-----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, UdzzG41yHVL6yKiLpNUsK81/1WskqYK+CrQibcyjEGUw8nXmGoGdax49/bStPa1/ Lf3CBjo51jngC5Y+Kzjkzg== 0000050982-97-000015.txt : 19971117 0000050982-97-000015.hdr.sgml : 19971117 ACCESSION NUMBER: 0000050982-97-000015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 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: 97720103 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, 1997 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: 4,327,829. INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES INDEX Page No. Part I - Financial Information Item I - Financial Statements: Consolidated Balance Sheets September 30, 1997 and December 31, 1996................ 3 Consolidated Statements of Income For the three and nine month periods ended September 30, 1997 and 1996............................. 4 Consolidated Statements of Cash Flows For the three and nine month periods ended September 30, 1997 and 1996............................. 6 Notes to Consolidated Financial Statements.................. 11 Item 2 - Management's Discussion and Analysis of Financial Conditions and Results of Operations.............. 13 Part II Other Information........................................... 20 Signature Page.............................................. 21 Part I - Financial Information Item 1. Financial Statements INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands of dollars) Sept.30, Dec. 31, 1997 1996 Unaudited ASSETS Investments: Fixed maturities, at amortized cost (market value approximates $4,527 and $8,374) $ 4,910 $ 8,165 Fixed maturities available for sale at market value (amortized cost of $448,476 and $451,550) 460,596 453,896 Equity securities at market value (cost approximates $369 and $373) 3,126 2,304 Policy loans 54,490 53,030 Mortgage loans 10,943 13,494 Invested real estate and other invested assets 50,448 38,696 Short-term investments 93,610 91,556 Total investments 678,123 661,141 Cash and cash equivalents 5,536 3,313 Notes receivable from affiliates 55,329 59,940 Accrued investment income 8,394 7,807 Agent advances and other receivables 22,623 21,725 Reinsurance receivables 13,801 12,123 Property and equipment, net 1,720 1,785 Deferred policy acquisition costs 28,638 26,938 Present value of future profits of acquired businesses 48,791 45,240 Deferred financing costs 209 636 Other assets 9,863 8,965 Separate account assets 448,111 414,329 Total Assets $1,321,138 $1,263,942 (See Notes to Consolidated Financial Statements) INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands of dollars) Sept.30, Dec. 31, 1997 1996 Unaudited LIABILITIES & SHAREHOLDERS' EQUITY Liabilities: Policy liabilities and contractholder deposit funds Future policy benefits $ 138,416 $ 119,744 Contractholder deposit funds 518,980 538,505 Unearned premiums 8,396 9,069 Other policy claims & benefits payable 5,955 5,988 671,747 673,306 Other policyholders' funds 3,117 2,720 Senior loans 18,364 24,944 Deferred federal income taxes 31,817 23,692 Other liabilities 21,312 13,835 Separate account liabilities 445,865 412,084 Total liabilities 1,192,222 1,150,581 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; 5,343,739 and 5,223,739 shares issued, 4,327,829 and 4,232,829 shares outstanding in 1997 and 1996 1,175 1,150 Additional paid-in capital 4,252 3,752 Net unrealized appreciation of equity securities 1,792 1,255 Net unrealized gain on investments in fixed maturities available for sale 7,877 1,525 Retained earnings 117,176 108,697 132,272 116,379 Common treasury stock, at cost, 1,015,910 shares in 1997 and 990,910 shares in 1996 (3,356) (3,018) Total Shareholders' Equity 128,916 113,361 Total Liabilities and Shareholders' Equity $1,321,138 $1,263,942 (See Notes to Consolidated Financial Statements) INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996 (Unaudited) (in thousands of dollars, except per share data) 3 Months Ended Sept. 30, 1997 1996 Revenues: Net premiums $ 3,581 $ 2,461 Earned insurance charges 10,203 11,726 Net investment income 14,710 14,635 Gain on sale of real estate -0- -0- Other 812 652 Total 29,306 29,474 Benefits and expenses: Interest expense 471 528 Interest on insurance policies 7,517 8,389 Benefits and other expenses 16,953 15,984 Total 24,941 24,901 Income from operations 4,365 4,573 Provision for federal income taxes 1,528 1,600 Net income $ 2,837 $ 2,973 Per Share Data: Common stock and common stock equivalents 5,248 5,361 Net income per share available to common shareholders $ .57 $ .59 (See Notes to Consolidated Financial Statements) INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996 (Unaudited) (in thousands of dollars, except per share data) 9 Months Ended Sept. 30, 1997 1996 Revenues: Net premiums $ 8,341 $7,957 Earned insurance charges 30,609 32,033 Net investment income 43,791 45,340 Gain on sale of real estate -0- 23,520 Other 2,521 2,041 Total 85,262 110,891 Benefits and expenses: Interest expense 1,310 2,266 Interest on insurance policies 23,483 24,219 Benefits and other expenses 47,425 47,559 Total 72,218 74,044 Income from operations 13,044 36,847 Provision for federal income taxes 4,565 12,896 Net income $ 8,479 $ 23,951 Per Share Data: Common stock and common stock equivalents 5,254 5,400 Net income per share available to common shareholders $ 1.72 $ 4.53 (See Notes to Consolidated Financial Statements) INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996 (Unaudited) (in thousands of dollars) 3 Months Ended Sept.30, 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 2,837 $ 2,973 Adjustments to reconcile net income to net cash used in operating activities: Amortization of present value of future profits of acquired businesses 1,686 (1,266) Amortization of deferred policy acquision costs 599 691 Depreciation 478 -0- Net gain on sales of investments 66 -0- Financing costs amortized 132 277 Changes in assets and liabilities: Increase in accrued investment income (142) (624) Decrease (increase) in agent advances and other receivables 262 (3,392) Policy acquisition costs deferred (1,205) (1,269) Decrease in policy liabilities and contract holder deposit funds (5,396) (2,393) (Decrease) increase in other policyholders'funds (37) 2 Increase (decrease) in other liabilities 2,888 (8,236) Increase in deferred federal income taxes 3,947 822 Increase in other assets (103) (464) Other, net (315) 865 Net cash provided by (used in) operating activities $ 5,697 $(12,014) (See Notes to Consolidated Financial Statements) INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996 (Unaudited) (In thousands of dollars) 3 Months Ended Sept.30, 1997 1996 CASH FLOWS FROM INVESTING ACTIVITIES Investments purchased $ (3,074) $(20,633) Proceeds from sale and maturities of investments 9,290 15,905 Net change in short-term investments 2,915 13,533 Repayment of notes to affiliate 1,537 -0- Purchase & retirement of equipment, net (418) 7 Net cash provided by investing activities 10,250 8,812 CASH FLOWS FROM FINANCING ACTIVITIES Issuance of common stock 358 74 Purchase of treasury stock (338) -0- Acquisition of insurance subsidiary (11,688) -0- Repayment of debt (2,000) (5,000) Net cash used in financing activities (13,668) (4,926) Net increase (decrease)in cash and cash equivalents 2,279 (8,128) Cash and cash equivalents, beginning of period 3,257 9,525 Cash and cash equivalents, end of period $ 5,536 $ 1,397 (See Notes to Consolidated Financial Statements) INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996 (Unaudited) (in thousands of dollars) 9 Months Ended Sept.30, 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 8,479 $ 23,951 Adjustments to reconcile net income to net cash used in operating activities: Amortization of present value of future profits of acquired businesses 4,657 1,834 Amortization of deferred policy acquisition costs 1,778 1,963 Depreciation 1,369 -0- Net gain on sales of investments -0- (23,732) Financing costs amortized 427 783 Changes in assets and liabilities: Increase in accrued investment income (251) (1,329) Increase in agent advances and other receivables (459) (8,115) Policy acquisition costs deferred (3,478) (3,625) Decrease in policy liabilities and contract holder deposit funds (17,472) (13,482) (Decrease) increase in other policyholders' funds (234) 35 Increase (decrease) in other liabilities 6,185 (9,669) Increase (decrease)in deferred federal income taxes 5,308 (5,800) Increase in other assets (898) (1,901) Other, net (622) 7,520 Net cash provided by (used in) operating activities $ 4,789 $(31,567) (See Notes to Consolidated Financial Statements) INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996 (Unaudited) (In thousands of dollars) 9 Months Ended Sept.30, 1997 1996 CASH FLOWS FROM INVESTING ACTIVITIES Investments purchased $ (18,024) $(43,908) Proceeds from sale and maturities of investments 30,635 96,970 Net change in short-term investments (403) 7,918 Repayment(issuance)of notes to affiliate 4,611 (253) Purchase & retirement of equipment, net (1,304) 27 Net cash provided by investing activities 15,515 60,754 CASH FLOWS FROM FINANCING ACTIVITIES Issuance of common stock 525 114 Purchase of treasury stock (338) -0- Acquisition of insurance subsidiary (11,688) -0- Repayment of debt (6,580) (34,441) Net cash used in financing activities (18,081) (34,327) Net increase (decrease)in cash and cash equivalents 2,223 (5,140) Cash and cash equivalents, beginning of period 3,313 6,537 Cash and cash equivalents, end of period $ 5,536 $ 1,397 (See Notes to 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, 1996 previously filed with the Securities and Exchange Commission for financial statements prepared in accordance with GAAP. Certain prior year amounts have been reclassified to conform with current year presentation. Sale of Home Office Building Net income for the nine months ended September 30, 1996 includes $15.3 million resulting from the sale of the Austin Centre, a hotel/office complex, located in Austin, Texas. The selling price was $62.675 million, less $1 million paid to a capital reserve account for the purchaser. The property was purchased in 1991 for $31.275 million. The book value of the property, $36.8 million, net of improvements and amortization, was retained and reinvested by Investors Life Insurance Company of North America. The balance of the proceeds of the sale, net of Federal Income Tax, was used to reduce the Company's senior loan obligations by $15 million. The sale closed on March 29, 1996. The Company continues to rent space on three floors under the terms of an operating lease which runs thru September, 1997. In May, 1997, the company renewed the lease, for a 5-year period, with options to renew for additional 5-year periods. Acquisition of Subsidiary On March 25, 1997, ILCO and Investors Life Insurance Company of Indiana (Investors-IN), an indirect, wholly-owned subsidiary of ILCO, entered into an agreement to acquire State Auto Life Insurance Company, an Ohio domiciled life insurer, from State Automobile Mutual Insurance Company, for a cash purchase price of $11.8 million, subject to certain post-closing adjustments. In connection with this transaction, the bank group participating in the Senior Loan agreed to defer payment of $4.5 million otherwise payable on April 1, 1997 under the terms of the Senior Loan, and to reduce the amount of the payment otherwise due on July 1, 1997 by $2.5 million. This deferral results in extending the maturity date of the Senior Loan to October 1, 1998. Under the terms of the transaction, State Auto Life would be merged into Investors-IN. The closing of the transaction took place on July 9, 1997. New Accounting Pronouncements In February 1997, the FASB issued 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. Earlier application is not permitted. However, an entity may disclose pro forma earnings per share amounts that would have resulted if the entity had applied the Statement in an earlier period. The Company intends to adopt FAS 128 in its annual financial statements for the year ended December 31, 1997. The pro forma unaudited earnings per share amounts that would have resulted assuming the Company had computed its earnings per share in accordance with the provisions established by FAS 128 for the three and nine months ended September 30, 1997 and 1996 are as follows: Three Months Ended Three Months Ended September 30, 1997 September 30, 1996 Basic earnings per share $0.66 $0.71 Diluted earnings per share $0.62 $0.70 Nine Months Ended Nine Months Ended September 30, 1997 September 30, 1996 Basic earnings per share $1.96 $5.69 Diluted earnings per share $1.94 $5.63 Management's Discussion and Analysis of Financial Conditions and Results of Operations: For the nine-month period ended September 30, 1997, ILCO's net income was $8,479,000 ($1.72 per common share) as compared to $23,951,000 ($4.53 per common share) in the first nine months of 1996. Net income from continuing operations (excluding the gain resulting from the Austin Centre as described below) was $8,479,000 ($1.72 per common share) for the nine-month period ended September 30, 1997, as compared to $8,651,000 ($1.71 per common share) for the first nine months of 1996. For the nine-month period ended September 30, 1996, net income included $15.3 million ($2.82 per common share) resulting from the sale of the Austin Centre, a hotel/office complex, located in Austin, Texas. The selling price was $62.675 million, less $1 million paid to a capital reserve account for the purchaser. The property was purchased in 1991 for $31.275 million. A portion of the sale proceeds, equal to the book value of the property, net of improvements and amortization ($36.8 million), was retained and reinvested by Investors Life Insurance Company of North America ("Investors-NA"). The balance of the proceeds, net of federal income tax, of the sale was used to reduce the Company's senior loan obligations by $15 million. The sale closed on March 29, 1996. The Company and its affiliates will continue to occupy space on three floors of the office tower as its headquarters, under a lease which runs through September 30, 1997. In May 1997, the Company renewed the lease, for a 5-year period, with options to renew for additional 5-year periods. 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 $15.2 million for the nine-month period ended September 30, 1997, as compared to $15.5 million for the comparable period in 1996. These statutory earnings are the source to provide for the repayment of ILCO's indebtedness. 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 1997 was $8.34 million, as compared to $7.96 million for the first nine months of 1996. Reinsurance premiums ceded were $3.3 million for the first nine months of 1997, as compared to $2.9 million in the first nine months of 1996. Earned insurance charges for the nine-month period ended September 30, 1997 were $30.61 million, as compared to $32.03 million for the same period in 1996. This source of revenues is related to the universal life insurance and annuity book of business of Investors- NA. Interest expense was $1.31 million for the first nine months of 1997, as compared to $2.27 million for the first nine months of 1996. The decrease is attributable to a reduction in the average principal balance of the senior loan from $36.58 million for the first nine months of 1996 to $19.76 million for the first nine months of 1997, as well as a decrease in the average rate of interest paid on the senior loan - 7.66% for the first nine months of 1997, as compared to 7.78% for the first nine months of 1996. The decline in long-term interest rates during the first nine months of 1997, which was related to general economic conditions, had a positive effect upon the market value of the fixed maturities available for sale segment of the portfolio. As of September 30, 1997, the market value of the fixed maturities available for sale segment was $460.6 million as compared to an amortized cost of $448.5 million, or an unrealized gain of $12.1 million. Such increase reflects unrealized gains on such investments. There is no assurance that this unrealized gain will be realized in the future. The net of tax effect of this increase has been recorded as an increase in shareholders' equity. A subsidiary of the Company, Investors-NA is the owner and developer of the office complex known as Bridgepoint Square Offices. The project consists of four office buildings, with a total rentable space of 364,000 square feet, and two parking garages. Investors-NA purchased the 20 acre tract of land for this complex in January 1995, for a cash purchase price of $9.75 million. At that time, the tract included one completed and fully leased office building, an adjacent parking garage, and sites for three more office buildings and a second parking garage. Since the purchase, Investors-NA has completed construction on the second parking garage and the three remaining building sites. Investors- NA has leased essentially all of the space in the four buildings. The investment of Investors-NA in the project is approximately $46 million. Investors-NA has listed the properties for sale. On March 25, 1997, ILCO and Investors Life Insurance Company of Indiana ("Investors-IN"), an indirect, wholly-owned subsidiary of ILCO, entered into an agreement to acquire State Auto Life Insurance Company, an Ohio domiciled life insurer, from State Automobile Mutual Insurance Company, for a cash purchase price of $11.8 million, subject to certain post-closing adjustments. In connection with this transaction, the bank group participating in the Senior Loan have agreed to defer payment of $4.5 million otherwise payable on April 1, 1997 under the terms of the Senior Loan, and to reduce the amount of the payment otherwise due on July 1, 1997 by $2.5 million. This deferral would result in extending the maturity date of the Senior Loan to October 1, 1998. Under the terms of the transaction, State Auto Life would be merged into Investors-IN. The closing of the transaction took place on July 9, 1997. At the annual meeting of shareholders, which was held on June 17, 1997, the shareholders approved the redomestication of the company from the State of New Jersey to the State of Texas. The redomestication was implemented by a merger of the Company into a Texas-domiciled company (ILCO-Texas) and, following the merger, changing the name of ILCO-Texas to InterContinental Life Corporation. Results of Operations For the three-month period ended September 30, 1997, the Company's income before federal income taxes was $4,365,000 on revenues of $29,306,000 as compared to income of $4,573,000, on revenues of $29,474,000 for the same period in 1996. For the three-month period ended September 30, 1997, the lapse rate with respect to universal life insurance policies decreased from the lapse rate experienced in the similar period in 1996. The rate for the 1997 period was 7.54 %, as compared to 9.27% in the 1996 period. The lapse rate with respect to traditional (non-universal) life insurance policies increased slightly from the levels experienced in the third quarter of 1996. The rate for the three- month period ended September 30, 1997 was 8.05 %, as compared to 7.77% in the similar period in 1996. The lapse rates experienced during these periods were within the ranges anticipated by management. 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 subsidiaries - Investors Life Insurance Company of Indiana (formerly known as Meridian Life Insurance Company) and InterContinental Life Insurance Company ("ILIC"). ILCO's primary source of funds consists of payments under two Surplus Debentures from Investors-NA. As of December 31, 1996, the outstanding principal balance of ILCO's senior loan obligations was $24.9 million. The Company made scheduled principal payments under its senior loan on January 1, 1997 and July 1, 1997, reducing the principal balance to $18.4 million at September 30, 1997. 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. Upon the merger of Standard Life into Investors-NA, the obligations of the Surplus Debentures were assumed by Investors-NA. As of September 30, 1997, the outstanding principal balance of the Surplus Debentures was $5.0 million and $26.5 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 September 30, 1997, the statutory surplus of Investors-NA was $54.3 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. As of September 30, 1997, Investors-NA had earned surplus of $9.4 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. ILIC, a subsidiary of Investors-NA, is domiciled in the State of New Jersey. Under the New Jersey 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. Any dividend must be paid from earned surplus. A proposed payment of a dividend or distribution which, together with dividends or distributions paid during the preceding twelve months, exceeds the greater of (i) 10% of statutory surplus as of the preceding December 31 or (ii) statutory net gain from operations for the preceding calendar year is treated as an "extraordinary dividend" and may not be paid until either it has been approved, or a waiting period shall have passed during which it has not been disapproved, by the insurance commissioner. ILIC had earned surplus of $5.0 million at September 30, 1997. 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 $7.4 million at September 30, 1997. ILCO's net cash flow used in operating activities was $4.8 million for the nine month period ended September 30, 1997, as compared to $(31.6) million for the first nine months of 1996. This change is primarily due to fluctuations in the amount of deferred federal income tax related to the market value of investment assets that are fixed maturities available for sale and the net gain realized in connection with the sale of the Austin Centre. 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, 1997, the book value of the Company's investment assets totaled $678.1 million, as compared to $661.1 million as of December 31, 1996. Total assets as of September 30, 1997 ($1.32 billion) increased slightly from the level as of December 31, 1996 ($1.26 billion). The level of short-term investments at September 30, 1997 was $93.6 million, as compared to $91.6 million at the end of 1996. Invested real estate and other invested assets increased from $38.7 million at December 31, 1996 to $50.4 million as of September 30, 1997. This increase is attributable to the development of the Bridgepoint property by Investors-NA. The fixed maturities available for sale portion of invested assets at September 30, 1997 was $460.6 million. The amortized cost of the fixed maturities available for sale segment as of September 30, 1997 was $448.5 million, representing a net unrealized gain of $12.1 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 September 30, 1997, included a non-material amount (0.92 % 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 December 31, 1996, the comparable percentage was 1.1%. Of these non-investment grade investments, 0.243 % are concentrated in the medium quality (or "3") category, with 0.677% receiving an NAIC rating of "4" (low quality) and none with a rating lower than "4". The consolidated balance sheets of the Company as of September 30, 1997 include $55.3 million of "Notes receivable from affiliates", represented by (i) a loan of $22.5 million from Investors-NA to Family Life Corporation and a $2.5 million loan from Investors-CA to Financial Industries Corporation (which 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 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 date 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. 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. Earlier application is not permitted. However, a company may disclose pro forma earnings per share amounts that would have resulted if it had applied the Statement in an earlier period. The Company intends to adopt FAS 128 in its annual financial statements for the year ended December 31, 1997. The pro forma unaudited earnings per share amounts that would have resulted assuming the Company had computed its earnings per share in accordance with the provisions established by FAS 128 for the nine month periods ended September 30, 1997 and 1996 are as follows: Nine Months Ended Nine Months Ended September 30, 1997 September 30, 1996 Basic earnings per share $1.96 $5.69 Diluted earnings per share $1.94 $5.63 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 None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (i) Computation of Earnings Per Share (ii) Form 10-K Annual Report of Registrant for the year ended December 31, 1996 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 SIGNATURES 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 14, 1997 Exhibit Index Exhibit Page Description Number Number 11 (a) 1 Computation of Earnings Per Share Exhibit 11(a) Net income per share is based on the weighted average common and common equivalent shares outstanding during each year. 3 Months Ended 9 Months Ended Sept 30, Sept 30, 1997 1996 1997 1996 (in thousands) Net income $ 2,837 $2,973 $8,479 $ 23,951 Interest expense reduc- tion net of income tax effect 148 181 542 524 Net income available to common shareholders $ 2,985 $3,154 $9,021 $ 24,475 Divide by: Common shares out- standing, less treasury stock 4,328 4,207 4,328 4,207 Dilutive common share equivalents 920 1,154 926 1,193 Common stock and common stock equivalents 5,248 5,361 5,254 5,400 Net income per share available to common shareholders $ .57 $ .59 $ 1.72 $ 4.53 EX-27 2
7 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000050982 INTERCONTINENTAL LIFE CORPORATION 1,000 9-MOS DEC-31-1997 SEP-30-1997 460,596 4,910 4,527 3,126 10,943 50,448 678,123 5,536 13,801 28,638 1,321,138 138,416 8,396 518,980 5,955 18,364 0 0 1,175 127,741 1,321,138 8,341 43,791 0 2,521 28,596 1,778 12,393 13,044 4,565 8,479 0 0 0 8,479 1.72 1.72 0 0 0 0 0 0 0
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