized investment losses of $5.3 million for the three months ended March 31, 2000. During the three months ended March 31, 2001 and 2000, the Company realized losses on common stocks of $2.0 million and $3.8 million, respectively. The Company also recorded losses on fixed maturity investments of $1.2 million and $1.8 million, respectively, during the three months ended March 31, 2001 and 2000. Offsetting the realized losses in 2000 were $0.4 million of gains generated by real estate ventures. Included in net realized investment losses are gains and losses on short positions held on common stock owned by the Company. For the three months ended March 31, 2001 and 2000, the Company realized short position gains (losses) of $1.1 million and $(5.2) million, respectively. There was a like amount of unrealized investment gain or loss on the related long positions which offset the short position gain or loss. Other income. Other income totaled $2.1 million for the three months ended March 31, 2001 compared to $1.6 million for the three months ended March 31, 2001. The primary reason for this increase is $0.8 million service fee charged to the reinsurer of the payroll-deduction business for administrative services provided by the Company for the three months ended March 31, 2001. The costs of providing these services to the reinsurer are included in other operating expenses. Policyholder benefits. Policyholder benefits totaled $52.6 million for the three months ended March 31, 2001 compared to $72.4 million for the three months ended March 31, 2000. Excluding the effects of the payroll-deduction business, policyholder benefits decreased $15.8 million. As discussed above, included in policyholder benefits in 2001 is a $12.2 million reduction related to the decline in value of the issued options embedded in the Company's equity-indexed annuity liabilities. The remaining decrease in policyholder benefits was attributable to (i) a $1.6 million decrease in death benefits and (ii) a $1.6 million decrease in other policyholder benefits. The decrease in other policyholder benefits from 2000 to 2001 is primarily associated with the decrease in traditional premiums over this same period. Amortization expense. Amortization expense totaled $14.7 million for the three months ended March 31, 2001 compared to $17.7 million for the three months ended March 31, 2000. Excluding the effect of the payroll-deduction business, amortization expense decreased $2.1 million during this period. The decrease occurred primarily in closed blocks of universal life and annuity business. A lower level of surrenders during the three months ended March 31, 2001 was the primary reason for the lower amortization expense. This lower amortization expense was partially offset by the lower surrender charge revenue during 2001 as discussed above. Offsetting the decrease in the closed blocks of business was a $0.8 million increase in amortization expense in the asset accumulation business. During 2000, the Company revised its estimate of future gross profits on the asset accumulation business, which had the effect of increasing amortization expense during the three months ended March 31, 2001 as compared to the same period in 2000. Other operating expenses. Other operating expenses totaled $20.7 million for the three months ended March 31, 2001 compared to $18.2 million for the three months ended March 31, 2000. Included in other operating expenses for the three months ended March 31, 2001 was a $1.0 million increase in the allowance for receivables from agents which the Company has estimated are uncollectible. Other operating expenses for the three months ended March 31, 2000 were lower due to $0.7 million of nonrecurring expense reimbursements received by the Company under servicing agreements. FINANCIAL CONDITION AND LIQUIDITY The changes occurring in the Company's consolidated balance sheet from December 31, 2000 to March 31, 2001 primarily reflect the normal operations of the Company's life insurance subsidiaries. The quality of the Company's investment in fixed maturity investments at March 31, 2001 remained consistent with the quality at December 31, 2000. Non-investment grade securities totaled less than 4.0% of the Company's total fixed maturity investments at March 31, 2001. The Company has not made any significant changes to its investment philosophy during 2001. The Company's net unrealized investment gains decreased $3.0 million during the first three months of 2001. The components of the change during the three months ended March 31, 2001 were as follows (in millions): Investment securities: Fixed maturities available for sale $ 17.9 Fixed maturities reclassified from available for sale to held to maturity (0.7) Equity securities (14.1) ------- 3.1 Effect on other balance sheet accounts (7.7) Deferred income taxes 1.6 ------- Net unrealized investment losses $ (3.0) =======

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The quantitative and qualitative disclosures about market risk are summarized in Management's Discussion and Analysis of Financial Condition and Results of Operations as of December 31, 2000, included in the Company's Form 10-K for the year ended December 31, 2000. During the three months ended March 31, 2001, changes in the interest rate environment did not adversely affect the Company's economic position. These rate changes do not materially affect disclosures included in the Company's December 31, 2000 Form 10-K regarding the Company's exposure to market risk. Additional information about the Company's equity-indexed annuity products and how the associated market risks are managed is provided in Management's Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-Q. PART II - OTHER INFORMATION ITEM 2. LEGAL PROCEEDINGS Reference is made to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 regarding certain legal proceedings to which the Company and/or certain of its subsidiaries are parties. Included among those matters reported in the Form 10-K was a class action settlement in July 2000 in Thibodeau, et al. v. Great American Life Underwriters, et al., District Court, Dallas County, Texas. As previously reported, a co-defendant, Norman T. Faircloth, filed a cross-claim against several of the other defendants shortly before the settlement was approved by the court. On April 13, 2001, the court granted summary judgment on said cross-claim in favor of the Company, Great Southern and other affiliated defendants. In addition, as previously reported, some members of the class appealed the trial court's approval of the class action settlement. That appeal remains pending. Also included among the matters reported in the Form 10-K were four purported class action lawsuits against Great Southern that were consolidated in May 1998 for multi-district litigation pretrial proceedings in the U.S. District Court for the Northern District of Texas (In Re Great Southern Life Insurance Company Sales Practice Litigation). These lawsuits allege deceptive sales practices in the marketing of Great Southern's whole life and universal life insurance policies and seek unspecified compensatory, punitive and/or treble damages. On March 14, 2000, the court filed an order certifying a class of all current and former owners of excess interest whole life and/or universal life policies issued from 1982 through 1997. Management is pursuing settlement of this case with plaintiffs. However, any such settlement will require court approval. On March 13, 2001, a purported class action lawsuit (Ernesto Cortes v. Ohio State Life Insurance Company, 11th Judicial Circuit Court, Dade County, Florida) was filed against the Company's subsidiary, Ohio State Life Insurance Company ("OSL"). The suit alleges that OSL breached its obligations under a term life insurance policy purchased by plaintiff by failing to observe the guaranteed features of the policy. The suit seeks damages in an unspecified amount, prejudgment interest and attorney's fees on behalf of plaintiff and a purported national class of others similarly situated. OSL denies the allegations and intends to defend the action vigorously. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 3.1 Restated Articles of Incorporation, as amended, of the Registrant (incorporated by reference from Exhibit 3.1 to Registrant's Form S-4 [File No. 33-64820] filed June 22, 1993). 3.2 Bylaws, as amended, of the Registrant (incorporated by reference from Exhibit 3.2 to Registrant's Form S-4 [File No. 33-64820] filed June 22, 1993). 2.1(i)* Amendment No. 5 to the Automatic Coinsurance Reinsurance Agreement dated as of April 16, 1997 between Employers Reassurance Corporation and The Ohio State Life Insurance Company. 2.1(j)* Amendment No. 1 to the Escrow Agreement (Ohio State/Investors Guaranty Business) entered into as of May 2, 1997 between Employers Reassurance Corporation and Great Southern Life Insurance Company. 2.1(k)* Amendment No. 3 to the Investment Management Agreement (Ohio State/Investors Guaranty Business) dated as of April 16, 1997 between Registrant and Employers Reassurance Corporation. 2.1(l)* Stipulation of Termination of the Modified Coinsurance Agreement (Ohio State Business) dated as of April 16, 1997 between Great Southern Life Insurance Company and Employers Reassurance Corporation. 2.1(m)* Stipulation of Termination of the Modified Coinsurance Agreement (Investors Guaranty Business) dated as of April 16, 1997 between Great Southern Life Insurance Company and Employers Reassurance Company. 10.15(c)(2)* Amendment No. 1 and Stipulation of Termination of the Custodian Agreement dated as of January 14, 2000 between Employers Reassurance Corporation, Great Southern Life Insurance Company and State Street Bank and Trust Company. 10.15(e)(2)* Amendment No. 3 to the Investment Management Agreement between the Registrant and Employers Reassurance Corporation dated as of October 2, 1995. 10.16(h)(1)* Amendment No. 2 to the Automatic Coinsurance Universal Life Reinsurance Agreement dated as of December 31, 1995 between Employers Reassurance Corporation and Great Southern Life Insurance Company, as successor in interest to Fremont Life Insurance Company. 10.15(h)(2)* Stipulation of Termination of the Retrocession Agreement between Great Southern Life Insurance Company and Employers Reassurance Corporation, effective January 1, 1995. 10.16(j)(1)* Amendment No. 2 to the Automatic Coinsurance Annuity Reinsurance Agreement dated as of January 1, 1996 between Employers Reassurance Corporation and Great Southern Life Insurance Company, as successor in interest to Fremont Life Insurance Company. 10.16(1)(1)* Amendment No. 1 to the Custodian Agreement (Fremont Business) dated as of January 14, 2000 between Employers Reassurance Corporation, Great Southern Life Insurance Company and State Street Bank and Trust Company. 10.16(m)(1)* Stipulation of Termination of the Modified Coinsurance Annuity Retrocession Agreement dated as of January 1, 1996 between Great Southern Life Insurance Company and Employers Reassurance Corporation. 10.16(n)(1)* Stipulation of Termination of the Modified Coinsurance Universal Life and Annuity Retrocession Agreement dated as of December 1, 1995 between Great Southern Life Insurance Company and Employers Reassurance Corporation. 10.17* Excess of Loss Reinsurance Agreement, dated October 1, 2000, between Manulife Reinsurance Limited of Hamilton, Bermuda and Americo Financial Life and Annuity Insurance Company. *Filed herewith. ------------------------------- --------------------------------------------------------------------------- (b) Reports on Form 8-K: There were no reports on Form 8-K filed for the three months ended March 31, 2001. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICO LIFE, INC. BY: /s/ Mark K. Fallon --------------------- Name: Mark K. Fallon Title: Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) Date: May 14, 2001

AMERICO LIFE INC 10-Q