-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Quqat/EkECTI/6oASU70uuSPyk9IHK4JM8m/CKL6EMYnPc2fqCrgemajV4XTTOfo juBOLedL5ccXftaBYhry0A== 0000050982-99-000071.txt : 19991117 0000050982-99-000071.hdr.sgml : 19991117 ACCESSION NUMBER: 0000050982-99-000071 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERCONTINENTAL LIFE CORP CENTRAL INDEX KEY: 0000050982 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 221890938 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-07288 FILM NUMBER: 99752902 BUSINESS ADDRESS: STREET 1: THE AUSTIN CENTRE STREET 2: 701 BRAZOS 12TH FL CITY: AUSTIN STATE: TX ZIP: 78701 BUSINESS PHONE: 5124045050 MAIL ADDRESS: STREET 1: 701 BRAZOS STE 1400 STREET 2: ATTN KELLYE S SEEKATZ CITY: AUSTIN STATE: TX ZIP: 78701 FORMER COMPANY: FORMER CONFORMED NAME: INTERCONTINENTAL FINANCIAL CORP DATE OF NAME CHANGE: 19781019 FORMER COMPANY: FORMER CONFORMED NAME: INTERCONTINENTAL LIFE CO DATE OF NAME CHANGE: 19600201 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 1999 Commission File Number 2-39310 INTERCONTINENTAL LIFE CORPORATION Texas 22-1890938 (State of Incorporation) (I.R.S. Employer Identification Number) The Austin Centre,701 Brazos, 12th Floor Austin, Texas 78701 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (512) 404-5000 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 Number of common shares outstanding ($.22 Par Value) at end of period: 8,805,912 - 1 - INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES INDEX PAGE NO. PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets September 30, 1999 and December 31, 1998.................................3 Consolidated Statements of Income For the three and nine month periods ended September 30, 1999 and 1998..............................................5 Consolidated Statements of Cash Flows For the three and nine month periods ended September 30, 1999 and 1998..............................................7 Notes to Consolidated Financial Statements...................................11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS..........................13 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......................................................20 PART II Other Information............................................................22 Signature Page...............................................................24 - 2 - INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands of dollars)
September 30, December 31, 1999 1998 (Unaudited) ASSETS Investments: Fixed maturities, at Amortized cost (market value Approximates $3,066 and $3,059) $ 3,090 $ 3,005 Fixed maturities available for sale, at market value (amortized cost $410,036 and $435,130) 409,415 450,149 Equity securities, at market value (cost approximates $338) 1,889 3,121 Policy loans 52,711 53,614 Mortgage loans 10,016 10,332 Invested real estate and other invested assets 13,838 10,025 Short-term investments 190,016 171,840 --------------- --------------- Total investments 680,975 702,086 Cash and cash equivalents 11,583 12,206 Notes receivable from affiliates 43,034 47,645 Accrued investment income 8,080 7,768 Agent advances and other receivables 20,867 20,753 Reinsurance receivables 18,064 18,847 Property and equipment, net 3,620 3,470 Deferred policy acquisition costs 34,659 31,953 Present value of future profits of acquired businesses 40,783 43,666 Other assets 11,711 10,643 Separate account assets 443,404 451,211 --------------- --------------- Total assets $ 1,316,780 $ 1,350,248 =============== ===============
The accompanying notes are an integral part of the consolidated financial statements. - 3 - INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS, Continued (in thousands of dollars)
September30, December 31, LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998 (Unaudited) Liabilities: Policy liabilities and contractholder deposit funds: Future policy benefits $ 133,861 $ 135,463 Contractholder deposit funds 533,700 545,908 Unearned premiums 2,104 2,124 Other policy claims and benefits payable 9,631 10,856 ------------------ ---------------- 679,296 694,351 Other policyholders' funds 3,065 3,056 Deferred federal income taxes 25,129 30,185 Other liabilities 17,425 20,127 Separate account liabilities 439,737 448,294 ------------------ ---------------- Total Liabilities 1,164,652 1,196,013 Commitments and Contingencies Redeemable preferred stock: Class A Preferred, $1 par value, 5,000,000 shares authorized, issued 5,000 5,000 Class B Preferred, $1 par value, 15,000 15,000 ------------------ ---------------- 15,000,000 shares authorized, issued 20,000 20,000 Redeemable preferred stock held in treasury (20,000) (20,000) ------------------ ---------------- -0- -0- Shareholders' Equity: Common Stock, $.22 par value, 15,000,000 shares authorized; 10,819,478 and 5,385,739 shares issued, 8,805,912 and 4,376,706 shares outstanding in 1999 and 1998, respectively 2,381 1,185 Additional paid-in capital 4,465 4,385 Accumulated other comprehensive income 604 11,571 Retained earnings 147,890 140,356 ------------------ ---------------- 155,340 157,497 Common treasury stock, at cost, 2,013,566 and 1,009,033 in 1999 and 1998, respectively (3,212) (3,262) ------------------ ---------------- Total Shareholders' Equity 152,128 154,235 ------------------ ---------------- Total Liabilities and Shareholders' Equity $ 1,316,780 $ 1,350,248 ================== ================
The accompanying notes are an integral part of the part of these consolidated financial statements - 4 - INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (in thousands of dollars, except for per share data) (unaudited)
Three Months ended September 30, 1999 1998 Revenues: Premium $ 2,446 $ 2,629 Net investment income 12,209 13,939 Earned insurance charges 10,161 10,176 Other 483 525 ---------------- ---------------- 25,299 27,269 Benefits and expenses: Policyholder benefits and expenses 7,048 8,604 Interest expense on contract holders deposit funds 7,524 8,026 Amortization of present value of future profits of acquired businesses 995 1,457 Amortization of deferred policy acquisition costs 461 407 Operating expenses 4,328 4,074 Interest Expense -0- 124 ---------------- ---------------- 20,356 22,692 ---------------- ---------------- Income from operations 4,943 4,577 Provision for Federal Income Taxes 1,808 1,748 ---------------- ---------------- Net Income $ 3,135 $ 2,829 ================ ================ Net income per share: Basic: Weighted Average Common Stock outstanding 8,791 8,750 ---------------- ----------------- Basic Earnings Per Share $ 0.36 $ 0.33 ================ ================= Diluted: Common stock and common stock equivalents 8,817 8,800 ---------------- ----------------- Diluted earnings per share $ 0.36 $ 0.32 ================ =================
The accompanying notes are an integral part of these consolidated financial statements. - 5 - INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (in thousands of dollars, except for per share data) (unaudited)
Nine Months ended September 30, 1999 1998 Revenues: Premium $ 7,604 $ 8,393 Net investment income 38,084 41,737 Earned insurance charges 30,308 30,806 Other 2,266 1,732 ----------------- --------------- 78,262 82,668 Benefits and expenses: Policyholder benefits and expenses 23,642 28,026 Interest expense on contract holders deposit funds 23,599 23,028 Amortization of present value of future profits of acquired businesses 2,883 4,402 Amortization of deferred policy acquisition costs 1,676 1,380 Operating expenses 12,682 12,106 Interest expense -0- 645 ----------------- --------------- 64,482 69,587 ----------------- --------------- Income from operations 13,780 13,081 Provision for federal income taxes 5,057 4,725 ----------------- --------------- Net income $ 8,723 $ 8,356 ================= =============== Net income per share (Note 14): Basic: Weighted average common stock Outstanding 8,791 8,750 ------------------ ---------------- Basic Earnings Per Share $ 0.99 $ 0.95 ================== ================ Diluted: Common stock and common stock equivalents 8,817 8,800 ------------------ ---------------- Diluted earnings per share $ 0.99 $ 0.95 ================== ================
The accompanying notes are an integral part of these consolidated financial statements. - 6 - INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of dollars) (unaudited)
Three Months ended September CASH FLOWS FROM OPERATING 1999 1998 ACTIVITIES Net Income $ 3,135 $ 2,829 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Amortization of present value of future profits of acquired businesses 995 1,457 Amortization of deferred policy acquisition costs 461 407 Net gain on sale of investments 73 76 Depreciation 120 113 Financing costs amortized -0- 56 Changes in assets and liabilities: Increase in accrued investment income (394) (120) Decrease (increase) in agent advances and other receivables 7,717 (4,631) Policy acquisition costs deferred (1,537) (1,325) Decrease in policy liabilities and contractholder deposit funds (3,944) (2,464) Dcrease in other policyholders' funds (16) (4) Decrease (increase) in other liabilities (7,048) 5,807 (Decrease) increase in deferred federal income taxes (997) 2,050 Decrease (increase) in other assets 882 (4,138) Other, net (4,419) 2,619 ---------------- ---------------- Net cash (used in) provided by operating activities $ (4,972) $ 2,732
The accompanying notes are an integral part of these consolidated financial statements. - 7 - INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of dollars)
Nine Months ended September 30, 1999 1998 (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 8,723 $ 8,356 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Amortization of present value of future profits of acquired businesses 2,883 4,402 Amortization of deferred policy acquisition costs 1,676 1,380 Net gain on sale of investments (149) -0- Depreciation 347 321 Financing costs amortized -0- 111 Changes in assets and liabilities: Increase in accrued investment income (312) (253) Decrease (increase) in agent advances and other receivables 669 (12,593) Policy acquisition costs deferred (4,382) (4,173) Decrease in policy liabilities and contractholder deposit funds (15,055) (19,528) Increase (decrease) in other policyholders' funds 9 (659) (Decrease) increase in other liabilities (2,685) 2,440 (Decrease) increase in deferred federal income taxes (5,056) 1,419 Increase in other assets (1,068) (5,017) Other, net (710) (1,072) ----------------- --------------- Net cash used in operating activities $ (15,110) $ (24,866)
The accompanying notes are an integral part of these consolidated financial statements. - 8 - INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of dollars) (unaudited)
Three Months ended September 30, 1999 1998 CASH FLOWS FROM INVESTING ACTIVITIES Investments purchased $ (27,343) $ (52) Proceeds from sales and maturities of investments 29,596 22,424 Net change in short-term investments 3,220 (23,586) Purchases & retirements of equipment (170) (722) Decrease in notes receivable from affiliates 1,537 1,537 ---------------- -------------- Net cash provided by investing activities 6,840 (399) CASH FLOWS FROM FINANCING ACTIVITIES Issuance of treasury stock -0- -0- Purchase of subsidiary -0- -0- Issuance of common stock 27 21 Repayment of debit -0- (3,564) ----------------- ------------- Net cash provided by (used in) financing activities 27 (3,543) ----------------- -------------- Net increase in cash and cash equivalents 1,895 (1,210) Cash and cash equivalents, beginning of period 9,688 9,620 ----------------- -------------- Cash and cash equivalents, end of period $ 11,583 $ 8,410 ================= ==============
The accompanying notes are an integral part of these consolidated financial statements. - 9 - INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of dollars) (unaudited)
Nine Months ended September 30, CASH FLOWS FROM INVESTING 1999 1998 ACTIVITIES Investments purchased $ (54,825) $ (25,402) Proceeds from sales and maturities of investments 83,254 57,810 Net change in short-term investments (18,176) 347 Purchases & retirements of equipment (497) (985) Decrease in notes receivable from affiliates 4,611 4,610 ------------------ ---------------- Net cash provided by investing activities 14,367 36,380 CASH FLOWS FROM FINANCING ACTIVITIES Issuance of treasury stock 33 0 Purchase of subsidiary -0- (1,322) Issuance of common stock 87 141 Repayment of debt -0- (10,964) ------------------ --------------- Net cash provided by (used in) financing activities 120 (12,145) ------------------ --------------- Net decrease in cash and cash equivalents (623) (631) Cash and cash equivalents, beginning of year 12,206 9,041 ------------------ ---------------- Cash and cash equivalents, end of period $ 11,583 $ 8,410 ================== ===============
The accompanying notes are an integral part of these consolidated financial statements. - 10 - INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The financial statements included herein reflect all adjustments which are, in the opinion of management, necessary to present a fair statement of the interim results. The statements have been prepared to conform to the requirements of Form 10-Q and do not necessarily include all disclosures required by generally accepted accounting principles (GAAP). The reader should refer to Form 10-K for the year ended December 31, 1998 previously filed with the Securities and Exchange Commission for financial statements prepared in accordance with GAAP. ACQUISITION OF SUBSIDIARY On June 30, 1998, ILCO, through a subsidiary, acquired Grinnell Life Insurance Company ("Grinnell Life") for a base purchase price of $16.4 million, subject to certain post-closing adjustments. As part of the transaction, Grinnell Life was immediately merged with and into that subsidiary, with that subsidiary being the surviving entity. COMPREHENSIVE INCOME Total comprehensive income for the nine months ended September 30, 1999 and September 30, 1998 is $ (2.2) million and $ 9.9 million, respectively. The following is a reconciliation of total accumulated other comprehensive income from December 31, 1998 to September 30, 1999 (in thousands):
Net unrealized Net Total gain on appreciation accumulated investments (depreciation) other in fixed of equity comprehensive maturities securities income available for sale Balance at December 31, 1998 $ 9,762 $ 1,809 $ 11,571 Current period change (10,167) (800) (10,967) -------------- -------------- -------------- Balance at September 30, 1999 $ (405) $ 1,009 $ 604 ============== ============== ==============
- 11 - In December 1997, the Accounting Standards Executive Committee issued Statement of Position ("SOP") 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments," which provides guidance on accounting for insurance-related assessments. The Company is adopted SOP 97-3 effective January 1, 1999. The adoption of SOP 97-3 did not have a material impact on the Company's results of operations, liquidity or financial position. In June 1998, the FASB issued FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. FAS 133 is applicable to financial statements for all fiscal quarters of fiscal years beginning after June 15, 2000 as amended by FAS No. 137, "Accounting for the Derivative Instruments and Hedging Activities- Deferral of the Effective Date of FASB Statements No. 133". The operations of the Company are not affected by the provisions of FAS No. 133. - 12 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS: For the nine-month period ended September 30, 1999, InterContinental Life Corporation's ("ILCO") net income was $8,723,000 (basic earnings and diluted earnings of $0.99 per common share) as compared to $8,356,000 (basic earnings and diluted earnings of $0.95 per common share) in the first nine months of 1998. For the 1998 period, earnings per share have been adjusted to give effect to the stock dividend (one share of common stock for each outstanding share of common stock) which was paid on March 17, 1999. Earnings per share are stated in accordance with the requirements of FAS No. 128, which establishes two measures of earnings per share: basic earnings per share and diluted earnings per share. Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect the potential dilution that would occur if securities or other contracts to issue common stock were converted or exercised. Results of Operations For the nine-month period ended September 30, 1999, the Company's income before federal income taxes was $13,780,000 on revenues of $78,262,000 as compared to income of $13,081,000 on revenues of $82,668,000 for the first nine months of 1998. The operating strategy of the Company's management emphasizes several key objectives: expense management; marketing of competitively priced insurance products which are designed to generate an acceptable level of profitability; maintenance of a high quality portfolio of investment grade securities; and the provision of quality customer service. Premium income, net of reinsurance, for the first nine months of 1999 was $7.6 million, as compared to $8.4 million for the first nine months of 1998. Reinsurance premiums ceded were $1.9 million for the first nine months of 1999, as compared to $2.5 million in the first nine months of 1998. Earned insurance charges for the nine-month period ended September 30, 1999 were $30.3 million, as compared to $30.8 million for the same period in 1998. This source of revenues is related to the universal life insurance and annuity book of business of the insurance subsidiaries of the Company. The Company's senior loan was fully discharged effective September 30, 1998, accordingly, there was no interest expense for the first nine months of 1999, as compared to interest expense in the amount of $645,000 for the first nine months of 1998. As of September 30, 1999, the market value of the fixed maturities available for sale segment was $409.4 million as compared to an amortized cost of $410.04 million, or an unrealized loss of $0.64 million. The decrease reflects unrealized losses on such investments related to changes in interest rates subsequent to the purchase of such investments. The net of tax effect of this decrease ($0.405 million at September 30, 1999) is included in "Accumulated other comprehensive income" on the Consolidated Balance Sheets and has been recorded as a decrease in shareholders' equity. As required under the provisions of FAS No. 130, the determination of "Accumulated other comprehensive income" includes separate identification of the change in values which occurred during the current period. For the three-month period ended September 30, 1999, the lapse rate with respect to universal life insurance policies decreased from the lapse rate experienced in the similar period in 1998. The rate for the 1999 period was 5.89%, as compared to 7.08% in the 1998 period. The lapse rate with respect to traditional (non-universal) life insurance policies also decreased from the levels experienced in the second quarter of 1998. The rate for the three-month period ended September 30, 1999 was 8.56%, as compared to 8.67% in the similar period in 1998. The lapse rates experienced during these periods were within the ranges anticipated by management. - 13 - Liquidity and Capital Resources: ILCO is a holding company whose principal assets consist of the common stock of Investors Life Insurance Company of North America and its subsidiary - Investors Life Insurance Company of Indiana (formerly known as InterContinental Life Insurance Company). ILCO's primary source of funds consists of payments under two Surplus Debentures from Investors-NA. As of December 31, 1997, the outstanding principal balance of ILCO's senior loan obligations was $11.0 million, which reflected the prepayment by the Company of the payment originally scheduled for January 1, 1998. A regular payment, in the amount of $3.7 million, was made on April 1, 1998 and a prepayment of the July 1, 1998 installment, in the amount of $3.7 million, was made on June 30, 1998. The outstanding principal balance of ILCO's senior loan obligations was $3.6 million at June 30, 1998. The final installment on the senior loan obligation scheduled for October 1, 1998, was prepaid on September 30, 1998. As a result, the senior loan obligation of ILCO was fully discharged effective September 30, 1998. On March 17, 1999, the Company paid a stock dividend (one share of common stock for each outstanding share of common stock). As a result, Financial Industries Corporation ("FIC") currently owns, directly and indirectly through its subsidiary Family Life Insurance Company, 3,932,692 shares (approximately 45%) of ILCO's common stock. Prior to the discharge of ILCO's senior loan obligation, FIC held options to acquire (on a pre- dividend basis) an additional 1,702,155 shares of ILCO common stock. The options were granted under an option agreement between FIC and ILCO which was entered into in March, 1986 ("Option Agreement"). The Option Agreement provided that it continued in effect as long as FIC guaranteed indebtedness of ILCO. Since the senior loan was fully discharged by ILCO on September 30, 1998, FIC's rights under the Option Agreement expired on September 30, 1998. ILCO's principal source of liquidity consists of the periodic payment of principal and interest by Investors-NA, pursuant to the terms of the Surplus Debentures. The Surplus Debentures were originally issued by Standard Life Insurance Company and their terms were previously approved by the Mississippi Insurance Commissioner. In connection with the 1993 merger of Standard Life into Investors-NA, the obligations of the Surplus Debentures were assumed by Investors-NA. As of September 30, 1999, the outstanding principal balance of the Surplus Debentures was $1.5 million and $6.9 million, respectively. The terms of the latter required final payment of the remaining principal balance on September 30, 1999. Effective September 28, 1999, the Company and Investors- NA amended the payment schedule to provide payment of the remaining balance in four installments, with the final installment being due July 1, 2000. Since Investors-NA is domiciled in the State of Washington, the provisions of Washington insurance law apply to the Surplus Debentures. Under the provisions of the Surplus Debentures and current law, no prior approval of the Washington Insurance Commissioner is required for Investors-NA to pay interest or principal on the Surplus Debentures; provided that, after giving effect to such payments, the statutory surplus of Investors-NA is in excess of $10 million (the "surplus floor"). However, Investors-NA has voluntarily agreed with the Washington Insurance Commissioner that it will provide at least five days advance notice of payments which it will make under the surplus debenture. As of September 30, 1999, the statutory surplus of Investors-NA was $70.2 million, an amount substantially in excess of the surplus floor. The funds required by Investors-NA to meet its obligations to the Company under the terms of the Surplus Debentures are generated from operating income generated from insurance and investment operations. In addition to the payments under the terms of the Surplus Debentures, ILCO has received dividends from its subsidiaries. Washington's insurance code includes the "greater of" standard for payment of dividends to shareholders, but has a requirement that prior notification of a proposed dividend be given to the Washington Insurance Commissioner and that cash dividends may be paid only from earned surplus. Under the "greater of" standard, an insurer may pay a dividend in an amount equal to - 14 - the greater of (i) 10% of the policyholder surplus or (ii) the insurer's net gain from operations for the previous year. As of September 30, 1999, Investors-NA had earned surplus of $46.0 million. Investors-IN is domiciled in the State of Indiana. Under the Indiana insurance code, a domestic insurer may make dividend distributions upon proper notice to the Department of Insurance, as long as the distribution is reasonable in relation to adequate levels of policyholder surplus and quality of earnings. Under Indiana law the dividend must be paid from earned surplus. Extraordinary dividend approval would be required where a dividend exceeds the greater of 10% of surplus or the net gain from operations for the prior fiscal year. Investors-IN had earned surplus of $17.6 million at September 30, 1999. In June, 1999, Investors-IN paid a dividend in the amount of $3 million to its sole shareholder, Investors-NA. The amount of the dividend was less than the net gain from operations for the prior fiscal year; accordingly, no prior approval was required for the payment of the dividend. Advance notice of the payment was provided to the Indiana Department of Insurance, in accordance with the provisions of the Indiana Insurance Code. ILCO's net cash flow used in operating activities was $15.1 million for the nine-month period ended September 30, 1999, as compared to $24.8 million for the first nine months of 1998. Management believes that its cash, cash equivalents and short term investments are sufficient to meet the needs of its business and to satisfy debt service. Investments As of September 30, 1999, the Company's investment assets totaled $681.0 million, as compared to $702.1 million as of December 31, 1998. Total assets as of September 30, 1999 ($1.32 billion) decreased slightly from the level as of December 31, 1998 ($1.35 billion). The level of short-term investments at September 30, 1999 was $190.0 million, as compared to $171.8 million at December 31, 1998. Invested real estate and other invested assets increased from $10.0 million at December 31, 1998 to $13.8 million as of September 30, 1999. This increase is related to the purchase by Investors-NA of the 47.995 acres of land in Austin, Texas for the development of the River Place Pointe project. The land was purchased in October, 1998 by Investors-NA, for an aggregate purchase price of $8.1 million. Prior to the closing of the transaction, Investors-NA obtained a Site Development Permit for the tracts from the City of Austin. The Site Development Permit allows for the construction of seven office buildings totaling 600,000 square feet, with associated parking, drives and related improvements. Development of the initial phase of the project commenced during the first quarter of 1999. When completed, the first phase will consist of two office buildings, a parking garage and the infrastructure for the entire project. Investors-NA plans to commence development of the additional stages of the project following completion and leasing of the first phase. The fixed maturities available for sale portion of invested assets at September 30, 1999 was $409.4 million. The amortized cost of the fixed maturities available for sale segment as of September 30, 1999 was $410.04 million, representing a net unrealized loss of $0.405 million. This unrealized loss principally reflects changes in interest rates from the date the respective investments were purchased. To reduce the exposure to interest rate changes, portfolio investments are selected so that diversity, maturity and liquidity factors approximate the duration of associated policyholder liabilities. The assets held by ILCO's life insurance subsidiaries must comply with applicable state insurance laws and regulations. In selecting investments for the portfolios of its life insurance subsidiaries, the Company's emphasis is to obtain targeted profit margins, while minimizing the exposure to changing interest rates. This objective is implemented by selecting primarily short-to-medium term, investment grade fixed income securities. In making such portfolio selections, the Company generally does not select new investments which are commonly referred to as "high yield" or "non-investment grade." - 15 - The portfolio includes investments in mortgage-backed securities which includes collateralized mortgage obligations ("CMOs") of $182.1 million and mortgage-backed pass-through securities of $30.7 million at September 30, 1999. Mortgage-backed pass-through securities, sequential CMOs and support bonds, which comprised approximately 52.0% of the book value of the Company's mortgage-backed securities at September 30, 1999, are sensitive to prepayment and extension risks. The Company has reduced the risk of prepayment associated with this portion of the investment portfolio by investing in planned amortization class ("PAC"), target amortization class ("TAC") instruments, and scheduled bonds. These investments are designed to amortize in a predictable manner by shifting the risk of prepayment of the underlying collateral to other investors in other tranches ("support classes") of the CMO. PAC and TAC instruments and scheduled bonds represented approximately 48.0% and sequential and support classes represented approximately 37.6% of the book value of the Company's mortgage-backed securities at September 30, 1999. In addition, the Company limits the risk of prepayment of CMOs by not paying a premium for any CMOs. The Company does not invest in mortgage-backed securities with increased prepayment risk, such as interest-only stripped pass-through securities and inverse floater bonds. The prepayment risk that certain mortgage-backed securities are subject to is prevalent in periods of declining interest rates, when mortgages may be repaid more rapidly than scheduled as individuals refinance higher rate mortgages to take advantage of the lower current rates. As a result, holders of mortgage-backed securities may receive large prepayments on their investments which cannot be reinvested at an interest rate comparable to the rate on the prepaying mortgages. The Company did not make additional investments in CMOs during 1998 and the first three quarters of 1999. The current investment objectives of the Company do not contemplate additions to the portfolio of CMO investments during the remainder of 1999. The Company's fixed maturities portfolio (including short-term investments), as of September 30, 1999 and December 31, 1998, included a non-material amount (0.1% of total fixed maturities and short-term investments) of debt securities which, in the annual statements of the companies as filed with state insurance departments, were designated under the National Association of Insurance Commissioners ("NAIC") rating system as "3" (medium quality) or below. Of these non-investment grade investments, all received an NAIC rating of "5" (lowest quality). The consolidated balance sheets of the Company as of September 30, 1999 include $43.0 million of "Notes receivable from affiliates", represented by (i) a loan of $22.5 million from Investors-NA to Family Life Corporation ("FLC") and a $2.5 million loan from Investors-CA to Financial Industries Corporation ("FIC") - which loan is now owned by Investors-NA as a result of the merger of Investors-CA into Investors-NA) - and $2.0 million of additions to the $2.5 million note made in accordance with the terms of such note; these loans were granted in connection with the 1991 acquisition of Family Life Insurance Company by a wholly-owned subsidiary of FIC (ii) a loan of $30 million by Investors-NA to Family Life Corporation made in July, 1993, in connection with the prepayment by the FIC subsidiaries of indebtedness which had been previously issued to Merrill Lynch as part of the 1991 acquisition and (iii) a loan of $4.5 million by Investors-NA to Family Life Insurance Investment Company ("FLIIC") made in July, 1993, in connection with the same transaction described above. As of June 12, 1996, the provisions of the notes from Investors-NA to FIC, FLC and Family Life Insurance Investment Company ("FLIIC") were modified as follows: (a) the $22.5 million note was amended to provide for twenty quarterly principal payments, in the amount of $1,125,000 each, to commence on December 12, 1996; the final quarterly principal payment is due on September 12, 2001; the interest rate on the note remains at 11%, (b) the $30 million note was amended to provide for forty quarterly principal payments, in the amount of $163,540 each for the period December 12, 1996 to September 12, 2001; beginning with the principal payment due on December 12, 2001, the amount of the principal payment increases to $1,336,458; the final quarterly principal payment is due on September 12, 2006; the interest rate on the note remains at 9%, (c) the $4.5 million note was amended to provide for forty quarterly principal payments, in the amount of $24,531 each for the period December 12, 1996 to September 12, 2001; beginning with the principal payment due on December 12, 2001, the amount of the principal payment increases to $200,469; the final quarterly - 16 - principal payment is due on September 12, 2006; the interest rate on the note remains at 9%, (d) the $2.5 million note was amended to provide that the principal balance of the note is to be repaid in twenty quarterly installments of $125,000 each, commencing December 12, 1996 with the final payment due on September 12, 2001; the rate of interest remains at 12%, (e) the Master PIK note, which was issued to provide for the payment in kind of interest due under the terms of the $2.5 million note prior to June 12, 1996, was amended to provide that the principal balance of the note ($1,977,119) is to be paid in twenty quarterly principal payments, in the amount of $98,855.95 each, to commence December 12, 1996 with the final payment due on September 12, 2001; the interest rate on the note remains at 12%. In December, 1998, FLIIC was dissolved. In connection with the dissolution, all of the assets and liabilities of FLIIC became the obligations of FLIIC's sole shareholder (FIC). Accordingly, the obligations under the provisions of the $4.5 million note described above are now the obligations of FIC. The NAIC continued its rating of "3" to the "Notes receivable from affiliates", as amended. These loans have not been included in the preceding description of NAIC rating percentages. Management believes that the absence of any material amounts of "high-yield" or "non-investment grade" investments (as defined above) in the portfolios of its life insurance subsidiaries enhances the ability of the Company to service its debt, provide security to its policyholders and to credit relatively consistent rates of return to its policyholders. Year 2000 Compliance The Company and its subsidiaries utilize a centralized computer system to process policyholder records and financial information. In addition, the Company uses non-centralized computer terminals in connection with its operations. The software programs used in connection with these systems will be affected by what is referred to as the "year 2000 problem". This refers to the limitations of the programming code in certain existing software programs to recognize date sensitive information as the year 2000 approaches. Unless modified prior to the year 2000, such systems may not properly recognize such information and could generate erroneous data or cause a system to fail to operate properly. The Company has evaluated its centralized computer systems and has developed a plan to reach year 2000 compliance. A central feature of the Plan is to convert most of the centralized systems to a common system which is already in compliance with year 2000 requirements. The Company is in the process of this systems conversion and anticipates that the project will be completed in advance of the year 2000. The Plan calls for a conversion of certain systems onto the Company's CK/4 System; a system which is designed to be Y2K compliant according to the representations of the vendor. Those systems which are not converted will be upgraded by changing individual lines of computer code in order to modify current operating software such that it will become Y2K compliant. Under the Plan, the Company utilizes its own personnel and personnel of its affiliated company, FIC Computer Services, Inc., acquired Y2K compliant operating software, and engaged the assistance of outside consultants to facilitate the systems conversions and modifications. The Company has completed this system conversion, except as it relates to the conversion of approximately 6,130 policies and additional testing of previously completed conversions. The Company has increased the budget for the implementation and completion of the Plan from the prior years estimate. As of December 31, 1997, the Company had budgeted approximately $470,000 for implementing the Plan. Based on its current analysis, the Company expects that the cost of implementing and completing the Plan will result in an after-tax expense of approximately $587,000 for the three-year (1997 - 1999) conversion period. For the three month period ended September 30, 1999, the Company has incurred an after-tax expense of approximately $33,800 in connection with the completion of the Plan. - 17 - Between January 1, 1997 and September 30, 1999, the Company has expended approximately 78 % of the three-year expected after-tax cost discussed above. In the event that the Plan does not achieve full compliance by the target dates, or if unforeseen matters involving Y2K appear before or after January 1, 2000, the Company will utilize the staff of FIC Computer Services, Inc. to identify and resolve such issues as and if they arise. In order to continuously evaluate the effectiveness of the modifications and conversions made to the various systems, FIC Computer Services has acquired testing software to simulate dates on or after January 1, 2000. Additionally, FIC Computer Services runs the systems through model office cycles and also conducts visual inspections of screen displays to determine whether the systems are functioning in a Y2K compliant manner. FIC Computer Services plans to continue testing the completed conversions and modifications through December, 1999. As of September 30, 1999, FIC Computer Services, Inc. estimated that it had completed the necessary conversions and modifications on the administrative systems which process approximately 97% of the insurance policies for the Company and its subsidiaries. This included the conversion of the ALIS System (administering approximately 42,000 active policies) to CK/4 in February, 1998, the System 38 (administering approximately 9,400 active policies) conversion in January, 1997, the TI System (administering approximately 5,240 active policies) conversion to CK/4 in July, 1998 and the conversion of the Lifecomm-B system (which is responsible for approximately 16,900 policies assumed after the acquisition of State Auto Life) in February,1999. The conversion of the Life 70 system (administering approximately 15,300 active policies for Investors-IN) was completed in May, 1999. As of June 30, 1999, the Lifecomm-A system administered approximately 57,140 active policies for Investors-NA. As of September 30, 1999, the conversion of all but approximately 6,130 active policies had been completed. The majority of those conversions were completed in November, and the Company expects the conversion of the remaining Lifecomm-A policies to be completed before the end of November, 1999. The modification of one of the Company's smaller systems which administers approximately 2,100 active credit life policies was completed on schedule in December 1998. The modification of a smaller system which administers approximately 15,470 active industrial life policies was completed in June of 1999. The various software applications described above are licensed to the Company under agreements which permit the Company's subsidiaries to process business on its computer systems utilizing such software. In 1997, FIC Computer Services, Inc. purchased new mainframe hardware and accompanying operating software, which the vendor has represented to be Y2K compliant. FIC Computer Services, Inc. has completed the installation and testing of such new mainframe hardware and software for compliance with the requirements of the Year 2000 conversion. In addition, FIC Computer Services has purchased certain third-party software which is run on the mainframe. This software has been represented by the vendor as being in compliance with Year 2000 requirements. Initial testing on such third-party software was completed in October, 1999. The telephone system, which includes both PBX and voice mail systems, has been tested by the maintenance provider for that system and the Company has received assurances that the telephone system is Y2K compliant. With respect to non-centralized systems (i.e., desktop computers), the Company has obtained updated software releases and new hardware designed to be Y2K compliant according to the representations of the vendors. The Company expects that the effort needed to correct for Y2K problems on such systems will be less time intensive than the effort needed to achieve compliance for its centralized systems. The installation of such new PC hardware and software was commenced in early 1999 and was completed in mid-November, 1999. The Company also faces the risk that one or more of its external suppliers of goods or services ("third party providers") will not be in a position to properly interact with the Company due to the inability of such third party provider to resolve its own Y2K issues. Pursuant to the Plan, the Company has completed an inventory of its third party provider relationships. In order to assess the Y2K readiness - 18 - of such third party providers, the Company has developed and forwarded a detailed questionnaire to such providers. The Company has received responses and assurances of Y2K readiness from all of its mission critical external suppliers, as well as many of its non-mission critical suppliers. The receipt and evaluation of responses is on-going, and the Company will consider whether to continue relationships with external suppliers who fail to respond to the questionaire. In the event that a major administrative system fails to operate properly due to the Y2K problem, or the Company does not complete the necessary systems conversions prior to January 1, 2000, the Company has developed a plan to respond to such a contingency. FIC Computer Services has assigned certain personnel to be members of an emergency response team to resolve Y2K operations problems. Additionally, insurance policies would be administered manually if the necessary systems conversions were not completed prior to January 1, 2000, or subsequent Y2K operational problems arise. Manual policy administration would require additional personnel. If substantial additional personnel become necessary for manual policy administration, the training and salary expenses of such personnel could materially affect the Company's business and results of operations. The Company is not able to estimate the likelihood that manual administration will be needed or the amount of any expense which it would incur in connection with such manual administration. Cautionary Statements for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 Except for historical factual information set forth in this Management's Discussion and Analysis, certain statements made in this report are forward looking and contain information about financial results, economic conditions, Y2K risks and other risks and known uncertainties. The Company cautions the reader that actual results could differ materially from those anticipated by the Company, depending upon the eventual outcome of certain factors, including: (1) heightened competition for new business, (2) significant changes in interest rates, (3) adverse regulatory changes affecting the business of insurance and (4) adverse changes in the Y2K readiness of the Company or its significant third party providers. Accounting Developments In December, 1997, the Accounting Standards Executive Committee issued Statement of Position ("SOP") 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments", which provides guidance on accounting for insurance-related assessments. The Company adopted SOP 97-3, effective January 1, 1999. The adoption of SOP 97-3 did not have a material impact on the Company's results of operations, liquidity or financial position. In June, 1998, the FASB issued FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. FAS No. 133 is applicable to financial statements for all fiscal quarters of fiscal years beginning after June 15, 2000, as amended by FAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133." As the Company does not have significant investments in derivative financial instruments, the adoption of FAS No. 133 does not have a material impact on the Company's results of operations, liquidity or financial position. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK GENERAL: ILCO's principal assets are financial instruments, which are subject to market risks. Market risk is the risk of loss arising from adverse changes in market rates and prices, principally interest rates on fixed - 19 - rate investments. For a discussion of the Company's investment portfolio and the management of that portfolio to reflect the nature of the underlying insurance obligations of the Company's insurance subsidiaries, please refer to the information set forth in Item 2 "Management's Discussion and Analysis of Financial Conditions and Results of Operations - Investments" of this report. The following is a discussion of the Company's primary market risk sensitive instruments. It should be noted that this discussion has been developed using estimates and assumptions. Actual results may differ materially from those described below. Further, the following discussion does not take into account actions which could be taken by management in response to the assumed changes in market rates. In addition, the discussion does not take into account other types of risks which may be involved in the business operations of the Company, such as the reinsurance recoveries on reinsurance treaties with third party insurers. The primary market risk to the Company's investment portfolio is interest rate risk. The Company does not use derivative financial instruments. INTEREST RATE RISK: Assuming an immediate increase of 100 basis points in interest rates, the net hypothetical loss in fair market value related to the financial instruments segment of the Company's balance sheet is estimated to be $23.7 million at September 30, 1999 and $17.1 million at December 31, 1998. For purposes of the foregoing estimate, the following categories of the Company's fixed income investments were taken into account: (i) fixed maturities, including fixed maturities available for sale, (ii) short-term investments and (iii) notes receivable from affiliates. The market value of such assets was $642.5 million at September 30, 1999 and $672.6 million at December 31, 1998. The fixed income investments of the Company include certain mortgage-backed securities. The market value of such securities was $215.2 million at September 30, 1999 and $250.8 million at December 31, 1998. Assuming an immediate increase of 100 basis points in interest rates, the net hypothetical loss in the fair market value related to such mortgage-backed securities is estimated to be $12.3 million at September 30, 1999 and $7.1 million at December 31, 1998. Fixed income investments held in separate accounts have not been included, since gains and losses on those assets generally accrue to the policyholders. The hypothetical effect of the interest rate risk on fair values was estimated by applying a commonly used model. The model projects the impact of interest rate changes on a range of factors, including duration and potential prepayment. - 20 - INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES Part II. Other Information ITEM 1. LEGAL PROCEEDINGS The Company and Investors-NA are defendants in a lawsuit which was filed in October, 1996, in Travis County, Texas. CIGNA Corporation, an unrelated Company, is also a named defendant in the lawsuit. The named plaintiffs in the suit (a husband and wife), allege that the universal life insurance policies sold to them by INA Life Insurance Company (a company which was merged into Investors- NA in 1992) utilized unfair sales practices. The named plaintiffs seek reformation of the life insurance contracts and an unspecified amount of damages. The named plaintiffs also seek a class action as to similarly situated individuals. No certification of a class has been granted as of the date hereof. The Company believes that the suit is without merit and intends to vigorously defend this matter. In August, 1997, another individual filed a similar action in Travis County, Texas against the corporate entities identified above. The lawsuit involves the same type of policy and includes allegations which are substantially identical to the allegations in the first action. The named plaintiff also seeks class certification. The Company believes that the court would consider class certification with respect to only one of these actions. The Company also believes that this action is without merit and intends to vigorously defend this matter. ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION On June 29, 1999, ILCO announced that its Board of Directors has approved a stock repurchase plan. Under the plan, ILCO may repurchase up to 5% of its issued and outstanding common stock in the open market or in "block" transactions, within the meaning of Rule 10b-18 under the Securities Exchange Act of 1934, as amended. A more detailed description of the plan was included in a Form 8-K dated June 29, 1999 filed by ILCO. As of November 8, 1999, the Company has not repurchased any ILCO common stock pursuant to the plan. - 21 - ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Form 10-K Annual Report of Registrant for the year ended December 31, 1998 heretofore filed by Registrant with the Securities and Exchange Commission, which is hereby incorporated by reference. (b) Reports on Form 8-K: Form 8-K dated June 29, 1999 as filed by Registrant with the Securities and Exchange Commission, which is hereby incorporated by reference. - 22 - INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INTERCONTINENTAL LIFE CORPORATION /S/ JAMES M. GRACE James M. Grace, Treasurer Date: November 15, 1999 - 23 - EX-27 2 FDS --
7 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCES 1,000 9-mos Dec-31-1999 Sep-30-1999 409,415 3,090 3,066 1,889 10,016 13,838 680,975 11,583 18,064 34,659 1,316,780 133,861 2,104 533,700 9,631 0 0 0 2,381 149,747 1,316,780 7,604 38,084 0 2,266 23,642 1,676 12,682 13,780 5,057 8,723 0 0 0 8,723 0.99 0.99 0 0 0 0 0 0 0
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