SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the Quarterly Period Ended March 31, 2000
Commission File Number 0-4690
FINANCIAL INDUSTRIES CORPORATION
(Exact Name of Registrant as specified in its charter)
Texas 74-2126975
(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 ($.20 par value) at end of period:
5,054,661.
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FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
INDEX
Page No.
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 2000 and December 31, 1999................................ 3
Consolidated Statements of Income
For the three month period ended
March 31, 2000 and March 31, 1999................................... 5
Consolidated Statements of Cash Flows
For the three month period ended
March 31, 2000 and March 31, 1999................................... 7
Notes to Consolidated Financial Statements....................................9
Item 2. Management's Discussion and Analysis of
Financial Conditions and Results of Operations......................11
Item 3. Quantitative and Qualitative Disclosures
About Market Risk ...............................................17
Part II
Other Information...........................................................18
Signature Page..............................................................20
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<PAGE>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
(unaudited)
<S> <C> <C>
ASSETS
Investments other than investments
in affiliate:
Fixed maturities available for sale
at market value (amortized cost of
$79,597 and $78,252 at March 31,
2000 and December 31, 1999, respectively) $ 78,920 $ 77,515
Equity securities at market (cost
approximates $11 at March 31,
2000 and December 31, 1999) 4 4
Policy loans 3,598 3,595
Short-term investments 22,127 24,839
Total investments 104,649 105,953
Cash and cash equivalents 873 692
Investment in affiliate 71,594 70,013
Accrued investment income 1,131 1,180
Agency advances and other receivables 6,323 6,885
Reinsurance receivables 15,667 14,848
Due and deferred premiums 12,255 12,392
Property and equipment, net 1,355 1,355
Deferred policy acquisition costs 53,112 52,490
Present value of future profits of
acquired businesses 22,093 23,109
Other assets 4,658 4,758
Separate account assets 383 379
Total Assets $ 294,093 $ 294,054
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
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FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Liabilities:
Policy liabilities and contract holder
deposit funds:
Future policy benefits $ 60,979 $ 59,783
Contract holder deposit funds 43,336 44,681
Unearned premiums 14 14
Other policy claims and benefits payable 4,211 4,282
108,540 108,760
Subordinated notes payable to affiliate 39,960 41,497
Deferred federal income taxes 23,175 23,222
Other liabilities 4,528 4,079
Separate account liabilities 383 379
Total Liabilities 176,586 177,937
Commitments and Contingencies
Shareholders' equity:
Common stock, $.20 par value, 10,000,000
shares authorized; 5,845,300 shares
issued, 5,054,661 outstanding in 2000
and 1999 1,169 1,169
Additional paid-in capital 7,225 7,225
Accumulated other comprehensive loss (2,364) (2,454)
Retained earnings 118,852 117,552
124,882 123,492
Common treasury stock, at cost, 790,639
shares in 2000 and 1999
(7,375) (7,375)
Total Shareholders' Equity 117,507 116,117
Total Liabilities and Shareholders' Equity $ 294,093 $ 294,054
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
(unaudited)
<S> <C> <C>
Revenues:
Premiums $ 8,401 $ 8,581
Net investment income 1,740 1,753
Earned insurance charges 1,147 1,376
11,288 11,710
Benefits and expenses:
Policyholder benefits and expenses 3,351 3,336
Interest expense on contract holders
deposit funds 590 505
Amortization of present value of future
profits of acquired businesses 1,016 1,210
Amortization of deferred policy
acquisition costs 1,349 1,203
Operating expenses 2,947 2,916
Interest expense 528 698
9,781 9,868
Income before federal income tax and
equity in net earnings of affiliates 1,507 1,842
Provision for federal income taxes 259 339
Income before equity in net earnings
of affiliates 1,248 1,503
Equity in net earnings of affiliate,
net of tax 966 765
Net Income $ 2,214 $ 2,268
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
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FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
(unaudited)
<S> <C> <C>
Net Income Per Share
Basic:
Average weighted shares outstanding 5,055 5,055
Basic earnings per share $ 0.44 $ 0.45
Diluted:
Common stock and common stock equivalents 5,167 5,206
Diluted earnings per share $ 0.43 $ 0.44
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
(unaudited)
CASH FLOWS FROM OPERATING
ACTIVITIES
<S> <C> <C>
Net Income $ 2,214 $ 2,268
Adjustments to reconcile net income
to net cash provided by operating
activities:
Amortization of present value of future
profits of acquired business 1,016 1,210
Amortization of deferred policy
acquisition costs 1,349 1,203
Equity in undistributed earnings of
affiliate (1,526) (1,314)
Changes in assets and liabilities:
Decrease in accrued
investment income 49 228
Increase in agent advances and
other receivables (257) (969)
Decrease in due premiums 137 197
Increase in deferred policy acquisition
costs (1,971) (2,057)
Decrease in other assets 100 341
(Decrease) increase in policy liabilities
and accruals (220) 82
Decrease in other liabilities (465) (652)
(Decrease) increase in deferred federal
income taxes (47) 138
Other, net (140) (69)
Net cash provided by operating activities $ 239 $ 606
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
(unaudited)
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed maturities purchased $ (1,462) $ (7,000)
Increase in policy loans (3) (78)
Proceeds from sales and maturities of
fixed maturities 232 9,769
Net increase (decrease) in short-term investments 2,712 (2,603)
Net cash provided by investing activities 1,479 88
CASH FLOW FROM FINANCING
ACTIVITIES
Repayment of subordinated notes payable (1,537) (1,537)
Net cash used in financing activities (1,537) (1,537)
Net increase (decrease) in cash 181 (843)
Cash and cash equivalents, beginning of year 692 2,601
Cash and cash equivalents, end of period $ 873 $ 1,758
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The financial statements included herein have been presented to conform to the
requirements of Form 10-Q. This presentation includes year end balance sheet
data which was derived from audited financial statements. The notes to the
financial statements 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, 1999 previously filed with the Securities
and Exchange Commission for financial statements prepared in accordance with
GAAP. Management believes the financial statements reflect all adjustments
necessary to present a fair statement of interim results. Certain prior year
amounts have been reclassified to conform with current year presentation.
The consolidated financial statements include the accounts of Financial
Industries Corporation ("FIC") and its wholly-owned subsidiaries. The investment
of FIC in InterContinental Life Corporation ("ILCO") is presented using the
equity method. All significant intercompany items and transactions have been
eliminated.
Other Comprehensive Income
The following is a reconciliation of accumulated other comprehensive income
(loss) from December 31, 1999 to March 31, 2000 (in thousands):
<TABLE>
<CAPTION>
Total
Net unrealized Net accumulated
gain (loss) on appreciation other
investments of equity comprehensive
in fixed maturities securities income (loss)
available for sale
<S> <C> <C> <C>
Balance at December 31, 1999 $ (2,454) $ 0 $ (2,454)
Current Period Change 89 1 90
Balance at March 31, 2000 $ (2,365) $ 1 $ (2,364)
</TABLE>
Dividends Declared
On January 17, 2000, FIC's Board of Directors approved an annual cash dividend
in the amount of $.18 per common share. The dividend is payable on April 12,
2000 to shareholders of record on April 5, 2000. The dividend has been accrued
in other liabilities on the consolidated balance sheet.
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FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
New Accounting Pronouncements
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. No. FAS 133 is applicable to financial statements for all
fiscal quarters of fiscal years beginning after June 15, 2000, as amended by FAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FAS No. 133". As the Company does not have
significant investments in derivative financial instruments, the adoption of FAS
No. 133 is not anticipated to have a material impact on the Company's results of
operations, liquidity or financial position.
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Conditions and Results
of Operation
For the three-month period ended March 31, 2000, Financial Industries
Corporation's ("FIC") net income was $2,214,000 (basic earnings of $0.44 per
common share, or diluted earnings of $0.43 per common share) as compared to
$2,268,000 (basic earnings of $0.45 per common share, or diluted earnings of
$0.44 per common share) in the first three months of 1999. Earnings per share
are stated in accordance with the requirements of FAS No. 128, which establishes
two measures of earnings per share: basic earnings per share and diluted
earnings per share. Basic earnings per share is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflect the potential
dilution that would occur if securities or other contracts to issue common stock
were converted or exercised.
On January 17, 2000, FIC's Board of Directors approved an annual cash dividend
in the amount of $.18 per common share. The dividend is payable on April 12,
2000, to record holders as of the close of business on April 5, 2000. The
dividend is payable with respect to each share of common stock which is issued
on the record date, except for shares owned directly by FIC.
Results of Operations
FIC's income from operations - as determined before federal income tax and
equity in net earnings of its affiliate, InterContinental Life Corporation - for
the three-month period ended March 31, 2000, was $1,507,000 (on revenues of
$11,288,000), as compared to $1,842,000 (on revenues of $11,710,000) in the
first three months of 1999.
Premiums for the first three months of 2000, net of reinsurance ceded, were $8.4
million, as compared to $8.6 million in the first three months of 1999.
Policyholder benefits and expenses were $3.4 million in the first quarter of
2000, as compared to $3.3 million in the first three months of 1999.
As of March 31, 2000, the market value of the fixed maturities available for
sale segment was $78.9 million as compared to an amortized value of $79.6
million, or an unrealized loss of $0.7 million. The decrease reflects unrealized
losses on such investments related to changes in interest rates subsequent to
the purchase of such investments. The net of tax effect of this decrease ($0.46
million at March 31, 2000) has been recorded as an decrease in shareholders'
equity. As required under the provisions of FAS No. 130, the determination of
"Accumulated other comprehensive loss" includes separate identification of the
change in values which occurred during the current period.
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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.
Equity in Net Income of InterContinental Life Corporation
General
For the three-month period ended March 31, 2000, the Company's equity in the net
earnings of InterContinental Life Corporation ("ILCO"), net of federal income
tax, was $966,000, as compared to $765,000 for the first three months of 1999.
On March 17, 1999, ILCO paid a stock dividend (one share of common stock for
each outstanding share of common stock). FIC currently owns 3,590,292 shares of
ILCO's common stock. In addition, Family Life currently owns 342,400 shares of
ILCO common stock. As a result, FIC currently owns, directly and indirectly
through Family Life, 3,932,692 shares (approximately 47.50%) of ILCO's common
stock.
As of March 31, 2000, the market value of ILCO's fixed maturities available for
sale segment was $419.5 million as compared to an amortized cost of $426.2
million, or an unrealized loss of $6.7 million. The decrease reflects unrealized
losses on such investments related to changes in interest rates subsequent to
the purchase of such investments. Since FIC owns approximately 47.50% of the
common stock of ILCO, the net of tax effect of this decrease ($1.9 million at
March 31, 2000) is included in "Accumulated other comprehensive loss" on the
Consolidated Balance Sheets and has been recorded as an decrease in
shareholders' equity.
Liquidity and Capital Resources of ILCO
ILCO is a holding company whose principal assets consist of the common stock of
Investors Life Insurance Company of North America ("Investors-NA") and its
subsidiary, Investors Life Insurance Company of Indiana
("Investors-IN")(formerly InterContinental Life Insurance Company). ILCO's
primary source of funds consists of payments under the surplus debentures from
Investors-NA.
ILCO's principal source of liquidity consists of the periodic payment of
principal and interest to it by Investors-NA, pursuant to the terms of the two
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 March 31, 2000, the outstanding principal
balances of the surplus debentures were $0.456 million and $2.9 million,
respectively.
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<PAGE>
The terms of the latter of the two Surplus Debentures required final payment of
the remaining principal balance on March 31, 2000. Effective September 28, 1999,
ILCO and Investors-NA amended the payment schedule to provide payment of the
remaining balance in four installments, with the final installment being due
July 1, 2000. Since Investors-NA is domiciled in the State of Washington, the
Washington insurance law applies to the administration of the terms of 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 March 31, 2000, the statutory capital and surplus
of Investors-NA was $73.6 million, an amount substantially in excess of the
surplus floor. The funds required by Investors-NA to meet its obligations to
ILCO under the terms of the surplus debentures are generated from operating
income generated from insurance and investment operations.
In addition to the payments under the terms of the Surplus Debentures, ILCO has
received dividends from its subsidiaries. Washington's insurance code includes
the "greater of" standard for payment of dividends to shareholders, but has a
requirement that prior notification of a proposed dividend be given to the
Washington Insurance Commissioner and that cash dividends may be paid only from
earned surplus. Under the "greater of" standard, an insurer may pay a dividend
in an amount equal to the greater of (i) 10% of policyholder surplus or (ii) the
insurer's net gain from operations for the previous year. As of March 31, 2000,
Investors-NA had earned surplus of $52.037 million.
Investors-IN is domiciled in the State of Indiana. Under the Indiana insurance
code, a domestic insurer may make dividend distributions upon proper notice to
the Department of Insurance, as long as the distribution is reasonable in
relation to adequate levels of policyholder surplus and quality of earnings.
Under Indiana law the dividend must be paid from earned surplus. Extraordinary
dividend approval would be required where a dividend exceeds the greater of 10%
of surplus or the net gain from operations for the prior fiscal year.
Investors-IN had earned surplus of $18.6 million at March 31, 2000. In June,
1999, Investors-IN paid a dividend in the amount of $3 million to its sole
shareholder, Investors-NA. The amount of the dividend was less than the net gain
from operations for the prior fiscal year; accordingly, no prior approval was
required for the payment of the dividend. Advance notice of the payment was
provided to the Indiana Department of Insurance, in accordance with the
provisions of the Indiana Insurance Code.
The Form 10-Qs of ILCO for the three-month periods ended March 31, 2000 and
March 31,1999, set forth the business operations and financial results of ILCO
and its life insurance subsidiaries. Such 10-Q reports of ILCO, including the
discussion by ILCO's management under the caption "Management's Discussion and
Analysis of Financial Conditions and Results of Operations" are incorporated
herein by reference.
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<PAGE>
Liquidity and Capital Resources
FIC is a holding company whose principal assets consist of the common stock of
Family Life and its equity ownership in ILCO. FIC's primary sources of capital
consists of cash flow from operations of its subsidiaries.
The cash requirements of FIC and its subsidiaries consist primarily of its
service of the indebtedness created in connection with its ownership of Family
Life. As of March 31, 2000, the outstanding balance of such indebtedness was
$39.96 million on the Subordinated Notes granted by Investors-NA.
The principal source of liquidity for FIC's subsidiaries consists of the
periodic payment of principal and interest by Family Life pursuant to the terms
of a Surplus Debenture. The terms of the Surplus Debenture were previously
approved by the Washington Insurance Commissioner. Under the provisions of the
Surplus Debenture and current law, no prior approval of the Washington Insurance
Department is required for Family Life to pay interest or principal on the
Surplus Debenture; provided that, after giving effect to such payments, the
statutory surplus of Family Life is in excess of 6% of assets (the "surplus
floor"). However, Family Life 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 March 31, 2000,
the statutory capital and surplus of Family Life was $25.55 million, an amount
substantially in excess of the surplus floor. As of March 31, 2000, the
principal balance of the Surplus Debenture was $11.884 million. The funds
required by Family Life to meet its obligations under the terms of the Surplus
Debenture are generated primarily from premium payments from policyholders,
investment income and the proceeds from the sale and redemption of portfolio
investments.
Washington's insurance code includes the "greater of" standard for dividends 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. Family Life does not presently have earned surplus as defined by
the regulations adopted by the Washington Insurance Commissioner and, therefore,
is not permitted to pay cash dividends. However, since the new law applies only
to dividend payments, the ability of Family Life to make principal and interest
payments under the Surplus Debenture is not affected. The Company does not
anticipate that Family Life will have any difficulty in making principal and
interest payments on the Surplus Debenture in the amounts necessary to enable
Family Life Corporation to service its indebtedness for the foreseeable future.
The sources of funds for Family Life consist of premium payments from
policyholders, investment income and the proceeds from the sale and redemption
of portfolio investments. These funds are applied primarily to provide for the
payment of claims under insurance and annuity policies, operating expenses,
taxes, investments in portfolio securities, shareholder dividends and payments
under the provisions of the Surplus Debenture.
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<PAGE>
FIC's net cash flow provided by operating activities was $0.24 million in the
first three months of 2000, as compared to $0.61 million in the first three
months of 1999. Net cash flow used in financing activities was $1.537 million in
the first three months of 2000, as compared to $1.537 million in the first three
months of 1999.
The guaranty commitments of FIC under the loans incurred in connection with the
acquisition of Family Life (after taking into account the repayments and new
loans which occurred in July, 1993) relate to: (i) the $22.5 million note issued
by Family Life Corporation to Investors Life Insurance Company of North America
and (ii) the $34.5 million loaned by Investors-NA to two subsidiaries of FIC.
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.
There are no trends, commitments or capital asset requirements that are expected
to have an adverse effect on the liquidity of FIC.
Investments
As of March 31, 2000, the Company's investment assets totaled $104.65 million,
as compared to $105.95 million as of December 31, 1999.
The level of short-term investments at March 31, 2000 was $22.13 million, as
compared to $24.84 million as of December 31, 1999. The fixed maturities
available for sale portion represents $78.9 million of investment assets as of
March 31, 2000, as compared to $77.5 million at December 31, 1999. The amortized
cost of fixed maturities available for sale as of March 31, 2000 was $79.6
million representing a net unrealized loss of $0.7 million. This unrealized loss
principally reflects changes in interest rates from the date the respective
investments were purchased. To reduce the exposure to interest rate changes,
portfolio investments are selected so that diversity, maturity and liquidity
factors approximate the duration of associated policyholder liabilities.
The assets held by Family Life 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".
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<PAGE>
The fixed maturities portfolio of Family Life, as of March 31, 2000, consisted
solely of fixed maturities investments 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 a "1"
(highest quality).
The investments of Family Life and ILCO's insurance subsidiaries in
mortgage-backed securities included collateralized mortgage obligations ("CMOs")
of $22.1 million and $181.3 million, respectively, and mortgage-backed
pass-through securities of $6.4 million and $39.4 million, respectively, at
March 31, 2000. Mortgage-backed pass-through securities, sequential CMO's and
support bonds, which comprised approximately 45.8% of the book value of FIC's
mortgage- backed securities and 53.8% of the book value of ILCO's
mortgage-backed securities at March 31, 2000, are sensitive to prepayment and
extension risks. ILCO and FIC have reduced the risk of prepayment associated
with mortgage-backed securities by investing in planned amortization class
("PAC"), target amortization class ("TAC") instruments and scheduled bonds.
These investments are designed to amortize in a predictable manner by shifting
the risk of prepayment of the underlying collateral to other investors in other
tranches ("support classes") of the CMO. At March 31, 2000, PAC and TAC
instruments and scheduled bonds represented approximately 54.2% of the book
value of FIC's mortgage-backed securities and approximately 46.2% of the book
value of ILCO's mortgage-backed securities. Sequential and support classes
represented approximately 23.3% of the book value of FIC's mortgage-backed
securities and approximately 35.8% of the book value of ILCO's mortgage-backed
securities at March 31, 2000. In addition, FIC and ILCO limit the risk of
prepayment of CMOs by not paying a premium for any CMOs. ILCO and FIC do not
invest in mortgage-backed securities with increased prepayment risk, such as
interest-only stripped pass-through securities and inverse floater bonds.
Neither FIC nor ILCO had any z-accrual bonds as of March 31, 2000. The
prepayment risk that certain mortgage- backed securities are subject to is
prevalent in periods of declining interest rates, when mortgages may be repaid
more rapidly than scheduled as individuals refinance higher rate mortgages to
take advantage of the lower current rates. As a result, holders of
mortgage-backed securities may receive large prepayments on their investments
which cannot be reinvested at an interest rate comparable to the rate on the
prepaying mortgages. Neither FIC nor ILCO made additional investments in CMOs
during 1999. For the year 2000, the investment objectives of FIC and ILCO
include the making of selected investments in CMOs.
Management believes that the absence of "high-yield" or "non-investment grade"
investments (as defined above) in the portfolios of its life insurance
subsidiary 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.
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<PAGE>
Cautionary Statements for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act of 1995
Except for historical factual information set forth in this Management's
Discussion and Analysis, certain statements made in this report are forward
looking and contain information about financial results, economic conditions and
other risks and known uncertainties. The Company cautions the reader that actual
results could differ materially from those anticipated by the Company, depending
upon the eventual outcome of certain factors, including: (1) heightened
competition for new business, (2) significant changes in interest rates and (3)
adverse regulatory changes affecting the business of insurance.
Accounting Developments
In June, 1998, the FASB issued FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. FAS No. 133 is applicable to financial statements for all
fiscal quarters of fiscal years beginning after June 15, 2000, as amended by FAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FAS No. 133". As the Company does not have
significant investments in derivative financial instruments, the adoption of FAS
No. 133 is not anticipated to have a material impact on the Company's results of
operations, liquidity or financial position.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
General
FIC's principal assets are financial instruments, which are subject to market
risks. Market risk is the risk of loss arising from adverse changes in market
rates, principally interest rates on fixed rate investments. For a discussion of
the Company's investment portfolio and the management of that portfolio to
reflect the nature of the underlying insurance obligations of the Company's
insurance subsidiaries, please refer to the information set forth in Item 2
"Management's Discussion and Analysis of Financial Conditions and Results of
Operation - Investments" of this report.
The following is a discussion of the Company's primary market risk sensitive
instruments. It should be noted that this discussion has been developed using
estimates and assumptions. Actual results may differ materially from those
described below. Further, the following discussion does not take into account
actions which could be taken by management in response to the assumed changes in
market rates. In addition, the discussion does not take into account other types
of risks which may be involved in the business operations of the Company, such
as the reinsurance recoveries on reinsurance treaties with third party insurers.
The primary market risk to the Company's investment portfolio is interest rate
risk. Since the Company own approximately 47.50% of the common stock of ILCO,
the interest rate risk of ILCO's fixed income portfolio has an effect on the
value of FIC's "investment in affiliate". The Company does not use derivative
financial instruments.
- 17 -
<PAGE>
Interest Rate Risk
(a) FIC's Fixed Income Investments
Assuming an immediate increase of 100 basis points in interest rates, the
net hypothetical loss in fair market value related to the financial
instruments segment of the Company's balance sheet is estimated to be $ 3.4
million at March 31, 2000 and $9.7 million at December 31, 1999. For
purposes of the foregoing estimate, the following categories of the
Company's fixed income investments were taken into account: (i) fixed
maturities, including fixed maturities available for sale and (ii)
short-term investments. The market value of such assets was $ 101.1 million
at March 31, 2000 and $102.4 million at December 31, 1999.
The fixed income investments of the Company include certain mortgage-backed
securities. The market value of such securities was $ 28.1 million at March
31, 2000 and $ 27.3 million at December 31, 1999. Assuming an immediate
increase of 100 basis points in interest rates, the net hypothetical loss
in the fair market value related to such mortgage-backed securities is
estimated to be $ 1.5 million at March 31, 2000 and $ 1.9 million at
December 31, 1999.
(b) FIC's Investment in Affiliate
The value of FIC's investment in affiliate is affected by the amount of
unrealized gains and losses, net of tax, in the investment portfolio of its
affiliate, ILCO. Assuming an immediate increase of 100 basis points in
interest rates, the net hypothetical loss in value, net of tax, related to
the Company's investment in affiliate is estimated to be $6.7 million at
March 31, 2000 and $6.3 million at December 31, 1999.
The hypothetical effect of the interest rate risk on fair values was estimated
by applying a commonly used model. The model projects the impact of interest
rate changes on a range of factors, including duration and potential prepayment.
Part II. 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.
ILCO 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
- 18 -
<PAGE>
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
Form 10-K Annual Report of Registrant for the year ended December 31,
1999 heretofore filed by Registrant with the Securities and Exchange
Commission, which is hereby incorporated by reference.
(b) Reports on Form 8-K
None.
- 19 -
<PAGE>
FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FINANCIAL INDUSTRIES CORPORATION
/s/ James M. Grace
James M. Grace, Treasurer
Date: May 15, 2000
- 20 -
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR
THE THREE MONTHS ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> Mar-31-2000
<DEBT-HELD-FOR-SALE> 78,920
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 4
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 104,649
<CASH> 873
<RECOVER-REINSURE> 15,667
<DEFERRED-ACQUISITION> 53,112
<TOTAL-ASSETS> 294,093
<POLICY-LOSSES> 60,979
<UNEARNED-PREMIUMS> 14
<POLICY-OTHER> 43,336
<POLICY-HOLDER-FUNDS> 4,211
<NOTES-PAYABLE> 39,960
0
0
<COMMON> 1,169
<OTHER-SE> 116,338
<TOTAL-LIABILITY-AND-EQUITY> 294,093
8,401
<INVESTMENT-INCOME> 1,740
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<INCOME-PRETAX> 2,473
<INCOME-TAX> 259
<INCOME-CONTINUING> 2,214
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,214
<EPS-BASIC> 0.44
<EPS-DILUTED> 0.43
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
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