10-Q 1 sept10q.txt AMERICO LIFE, INC. 9/30/01 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 September 30, 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 X 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 November 12, 2001 ------------- ----------------------- Common Stock $1.00 Par Value 10,000 AMERICO LIFE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In thousands - unaudited) September 30, December 31, 2001 2000 ---- ---- Assets Investments: Fixed maturities: Held to maturity, at amortized cost (market: $738,623 and $737,496) $ 711,413 $ 742,618 Available for sale, at market (amortized cost: $1,349,419 and $1,050,421) 1,380,798 1,032,937 Equity securities, at market (cost: $61,722 and $57,920) 80,889 104,771 Investment in equity subsidiaries 13,683 14,259 Mortgage loans on real estate, net 251,877 268,902 Investment real estate, net 29,045 30,398 Policy loans 191,548 194,651 Other invested assets 44,746 32,345 ----------- ----------- Total investments 2,703,999 2,420,881 Cash and cash equivalents 60,480 110,260 Accrued investment income 35,054 31,730 Amounts receivable from reinsurers 1,087,246 1,139,673 Other receivables 113,993 101,148 Deferred policy acquisition costs 232,195 228,679 Cost of business acquired 141,529 166,458 Other assets 24,095 42,325 ----------- ----------- Total assets $ 4,398,591 $ 4,241,154 =========== =========== Liabilities and stockholder's equity Policyholder funds $ 2,672,402 $ 2,623,747 Reserves for future policy benefits 829,700 819,943 Unearned policy revenues 49,658 54,599 Policy and contract claims 32,411 32,612 Other policyholder funds 126,724 113,496 Notes payable 102,564 102,297 Amounts payable to reinsurers 27,354 39,056 Deferred income taxes 58,142 56,897 Due to brokers 173,968 66,899 Amounts due to affiliates 3,216 2,744 Other liabilities 62,918 74,202 ----------- ----------- Total liabilities 4,139,057 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 34,042 35,635 Retained earnings 221,737 215,272 ----------- ----------- Total stockholder's equity 259,534 254,662 ----------- ----------- Commitments and contingencies Total liabilities and stockholder's equity $ 4,398,591 $ 4,241,154 =========== ===========

See notes to consolidated financial statements AMERICO LIFE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (In thousands, except per share amounts - unaudited) Three Months Nine Months Ended September 30, Ended September 30, 2001 2000 2001 2000 ---- ---- ---- ---- Income Premiums and policy revenues $ 50,611 $ 56,881 $ 154,968 $ 168,858 Net investment income 47,505 54,507 147,065 167,627 Net realized investment losses (721) (1,095) (4,936) (5,961) Other income 1,762 2,872 5,982 7,979 ----------- ----------- ----------- ----------- Total income 99,157 113,165 303,079 338,503 Benefits and Expenses Policyholder benefits: Death benefits 30,913 23,896 88,356 81,649 Interest credited on policyholder funds 27,992 29,366 83,637 85,837 Other policyholder benefits 1,087 13,660 9,074 43,947 Change in reserves for future policy benefits 919 (4,241) (4,058) (13,972) Commissions 951 862 6,106 4,651 Amortization expense 13,739 18,888 42,272 52,733 Interest expense 2,411 2,425 7,216 7,671 Other operating expenses 19,191 22,489 59,823 60,390 ----------- ----------- ----------- ----------- Total benefits and expenses 97,203 107,345 292,426 322,906 ----------- ----------- ----------- ----------- Income before provision for income taxes and cumulative effect of a change in accounting principle 1,954 5,820 10,653 15,597 Provision for income taxes 621 1,818 3,520 5,194 ----------- ----------- ----------- ----------- Income before cumulative effect of a change in accounting principle 1,333 4,002 7,133 10,403 Cumulative effect of a change in accounting principle - - 832 - ----------- ----------- ----------- ----------- Net income $ 1,333 $ 4,002 $ 7,965 $ 10,403 =========== =========== =========== =========== Net income per common share: Income before cumulative effect of a change in accounting principle $ 133.30 $ 400.20 $ 713.30 $ 1,040.30 Cumulative effect of a change in accounting principle - - 83.20 - ---------- ----------- ----------- ----------- Net income $ 133.30 $ 400.20 $ 796.50 $ 1,040.30 ========== ========== ========== ==========

See notes to consolidated financial statements AMERICO LIFE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands - unaudited) Nine Months Ended September 30, ------------------- 2001 2000 ---- ---- Cash flows from operating activities Net income $ 7,965 $ 10,403 --------- -------- Adjustments to reconcile net income to net cash provided by (used by) operating activities: Depreciation and amortization 45,901 55,507 Deferred policy acquisition costs (48,337) (60,357) Undistributed earnings of equity subsidiaries 532 (338) Amortization of unrealized gains (3,072) (4,728) (Increase) decrease in assets: Accrued investment income (3,324) (958) Amounts receivable from reinsurers 52,536 89,184 Other receivables 1,015 274 Other assets, net of amortization expense (3,674) (1,845) Increase (decrease) in liabilities: Policyholder funds (66,785) (55,939) Reserves for future policy benefits and unearned policy revenues 15,684 (4,174) Policy and contract claims (201) (1,788) Other policyholder funds 13,228 (6,417) Amounts payable to reinsurers (11,702) (15,729) Provision for deferred income taxes 1,614 6,167 Federal income taxes payable (73) 76 Affiliate balances 472 (7,674) Other liabilities (9,178) 5,654 Change in trading securities 398 - Net realized losses on investments sold 4,936 5,961 Amortization on bonds and mortgage loans 1,261 2,029 Other changes (1,551) (2,816) --------- --------- Total adjustments (10,320) 2,089 --------- --------- Net cash provided by (used by) operating activities (2,355) 12,492 --------- ---------

(Continued) See notes to consolidated financial statements AMERICO LIFE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Continued) (In thousands - unaudited) Nine Months Ended September 30, ------------------- 2001 2000 ---- ---- Cash flows from investing activities Purchases of fixed maturity investments $(1,306,392) $ (980,855) Purchases of equity securities (35,879) (181,203) Purchases of other investments (16,815) (6,982) Mortgage loans originated (15,789) (25,688) Maturities or redemptions of fixed maturity investments 29,624 94,103 Sales of fixed maturity available for sale investments 1,022,849 786,929 Sales of fixed maturity held to maturity investments - 54,576 Sales of equity securities 30,185 149,624 Sales of other investments 1,878 1,526 Transfer of cash on disposition of block of insurance business - (100,001) Repayments from mortgage loans 15,995 11,162 Change in due to brokers 89,838 18,215 Change in policy loans 3,103 2,900 ----------- ----------- Net cash used by investing activities (181,403) (175,694) ----------- ----------- Cash flows from financing activities Receipts credited to policyholder funds 308,094 354,436 Return of policyholder account funds (172,254) (265,718) Repayments of notes payable (362) (8,500) Dividends paid (1,500) (1,500) ----------- ----------- Net cash provided by financing activities 133,978 78,718 ----------- ----------- Net decrease in cash and cash equivalents (49,780) (84,484) ----------- ----------- Cash and cash equivalents at beginning of period 110,260 122,788 ----------- ----------- Cash and cash equivalents at end of period $ 60,480 $ 38,304 =========== ===========

See notes to consolidated financial statements AMERICO LIFE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Nine Months Ended September 30, 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 September 30, 2001 and for the three and nine months ended September 30, 2001 and 2000 reflect all adjustments, consisting of normal recurring adjustments, that 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, except for the accounting change associated with the adoption of SFAS No. 133 described below. The results of operations for the three and nine months ended September 30, 2001 and 2000 are not necessarily indicative of the expected results for the full year 2001, nor the results experienced for the year 2000. Recently issued accounting pronouncements In July 2001, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards (SFAS) No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets." SFAS No. 141 supersedes previously issued guidance on accounting for business combinations. SFAS No. 141 eliminates the pooling-of-interests method of accounting for business combinations initiated after July 1, 2001 and also changes the criteria used to recognize intangible assets apart from goodwill. SFAS No. 142 supersedes the current accounting guidance for goodwill and intangible assets. Under SFAS No. 142, goodwill and indefinite-lived intangible assets will no longer be amortized but will be reviewed for impairment. Intangible assets with finite lives will continue to be amortized over their useful lives. The amortization provisions of SFAS No. 142 apply to goodwill and intangible assets acquired after June 30, 2001. For all other goodwill and intangible assets, the amortization provisions are effective upon adoption of SFAS No. 142. The impairment provisions of SFAS No. 142 are effective upon adoption of the statement. Adoption of SFAS No. 142 is required as of the beginning of fiscal years beginning after December 15, 2001. The Company does not expect that adoption of SFAS No. 142 will have a significant effect on its consolidated financial position or results of operations. The FASB has also recently issued SFAS No. 143 "Accounting for Asset Retirement Obligations" and SFAS No. 144 "Accounting for Impairment or Disposal of Long-Lived Assets." SFAS No. 143 requires that obligations associated with the retirement of a tangible long-lived asset be recorded as a liability when those obligations are incurred. The liability is initially measured at fair value and the cost is capitalized by increasing the carrying amount of the related long-lived asset. SFAS No. 143 will be effective for financial statements for fiscal years beginning after June 15, 2002. The Company does not own long-lived assets of the type that will generally create retirement obligations. Therefore, adoption of SFAS No. 143 should have no effect on the Company's financial statements. SFAS No. 144 provides guidance on the accounting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and amends Accounting Principles Board Opinion No. 30 (APB No. 30) "Reporting Results of Operations - Reporting the Effects of Disposal of a Segment of a Business." SFAS No. 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally, entities are no longer required to include under "discontinued operations" operating losses that have not yet occurred. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, its provisions are to be applied prospectively. Use of Estimates 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 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 discretion 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 September 30, 2001, the total liability for EIA products, included in policyholder funds on the consolidated balance sheet, was $322,644. The change in fair value of the derivative assets and derivative liabilities for the three months ended September 30, 2001 were decreases of $8,471 and $9,777, respectively. The change in fair value of the derivative assets and derivative liabilities for the nine months ended September 30, 2001 were decreases of $21,208 and $24,183, respectively. Reclassifications Previously reported amounts for the prior year have in some instances been reclassified to conform to the current year presentation. 2. DEFERRED POLICY ACQUISITION COSTS AND COST OF BUSINESS ACQUIRED During the three months ended June 30, 2001, the Company revised its estimates of the future gross profits on certain of its universal life-type and annuity products. The revisions primarily consisted of changes in estimated policy revenues and benefits paid to policyholder account balances. Certain of these revisions resulted from the anticipated impact of settling litigation in which the Company is the defendant. As a result of these changes in estimates, the Company recorded retrospective adjustments during the three months ended June 30, 2001 which decreased the deferred policy acquisition cost asset by $3,630 and increased the cost of business acquired asset by $8,130 as of June 30, 2001. The net effect of these adjustments was to decrease amortization expense for the three months ended June 30, 2001 by $4,500. 3. GOODWILL The Company recorded goodwill in connection with the 1998 acquisition of the 50% of College Insurance Group, Inc. which it did not previously own and the related acquisition of the stock or assets of certain marketing companies owned by an individual. These acquired entities are involved in the sale of tax-qualified life and annuity products to employees of public school districts. One of the acquired entities also provided administration for retirement and cafeteria plans to school districts and other clients. During the three months ended June 30, 2001, several events occurred which resulted in a determination by the Company that a portion of the goodwill related to these entities had become impaired. Among these events is the anticipated settlement of litigation in which the Company is a defendant. Based upon the Company's best estimate of the future results of operations of these entities, the goodwill asset was reduced by $4,696 as of June 30, 2001. The reduction in the goodwill asset is reflected in amortization expense in the consolidated statement of income. 4. STOCKHOLDER'S EQUITY Comprehensive income (loss) for the three and nine months ended September 30, 2001 and 2000 is as follows: Three Months Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 ---- ---- ---- ---- Net income $ 1,333 $ 4,002 $ 7,965 $ 10,403 Other comprehensive income (loss) 5,432 18,836 (1,593) 18,831 --------- --------- --------- --------- Comprehensive income $ 6,765 $ 22,838 $ 6,372 $ 29,234 ========= ========= ========= =========

Following are the components of net unrealized investment gains (losses) which comprise accumulated other comprehensive income Nine Months September 30, December 31, Ended 2001 2000 September 30, 2001 ---- ---- ------------------ Investment securities: Fixed maturities available for sale $ 29,065 $ (19,347) $ 48,412 Fixed maturities reclassified from available for sale to held to maturity 23,640 26,712 (3,072) Equity securities 19,167 46,752 (27,585) ---------- ---------- ---------- 71,872 54,117 17,755 Effect on other balance sheet accounts (20,714) (509) (20,205) Deferred income taxes (17,116) (17,973) 857 ---------- ---------- ---------- Net unrealized investment gains (losses) $ 34,042 $ 35,635 $ (1,593) ========== ========== ==========

During both the nine months ended September 30, 2001 and 2000, the Company paid dividends to Financial Holding Corporation ("FHC") totaling $1,500. 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. 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 a notice of a proposed class action settlement has been mailed to class members. Proposed class action settlements also have been executed and preliminarily approved by the courts in two other purported class action lawsuits (Notzon v. The College Life Insurance Company of America, et al., Webb County District Court, Texas, and Alexander v. Fremont General Corporation, Fremont Life Insurance Co. and Great Southern Life Insurance Co., Orange County Superior Court, California). Each of these proposed settlements will require final court approval. Great Southern and two other subsidiaries, Americo Financial Life and Annuity Insurance Company (formerly The College Life Insurance Company of America) and Ohio State Life Insurance Company, also are defendants in other 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 subsidiaries named in these pending actions have denied any allegations of wrongdoing and are defending the actions vigorously. Although there can be assurances because of the indeterminate amounts involved in these proceedings, at the present time the Company does not anticipate that any ultimate liability arising from such proceedings, after consideration of amounts provided for in the consolidated financial statements, will have a material adverse affect on the financial condition of the Company. 7. SEGMENT INFORMATION The table below presents information about the reported revenues and income before provision for income taxes 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, since the Company does not produce such information internally. Asset Accumulation Non-Life Life Insurance Product Insurance Reconciling Consolidated Operations Operations Investments Items Totals ---------- --------- ----------- ----- ------ Nine months ended September 30, ------------------------------------------------------------------------------------------------- 2001 2000 2001 2000 2001 2000 2001 2000 2001 2000 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Revenues $273,274 $278,021 $47,338 $ 42,547 $ 2,916 $3,123 $(20,449) $ 14,812 $303,079 $338,503 Income (loss) before income taxes 38,973 39,498 (1,663) 5,188 1,684 1,379 (28,341) (30,468) 10,653 15,597

Three months ended September 30, ------------------------------------------------------------------------------------------------- 2001 2000 2001 2000 2001 2000 2001 2000 2001 2000 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Revenues $ 89,976 $ 91,185 $16,238 $ 14,887 $ 946 $ 887 $(8,003) $ 6,206 $99,157 $113,165 Income (loss) before income taxes 5,541 16,090 973 835 554 616 (5,114) (11,721) 1,954 5,820

Significant reconciling items shown in the above table which are not all,ocated to specific segments include interest expense and a portion of (i) net investment income, (ii) operating expenses and (iii) net realized investment gains (losses). 8. 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. 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" 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 Company's 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. This discussion should be read in conjunction with the accompanying consolidated financial statements and the notes thereto. 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 discretion 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 for the three months and nine months ended September 30, 2001 below. 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 ------------------------ ----------------------- ----------------------- Nine months ended September 30, -------------------------------------------------------------------------------- 2001 2000 2001 2000 2001 2000 ---- ---- ---- ---- ---- ---- Revenues $273.3 $278.0 $47.3 $42.5 $2.9 $3.1 Income before income taxes 39.0 39.5 (1.7) 5.2 1.7 1.4

Three months ended September 30, -------------------------------------------------------------------------------- 2001 2000 2001 2000 2001 2000 ---- ---- ---- ---- ---- ---- Revenues $90.0 $91.2 $16.2 $14.9 $0.9 $0.9 Income before income taxes 5.5 16.1 1.0 0.8 0.6 0.6

Life insurance operations. Income before income taxes for the nine months ended September 30, 2001 was $39.0 million compared to $39.5 million for the nine months ended September 30, 2000. The decrease in profits is primarily due to a $6.3 million increase in death benefits in 2001 and a $4.6 million decrease in surrender charge income in 2001, partially offset by lower amortization expense in 2001. The decrease in surrender charge income was the result of lower levels of surrenders during the nine months ended September 30, 2001 in the Company's closed blocks of business. The decrease in amortization expense resulted from revisions to estimated gross profits from universal life type policies and from the lower levels of surrenders in 2001. Income before income taxes for the three months ended September 30, 2001 was $5.5 million compared to $16.1 million for the three months ended September 30, 2000. The decrease in profits is primarily the result of a $6.9 million increase in death benefits in 2001. Asset accumulation products operations. Income before income taxes for the nine months ended September 30, 2001 was a loss of $1.7 million compared to income of $5.2 million for the nine months ended September 30, 2000. This $6.9 million decrease in income was due primarily to an increase in amortization expense in 2001 on universal life-type and annuity policies as a result of revisions to estimated gross profits. Income before income taxes for the three months ended September 30, 2001 was $1.0 million compared to income of $0.8 million for the three months ended September 30, 2000. Non-life insurance investments. Income before income taxes for the nine months ended September 30, 2001 and 2000 was $1.7 million and $1.4 million, respectively. Income before income taxes for the three months ended September 30, 2001 and 2000 was $0.6 million and $0.6 million, respectively. No significant changes have taken place with respect to the Company's non-life investments since 2000. Reconciling items. Significant reconciling items of the segment revenues and income before income taxes 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). Income before income taxes related to reconciling items for the nine months ended September 30, 2001 increased $2.1 million from over the same period in 2000 primarily due to (i) a $2.0 million gain from the hedging activities related to the Company's equity-indexed annuities, (ii) a decrease in other operating expenses not allocated to the other segments and (iii) a $1.0 million decrease in net realized investment losses. These increased profits were offset by a $4.6 million write down of goodwill associated with certain marketing subsidiaries of the Company. Income before income taxes related to reconciling items for the three months ended September 30, 2001 increased $6.6 million from the same period in 2000 primarily due to (i) a decrease in other operating expenses not allocated to the other segments (ii) a $1.3 million gain from hedging activities related to the Company's equity-indexed annuities and (iii) a $1.0 million decrease in net realized investment losses. NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2000. Income before income taxes and cumulative effect of a change in accounting principle for the nine months ended September 30, 2001 was $10.7 million compared to $15.6 million for the nine months ended September 30, 2000. Excluding the effects of net realized investment gains and losses, income before income taxes decreased $6.0 million for this same period from $21.6 million to $15.6 million. The primary reasons for the decrease in profits in 2001 compared to 2000 were (i) an increase in death benefits and (ii) a decrease in surrender charge income on closed blocks of universal life and annuity business. These decreases in profits were partially offset by (i) a net gain from the changes in market values of owned options versus issued options and (ii) a net decrease in amortization expense. Premiums and policy revenues. Premiums and policy revenues totaled $155.0 million for the nine months ended September 30, 2001 compared to $168.9 million for the nine months ended September 30, 2000. Premiums from traditional life insurance business decreased $5.8 million for the nine months ended September 30, 2001 compared to the nine months ended September 30, 2000. An $11.2 million decrease in premiums from the Company's inforce traditional life insurance business was partially offset by a $5.4 million increase in preneed premiums. Policy revenues from interest-sensitive life and annuity products decreased $7.3 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 $147.1 million for the nine months ended September 30, 2001 compared to $167.6 million for the nine months ended September 30, 2000. Net investment income for the nine months ended September 30, 2001 and 2000 was comprised of the following (in millions): 2001 2000 ---- ---- Fixed maturities $ 107.0 $ 100.7 Mortgage loans 15.5 14.2 Policy loans 7.4 8.3 Reinsurance funds held by reinsurer 36.6 41.6 Derivatives (21.2) - Other, net of investment expenses 1.8 2.8 ---------- ---------- Net investment income $ 147.1 $ 167.6 ========== ==========

The reduction in net investment income in 2001 was primarily due to a $21.2 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. Excluding the decrease in the fair value of derivative assets, investment income for the nine months ended September 30, 2001 increased $0.7 million compared to the same period in 2000. Net realized investment losses. Net realized investment losses totaled $4.9 million for the nine months ended September 30, 2001 compared to net realized investment losses of $6.0 million for the nine months ended September 30, 2000. During the nine months ended September 30, 2001 and 2000, the Company recorded realized gains (losses) on common stock of $1.3 million and $(5.5) million, respectively. The Company also recorded realized losses on fixed maturity investments of $5.9 million and $0.5 million, respectively, during the nine months ended September 30, 2001 and 2000. Other income. Other income totaled $6.0 million for the nine months ended September 30, 2001 compared to $8.0 million for the nine months ended September 30, 2000. The primary reason for this decrease is a reduction in servicing revenue on blocks of business which have been permanently coinsured to other insurance companies. Policyholder benefits. Policyholder benefits totaled $177.0 million for the nine months ended September 30, 2001 compared to $197.5 million for the nine months ended September 30, 2000. As discussed above, included in policyholder benefits in 2001 is a $24.2 million reduction related to the decline in value of the issued options embedded in the Company's equity-indexed annuity liabilities. Excluding the decrease in the value of the issued options, policyholder benefits increased $3.7 million for the nine months September 30, 2001 compared to the same period in 2000. Death benefits during the nine months ended September 30, 2001 were $6.7 million higher than for the nine months ended September 30, 2000. The remaining decrease in policyholder benefits from 2000 to 2001 was attributable to a decrease in other policyholder benefits associated with the decrease in traditional premiums over this same period. Amortization expense. Amortization expense totaled $42.3 million for the nine months ended September 30, 2001 compared to $52.7 million for the nine months ended September 30, 2000. The decrease resulted from (i) a revision of estimated future gross profits on blocks of universal life and annuity business and (ii) lower amortization expense in closed blocks of universal life and annuity business, partially offset by (iii) a write down of goodwill. During the three months ended June 30, 2001, the Company revised its estimates of the future gross profits on certain of its universal life-type and annuity products. The revisions primarily consisted of changes in estimated policy revenues and benefits paid to policyholder account balances. Certain of these revisions resulted from the anticipated impact of settling litigation in which the Company is the defendant. As a result of these changes in estimates, the Company recorded retrospective adjustments during the three months ended June 30, 2001 which decreased the deferred policy acquisition cost asset by $3.6 million and increased the cost of business acquired asset by $8.1 million as of June 30, 2001. The net effect of these adjustments was to decrease amortization expense for the three months ended June 30, 2001 by $4.5 million. The Company recorded goodwill in connection with the 1998 acquisition of the 50% of College Insurance Group, Inc. which it did not previously own and the related acquisition of the stock or assets of certain marketing companies owned by an individual. These acquired entities are involved in the sale of tax-qualified life and annuity products to employees of public school districts. One of the acquired entities also provided administration for retirement and cafeteria plans to school districts and other clients. During the three months ended June 30, 2001, several events occurred which resulted in a determination by the Company that a portion of the goodwill related to these entities had become impaired. Among these events is the anticipated settlement of litigation in which the Company is a defendant. Based upon the Company's best estimate of the future results of operations of these entities, the goodwill asset was reduced by $4.7 million as of June 30, 2001. This write down increased amortization expense for the nine months ended September 30, 2001. The Company's closed blocks of universal life and annuity business experienced significantly lower levels of withdrawals during the nine months ended September 30, 2001 than for the same period in 2000. The decrease of $8.4 million in amortization expense related to these blocks was partially offset by the lower surrender charge revenue during 2001 as discussed above. Other operating expenses. Other operating expenses totaled $59.8 million for the nine months ended September 30, 2001 compared to $60.4 million for the nine months ended September 30, 2000. Included in other operating expenses for the nine months ended September 30, 2001 was a $1.0 million increase in the allowance for receivables from agents which the Company has estimated are uncollectible and $0.8 million related to the costs of mailing notices to policyholders to comply with recently-issued federal regulations. Other operating expenses for the nine months ended September 30, 2000 included $3.1 million of costs associated with the settlement of a lawsuit. Other operating expenses for the nine months ended September 30, 2000 were reduced by $0.7 million of nonrecurring expense reimbursements received by the Company under servicing agreements. THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2000 Income before income taxes for the three months ended September 30, 2001 was $2.0 million compared to $5.8 million for the three months ended September 30, 2000. Excluding the effects of net realized investment gains and losses, income before income taxes decreased $4.2 million for this same period from $6.9 million to $2.7 million. The primary reasons for the decrease in profit from 2000 to 2001 were (i) higher death benefits during the three months ended September 30, 2001 and (ii) a decrease in surrender charge income on closed blocks of universal life and annuity business. These decreases in profits were partially offset by (i) a decrease in other operating expenses and (ii) a net decrease in amortization expense. Premiums and policy revenues. Premiums and policy revenues totaled $50.6 million for the three months ended September 30, 2001 compared to $56.9 million for the three months ended September 30, 2000. Premiums from traditional life insurance business decreased $2.1 million for the three months ended September 30, 2001 compared to the three months ended September 30, 2000. A $4.3 million decrease in premiums from the Company's in force traditional life insurance business was partially offset by a $2.2 million increase in preneed premiums. Policy revenues from interest-sensitive life and annuity products decreased $3.2 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 $47.5 million for the three months ended September 30, 2001 compared to $54.5 million for the three months ended September 30, 2000. Net investment income for the three months ended September 30, 2001 and 2000 was comprised of the following (in millions): 2001 2000 ---- ---- Fixed maturities $ 36.3 $ 32.7 Mortgage loans 5.1 6.2 Policy loans 2.9 3.0 Reinsurance funds held by reinsurer 12.3 12.6 Derivatives (8.5) - Other, net of investment expenses (0.6) - --------- -------- Net investment income $ 47.5 $ 54.5 ========= ========

The reduction in net investment income in 2001 was primarily due to an $8.5 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. Excluding the decrease in the fair value of derivative assets, investment income for the three months ended September 30, 2001 increased $1.5 million compared to the same period in 2000. Net realized investment losses. Net realized investment losses totaled $0.7 million for the three months ended September 30, 2001 compared to net realized investment losses of $1.1 million for the three months ended September 30, 2000. During the three months ended September 30, 2001 and 2000, the Company realized gains (losses) on fixed maturity investments of $(3.0) million and $0.1 million, respectively. The Company also recorded realized gains (losses) on common stocks of $2.2 million and $(1.2) million, respectively, during the three months ended September 30, 2001 and 2000. Policyholder benefits. Policyholder benefits totaled $60.9 million for the three months ended September 30, 2001 compared to $62.7 million for the three months ended September 30, 2000. As discussed above, included in policyholder benefits for the three months ended September 30, 2001 is a $9.8 million reduction related to the decline in value of the issued options embedded in the Company's equity-indexed annuity liabilities. Excluding the decrease in the value of the issued options, policyholder benefits increased $8.0 million for the three months ended September 30, 2001 compared to the same period in 2000. Death benefits during the three months ended September 30, 2001 were $7.0 million higher than for the three months ended September 30, 2000. The remaining decrease in policyholder benefits from 2000 to 2001 was attributable to a decrease in other policyholder benefits associated with the decrease in traditional premiums over this same period. Amortization expense. Amortization expense totaled $13.7 million for the three months ended September 30, 2001 compared to $18.9 million for the three months ended September 30, 2000. The Company's closed blocks of universal life and annuity business experienced significantly lower levels of withdrawals during the three months ended September 30, 2001 than for the same period in 2000. The decrease of $5.2 million in amortization expense was partially offset by the lower surrender charge revenue during 2001 as discussed above. Other operating expenses. Other operating expenses totaled $19.2 million for the three months ended September 30, 2001 compared to $22.5 million for the three months ended September 30, 2000. Other operating expenses for the three months ended September 30, 2000 included $3.1 million of costs associated with the settlement of a lawsuit. FINANCIAL CONDITION AND LIQUIDITY The changes occurring in the Company's consolidated balance sheet from December 31, 2000 to September 30, 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 September 30, 2001 remained consistent with the quality at December 31, 2000. Non-investment grade securities were approximately 3% of the Company's total fixed maturity investments at September 30, 2001. The Company has not made any significant changes to its investment philosophy during 2001. The Company's net unrealized investment gains decreased $1.6 million from December 31, 2000 to September 30, 2001. The components of the change during the nine months ended September 30, 2001 were (in millions): Investment securities: Fixed maturities available for sale $ 48.4 Fixed maturities reclassified from available for sale to held to maturity (3.1) Equity securities (27.6) --------- 17.7 Effect on insurance assets and liabilities (20.2) Deferred income tax effect 0.9 --------- Net unrealized investment losses $ (1.6) =========

Recently issued accounting pronouncements In July 2001, the Financial Accounting Standards Board issued SFAS No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets." SFAS No. 141 supersedes previously issued guidance on accounting for business combinations. SFAS No. 141 eliminates the pooling-of-interests method of accounting for business combinations initiated after July 1, 2001 and also changes the criteria used to recognize intangible assets apart from goodwill. SFAS No. 142 supersedes the current accounting guidance for goodwill and intangible assets. Under SFAS No. 142, goodwill and indefinite-lived intangible assets will no longer be amortized but will be reviewed for impairment. Intangible assets with finite lives will continue to be amortized over their useful lives. The amortization provisions of SFAS No. 142 apply to goodwill and intangible assets acquired after June 30, 2001. For all other goodwill and intangible assets, the amortization provisions are effective upon adoption of SFAS No. 142. The impairment provisions of SFAS No. 142 are effective upon adoption of the statement. Adoption of SFAS No. 142 is required as of the beginning of fiscal years beginning after December 15, 2001. The Company does not expect that adoption of SFAS No. 142 will have a significant effect on its consolidated financial position or results of operations. The FASB has also recently issued SFAS No. 143 "Accounting for Asset Retirement Obligations" and SFAS No. 144 "Accounting for Impairment or Disposal of Long-Lived Assets." SFAS No. 143 requires that obligations associated with the retirement of a tangible long-lived asset be recorded as a liability when those obligations are incurred. The liability is initially measured at fair value and the cost is capitalized by increasing the carrying amount of the related long-lived asset. SFAS No. 143 will be effective for financial statements for fiscal years beginning after June 15, 2002. The Company does not own long-lived assets of the type that will generally create retirement obligations. Therefore, adoption of SFAS No. 143 should have no effect on the Company's financial statements. SFAS No. 144 provides guidance on the accounting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and amends Accounting Principles Board Opinion No. 30 (APB No. 30) Reporting Results of Operations - Reporting the Effects of Disposal of a Segment of a Business." SFAS No. 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally, entities are no longer required to include under "discontinued operations' operating losses that have not yet occurred. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, its provisions are to be applied prospectively. 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 nine months ended September 30, 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 1. LEGAL PROCEEDINGS Reference is made to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 and the Quarterly Reports on Form 10-Q for the periods ended March 31, 2001 and June 30, 2001 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 certified class action in a multi-district litigation proceeding (In Re Great Southern Life Insurance Company Sales Practices Litigation, U.S. District Court for the Northern District of Texas). A notice of a proposed class action settlement in this case has been mailed to class members. A final fairness hearing is scheduled for January 14, 2002, in connection with the proposed settlement, which requires court approval. Proposed class action settlements also have been executed and preliminarily approved by the courts in two other purported class action lawsuits reported in the Form 10-K (Notzon v. The College Life Insurance Company of America, et. al., Webb County District Court, Texas, and Alexander v. Fremont General Corporation, Fremont Life Insurance Co. and Great Southern Life Insurance Company, Orange County Superior Court, California). These settlements also require final court approval. Final fairness hearings are scheduled for January 25, 2002 in Notzon and February 20, 2002 in Alexander. 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). (b) Reports on Form 8-K: There were no reports on Form 8-K filed for the three months ended September 30, 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: November 13, 2001

AMERICO LIFE INC 10-Q