-----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, FZr1/uEiD8B1RA98qLcZrb3W1G+TvFfqGt/mqAO7+cUoNHckFXxsIwHGAoVXlZAI TkR3QAQAqEwWUXJWsXpSGA== 0000050982-98-000010.txt : 19980817 0000050982-98-000010.hdr.sgml : 19980817 ACCESSION NUMBER: 0000050982-98-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NASD 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: 98689479 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 June 30, 1998 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: 4,368,835. INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES INDEX Page No. PART I - FINANCIAL INFORMATION Consolidated Balance Sheets June 30, 1998 and December 31, 1997............... 3 Consolidated Statements of Income For the three and six month periods ended June 30, 1998 and 1997............................ 5 Consolidated Statements of Cash Flows For the three and six month periods ended June 30, 1998 and 1997 ........................... 7 Notes to Consolidated Financial Statements.............. 11 Management's Discussion and Analysis of Financial Conditions and Results of Operations......13 PART II Other Information........................................21 Signature Page...........................................23 INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands of dollars) June 30, Dec. 31, 1998 1997 (Unaudited) ASSETS Investments: Fixed maturities, at amortized cost (market value approximates $2,511 and $3,332) $ 2,492 $ 3,412 Fixed maturities available for sale, at market value (amortized cost of $470,232 and $436,836) 488,243 454,462 Equity securities, at market value (cost approximates $338 and $369) 3,709 4,902 Policy loans 54,959 53,499 Mortgage loans 10,666 10,862 Invested real estate and other invested assets 1,518 1,300 Short-term investments 140,689 164,622 Total Investments 702,276 693,059 Cash and cash equivalents 9,620 9,041 Notes receivable from affiliates 50,719 53,792 Accrued investment income 8,599 7,781 Agent advances and other receivables 24,182 11,362 Reinsurance receivables 15,694 20,433 Property and equipment, net 2,165 1,902 Deferred policy acquisition costs 30,496 28,621 Present value of future profits of acquired businesses 45,860 47,286 Deferred financing costs 56 111 Other assets 12,548 7,929 Separate account assets 464,219 440,336 Total Assets $ 1,366,434 $1,321,653
The accompanying notes are an integral part of the consolidated financial statements. INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands of dollars) June 30, Dec. 31, 1998 1997 (Unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Policy liabilities and contractholder deposit funds: Future policy benefits $ 169,634 $ 131,720 Contractholder deposit funds 516,851 525,135 Unearned premiums 1,095 7,701 Other policy claims & benefits payable 5,901 7,078 693,481 671,634 Other policyholders' funds 3,069 3,093 Senior loans 3,564 10,964 Deferred federal income taxes 32,595 31,811 Other liabilities 20,828 20,299 Separate account liabilities 461,973 438,090 Total Liabilities 1,215,510 1,175,891 Commitments and Contingencies Redeemable preferred stock: Class A Preferred, $1 par value, 5,000,000 shares authorized and issued 5,000 5,000 Class B Preferred, $1 par value, 15,000,000 shares authorized and issued 15,000 15,000 20,000 20,000 Redeemable preferred treasury stock at cost, 20,000,000 shares (20,000) (20,000) -0- -0- Shareholders' equity: Common stock, $.22 par value, 10,000,000 shares authorized; 5,379,739 and 5,343,739 shares issued,4,368,835 and 4,331,335 shares outstanding in 1998 and 1997 1,184 1,176 Additional paid-in capital 4,365 4,253 Accumulated other comprehensive income 13,898 14,403 Retained earnings 134,765 129,237 154,212 149,069 Common treasury stock, at cost, 1,010,904 and 1,012,404 shares in 1998 and 1997, respectively (3,288) (3,307) Total Shareholders' Equity 150,924 145,762 Total Liabilities and Shareholders' Equity $1,366,434 $1,321,653
The accompanying notes are an integral part of the consolidated financial statements. INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTH PERIODS ENDED JUNE 30, 1998 and 1997 (in thousands of dollars, except for per share data) (unaudited) 3 Months Ended June 30, 1998 1997 Revenues: Net premiums $ 2,666 $ 2,806 Net investment income 13,843 14,460 Earned insurance charges 10,333 10,189 Other 685 1,100 Total 27,527 28,555 Benefits and expenses: Policyholder benefits and expenses 9,066 8,933 Interest expense on contractholder deposit funds 7,772 7,950 Amortization of present value of future profits of acquired business 1,619 1,581 Amortization of deferred policy acquision costs 525 675 Operating expenses 3,978 4,487 Interest expense 246 404 Total 23,206 24,030 Income from operations 4,321 4,525 Provision for federal income taxes 1,513 1,583 Net Income $ 2,808 $ 2,942 Net income per share Basic: Weighted average common stock outstanding 4,369 4,321 Basic earnings per share $ 0.64 $ 0.68 Diluted: Common stock and common stock equivalents 4,545 4,421 Diluted earnings per share $ 0.62 $ 0.67
The accompanying notes are an integral part of the consolidated financial statements. INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1998 and 1997 (in thousands of dollars, except for per share data) (unaudited) 6 Months Ended June 30, 1998 1997 Revenues: Net premiums $ 5,764 $ 4,760 Net investment income 27,798 29,081 Earned insurance charges 20,630 20,406 Other 1,207 1,709 Total 55,399 55,956 Benefits and expenses: Policyholder benefits and expenses 19,422 18,327 Interest expense on contractholder deposit funds 15,002 15,966 Amortization of present value of future profits of acquired business 2,945 2,972 Amortization of deferred policy acquision costs 973 1,197 Operating expenses 8,032 7,976 Interest expense 521 839 Total 46,895 47,277 Income from operations 8,504 8,679 Provision for federal income taxes 2,977 3,037 Net Income $ 5,527 $ 5,642 Net income per share Basic: Weighted average common stock outstanding 4,369 4,321 Basic earnings per share $ 1.27 $ 1.30 Diluted: Common stock and common stock equivalents 4,398 4,421 Diluted earnings per share $ 1.26 $ 1.28
The accompanying notes are an integral part of the consolidated financial statements. INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTH PERIODS ENDED JUNE 30, 1998 and 1997 (in thousands of dollars) (unaudited) 3 Months Ended June 30, 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,808 $ 2,942 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Amortization of present value of future profits of acquired businesses 1,618 1,580 Amortization of deferred policy acquisition costs 525 657 Net gain on sale of investments (76) (66) Depreciation 85 376 Financing costs amortized 24 147 Changes in assets and liabilities: Decrease in accrued investment income 280 383 Increase in agent advances and other receivables (9,266) (4,416) Policy acquisition costs deferred (1,510) (1,105) Decrease in policy liabilities and contract holder deposit funds (6,778) (9,006) (Decrease) increase in other policyholders' funds (729) 5 (Decrease) increase in other liabilities (1,678) 3,940 Increase in deferred federal income taxes 144 4,132 Decrease (increase) in other assets 5,166 (205) Other, net (1,157) (3,609) Net cash used in operating activities $(10,544) $ (4,245)
The accompanying notes are an integral part of the consolidated financial statements. INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTH PERIODS ENDED JUNE 30, 1998 and 1997 (in thousands of dollars) (unaudited) 3 Months Ended June 30, 1998 1997 CASH FLOWS FROM INVESTING ACTIVITIES Investments purchased $ (1,183) $ (5,098) Proceeds from sales and maturities of investments 17,355 13,310 Net change in short-term investments 1,873 (6,122) Purchases & retirements of equipment, net (389) (374) Decrease in notes receivable from affiliates 1,537 1,538 Net cash provided by investing activities 19,193 3,254 CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock 79 (65) Purchase of subsidiary (1,322) -0- Repayment of debt (7,400) -0- Net cash used in financing activities (8,643) (65) Net increase in cash and cash equivalents 6 (1,056) Cash and cash equivalents, beginning of year 9,614 4,313 Cash and cash equivalents, end of year $ 9,620 $ 3,257
The accompanying notes are an integral part of the consolidated financial statements. INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1998 and 1997 (in thousands of dollars) (unaudited) 6 Months Ended June 30, 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 5,527 $ 5,642 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Amortization of present value of future profits of acquired businesses 2,944 2,971 Amortization of deferred policy acquisition costs 973 1,179 Net gain on sales of investments (76) (66) Depreciation 208 891 Financing costs amortized 55 295 Changes in assets and liabilities: Increase in accrued investment income (133) (109) Increase in agent advances and other receivables (7,962) (721) Policy acquisition costs deferred (2,848) (2,273) Decrease in policy liabilities and contract holder deposit funds (17,064) (12,076) Decrease in other policyholders' funds (655) (197) (Decrease) increase in other liabilities (3,367) 3,297 (Decrease) increase in deferred federal income taxes (631) 1,361 Increase in other assets (879) (795) Other, net (2,344) (307) Net cash used in operating activities $(26,252) $ (908)
The accompanying notes are an integral part of the consolidated financial statements. INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1998 and 1997 (in thousands of dollars) (unaudited) 6 Months Ended June 30, 1998 1997 CASH FLOWS FROM INVESTING ACTIVITIES Investments purchased $ (26,772) $ (14,950) Proceeds from sales and maturities of investments 35,462 21,345 Net change in short-term investments 23,933 (3,318) Purchases & retirements of equipment, net (263) (886) Decrease in notes receivable from affiliates 3,073 3,074 Net cash provided by investing activities 35,433 5,265 CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock 120 167 Purchase of subsidiary (1,322) -0- Repayment of debt (7,400) (4,580) Net cash used in financing activities (8,602) (4,413) Net increase in cash and cash equivalents 579 (56) Cash and cash equivalents, beginning of year 9,041 3,313 Cash and cash equivalents, end of year $ 9,620 $ 3,257
The accompanying notes are an integral part of the consolidated financial statements. INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED) 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, 1997 previously filed with the Securities and Exchange Commission for financial statements prepared in accordance with GAAP. Acquisition of Subsidiary In July 1997, ILCO through its subsidiary Investors Life Insurance Company of Indiana (Investors-IN), an indirect, wholly- owned subsidiary of ILCO, acquired State Auto Life Insurance Company, an Ohio based life insurer,for a cash purchase price of $11.8 million, subject to certain post-closing adjustments. The Company had $22.8 million in assets, $6 million in capital and surplus, total revenues of $7.9 million, and a good book of business. As part of the purchase agreement, State Auto was immediately merged with Investors Life of Indiana. The summary of operations of ILCO for the six months ended June 30, 1998 reflects State Auto's operations, as compared to the six months ended June 30, 1997 which does not include any income from State Auto. 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. The operations of ILCO for the six-month period ending June 30, 1998 do not reflect the operations of Grinnell Life. New Accounting Pronouncements In June 1997, the FASB issued Statement of Financial Accounting Standard (FAS) No. 130, " Reporting Comprehensive Income." The new standard, which is effective for financial statements issued for periods ending after December 15, 1997, established standards for reporting, in addition to net income, other comprehensive income and its components including, as applicable, foreign currency income, minimum pension liability adjustments and unrealized gains and losses on certain investments in debt and equity securities. Upon adoption, the Company is also required to reclassify financial statements for earlier periods provided for comparative purposes. The Company adopted this standard in the first quarter of 1998. Total comprehensive income for the six months ended June 30, 1998 and June 30, 1997 is $5.0 million and $5.6 million, respectively. INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED) New Accounting Pronouncements, continued The following is a reconciliation of total accumulated other comprehensive income from December 31, 1997 to June 30, 1998 (in thousands): Net unrealized gain on investments in Net Appreciation Total fixed maturities (depreciation) accumulated available of equity other for sale securities comprehensive Balance at December 31, 1997 $ 11,457 $ 2,946 $ 14,403 Current period change 250 (755) (505) Balance at June 30, 1998 $ 11,707 $ 2,191 $ 13,898 In June 1997, the FASB issued FAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for reporting information about operating segments. Generally, FAS 131 requires that financial information be reported on the basis that is used internally for evaluating performance. The Company adopted FAS 131 effective January 1, 1998, and comparative information for earlier years will be restated. This statement does not need to be applied to interim financial statements in the initial year of application. The adoption of FAS No. 131 did not have a material impact on the Company's results of operations, liquidity or financial position. In February 1998, the FASB issued FAS No. 132, "Employers Disclosures about Pensions and Other Postretirement Benefits," which revises current disclosure requirements for employers' pension and other retiree benefits. FAS 132 does not change the measurement or recognition of pension or other postretirement benefit plans. The Company adopted FAS 132 effective January 1, 1998, with restatement of disclosures for earlier years. The adoption of FAS No. 132 is not expected to have a material impact on the Company's results of operations, liquidity or financial position. 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 required to adopt SOP 97-3 effective January 1, 1999. Previously issued financial statements should not be restated unless the SOP is adopted prior to the effective date and during an interim period. 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, 1999. The operations of the Company are not affected by the provisions of FAS No. 133. Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations: For the six-month period ended June 30, 1998, InterContinental Life Corporation's ("ILCO") net income was $5,527,000 (basic earnings of $1.27 per common share, or diluted earnings of $1.26 per common share) as compared to $5,642,000 (basic earnings of $1.30 per common share, or diluted earnings of $1.28 per common share) in the first six months of 1997. Earnings per share are stated in accordance with the requirements of Financial Accounting Standard (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. For the six month period ended June 30, 1997, earnings per share have been restated to reflect the effect of FAS No. 128 Results of Operations The statutory earnings of the Company's insurance subsidiaries, as required to be reported to insurance regulatory authorities, before interest expense, capital gains and losses, and federal income taxes were $9,331,000 at June 30, 1998, as compared to $10,027,000 at June 30, 1997. These statutory earnings are the source to provide for the repayment of ILCO's indebtedness. For the six-month period ended June 30, 1998, the Company's income before federal income taxes was $8,504,000 on revenues of $55,399,000 as compared to income of $8,679,000 on revenues of $55,956,000 for the same period in 1997. 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 six months of 1998 was $5.8 million, as compared to $4.8 million for the first six months of 1997. Reinsurance premiums ceded were $2.2 million for the first six months of 1998, as compared to $2.4 million in the first six months of 1997. The increase in premium income is primarily attributable to the inclusion of the business of State Auto Life Insurance Company. ILCO, through a subsidiary, acquired State Auto Life Insurance Company in July of 1997. Earned insurance charges for the six-month period ended June 30, 1998 were $20.6 million, as compared to $20.4 million for the same period in 1997. This source of revenues is related to the universal life insurance and annuity book of business of Investors Life Insurance Company of North America ("Investors-NA"). Interest expense was $521,000 for the first six months of 1998, as compared to $839,000 for the first six months of 1997. The decrease is attributable to a reduction in the average principal balance of the senior loan from $20.5 million for the six month period ending June 30, 1997 to $9.1 million for the six month period ending June 30, 1998. The average rate of interest paid on the senior loan increased slightly - 7.65% for the first six months of 1998, as compared to 7.60% for the first six months of 1997. As of June 30, 1998, the market value of the fixed maturities available for sale segment was $488.2 million as compared to an amortized cost of $470.2 million, or an unrealized gain of $18 million. The increase reflects unrealized gains on such investments related to changes in interest rates subsequent to the purchase of such investments. There is no assurance that this unrealized gain will be realized in the future. The net of tax effect of this increase ($11.7 million at June 30, 1998) is included in "Accumulated other comprehensive income" on the Consolidated Balance Sheets and has been recorded as an increase 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 June 30, 1998, the lapse rate with respect to universal life insurance policies increased slightly from the lapse rate experienced in the similar period in 1997. The rate for the 1998 period was 7.95%, as compared to 7.92% in the 1997 period. The lapse rate with respect to traditional (non- universal) life insurance policies decreased from the levels experienced in the second quarter of 1997. The rate for the three- month period ended June 30, 1998 was 7.78%, as compared to 8.52% in the similar period in 1997. The lapse rates experienced during these periods were within the ranges anticipated by management. In July 1997, ILCO, through a subsidiary, acquired State Auto Life Insurance Company ("State Auto Life") for a cash purchase price of $11.8 million. As part of the transaction, State Auto Life was immediately merged into that subsidiary. The operations of ILCO for the six month period ended June 30, 1998 reflect the operations of the acquired company, as compared to the six month period ended June 30, 1997 which do not reflect such operations. 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. The operations of ILCO for the six-month period ending June 30, 1998 do not reflect the operations of Grinnell Life. 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. As a result, 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 is due on October 1, 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 June 30, 1998, the outstanding principal balance of the Surplus Debentures was $4.7 million and $14.9 million, respectively. 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 June 30, 1998, the statutory surplus of Investors-NA was $69.1 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 Standard Life (now, from Investors-NA). 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 the greater of (i) 10% of the policyholder surplus or (ii) the insurer's net gain from operations for the previous year. As of June 30, 1998, Investors-NA had earned surplus of $35.6 million. Since the law applies only to dividend payments, the ability of Investors-NA to make principal and interest payments under the Surplus Debentures is not affected. ILCO does not anticipate that Investors-NA will have any difficulty in making principal and interest payments on the Surplus Debentures in the amounts necessary to enable ILCO to service the Senior Loan for the foreseeable future. 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 $17.9 million at June 30, 1998. ILCO's net cash flow provided by (used in) operating activities was $(26.2) million for the six month period ended June 30, 1998, as compared to $(0.9) million for the first six months of 1997. 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 June 30, 1998, the book value of the Company's investment assets totaled $702.3 million, as compared to $693.1 million as of December 31, 1997. Total assets as of June 30, 1998 ($1.37 billion) increased from the level at of December 31, 1997 ($1.32 billion). The level of short-term investments at June 30, 1998 was $140.7 million, as compared to $164.6 million at December 31, 1997. Invested real estate and other invested assets decreased from $48.5 million at June 30, 1997 to $1.5 million at June 30, 1998. The decrease in invested real estate and other invested assets and the corresponding increase in the level of short term investments as compared to the same period in 1997 is attributable to the sale by Investors-NA of its interest in the Bridgepoint Square Office property during the fourth quarter of 1997. The fixed maturities available for sale portion of invested assets at June 30, 1998 was $488.2 million. The amortized cost of the fixed maturities available for sale segment as of June 30, 1998 was $470.2 million, representing a net unrealized gain of $18 million. This unrealized gain 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." The Company's fixed maturities portfolio (including short-term investments), as of June 30, 1998, included a non-material amount (0.63% 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. As of June 30, 1997, the comparable percentage was 0.93%. Of these non-investment grade investments,0.031% are of the medium quality (or "3") category, with 0.475% receiving an NAIC rating of "4" (low quality) and 0.126% with a rating of "5" ("lower quality"). The securities in category "5" represent a reclassification of existing investments. The consolidated balance sheets of the Company as of June 30, 1998 include $50.7 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 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 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%. 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" or "Y2K 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. Based on its intitial analysis, the Company expects that the cost of implementing and completing the Plan will result in a after-tax expense of approximately $510,000 for the three-year (1997 - 1999) conversion period. 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. As of June 30, 1998, the Company estimated that it had completed the necessary conversions and modifications on the administrative systems which process approximately 38% of the insurance policies for the Company and its subsidiaries. This included the conversion of the ALIS System (administering approximately 49,280 policies) to CK/4 in January of 1998, and the TI System (administering approximately 5,244 policies) conversion to CK/4 which was completed the end of May, 1998. The conversion of the Life 70 system (administering approximately 17,285 policies for Investors- IN) is scheduled for completion in April, 1999. The modification of the LifeComm-B system which is responsible for the 19,205 policies assumed after the acquisition of State Auto Life Insurance Company is also scheduled for completion in April, 1999. The conversion of the LifeComm-A system (administering approximately 65,266 policies for Investors-NA) is now scheduled for completion in September of 1999. The modification of three non-material systems which administer 6,806 credit life policies, 2,514 group certificates and 15,938 industrial life policies are scheduled for completion in December of 1998, March of 1999 and June of 1999 respectively. In 1997, FIC Computer Services - a subsidiary of FIC which provides data processing services to ILCO and its affiliates - purchased new mainframe hardware and accompanying operating software, which the vendor has represented to be Y2K compliant. This hardware and software will be tested in 1998. The telephone system 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 anticipates that updated software releases will be commercially available well in advance of the year 2000. Accordingly, to the extent that such systems rely on date sensitive information, the Company expects that the effort needed to correct for year 2000 problems will be less time intensive than the effort needed to achieve compliance for its centralized systems. Accounting Developments In February 1997, the Financial Accounting Standards Board (FASB) issued Financial Accounting Standard (FAS) No. 128, "Earnings Per Share," which revises the standards for computing earnings per share previously prescribed by APB Opinion No. 15, "Earnings Per Share." The Statement 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 reflects the potential dilution that could occur if securities or other contracts to issue common stock were converted or exercised. The Statement requires dual presentation of basic and diluted earnings per share on the face of the income statement for all entities with potential dilutive securities outstanding. The Statement also requires a reconciliation of the numerator and denominator of the basic earnings per share computation to the numerator and denominator of the diluted earnings per share computation. The Statement is effective for interim and annual periods ending after December 15, 1997. The Company adopted FAS No. 128 in its annual financial statements for the year ended December 31, 1997. In June, 1997, the FASB issued FAS No. 130, "Reporting Comprehensive Income", which establishes standards for reporting and display of comprehensive income and its components in a financial statement with the same prominence as other financial statements. Total comprehensive income is required to be reported in condensed interim financial statements. Comprehensive income is defined as net income adjusted for changes in stockholders' equity resulting from events other than net income or transactions related to an entity's capital instruments. The Company adopted FAS 130 effective January 1, 1998, with reclassification of financial statements for earlier years. In June, 1997, the FASB issued FAS No. 131, "Disclosure About Segments of an Enterprise and Related Information", which establishes standards for reporting information about operating segments. Generally, FAS No. 131 requires that financial information be reported on the basis that it is used internally for evaluating performance. The Company adopted FAS No. 131 effective January 1, 1998 and comparative information for earlier years will be restated. This statement does not need to be applied to interim financial statements in the initial year of application. The adoption of FAS No. 131 did not have a material impact on the Company's results of operations, liquidity or financial position. In February, 1998, the FASB issued FAS No. 132, "Employers' Disclosures About Pensions and Other Postretirement Benefits", which revises current disclosure requirements for employers' pension and other retiree benefits. FAS No. 132 does not change the measurement or recognition of pension or other postretirement benefit plans. The Company adopted FAS No. 132 effective January 1, 1998, with the effect of such adoption to be reflected in year- end financial statements. The adoption of FAS No. 132 is not expected to have a material impact on the Company's results of operations, liquidity or financial position. 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 required to adopt SOP 97-3, effective January 1, 1999. Previously issued financial statements should not be restated unless the SOP is adopted prior to the effective date and during an interim period. The adoption of SOP 97-3 is not expected to 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, 1999. The operations of the Company are not affected by the provisions of FAS No. 133. INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES Part II. Other Information Item 1. Legal Proceedings The Company and Investors-NA are defendants in two lawsuits which were filed in Travis County, Texas in which the named plaintiffs 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 also seek a class action as to similarly situated individuals. A more detailed discussion of these lawsuits is contained in Part II, Item 1 Legal Proceedings of the Company's Form 10-Q for the three-month period ended March 31, 1998 and the Company's Form 10-K for the year ended December 31, 1997. Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of the Shareholders was held on May 19, 1998. The only matter submitted at the meeting to a vote of the Shareholders was the election of directors. All of the nominees were elected as directors. The nominees included one individual, Elizabeth Nash, who had not previously served as a director of the Company. The voting tabulation as to each nominee was as follows: Name In Favor Withheld Bender, Robert 3,809,134 1,685 Demgen, Jeffrey H. 3,809,139 1,680 Fleron, Theodore A. 3,809,139 1,680 Gilcrease, W. Lewis 3,802,107 8,712 Grace, James M. 3,808,779 2,040 Kosson, Richard 3,802,107 8,712 Mitte, Roy F. 3,808,279 2,540 Nash, Elizabeth 3,802,962 7,857 Payne, Dr. Eugene E. 3,808,779 2,040 Pruner, H. Gene 3,802,467 8,352 Schmitt, Steven P. 3,809,139 1,680 Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Form 10-K Annual Report of Registrant for the year ended December 31, 1997 heretofore filed by Registrant with the Securities and Exchange Commission, which is hereby incorporated by reference. (b) Reports on Form 8-K: None 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: August 14, 1998 EX-27 2
7 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR THE SIX MONTHS ENDED JUNE 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE. 1,000 6-MOS DEC-31-1998 JUN-30-1998 488,243 2,492 2,511 3,709 10,666 1,518 702,276 9,620 15,694 30,496 1,366,434 169,634 1,095 516,851 5,901 3,564 0 0 1,184 149,740 1,366,434 5,764 27,798 0 1,207 19,422 973 8,032 8,504 2,977 5,527 0 0 0 5,527 1.27 1.26 0 0 0 0 0 0 0
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