10-Q 1 june10_q.txt AMERICO LIFE, INC. JUNE 30, 2002 FORM 10-Q FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 2002 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 August 13, 2002 ------------- --------------------- Common Stock $1.00 Par Value 10,000 AMERICO LIFE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In thousands - unaudited) June 30, December 31, 2002 2001 ---- ---- Assets Investments: Fixed maturities: Held to maturity, at amortized cost (market: $671,018 and $712,314) $ 641,836 $ 694,889 Available for sale, at market (amortized cost: $1,396,923 and $1,308,773) 1,433,167 1,321,040 Trading, at market (amortized cost: $53,565 and $57,747) 53,464 57,760 Equity securities, at market (cost: $58,966 and $48,598) 77,435 74,531 Investment in equity subsidiaries 7,372 7,518 Mortgage loans on real estate, net 280,969 269,910 Investment real estate, net 28,139 28,196 Policy loans 186,320 189,683 Other invested assets 33,472 41,602 ------------ ------------ Total investments 2,742,174 2,685,129 Cash and cash equivalents 53,769 59,714 Accrued investment income 33,341 34,050 Amounts receivable from reinsurers 1,118,362 1,125,586 Other receivables 157,995 55,353 Deferred policy acquisition costs 235,948 242,170 Cost of business acquired 136,616 149,679 Amounts due from affiliates 6,794 7,980 Other assets 20,070 19,375 ------------ ------------ Total assets $ 4,505,069 $ 4,379,036 ============ ============ Liabilities and stockholder's equity Policyholder account balances $ 2,784,995 $ 2,729,865 Reserves for future policy benefits 811,432 811,355 Unearned policy revenues 43,921 50,907 Policy and contract claims 32,212 38,068 Other policyholder funds 164,102 151,946 Notes payable 101,300 101,547 Amounts payable to reinsurers 34,903 39,489 Deferred income taxes 80,272 65,825 Due to brokers 137,152 70,588 Other liabilities 55,308 67,138 ------------ ------------ Total liabilities 4,245,597 4,126,728 ------------ ------------ Stockholder's equity: Common stock ($1 par value; 30,000 shares authorized, 10,000 shares issued and outstanding) 10 10 Preferred stock, net of investment in parent company preferred stock - - Additional paid-in capital 3,745 3,745 Accumulated other comprehensive income 32,439 30,757 Retained earnings 223,278 217,796 ------------ ------------ Total stockholder's equity 259,472 252,308 ------------ ------------ Commitments and contingencies Total liabilities and stockholder's equity $ 4,505,069 $ 4,379,036 ============ ============

AMERICO LIFE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (In thousands, except per share amounts - unaudited) Three Months Six Months Ended June 30, Ended June 30, 2002 2001 2002 2001 ---- ---- ---- ---- Income Premiums and policy revenues $ 52,318 $ 50,954 $ 106,265 $ 104,357 Net investment income 46,958 56,269 102,159 99,560 Net realized investment losses (5,644) (881) (5,475) (4,215) Other income 2,450 2,100 4,499 4,220 ------------- ------------- ------------- ------------- Total income 96,082 108,442 207,448 203,922 Benefits and Expenses Policyholder benefits: Death benefits 28,067 28,792 60,629 57,443 Interest credited on policyholder funds 29,268 27,860 57,550 55,645 Other policyholder benefits 909 8,914 9,460 7,986 Change in reserves for future policy benefits (3,255) (2,081) (4,858) (4,977) Commissions 1,558 2,902 2,752 5,154 Amortization expense 15,393 9,133 30,558 23,837 Interest expense 2,362 2,403 4,687 4,805 Other operating expenses 18,511 19,883 36,549 40,634 Restructuring expenses - 4,696 - 4,696 ------------- ------------- ------------- ------------- Total benefits and expenses 92,813 102,502 197,327 195,223 ------------- ------------- ------------- ------------- Income before provision for income taxes and cumulative effect of a change in accounting principle 3,269 5,940 10,121 8,699 Provision for income taxes 1,155 1,981 3,456 2,899 ------------- ------------- ------------- ------------- Income before cumulative effect of a change in accounting principle 2,114 3,959 6,665 5,800 Cumulative effect of a change in accounting principle - - - 832 ------------- ------------- ------------- ------------- Net income $ 2,114 $ 3,959 $ 6,665 $ 6,632 ============= ============= ============= ============= Net income per common share: Income before cumulative effect of a change in accounting principle $ 211.40 $ 395.90 $ 666.50 $ 580.00 Cumulative effect of a change in accounting principle - - - 83.20 ------------ ------------- ------------ ------------ Net income $ 211.40 $ 395.90 $ 666.50 $ 663.20 ============ ============ ============ ============

AMERICO LIFE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands - unaudited) Six Months Ended June 30, 2002 2001 ---- ---- Cash flows from operating activities Net income $ 6,665 $ 6,632 ----------- ----------- Adjustments to reconcile net income to net cash used by operating activities: Depreciation and amortization 32,574 31,186 Deferred policy acquisition costs (29,848) (32,401) Undistributed earnings of equity subsidiaries (583) 769 Amortization of unrealized gains (1,883) (1,425) (Increase) decrease in assets: Accrued investment income 709 (2,193) Amounts receivable from reinsurers 7,509 47,046 Other receivables (4,346) 3,356 Other assets, net of amortization expense (1,153) (3,297) Increase (decrease) in liabilities: Policyholder account balances (41,561) (38,588) Reserves for future policy benefits and unearned policy revenues 345 9,132 Policy and contract claims (5,857) 4,612 Other policyholder funds 12,156 6,512 Amounts payable to reinsurers (4,586) (18,264) Provision for deferred income taxes 13,515 629 Federal income taxes payable 20 (122) Change in affiliated balances 1,186 (5,053) Other liabilities (11,850) (16,929) Change in trading securities 5,302 (5,357) Net realized losses on investments sold 5,475 4,215 Amortization on bonds and mortgage loans 379 1,119 Other changes (50) 2,852 ------------ ------------ Total adjustments (22,547) (12,201) ------------ ------------ Net cash used by operating activities (15,882) (5,569) ------------ ------------ (Continued)

AMERICO LIFE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Continued) (In thousands - unaudited) Six Months Ended June 30, 2002 2001 ---- ---- Cash flows from investing activities Purchases of fixed maturity investments $ (590,452) $ (936,968) Purchases of equity securities (15,113) (34,629) Purchases of other investments (3,006) (17,891) Mortgage loans originated (22,358) (9,029) Maturities or redemptions of fixed maturity investments 93,623 6,508 Sales of fixed maturity available for sale investments 442,114 631,231 Sales of fixed maturity held to maturity investments 16,856 - Sales of equity securities 2,219 22,978 Sales of other investments 9,686 1,520 Repayments from mortgage loans 11,501 10,206 Change in due to brokers (33,609) 171,553 Change in policy loans 3,363 2,454 ------------ ------------ Net cash used by investing activities (85,176) (152,067) ------------ ------------ Cash flows from financing activities Receipts credited to policyholder account balances 207,563 213,202 Return of policyholder account balances (110,871) (120,513) Repayments of notes payable (396) (346) Dividends paid (1,183) (1,000) ------------ ------------ Net cash provided by financing activities 95,113 91,343 ------------ ------------ Net decrease in cash and cash equivalents (5,945) (66,293) ------------ ------------ Cash and cash equivalents at beginning of period 59,714 110,260 ------------ ------------ Cash and cash equivalents at end of period $ 53,769 $ 43,967 ============ ============

AMERICO LIFE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Six Months Ended June 30, 2002 and 2001 (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, 2001 Form 10-K as filed with the Securities and Exchange Commission. 1. ACCOUNTING POLICIES The unaudited consolidated financial statements as of June 30, 2002 and for the three and six months ended June 30, 2002 and 2001 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, 2001 consolidated financial statements. The results of operations for the three and six months ended June 30, 2002 and 2001 are not necessarily indicative of the expected results for the full year 2002, nor the results experienced for the year 2001. 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 these estimates. Reclassifications Previously reported amounts for the prior year have in some instances been reclassified to conform to the current year presentation. Newly adopted accounting pronouncements In 2001, the Financial Accounting Standards Board ("FASB") issued Statement 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. The Company's adoption of SFAS No. 142 on January 1, 2002 did not have a significant effect on its consolidated financial position or results of operations. During 2001, the FASB issued SFAS No. SFAS No. 144 "Accounting for Impairment or Disposal of Long-Lived Assets" which 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. The Company's adoption of SFAS No. 144 on January 1, 2002 did not have a significant effect on its consolidated financial position or results of operations. During 2001, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position No. 01-06 ("SOP 01-06") "Accounting by Certain Entities (Including Entities with Trade Receivables) That Lend to or Finance the Activities of Others." The guidance in SOP 01-06 relating to financing and lending activities is explicitly applicable to insurance companies. SOP 01-06 reconciles and conforms the accounting and financial reporting guidance presently contained in other accounting guidance. The Company's accounting practices for its lending activities are already consistent with the guidance contained in SOP 01-06. Therefore, adoption of SOP 01-06 on January 1, 2002 did not have a significant effect on the Company's financial statements. Recently issued accounting pronouncements During 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement Obligations" which 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 will not affect the Company's consolidated financial statements. During 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No. 4,44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds prior Statements that required the classification of gains or losses from the extinguishment of debt as extraordinary. As a result, gains or losses from extinguishments of debt will only be classified as extraordinary if they meet existing accounting criteria. SFAS No. 145 also rescinds SFAS No. 44 "Accounting for Intangible Assets of Motor Carriers" and amends SFAS No.13 "Accounting for Leases" to require sale-leaseback accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 also makes various technical corrections to existing pronouncements. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. The Company's consolidated financial statements will not be affected by the adoption of SFAS No. 145. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement provides guidance on the recognition and measurement of liabilities associated with disposal activities. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. Consequently, the Company's consolidated financial statements will not be affected by the adoption of SFAS No. 146. 2. INVESTMENTS Certain circumstances during the six months ended June 30, 2002 caused the Company to change its intent to hold specific securities to maturity. Due to evidence of significant deterioration in several issuers' creditworthiness, $16,856 of held-to-maturity securities were sold. The sales resulted in realized gains of $406. Net realized investment losses for the six months ended June 30, 2002 includes $5,879 of write-downs on fixed maturity securities to reflect an other than temporary impairment. 3. STOCKHOLDER'S EQUITY Comprehensive income (loss) for the three and six months ended June 30, 2002 and 2001 is as follows: Three Months Ended June 30, Six Months Ended June 30, 2002 2001 2002 2001 ---- ---- ---- ---- Net income $ 2,114 $ 3,959 $ 6,665 $ 6,632 Other comprehensive income (loss) 8,393 (4,016) 1,682 (7,025) --------- --------- --------- --------- Comprehensive income (loss) $ 10,507 $ (57) $ 8,347 $ (393) ========= ========= ========= =========

Following are the components of net unrealized investment gains which comprise accumulated other comprehensive income: Six Months Ended June 30, December 31, June 30, 2002 2001 2002 ---- ---- ---- Investment securities: Fixed maturities available for sale $ 33,930 $ 9,966 $ 23,964 Fixed maturities reclassified from available for sale to held to maturity 20,707 22,590 (1,883) Equity securities 18,475 25,939 (7,464) ----------- ----------- ----------- 73,112 58,495 14,617 Effect on other balance sheet accounts (24,347) (12,391) (11,956) Deferred income taxes (16,326) (15,347) (979) ----------- ----------- ----------- Net unrealized investment gains $ 32,439 $ 30,757 $ 1,682 =========== =========== ===========

During the six months ended June 30, 2002 and 2001, the Company paid cash dividends on its common stock to Financial Holding Corporation ("FHC") totaling $1,000 and $1,000, respectively. During the six months ended June 30, 2002, the Company paid dividends on its preferred stock of $3,613, consisting of the issuance of 27,500 shares of preferred stock with a stated value of $100 per share and the payment of $863 of cash. During the six months ended June 30, 2002, the Company received dividends on FHC preferred stock of $3,430, consisting of 27,500 shares of preferred stock with a stated value of $100 per share and $680 of cash. The Company has accounted for its investment in the FHC preferred stock as an offset to its own preferred stock in stockholder's equity. Dividends on the Company's preferred stock and the dividends receivable on the FHC preferred stock are both recorded directly to retained earnings. 4. COMMITMENTS AND CONTINGENCIES On January 15, 2002, the United States District Court for the Northern District of Texas approved a class-wide settlement and dismissed with prejudice the claims of the class members in a certified class action in which Great Southern Life Insurance Company ("Great Southern") had been a defendant. The class consists of certain present and former policyholders who purchased interest-sensitive whole life and universal life insurance policies issued or acquired by Great Southern between January 1, 1982 and December 31, 1999. The orders approving the settlement are now final, as no appeals were filed. The Company has accounted for the terms of the settlement in its consolidated financial statements. Under the terms of the settlement, potential class members were given an opportunity to exclude themselves from the class by sending a written exclusion notice to the settlement administrator. Of those present and former policyholders who filed such notices, approximately 1,300 have notified Great Southern that they have retained an attorney to represent them. In early February 2002, Great Southern filed actions in twelve states against substantially all of these policyholders seeking, among other things, a declaration of nonliability. Pursuant to Great Southern's request, the Judicial Panel ("Panel") on Multidistrict Litigation issued an order on March 27, 2002 conditionally transferring the actions filed outside of Texas to the United States District Court for the Northern District of Texas for consolidated pretrial proceedings. Several objections to the conditional transfer order have been filed which have the effect of staying the transfer order until the Panel rules on the objections. In addition, several other policyholders who sent in exclusion notices have filed separate actions against Great Southern in several states asserting claims related to sales practices and seeking actual and punitive damages. Great Southern is unable to estimate the costs it might incur as a result of the exclusion notices or if the outcomes of the above-referenced actions are adverse to it. On January 25, 2002, the 111th District Court of Webb County, Texas approved a class-wide settlement and dismissed with prejudice the claims of the class members in a certified class action in which Americo Financial Life and Annuity Insurance Company ("Americo Financial"), as well as certain affiliates of the Company, had been defendants. The class consists of certain present and former owners of certain annuities and interest-sensitive life insurance policies issued or acquired by Americo Financial between January 1, 1993 and October 1, 2001. The orders approving the settlement are now final, as no appeals were filed. The Company has accounted for the anticipated costs of the settlement in its consolidated financial statements. The Company and its subsidiaries are also named as defendants in other pending actions, including but not limited to purported class actions filed against Great Southern, Americo Financial and Ohio State Life Insurance Company asserting claims related to sales practices and premiums charged in connection with certain life insurance products and sales practices in connection with annuity products. Plaintiffs in these actions generally are seeking indeterminate amounts, including punitive and treble damages. 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. 5. 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, 2001 Form 10-K. Asset information by segment is not reported, because the Company does not produce such information internally. Life Insurance Asset Accumulation Reconciling Consolidated Operations Operations Items Totals ---------- ---------- ----- ------ Six months ended June 30, --------------------------------------------------------------------------------------------------------------------- 2002 2001 2002 2001 2002 2001 2002 2001 ---- ---- ---- ---- ---- ---- ---- ---- Revenues $183,405 $183,298 $36,493 $31,100 $(12,450) $(10,476) $207,448 $203,922 Income (loss) before income taxes 22,043 33,432 4,688 (2,636) (16,610) (22,097) 10,121 8,699 Three months ended June 30, ---------------------------------------------------------------------------------------------------------------------- 2002 2001 2002 2001 2002 2001 2002 2001 ---- ---- ---- ---- ---- ---- ---- ---- Revenues $90,541 $91,205 $18,970 $16,018 $(13,429) $1,219 $96,082 $108,442 Income (loss) before income taxes 11,991 20,633 2,186 (3,284) (10,908) (11,409) 3,269 5,940

Significant reconciling items shown in the above table which are not allocated to specific segments include interest expense, gains or losses from changes in fair values of the Company's asset and liability derivatives and a portion of (i) net investment income, (ii) operating expenses and (iii) net realized investment gains (losses). Prior to 2002, the Company reported a non-life insurance investments segment. The Company has determined that the investments that comprised this segment are no longer significant enough for separate reporting as a segment. These investments are now reported with the other reconciling items for all periods presented. 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. CRITICAL ACCOUNTING POLICIES Reference is made to the Company's Form 10-K for the year ended December 31, 2001 for a discussion of the Company's critical accounting policies and the use of estimates and judgement in the preparation of the Company's consolidated financial statements. There were no changes in estimates during the six months ended June 30, 2002 which had a significant impact on the Company's reported results of operations or financial condition. 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 Operations Operations ------------------------ ----------------------- Six months ended June 30, 2002 2001 2002 2001 ---- ---- ---- ---- Revenues $183.4 $183.3 $36.5 $31.1 Income before income taxes 22.0 33.4 4.7 (2.6) Three months ended June 30, 2002 2001 2002 2001 ---- ---- ---- ---- Revenues $90.5 $91.2 $19.0 $16.0 Income before income taxes 12.0 20.6 2.2 (3.3)

Prior to 2002, the Company reported a non-life insurance investments segment. The Company has determined that the investments that comprised this segment are no longer significant enough for separate reporting as a segment. These investments are now reported with the other reconciling items for all periods presented. Life insurance operations. Income before income taxes for the six months ended June 30, 2002 was $22.0 million compared to $33.4 million for the six months ended June 30, 2001. The decrease in profits from 2001 to 2002 is primarily due to (i) a $2.4 million increase in death benefits, net of reserves for future policy benefits released on traditional life insurance death benefits, and (ii) a $9.5 million increase in amortization expense on universal life-type policies in 2002 compared to 2001. Income before income taxes for the three months ended June 30, 2002 was $12.0 million compared to $20.6 million for the three months ended June 30, 2001. The decrease in profits from 2001 to 2002 is primarily due to the higher amortization expense in 2002 discussed in the preceding paragraph. Asset accumulation operations. Income before income taxes for the six months ended June 30, 2002 was $4.7 million compared to a $2.6 million loss for the same period in 2001. This increase in income was due to increased interest spreads on the Company's annuities and lower amortization expense in 2002. Income before income taxes for the three months ended June 30, 2002 was $2.2 million compared to a $3.3 million loss for the same period in 2001. The increase in income is due to lower amortization expense in 2002. 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, gains or losses from changes in fair values of the Company's asset and liability derivatives and a portion of (i) net investment income, (ii) operating expenses and (iii) net realized investment gains (losses). The loss before income taxes from reconciling items decreased $5.5 million for the six months ended June 30, 2002 from the same period in 2001 primarily due to a $4.7 million write down of goodwill associated with certain marketing subsidiaries of the Company in 2001. The loss before income taxes from reconciling items was $10.9 million and $11.4 million for the three months ended June 30, 2002 and 2001, respectively. The reduction in the loss in 2002 compared to 2001 primarily resulted from the goodwill write down discussed in the preceding paragraph, offset by $4.8 million higher realized investment losses in 2002. SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001 Income before income taxes and cumulative effect of a change in accounting principle for the six months ended June 30, 2002 was $10.1 million compared to $8.7 million for the six months ended June 30, 2001. The primary reasons for the increase in profits in 2002 compared to 2001 were (i) higher investment income, (ii) a decrease in commissions, (iii) restructuring expenses recorded in 2001, and (iv) a decrease in other operating expenses. These factors were partially offset by (i) an increase in death benefits, (ii) an increase in amortization expense, and (iii) higher net realized investment losses. Premiums and policy revenues. Premiums and policy revenues totaled $106.3 million for the six months ended June 30, 2002 compared to $104.4 million for the six months ended June 30, 2001. Premiums from preneed business increased $2.6 million for the six months ended June 30, 2002 compared to the six months ended June 30, 2001. This increase was partially offset by a decrease in premiums from the Company's inforce traditional life insurance business of $1.4 million. Policy revenues from interest-sensitive life and annuity products increased $0.9 million from 2001 to 2002, primarily due to the overall growth in the Company's universal-life type policies and annuities. Net investment income. Net investment income totaled $102.2 million for the six months ended June 30, 2002 compared to $99.6 million for the six months ended June 30, 2001. Net investment income for the six months ended June 30, 2002 and 2001 was comprised of the following (in millions): 2002 2001 ---- ---- Fixed maturities $ 76.8 $ 70.8 Mortgage loans 10.8 10.5 Policy loans 5.3 4.5 Reinsurance funds held by reinsurer 23.8 24.3 Derivatives (13.8) (12.7) Other, net of investment expenses (0.7) 2.2 --------- -------- Net investment income $ 102.2 $ 99.6 ========= ========

Fixed maturities income was higher in 2002 compared to 2001 due primarily to larger amounts of fixed maturity investments in 2002 compared to 2001. The increase in investments is consistent with the increase in the Company's liabilities. In addition, a bond owned by the Company was called in 2002 at a premium, generating an additional $0.8 million of investment income. The changes in the fair values of call options and futures contracts owned by the Company are recorded as a component of investment income. The fair value of the Company's call options and futures contracts decreased $13.8 million and $12.7 million during the six months ended June 30, 2002 and 2001, respectively. 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, which is recorded as a component of policyholder benefits. Net realized investment losses. Net realized investment losses totaled $5.5 million for the six months ended June 30, 2002 compared to net realized investment losses of $4.2 million for the six months ended June 30, 2001. During the six months ended June 30, 2002 and 2001, the Company realized losses on common stocks of $2.4 million and $0.9 million, respectively. The Company also recorded losses on fixed maturity investments of $3.1 million and $3.2 million, respectively, during the six months ended June 30, 2002 and 2001. Net realized investment losses for the six months ended June 30, 2002 includes $5.9 million of write-downs on fixed maturity investments to reflect an other than temporary impairment. Policyholder benefits. Policyholder benefits totaled $122.8 million for the six months ended June 30, 2002 compared to $116.1 million for the six months ended June 30, 2001. The primary reasons for the increase in 2002 compared to 2001 were (i) an increase in death benefits of $3.2 million, (ii) higher interest credited on policyholder funds due to the overall growth of the Company's universal life-type policies and annuities, and (iii) an increase in other policy benefits of $1.5 million. As discussed above, included in policyholder benefits is the change in the fair value of issued options embedded in the Company's equity-indexed annuity liabilities. During the six months ended June 30, 2002 and 2001, the fair values of the issued options decreased $13.6 million and $14.4 million, respectively. Commissions. Commission expense was $2.8 million and $5.2 million for the six months ended June 30, 2002 and 2001, respectively. The decrease in commission expense from 2001 to 2002 is due to higher amounts of nondeferrable commissions during the first six months of 2001. Amortization expense. Amortization expense totaled $30.6 million for the six months ended June 30, 2002 compared to $23.8 million for the six months ended June 30, 2001. During the six 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. The net effect of these revisions was to decrease amortization expense for the six months ended June 30, 2001 by $4.5 million. During 2001, the Company revised its estimate of future gross profits on the asset accumulation business, which had the effect of increasing its deferred policy acquisition cost assets at December 31, 2001. Consequently, amortization expense related to deferred policy acquisition cost assets was higher during the six months ended June 30, 2002 as compared to the same period in 2001. Other operating expenses. Other operating expenses totaled $36.5 million for the six months ended June 30, 2002 compared to $40.6 million for the six months ended June 30, 2001. The Company has realized significant cost savings in 2002 as a result of the Company's decision to cease operations in the third quarter of 2001 of an entity that previously provided administration for retirement and cafeteria plans to school districts and other clients. Included in other operating expenses for the six months ended June 30, 2001 was $0.5 million related to the costs of mailing notices to policyholders to comply with recently issued federal regulations. Partially offsetting the decreases in operating expenses in 2002 are approximately $1.0 million of expenses associated with the transition of the operations from the Company's offices in Austin, Texas to its Kansas City, Missouri offices. These transition expenses were not eligible for inclusion in the exit costs recorded by the Company in the fourth quarter of 2001. Restructuring expenses. During 2001, the Company made certain changes to its administrative and sales operations involved in the sale of insurance products to the tax-qualified market. During the second quarter of 2001, the Company determined that a portion of the goodwill related to the entities involved in such operations had become impaired. 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. THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001 Income before income taxes and cumulative effect of a change in accounting principle for the three months ended June 30, 2002 was $3.3 million compared to $5.9 million for the three months ended June 30, 2001. The primary reasons for the decrease in profits in 2002 compared to 2001 were (i) higher net realized investment losses in 2002 and (ii) higher amortization expense in 2002. Factors which partially offset these decreases in profits were (i) the recording of restructuring expenses in 2001 and (ii) lower commissions in 2002. Premiums and policy revenues. Premiums and policy revenues totaled $52.3 million for the three months ended June 30, 2002 compared to $51.0 million for the three months ended June 30, 2001. Premiums from preneed business increased $1.3 million for the three months ended June 30, 2002 compared to the three months ended June 30, 2001. This increase was partially offset by a decrease in premiums from the Company's inforce traditional life insurance business of $1.0 million. Policy revenues from interest-sensitive life and annuity products increased $0.4 million from 2001 to 2002. Net investment income. Net investment income totaled $47.0 million for the three months ended June 30, 2002 compared to $56.3 million for the three months ended June 30, 2001. Net investment income for the three months ended June 30, 2002 and 2001 was comprised of the following (in millions): 2002 2001 ---- ---- Fixed maturities $ 39.1 $ 36.0 Mortgage loans 5.4 5.3 Policy loans 2.6 2.7 Reinsurance funds held by reinsurer 11.7 12.6 Derivatives (11.2) (0.9) Other, net of investment expenses (0.6) 0.6 --------- -------- Net investment income $ 47.0 $ 56.3 ========= ========

Fixed maturities income was higher in 2002 compared to 2001 due primarily to higher amounts of fixed maturity investments in 2002 compared to 2001. The increase in investments is consistent with the increase in the Company's liabilities. In addition, a bond owned by the Company was called in 2002 at a premium, generating an additional $0.8 million of investment income. The changes in the fair values of call options and futures contracts owned by the Company are recorded as a component of investment income. The fair value of the Company's call options and futures contracts decreased $11.2 million and $0.9 million during the three months ended June 30, 2002 and 2001, respectively. 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, which is recorded as a component of policyholder benefits. Net realized investment losses. Net realized investment losses totaled $5.6 million for the three months ended June 30, 2002 compared to net realized investment losses of $0.9 million for the three months ended June 30, 2001. During the three months ended June 30, 2002 and 2001, the Company realized gains (losses) on common stocks of $(2.3) million and $1.1 million, respectively. The Company also recorded losses on fixed maturity investments of $3.3 million and $2.0 million, respectively, during the three months ended June 30, 2002 and 2001. Net realized investment losses for the three months ended June 30, 2002 includes $5.9 million of write-downs on bonds to reflect an other than temporary impairment. Policyholder benefits. Policyholder benefits totaled $55.0 million for the three months ended June 30, 2002 compared to $63.5 million for the three months ended June 30, 2001. As discussed above, included in policyholder benefits is the change in the fair value of issued options embedded in the Company's equity-indexed annuity liabilities. During the three months ended June 30, 2002 and 2001, the fair values of the issued options decreased $11.5 million and $2.1 million, respectively. This decrease in policyholder benefits was partially offset by a $1.4 million increase in interest credited on policyholder funds. Commissions. Commission expense for the three months ended June 30, 2002 and 2001 was $1.6 million and $2.9 million, respectively. The decrease in commission expense from 2001 to 2002 is due to higher amounts of nondeferrable commissions in 2001. Amortization expense. Amortization expense totaled $15.4 million for the three months ended June 30, 2002 compared to $9.1 million for the three months ended June 30, 2001. The increase in amortization expense in 2002 over 2001 was partially due to revisions of gross profit estimates on certain universal life-type and annuity products in 2001 as discussed above in the comparison of the six months results of operations. During 2001, the Company revised its estimate of future gross profits on the asset accumulation business, which had the effect of increasing its deferred policy acquisition cost assets at December 31, 2001. Consequently, amortization expense related to deferred policy acquisition cost assets was higher during the three months ended June 30, 2002 as compared to the same period in 2001. Restructuring expenses. During 2001, the Company made certain changes to its administrative and sales operations involved in the sale of insurance products to the tax-qualified market. During the second quarter of 2001, the Company determined that a portion of the goodwill related to the entities involved in the operations had become impaired. Based upon the Company's best estimate of the future results of operations of the entities, the goodwill asset was reduced by $4.7 million. FINANCIAL CONDITION AND LIQUIDITY The changes occurring in the Company's consolidated balance sheet from December 31, 2001 to June 30, 2002 primarily reflect the normal operations of the Company's life insurance subsidiaries. The quality of the Company's fixed maturity investments at June 30, 2002 remained consistent with the quality at December 31, 2001. Non-investment grade securities totaled 4% of the Company's total fixed maturity investments at June 30, 2002. The Company has not made any significant changes to its investment philosophy during 2002. The Company's net unrealized investment gains increased $1.7 million during the first six months of 2002. The components of the change during the six months ended June 30, 2002 were as follows (in millions): Investment securities: Fixed maturities available for sale $ 24.0 Fixed maturities reclassified from available for sale to held to maturity (1.9) Equity securities (7.5) ------- 14.6 Effect on other balance sheet accounts (12.0) Deferred income taxes (0.9) ------- Net unrealized investment gains $ 1.7 =======

The increase in unrealized gains on fixed maturities available for sale is due to the general decline in market interest rates during the first six months of 2002. Recently issued accounting pronouncements The FASB recently issued SFAS No. 143 "Accounting for Asset Retirement Obligations" which 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 will not affect the Company's consolidated financial statements. During 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds prior Statements that required the classification of gains or losses from the extinguishment of debt as extraordinary. As a result, gains or losses from extinguishments of debt will only be classified as extraordinary if they meet existing accounting criteria. SFAS No. 145 also rescinds SFAS No. 44 "Accounting for Intangible Assets of Motor Carriers" and amends SFAS No. 13 "Accounting for Leases" to require sale-leaseback accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 also makes various technical corrections to existing pronouncements. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. The Company's consolidated financial statements will not be affected by the adoption of SFAS No. 145. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement provides guidance on the recognition and measurement of liabilities associated with disposal activities. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. Consequently, the Company's consolidated financial statements will not be affected by the adoption of SFAS No. 146. 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, 2001, included in the Company's Form 10-K for the year ended December 31, 2001. During the six months ended June 30, 2002, changes in the interest rate environment did not materially affect the Company's economic position. These rate changes do not materially affect disclosures included in the Company's December 31, 2001 Form 10-K regarding the Company's exposure to market risk. 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, 2001 and the Quarterly Report on Form 10-Q for the period ended March 31, 2002 regarding certain legal proceedings to which the Company and/or certain of its subsidiaries are parties. Included among the matters reported in the Form 10-K was a purported class action lawsuit (Pritzker v. College Life Insurance Company of America (now Americo Financial) and Loyalty Life Insurance Company, U.S. District Court for the District of Massachusetts), in which Plaintiff alleged misrepresentations, breach of contract and other wrongful conduct in connection with the imposition of increased cost of insurance charges and the calculation of interest due under certain universal life policies assumed by defendants. This suit sought actual and punitive damages, restitutionary and injunctive relief and an accounting. The suit was settled in July, 2002 by the payment of a nominal amount to the individual named plaintiff and the filing of a stipulation of dismissal with prejudice. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 3.1 Restated Articles of Incorporation, as amended December 28, 2001, of the Registrant (incorporated by reference from Exhibit 3.1 to Registrant's Form 10-K [File No. 33-64820] for the year ended December 31, 2001. 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). 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ------------------------------- ----------------------------------------------- (b) Reports on Form 8-K: There were no reports on Form 8-K filed for the three months ended June 30, 2002. 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: August 14, 2002

AMERICO LIFE INC 10-Q