-----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, PhNjSkMXUoZkNpD9vtroXtJA4E3SI9x/3UsVDFhR5Xk5VETbYupAtpKDW4zmYauO AKOi/j86qV4mEGtpftYnbA== 0000050982-96-000013.txt : 19961118 0000050982-96-000013.hdr.sgml : 19961118 ACCESSION NUMBER: 0000050982-96-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 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: 1934 Act SEC FILE NUMBER: 000-07288 FILM NUMBER: 96665252 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, 1996 Commission File Number 2-39310 INTERCONTINENTAL LIFE CORPORATION New Jersey 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: 4,206,829. INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES INDEX Page No. Part I - Financial Information Consolidated Balance Sheets September 30, 1996 and December 31, 1995................ 3 Consolidated Statements of Income For the three and nine month periods ended September 30, 1996 and 1995............................. 4 Consolidated Statements of Cash Flows For the three and nine month periods ended September 30, 1996 and 1995............................. 6 Notes to Consolidated Financial Statements...................11 Management's Discussion and Analysis of Financial Conditions and Results of Operations..........13 Part II Computations of Earnings Per Share...........................19 Part III Other Information............................................20 Signature Page...............................................21 Item 1. Financial Statements INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands of dollars) Sept 30, Dec. 31, 1996 1995 Unaudited ASSETS Investments: Fixed maturities, at amortized cost (market value approximates $8,778 and $14,277) $ 7,260 $ 14,420 Fixed maturities available for sale at market value (amortized cost of $466,222 and $463,268) 461,587 483,606 Equity securities at market (cost approximates $368 and $368) 2,397 1,559 Policy loans 52,822 53,656 Mortgage loans 13,702 14,836 Invested real estate and other invested assets 29,715 15,467 Short-term investments 78,076 85,994 Total investments 645,559 669,538 Cash and cash equivalents 1,397 6,537 Notes receivable from affiliates 61,477 61,224 Accrued investment income 9,519 8,190 Agent advances and other receivables 24,777 16,591 Reinsurance receivables 14,403 14,474 Property and equipment, net 4,433 4,460 Real estate occupied by the Company, net -0- 36,169 Deferred policy acquisition costs 26,588 24,926 Present value of future profits of acquired businesses 46,772 48,606 Deferred financing costs 814 1,597 Other assets 8,760 6,859 Separate account assets 408,667 416,122 Total Assets $1,253,166 $1,315,293 (See Notes to Consolidated Financial Statements) INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands of dollars) Sept 30, Dec. 31, 1996 1995 Unaudited LIABILITIES & SHAREHOLDERS' EQUITY Liabilities: Policy liabilities and contractholder deposit funds Future policy benefits $ 125,388 $ 128,265 Contractholder deposit funds 535,684 544,621 Unearned premiums 8,995 10,669 Other policy claims & benefits payable 6,130 6,125 676,197 689,680 Other policyholders' funds 2,735 2,700 Senior loans 24,944 59,385 Deferred federal income taxes 19,662 25,462 Other liabilities 17,438 27,105 Separate account liabilities 406,421 413,876 Total liabilities 1,147,397 1,218,208 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; 5,197,739 and 5,166,239 shares issued, 4,206,829 and 4,175,329 shares outstanding in 1996 and 1995 1,144 1,137 Additional paid-in capital 3,628 3,521 Net unrealized appreciation of equity securities 1,319 748 Net unrealized (loss) gain on invest- ments in fixed maturities available for sale (3,013) 12,938 Retained earnings 105,709 81,759 108,787 100,103 Common treasury stock, at cost, 990,910 shares in 1996 and 1995 (3,018) (3,018) Total Shareholders' Equity 105,769 97,085 Total Liabilities and Shareholders' Equity $1,253,166 $1,315,293 (See Notes to Consolidated Financial Statements) INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995 (Unaudited) (in thousands of dollars, except per share data) 3 Months Ended Sept 30, 1996 1995 Revenues: Net premiums $ 2,461 $ 2,537 Earned insurance charges 11,726 10,279 Net investment income 14,635 16,779 Gain on sale of real estate -0- -0- Other 652 858 Total 29,474 30,453 Benefits and expenses: Interest expense 528 1,443 Interest on insurance policies 8,389 8,213 Benefits and other expenses 15,984 17,025 Total 24,901 26,681 Income from operations 4,573 3,772 Provision for federal income taxes 1,600 1,274 Net income $ 2,973 $ 2,498 Per Share Data: Common stock and common stock equivalents 5,361 5,372 Net income per share available to common shareholders $ .59 $ .50 (See Notes to Consolidated Financial Statements) INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995 (Unaudited) (in thousands of dollars, except per share data) 9 Months Ended Sept 30, 1996 1995 Revenues: Net premiums $ 7,957 $ 8,212 Earned insurance charges 32,033 30,278 Net investment income 45,340 48,760 Gain on sale of real estate 23,520 -0- Other 2,041 2,639 Total 110,891 89,889 Benefits and expenses: Interest expense 2,266 4,550 Interest on insurance policies 24,219 24,252 Benefits and other expenses 47,559 49,260 Total 74,044 78,062 Income from operations 36,847 11,827 Provision for federal income taxes 12,896 4,139 Net income $ 23,951 $ 7,688 Per Share Data: Common stock and common stock equivalents 5,400 5,372 Net Income per share available to common shareholders $ 4.53 $ 1.52 (See Notes to Consolidated Financial Statements) INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995 (Unaudited) (in thousands of dollars) 3 Months Ended Sept 30, CASH FLOWS FROM OPERATING ACTIVITIES 1996 1995 Net Income $ 2,973 $ 2,498 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Amortization of present value of future profits of acquired businesses (1,266) 1,447 Amortization of deferred policy acquisition costs 691 1,014 Depreciation -0- (11) Net gain on sales of investments -0- 54 Financing costs amortized 277 274 Changes in assets and liabilities: (Increase) decrease in accrued investment income (624) 57 (Increase) decrease in agent advances and other receivables (3,392) 7,608 Policy acquisition costs deferred (1,269) (590) Decrease in policy liabilities and contract holder deposit funds (2,393) (4,911) Increase in other policyholders' funds 2 31 Decrease in other liabilities (8,236) (6,975) Increase in deferred federal income taxes 822 1,661 Increase in other assets (464) (1,478) Other, net 865 (1,446) Net cash (used in) provided by operating activities $(12,014) $ (767) (See Notes to Consolidated Financial Statements) INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995 (Unaudited) (In thousands of dollars) 3 Months Ended Sept 30, CASH FLOWS FROM INVESTING ACTIVITIES 1996 1995 Investments purchased $(20,633) $ (2,703) Proceeds from sale and maturities of investments 15,905 12,054 Net change in short-term investments 13,533 (11,080) Issuance of notes to affiliate -0- -0- Payment for purchase of insurance sub- sidiary, net of cash acquired -0- -0- Purchase & retirement of equipment, net 7 247 Net cash provided by (used in) investing activities 8,812 (1,482) CASH FLOWS FROM FINANCING ACTIVITIES Issuance of common stock 74 72 Repayment of debt (5,000) -0- Net cash (used in) provided by financing activities (4,926) 72 Net decrease in cash and cash equivalents (8,128) (2,177) Cash and cash equivalents, beginning of period 9,525 3,295 Cash and cash equivalents, end of period $ 1,397 $ 1,118 (See Notes to Consolidated Financial Statements) INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995 (Unaudited) (in thousands of dollars) 9 Months Ended Sept 30, CASH FLOWS FROM OPERATING ACTIVITIES 1996 1995 Net Income $ 23,951 $ 7,688 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Amortization of present value of future profits of acquired businesses 1,834 4,584 Amortization of deferred policy acquisition costs 1,963 2,749 Depreciation -0- -0- Net gain on sales of investments (23,732) -0- Financing costs amortized 783 607 Changes in assets and liabilities: (Increase) decrease in accrued investment income (1,329) 1,081 (Increase) decrease in agent advances and other receivables (8,115) 6,527 Policy acquisition costs deferred (3,625) (1,549) Decrease in policy liabilities and contract holder deposit funds (13,482) (22,327) Increase (decrease) in other policyholders' funds 35 (309) Decrease in other liabilities (9,669) (7,029) (Decrease) increase in deferred federal income taxes (5,800) 16,141 Increase in other assets (1,901) (2,496) Other, net 7,520 (2,303) Net cash (used in) provided by operating activities $(31,567) $ 3,364 (See Notes to Consolidated Financial Statements) INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995 (Unaudited) (In thousands of dollars) 9 Months Ended Sept 30, CASH FLOWS FROM INVESTING ACTIVITIES 1996 1995 Investments purchased $(43,908) $(17,561) Proceeds from sale and maturities of investments 96,970 18,682 Net change in short-term investments 7,918 10,916 Issuance of notes to affiliate (253) -0- Payment for purchase of insurance subsidiary, net of cash acquired -0- (17,492) Purchase & retirement of equipment, net 27 10 Net cash provided by (used in) investing activities 60,754 (5,445) CASH FLOWS FROM FINANCING ACTIVITIES Issuance of common stock 114 336 Issuance of senior loan -0- 15,000 Repayment of debt (34,441) (17,700) Net cash used in financing activities (34,327) (2,364) Net decrease in cash and cash equivalents (5,140) (4,445) Cash and cash equivalents, beginning of period 6,537 5,563 Cash and cash equivalents, end of period $ 1,397 $ 1,118 (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, 1995 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. Acquisition of Insurance Subsidiary On February 14, 1995, the Company, through Investors Life Insurance Company of North America ("Investors-NA"), purchased from Meridian Mutual Insurance Company the stock of Meridian Life Insurance Company, an Indianapolis-based life insurer, for a cash purchase price of $17.1 million, net of past-closing adjustments. After the aquisition, Meridian Life changed its name to Investors Life Insurance Company of Indiana ("Investors-IN"). Investors-IN is licensed in ten states and markets a variety of individual life and annuity products through independent agents. This is not considered a significant subsidiary for Securities and Exchange Commission reporting purposes. Under the terms of the purchase agreement, the Company acquired approximately 82% of the outstanding stock of Investors-IN for $14 million and Investors-NA acquired approximately 18% of the outstanding stock of Investors-IN for the remainder of the purchase price. Immediately following the closing of the transaction, the Company contributed the shares acquired by it to the unassigned surplus of Investors-NA. As a result, Investors- IN became a wholly-owned subsidiary of Investors-NA. This transaction was financed, in part, through a $15 million increase in the Company's Senior Loan. Sale of Home Office Building Net income for the first nine months of 1996 includes $15.3 million resulting from the sale during the first quarter of 1996 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-NA. 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. New Accounting Pronouncements In March 1995, the FASB issued FAS No. 121, "Accounting For the Impairment of Long-Lived Assets and For Long-Lived Assets to be Disposed of." This Statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In addition, the Statement requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell. FAS No. 121 is effective for fiscal years beginning after 1995. The Company adopted FAS No 121 effective January 1, 1996. The adoption of this Statement did not have a material impact on the Company's financial statements. In October 1995, the FASB issued FAS No. 123 "Accounting for Stock-Based Compensation," which encourages companies to adopt the fair value based method of accounting for stock-based compensation. This method requires the recognition of compensation expense equal to the fair value of such equity securities at the date of the grant. This Statement also allows companies to continue to account for stock-based compensation under the intrinsic value based method, as prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," with footnote disclosure of the pro forma effects of the fair value based method. FAS No. 123 is effective for transactions entered into in years that begin after December 15, 1995. The Company plans to adopt FAS No. 123 during 1996 by continuing to account for stock-based compensation under the intrinsic value method and disclosing the pro forma effects of the fair value method in the footnotes to the financial statements. Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations: For the nine-month period ended September 30, 1996, ILCO's net income was $23,951,000 ($4.53 per common share), as compared to $7,688,000 ($1.52 per common share) for the similar period in 1995. Net income for the first nine months of 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. 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 reported results for 1995 include the operations of Investors Life Insurance Company of Indiana (formerly known as Meridian Life Insurance Company) for the period from February 14, 1995 to December 31, 1995. Investors Life Insurance Company of Indiana (Investors-IN) was purchased by ILCO and Investors-NA for an adjusted purchase price of $17.1 million; the transaction was completed on February 14, 1995. The name change was completed in May, 1995. 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 $15.5 million at September 30, 1996, as compared to $18.4 million at September 30, 1995. 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 1996 was $7.96 million, as compared to $8.21 million in the same period of 1995. Reinsurance premiums ceded were $2.4 million in the first nine months of 1996 and $2.7 million for the first nine months of 1995. Earned insurance charges for the first nine months of 1996 were $32.03 million, as compared to $30.28 million for the similar period in 1995. This source of revenues is related to the universal life insurance and annuity books of business of Investors-NA. In December, 1995, Investors-NA entered into a reinsurance agreement with Family Life Insurance Company ("Family Life")(an insurance company subsidiary of Financial Industries Corporation and an affiliated company of Investors-NA), pertaining to universal life insurance written by Family Life. The reinsurance agreement is on a co-insurance basis and applies to all covered business with effective dates on and after January 1, 1995. The agreement applies to only that portion of the face amount of the policy which is less than $200,000; face amounts of $200,000 or more are reinsured by Family Life with a third party reinsurer. As of January, 1996, Investors-NA entered into a reinsurance agreement with Family Life, pertaining to annuity contracts written by Family Life. This reinsurance agreement is also on a co-insurance basis and applies to all covered business with effective dates on and after January 1, 1996. These arrangements reflect management's plan to develop universal life and annuity business at Investors-NA, with Family Life concentrating on the writing of term life insurance products. Interest expense was $2.27 million for the first nine months of 1996, as compared to $4.55 million for the similar period in 1995. The decrease is attributable to a reduction in the average principal balance of the senior loan from $65.96 million for the nine month period ending September 30, 1995 to $36.58 million for the nine month period ending September 30, 1996, as well as a decrease in the average rate of interest paid on the senior loan- 7.78% for the first nine months of 1996 as compared to 8.72% for the same period in 1995. The increase in interest rates during the first nine months of 1996, which was related to general economic conditions, had a negative effect upon the market value of the fixed maturities available for sale segment of the portfolio. As of September 30, 1996, the market value of the fixed maturities available for sale segment was $461.6 million, representing a net unrealized loss of $4.6 million over amortized cost. Such decrease reflects unrealized losses on such investments. The net of tax effect of this decrease has been recorded as a reduction in shareholders' equity. In January, 1995, ILCO, through Investors-NA, purchased, as an investment property, an office building project known as One Bridgepoint Office Square in Austin, Texas, for a cash purchase price of $9.75 million. The property consists of 20 acres of land, with four office building sites and two sites for parking garages. At the time of the purchase, the first stage of the development had already been completed, consisting of a five- story office building with 83,474 square feet of rentable space and a 550-car parking garage. That stage of the development was completed in 1986. In the fourth quarter of 1995, construction commenced on a second building on the site, with 110,000 square feet of rentable space, and the second parking garage. The second phase of the project was completed in the summer of 1996 and is fully rented. In the first quarter of 1996, construction commenced on the third building on the site, with approximately 81,000 square feet of rentable space. This third phase is projected to be finished in late 1996, and is more than 50% rented. A fourth building, with approximately 92,000 square feet of rentable space, is currently under construction, with an expected completion date in the fourth quarter of 1997. Results of Operations For the three-month period ended September 30, 1996, the Company's income from operations before Federal income taxes was $4,573,000 on revenues of $29,474,000, as compared to $3,772,000, on revenues of $30,453,000 for the same period in 1995. For the three-month period ended September 30, 1996, the lapse rate with respect to universal life insurance policies increased from the lapse rate experienced in the similar period in 1995. The rate for the 1996 period was 9.27%, as compared to 7.88% in the 1995 period. The lapse rate with respect to traditional (non-universal) life insurance policies increased slightly from the levels experienced in the third quarter of 1995. The rate for the three-month period ended September 30, 1996 was 7.77%, as compared to 7.10% in the similar period in 1995. 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-NA and its subsidiaries - Investors-IN 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, 1995, the outstanding principal balance of the ILCO's senior loan obligations was $59.4 million. In January, 1996, the Company made a scheduled payment of $4.5 million under its Senior Loan. In March, 1996, the Company made the scheduled payments for April 1st and July 1st, totaling $9 million. At that same time, the Company made a payment of $941,000, an additional payment under the terms of the loan applied to the principal balance. On April 1, 1996, an optional principal payment in the amount of $15 million was made. In July, 1996, the Company made the principal payment for October 1st ($4.5 million), plus an optional principal payment of $0.5 million, thereby reducing the total amount of the outstanding Senior Loan to $24.94 million. 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 ("Standard Life") 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. The terms of the merger were approved by the Insurance Commissioner of the State of Washington, the State of domicile of Investors-NA. As of September 30, 1996, the outstanding principal balance of the Surplus Debentures was $6.4 million and $35.5 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, 1996, the statutory capital and 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 requirements 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. 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 policy holder 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 currently has earned surplus. ILCO's net cash flow (used in) provided by operating activities was $(31.6) million for the nine month period ended September 30, 1996, as compared to $3.4 million for the same period in 1995. 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 to 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, 1996, the carrying value of the Company's invested assets totaled $645.6 million, as compared to $669.5 million as of December 31, 1995. The decrease in invested assets is primarily attributable to a decrease in the market value of the fixed maturities segment of invested assets. The level of short-term investments as of September 30, 1996 was $78.1 million, as compared to $86.0 million as of December 31, 1995. The fixed maturities available for sale portion of invested assets at September 30, 1996 was $461.6 million. The amortized cost of the fixed maturities available for sale segment as of September 30, 1996 was $466.2 million, representing a net unrealized loss of $4.6 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 policy holder 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 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, 1996, included a non-material amount (1.07% 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. For the year ended December 31, 1995, the percentage was 1.1%. The consolidated balance sheets of the Company as of December 31, 1995 include $61.5 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 Life Insurance Company of California 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. The NAIC has assigned a rating of "3" to the notes described above. 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 policy holders and to credit relatively consistent rates of return to its policy holders. Accounting Developments Long-Lived Assets In March, 1995, the FASB issued FAS No. 121," Accounting For the Impairment of Long-Lived Assets and For Long-Lived Assets to be Disposed of." This Statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In addition, the Statement requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell. FAS No. 121 is effective for the fiscal years beginning after 1995. The Company adopted FAS. No. 121 effective January 1, 1996. Management determined that adoption of this Statement did not have a material impact on the Company's financial statements. Stock-Based Compensation In October, 1995, the FASB issued Statement of FAS No. 123, "Accounting for Stock-Based Compensation." This Statement encourages companies to adopt a fair value based method of accounting for employee stock options and other equity instruments awarded as compensation. Under this method, compensation expense equal to the fair value of the security at the award grant date is recognized as compensation expense over the vesting period of the awarded security. However, the Statement also allows companies to continue to account for stock- based compensation under the intrinsic value based method, as prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees." Under the intrinsic value based method, the compensation cost is computed as the excess, if any, of the quoted market price of the equity security at the measurement date over the amount an employee must pay to acquire the security. If a company continues to account for stock-based compensation under the intrinsic value based method, it must make certain pro-forma disclosures in the footnotes to the financial statements for the difference in the fair value based method and the intrinsic value based method. This Statement is effective for stock-based compensation transactions entered into in fiscal years that begin after December 15, 1995. Management intends to continue to account for stock-based compensation under the intrinsic value based method as prescribed by APB No. 25, and allowed under FAS No. 123. The company will make the appropriate pro-forma disclosures required by FAS 123 in 1996. INTERCONTINENTAL LIFE CORPORATION PART II ITEM 6(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, 1996 1995 1996 1995 (in thousands) Net income $ 2,973 $ 2,498 $ 23,951 $ 7,688 Interest expense reduc- tion net of income tax effect 181 162 524 484 Net income available to common shareholders $ 3,154 $ 2,660 $ 24,475 $ 8,172 Divide by: Common shares out- standing, treasury stock 4,207 4,145 4,207 4,145 Dilutive common share equivalents 1,154 1,227 1,193 1,227 Common stock and common stock equivalents 5,361 5,372 5,400 5,372 Net income per share available to common shareholders $ .59 $ .50 $ 4.53 $ 1.52 INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES Part III. Other Information Item 1. Legal Proceedings The Company and its subsidiaries are defendants in certain legal actions related to the normal business operations of the Company. Management believes that the resolution of such legal actions will not have a material impact upon the financial statements. 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 Form 10-K Annual Report of Registrant for the year ended December 31, 1995 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, 1996 EX-27 2
7 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1996 SEP-30-1996 461,587 7,260 8,778 2,397 13,702 29,715 645,559 1,397 14,403 26,588 1,253,166 125,388 8,995 535,684 6,130 24,944 0 0 1,144 104,625 1,253,166 7,957 45,340 23,520 2,041 30,486 1,963 12,085 36,847 12,896 23,951 0 0 0 23,951 4.53 4.53 0 0 0 0 0 0 0
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