<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q/A
AMENDMENT NO. 3
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 12 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-7697
------------------------
SOUTHWESTERN LIFE CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 43-6069928
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 NORTH AKARD STREET,
DALLAS, TEXAS 75201
(Address of principal executive (Zip Code)
offices)
</TABLE>
(214) 954-7703
(Registrant's telephone number, including area code)
I.C.H. CORPORATION, 100 MALLARD CREEK ROAD, SUITE 400, LOUISVILLE, KENTUCKY
40207
(Former name, former address and former fiscal year, if changed since last
report)
------------------------
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 ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
SHARES OUTSTANDING
CLASS AND TITLE OF AS OF AUGUST 10,
CAPITAL STOCK 1994
- -------------------------------------- -------------------
<S> <C>
Common Stock, $1.00 Par Value 47,265,016
</TABLE>
------------------------
The Index to Exhibits appears on Page .
This filing contains pages.
This Amendment No. 2 amends Items 1 of Part I and Exhibit 11.1 of the Form
10-Q of Southwestern Life Corporation for the quarter ended June 30, 1994.
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<PAGE>
This Amendment No. 3 amends Items 1 of Part I and Exhibit 11.1 of the Form
10-Q of Southwestern Life Corporation for the quarter ended June 30, 1994.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOUTHWESTERN LIFE CORPORATION
(FORMERLY I.C.H. CORPORATION)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1993
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
Investments:
Fixed maturities:
Available for sale at fair value.................................................. $ 1,607,230 $1,691,693
Held to maturity at amortized cost................................................ 15,305 26,149
Equity securities, at fair value.................................................... 18,144 75,831
Mortgage loans on real estate, at amortized cost.................................... 124,084 138,504
Real estate, at lower of cost or fair value......................................... 64,781 67,491
Policy loans........................................................................ 175,713 177,736
Collateral loans.................................................................... 76,432 34,099
Investments in limited partnerships................................................. 44,430 43,640
Cash and short-term investments..................................................... 272,029 366,922
Other invested assets............................................................... 21,004 16,058
----------- ------------
Total investments............................................................. 2,419,152 2,638,123
Due from reinsurers................................................................... 253,152 388,083
Notes and accounts receivable and uncollected premiums................................ 15,528 6,951
Accrued investment income............................................................. 29,587 31,633
Deferred policy acquisition costs..................................................... 208,420 168,525
Present value of future profits of acquired business.................................. 81,564 50,705
Deferred income tax asset............................................................. 54,265 53,033
Excess cost of investments in subsidiaries over net assets acquired, net of
accumulated amortization............................................................. 302,833 307,604
Other assets.......................................................................... 43,390 47,999
Assets held in separate accounts...................................................... 5,016 5,207
----------- ------------
$ 3,412,907 $3,697,863
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Insurance liabilities:
Future policy benefits and other policy liabilities................................. $ 916,901 $ 927,303
Universal life and investment contract liabilities.................................. 1,667,107 1,684,396
Notes payable:
Due within one year................................................................. 8,235 34,546
Due after one year.................................................................. 379,343 383,435
Federal income taxes currently payable................................................ 9,101 29,015
Other liabilities..................................................................... 101,789 138,791
Liabilities related to separate accounts.............................................. 5,016 5,207
----------- ------------
3,087,492 3,202,693
----------- ------------
Stockholders' equity:
Preferred stock..................................................................... 199,997 229,239
Common stock........................................................................ 71,721 71,594
Common stock, Class B............................................................... -- 100
Additional paid-in capital.......................................................... 155,564 155,499
Net unrealized investment gains (losses), net of deferred income taxes in 1993...... (73,901) 20,458
Retained earnings................................................................... 29,377 71,833
----------- ------------
382,758 548,723
----------- ------------
Notes receivable collateralized by common stock..................................... (1,762) (1,729)
Treasury stock, at cost............................................................. (55,581) (51,824)
----------- ------------
325,415 495,170
----------- ------------
$ 3,412,907 $3,697,863
----------- ------------
----------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
SOUTHWESTERN LIFE CORPORATION
(FORMERLY I.C.H. CORPORATION)
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- --------------------------
1994 1993 1994 1993
------------ ------------ ------------ -----------
(RESTATED)
<S> <C> <C> <C> <C>
Income:
Premium income and other considerations............................. $ 113,131 $ 118,213 $ 229,705 $ 236,599
Net investment income............................................... 51,997 43,762 82,004 106,186
Realized investment gains (losses).................................. 673 (5,766) (45,101) 13,369
Equity in earnings of equity investees and limited partnerships..... 431 12,656 843 24,522
Gain on sale of stock by Bankers Life Holding Corporation........... 99,376
Other income........................................................ 8,826 6,699 11,325 33,346
------------ ------------ ------------ -----------
175,058 175,564 278,776 513,398
------------ ------------ ------------ -----------
Benefits, expenses and costs:
Policyholder benefits............................................... 99,584 102,547 190,269 216,553
Amortization of deferred policy acquisition costs and present value
of future profits.................................................. 13,102 14,686 25,395 27,752
Other operating expenses............................................ 34,869 42,837 72,349 91,764
Amortization of excess cost......................................... 2,398 2,402 4,796 4,803
Interest expense.................................................... 12,664 17,104 25,109 36,282
------------ ------------ ------------ -----------
162,617 179,576 317,918 377,154
------------ ------------ ------------ -----------
Operating earnings (loss) before income taxes......................... 12,441 (4,012) (39,142) 136,244
Income tax expense (credit)........................................... 7,703 4,464 (4,511) 39,097
------------ ------------ ------------ -----------
Operating earnings (loss)............................................. 4,738 (8,476) (34,631) 97,147
Cumulative effect to January 1, 1993 of change in method of accounting
for post-retirement benefits, net of tax effect...................... (1,812)
Extraordinary losses, net of tax effect............................... (129) (1,360)
------------ ------------ ------------ -----------
Net earnings (loss)................................................... 4,738 (8,605) (34,631) 93,975
Less dividends on preferred stock..................................... (3,500) (7,700) (7,825) (15,400)
------------ ------------ ------------ -----------
Net earnings (loss) applicable to common stock........................ $ 1,238 $ (16,305) $ (42,456) $ 78,575
------------ ------------ ------------ -----------
------------ ------------ ------------ -----------
Weighted average shares outstanding................................... 47,829,460 47,918,802 47,853,939 47,913,409
------------ ------------ ------------ -----------
------------ ------------ ------------ -----------
Earnings (loss) per common share:
Primary:
Operating earnings (loss)......................................... $ .03 $ (.34) $ (.89) $ 1.71
Cumulative effect to January 1, 1993 of change in method of
accounting for postretirement benefits........................... (.04)
Extraordinary losses.............................................. (.03)
------------ ------------ ------------ -----------
Net earnings (loss)............................................. $ .03 $ (.34) $ (.89) $ 1.64
------------ ------------ ------------ -----------
------------ ------------ ------------ -----------
Fully diluted:
Operating earnings (loss)......................................... $ .03 $ (.34) $ (.89) $ 1.58
Cumulative effect to January 1, 1993 of change in method of
accounting for postretirement benefits........................... (.03)
Extraordinary losses.............................................. (.02)
------------ ------------ ------------ -----------
Net earnings (loss)............................................. $ .03 $ (.34) $ .(89) $ 1.53
------------ ------------ ------------ -----------
------------ ------------ ------------ -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
SOUTHWESTERN LIFE CORPORATION
(FORMERLY I.C.H. CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1994 AND 1993
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1994 1993
--------- -----------
(RESTATED)
<S> <C> <C>
Cash flows from operating activities:
Operating earnings (loss)............................................................... $ (34,631) $ 97,147
Items not requiring (providing) cash:
Adjustments related to universal life and investment products:
Interest credited to account balances............................................... 20,937 52,419
Charges for mortality and administration............................................ (35,778) (36,497)
Depreciation and amortization......................................................... 9,352 8,623
Increase in future policy benefits.................................................... 3,219 3,306
Decrease (increase) in deferred policy acquisition costs.............................. (505) 3,471
Increase (decrease) in currently payable income taxes................................. (19,914) 5,482
Decrease in deferred income taxes..................................................... 7,315 42,721
Decrease in policy liabilities, other policyholder funds, accounts payable and accrued
expenses............................................................................. (12,725) (30,353)
Decrease (increase) in notes and accounts receivable and accrued investment income.... (2,671) 253
Decrease in asset valuation allowances................................................ 45,031 (935)
Equity in earnings of equity investees and limited partnerships....................... (843) (24,522)
Gain on termination of reinsurance.................................................... (8,735) (17,117)
Gain on sale of stock by BLHC......................................................... (99,376)
Other, net............................................................................ 3,299 9,282
--------- -----------
Net cash provided (used) by operating activities.................................. (26,649) 13,904
--------- -----------
Cash flows from investing activities:
Sales and maturities of long-term invested assets....................................... 517,849 772,663
Purchases of fixed maturities........................................................... (462,866) (531,284)
Purchases of other long-term invested assets............................................ (88,997) (52,765)
Additional investment in CFLIC preferred stock.......................................... (21,078)
Purchase of subsidiary, net of cash acquired............................................ (3,589)
Cash received (transferred) on reinsurance transactions................................. 10,108 (43,152)
Other................................................................................... (2,500)
--------- -----------
Net cash provided (used) by investing activities.................................. (51,073) 145,462
--------- -----------
Cash flows from financing activities:
Proceeds of collateralized mortgage note obligations.................................... 171,000
Policyholder contract deposits.......................................................... 87,770 91,422
Policyholder contract withdrawals....................................................... (91,664) (242,283)
Principal payments on notes payable..................................................... (402) (37,923)
Early retirement of subordinated debt................................................... (38,190)
Principal payments on collateralized mortgage note obligations.......................... (194,528)
Purchase of common stock for treasury................................................... (500) (932)
Dividends on preferred shares........................................................... (7,825) (15,400)
Other................................................................................... (4,550)
--------- -----------
Net cash provided (used) by financing activities.................................. (17,171) (266,834)
--------- -----------
Net decrease in cash and short-term investments........................................... (94,893) (107,468)
Cash and short-term investments at beginning of period.................................... 366,922 421,765
--------- -----------
Cash and short-term investments at end of period.......................................... $ 272,029 $ 314,297
--------- -----------
--------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
SOUTHWESTERN LIFE CORPORATION
(FORMERLY I.C.H. CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES:
Effective June 15, 1994, I.C.H. Corporation changed its name to Southwestern
Life Corporation (the Company or SLC).
The financial information included herein was prepared in conformity with
generally accepted accounting principles, and such principles were applied on a
basis consistent with those reflected in the 1993 Annual Report to Shareholders.
The information furnished includes all adjustments and accruals which are,
in the opinion of management, necessary for a fair statement of results for the
interim periods.
The disclosures in the notes presume that the users of the interim financial
information have read or have access to the audited financial statements
included in the 1993 Annual Report to Shareholders.
For the six months ended June 30, 1993, the Company had previously reported
a non-operating gain totaling $79,459,000, net of deferred income tax effects,
representing the Company's equity in the proceeds of a common stock offering by
the Company's then-equity investee, Bankers Life Holding Corporation (BLHC). On
September 30, 1993, the Company sold its investment in BLHC to Conseco, Inc.
(Conseco) and one of Conseco's subsidiaries for $287,639,000. Upon the sale of
the investment in BLHC, the Company reclassified its previously reported
non-operating gain as a component of operating earnings and, as a result of the
reclassification, revenues were increased by $99,376,000 to reflect the pre-tax
gain resulting from BLHC's stock offering and income tax expense was increased
$19,917,000 to reflect the tax effects associated with such gain. The
accompanying financial statements for the six months ended June 30, 1993, have
been restated to reflect the above described reclassification. As a result of
the reclassification, primary operating earnings per common share for the six
months ended June 30, 1993, increased from $.05 to $1.71 and fully diluted
operating earnings per common share increased from $.18 to $1.58. The
reclassification had no effect on net earnings or net earnings per common share
for the six months ended June 30, 1993, and had no effect on the results for the
three months ended June 30, 1993.
Primary earnings per share are computed by dividing earnings, less preferred
dividend requirements, by the weighted average number of common shares
outstanding. In computing fully diluted earnings per share, the weighted average
number of common shares outstanding is adjusted to reflect common stock
equivalents resulting from stock options and the assumed conversion of the
Company's Series 1984-A and 1986-A Preferred Stock into common shares if
outstanding at the end of the reporting period, and preferred dividend
requirements are adjusted to eliminate dividends on the shares assumed to have
been converted. The computation of fully diluted earnings per share excludes the
assumed conversion of such preferred shares for each period in which the assumed
conversion would be antidilutive.
Previously reported amounts for 1993 have, in some instances, been
reclassified to conform to the 1994 presentation.
4
<PAGE>
SOUTHWESTERN LIFE CORPORATION
(FORMERLY I.C.H. CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. INVESTMENT IN BANKERS LIFE HOLDING CORPORATION:
The Company continued to reflect its equity in the earnings of BLHC through
the date of sale. Following are unaudited condensed statement of financial
results for BLHC for the six months June 30, 1993 and the Company's equity in
such results as reflected in its consolidated statement of earnings (in
thousands):
<TABLE>
<S> <C>
Bankers Life Holding Corporation:
Revenues....................................................... $ 718,500
Earnings from operations....................................... 64,300
Extraordinary loss from early debt retirement.................. (5,600)
Net earnings attributable to common stock...................... 54,200
Amounts recorded by the Company:
Equity in operating earnings of BLHC........................... $ 20,539
Equity in extraordinary losses of BLHC......................... (1,370)
---------
Equity in earnings of BLHC..................................... $ 19,169
---------
---------
</TABLE>
3. NOTES PAYABLE:
Notes payable at June 30, 1994 and December 31, 1993, are summarized as
follows:
<TABLE>
<CAPTION>
1994 1993
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Borrowings under senior secured loan................................ $ 30,000
11 1/4% Senior Subordinated Notes due 1996.......................... $ 266,101 266,101
11 1/4% Senior Subordinated Notes due 2003.......................... 91,161 91,161
9 1/2% unsecured note payable due 1996.............................. 25,550 25,550
Note payable, interest at prime, due in monthly installments through
1999, collateralized by aircraft equipment......................... 4,469 4,872
Other............................................................... 297 297
----------- -----------
$ 387,578 $ 417,981
----------- -----------
----------- -----------
</TABLE>
At June 30, 1994, the Company has notes receivable totaling $26,500,000 from
an unaffiliated third party, which are collateralized by the Company's note
payable with a carrying value of $20,670,000. The Company has the right to set
off its obligation against the notes receivable. In the accompanying balance
sheets, the Company's notes receivable have been reflected net of amounts due
under the note payable.
4. FEDERAL INCOME TAXES:
The provision for income taxes on operating earnings (loss) consists of the
following components:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
1994 1993
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Current tax expense (credit).......................................... $ (11,826) $ (3,624)
Deferred tax expense.................................................. 7,315 42,721
---------- ---------
$ (4,511) $ 39,097
---------- ---------
---------- ---------
</TABLE>
5
<PAGE>
SOUTHWESTERN LIFE CORPORATION
(FORMERLY I.C.H. CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. FEDERAL INCOME TAXES (CONTINUED):
In July 1994, the Internal Revenue Service (IRS) completed its examination
of the Company and its subsidiaries for the tax years 1986 through 1989 and
issued its Revenue Agent's Report (RAR) relative to such examination (see Note
5). The Company has subsequently assessed the effects of the issues reflected in
the RAR on existing net operating loss carryforward and alternative minimum tax
(AMT) credit carryforwards included in its deferred income tax asset. As a
result of such assessment and updates of the Company's taxable income
projections, at June 30, 1994, the Company reduced its net deferred tax asset by
$12,265,000 through a charge included in its deferred income tax provision.
Because a substantially similar provision had been included in the Company's
current income tax liabilities for such effects, the Company concurrently
reduced its current income tax liabilities by $12,265,000 through a credit in
its current income tax provision.
A reconciliation of the income tax provisions based on the prevailing
corporate income tax rates of 35% in 1994 and 34% in 1993 to the provisions
reflected in the consolidated financial statements is as follows (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
1994 1993
---------- ---------
<S> <C> <C>
Computed expected income tax expense (credit) at statutory regular tax rate..... $ (13,700) $ 46,323
Amortization of excess cost..................................................... 1,679 1,633
Increase in (reduction of) deferred income tax asset valuation allowance........ 5,000 (8,790)
Permanent loss of tax deductions from redemption of Company's equity securities
(see Note 8)................................................................... 4,532
Other........................................................................... (2,022) (69)
---------- ---------
Income tax expense (credit)................................................. $ (4,511) $ 39,097
---------- ---------
---------- ---------
</TABLE>
Net unrealized investment gains included in stockholders' equity at December
31, 1993, are reflected net of deferred income taxes totaling $8,226,000.
The deferred income tax effects of unrealized investment losses included in
stockholder's equity at June 30, 1994, totaling approximately $25,865,000 have
been offset by an increase in the deferred income tax asset valuation allowance
by a corresponding amount due to the uncertainty as to the Company's ability to
generate capital gains in an amount sufficient to offset the unrealized capital
losses.
5. COMMITMENTS, LITIGATION AND CONTINGENT LIABILITIES:
The Company and its subsidiaries have been under examination by the IRS for
the tax years 1983 through 1992. The IRS had previously completed its
examination for the years 1983 through 1985 and had previously issued
Preliminary Notices of Deficiencies totaling approximately $17.5 million, before
interest. In March 1994, the Company reached agreement with the IRS relative to
such proposed deficiencies and subsequently paid settlements to the IRS totaling
$3,972,000, including interest. The Company had previously provided a liability
for such settlements and, as a consequence, the settlements had no effect on the
Company's 1994 results of operations.
6
<PAGE>
SOUTHWESTERN LIFE CORPORATION
(FORMERLY I.C.H. CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. COMMITMENTS, LITIGATION AND CONTINGENT LIABILITIES (CONTINUED):
In July 1994, the IRS completed its examination for the tax years 1986
through 1989 and issued Preliminary Notices of Deficiencies totaling
approximately $127.7 million, before interest. A substantial portion of the
proposed deficiencies involves the deductibility of approximately $444 million
of interest expense on certain surplus debentures issued by the Company's
insurance subsidiaries, which was offset by other proposed adjustments which
mitigate, in part, the impact of the proposed disallowance of surplus debenture
interest deductions. Management intends to vigorously protest the proposed
deficiencies and has filed a written appeal relative to the surplus debenture
interest issue and other significant issues. Management believes the surplus
debentures in question were legally enforceable debt instruments, as opposed to
equity contributions, and that the related interest was properly deductible.
Modern American Life Insurance Company (Modern) is a defendant in a class
action lawsuit filed on or about May 14, 1993 in the Circuit Court of Jackson
County, Missouri, styled WILLIAM D. CASTLE, ET AL. V. MODERN AMERICAN LIFE
INSURANCE COMPANY (the Castle case). The suit purports to be brought on behalf
of a class of persons who own what plaintiffs denominate as charter contracts,
issued by life insurance companies merged into or acquired by Modern and its
predecessors. The suit alleges breach of contract, and seeks declaratory
judgment, costs, expenses and such other relief as the Court deems appropriate.
As an alternative, the suit seeks rescission. SLC was added as a defendant to
the Castle case by an amended petition, filed February 16, 1994, alleging that
the Company should be liable for any judgment against Modern through either
disregarding Modern's corporate existence or finding tortious interference by
the Company with plaintiff's contracts with Modern. SLC's motion to dismiss the
amended petition as to SLC has been denied. On July 27, 1994, the Circuit Court
entered an order granting the plaintiffs' motion for certification of the suit
as a class action and certified six subclasses composed of the persons who own
or owned the so-called charter contracts purchased from Modern and five of its
predecessor corporations. Modern believes it has meritorious defenses to the
Castle case and intends to defend the case vigorously.
On or about October 12, 1993, the plaintiffs in the Castle case also filed a
lawsuit in the Circuit Court of Cole County, Missouri, naming Modern and the
Director of the Missouri Department of Insurance (the Missouri Director) as
defendants. The second lawsuit, styled ROBERT J. MEYER, ET AL. V. JAY ANGOFF,
DIRECTOR OF THE MISSOURI DEPARTMENT OF INSURANCE AND MODERN AMERICAN LIFE
INSURANCE COMPANY (the MEYER case), was an appeal from the regulatory
proceedings before the Missouri Department of Insurance, by which Modern
received regulatory approvals required for it to participate in a restructuring
of the Company's insurance holding company organization. The restructuring was
completed on or about September 29, 1993. The plaintiffs in the MEYER case were
seeking reversal or remand of the Director's order of approval, declaratory
judgment and such other relief to which they claim they were entitled. On July
16, 1994, the Cole Circuit Court issued an order indicating it had reviewed the
Department's decision on the record pursuant to Missouri's administrative
procedure act and affirmed the Missouri Director's orders. On August 16, 1994,
the plaintiffs appealed the Cole Circuit Court order to the Missouri Court of
Appeals.
Various other lawsuits and claims are pending against the Company and its
subsidiaries. Based in part upon the opinion of counsel as to the ultimate
disposition of the above discussed and other matters, management believes that
the liability, if any, will not be material.
7
<PAGE>
SOUTHWESTERN LIFE CORPORATION
(FORMERLY I.C.H. CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. REALIZED INVESTMENT GAINS (LOSSES):
Following is an analysis of the major components of gains (losses) on
investments (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ---------------------
1994 1993 1994 1993
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Fixed maturities............................. $ 225 $ (327) $ 2,245 $ 14,023
Mortgage-backed securities................... (46,448)
Equity securities............................ 740 (99) (485) 6,113
Investment in limited partnership............ (5,013) (5,013)
Other........................................ (292) (327) (413) (740)
--------- --------- ---------- ---------
$ 673 $ (5,766) $ (45,101) $ 13,369
--------- --------- ---------- ---------
--------- --------- ---------- ---------
</TABLE>
7. EXTRAORDINARY LOSSES:
For the six months ended June 30, 1993, the Company reflected on an
extraordinary loss totaling $690,000, resulting from the premium paid to effect
the early redemption of $37.5 million principal amount of the Company's 16 1/2%
Senior Subordinated Debentures due 1994. In addition, the Company reflected its
equity in the extraordinary loss of BLHC resulting from early retirement of debt
totaling $1,370,000. The extraordinary losses have been reflected net of the
estimated tax effects totaling $700,000.
8. TRANSACTIONS WITH CONSOLIDATED FIDELITY LIFE INSURANCE COMPANY:
On June 15, 1993, the Company, the Company's then-controlling shareholder,
Consolidated National Corporation (CNC), and CNC's subsidiary, Consolidated
Fidelity Life Insurance Company (CFLIC), entered into an agreement (the 1993
Agreement) under which (i) the Company was authorized, and undertook the
obligation, to negotiate the termination of reinsurance agreements pursuant to
which CFLIC reinsured certain annuity business written by Southwestern Life
Insurance Company (Southwestern), a subsidiary of the Company, and Bankers Life
and Casualty Company (Bankers), a former subsidiary of the Company, and (ii) the
Company transferred assets, consisting of a limited partnership interest (that
has since been liquidated) and 83% of the outstanding common stock of I.C.H.
Funding Corporation (ICH Funding), to CFLIC to acquire preferred stock of CFLIC,
with a stated value of $63,000,000. Under the terms of the 1993 Agreement, the
CFLIC preferred stock was to be repurchased by CFLIC immediately following the
termination of the CFLIC reinsurance agreements. The reinsurance agreements had
been entered into in 1990 in conjunction with the Company's sale of Marquette
National Life Insurance Company (Marquette) to CNC and its stockholders. Under
the reinsurance agreements, Employers Reassurance Corporation (ERC), an
independent third party reinsurer, retroceded to CFLIC certain annuity business
which was reinsured with ERC by each of Southwestern and Bankers.
On June 30, 1994, the CFLIC reinsurance agreements were terminated, and the
business reinsured thereunder was recaptured, effective as of April 1, 1994.
Immediately prior to the termination of the CFLIC reinsurance agreements, Union
Bankers Insurance Company (Union Bankers), a subsidiary of the Company, utilized
available cash to purchase all of the outstanding stock of Marquette, a
subsidiary of CFLIC, for $8,215,000. The purchase price was based on the fair
value of Marquette's underlying net assets, consisting primarily of cash and
U.S. Treasury obligations, adjusted for the value of Marquette's various state
insurance licenses as determined by an independent actuarial firm. Marquette's
results of operations will be included in the Company's consolidated results of
operations
8
<PAGE>
SOUTHWESTERN LIFE CORPORATION
(FORMERLY I.C.H. CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. TRANSACTIONS WITH CONSOLIDATED FIDELITY LIFE INSURANCE COMPANY (CONTINUED):
for periods subsequent to June 30, 1994. Following completion of the
terminations, CFLIC repurchased the shares of its preferred stock held by the
Company by transferring to the Company the senior secured loan of the Company
with an outstanding principal balance of $30 million, all of the outstanding
shares of the Company's Series 1984-A Preferred Stock with a stated value of
$22,242,000, all of the outstanding shares of the Company's Series 1987-B
Preferred Stock with a stated value of $7,000,000, a U.S. Treasury note (par
value $1,050,000), and 620,423 shares of the Company's Common Stock. Immediately
following the repurchase of the CFLIC preferred stock, SLC retired the senior
secured loan and the SLC preferred stocks. The shares of SLC Common Stock
received were placed in treasury.
Upon termination of the CFLIC reinsurance agreement relating to the business
written by Southwestern, CFLIC transferred cash and invested assets with a fair
value equal to the reserve liabilities being recaptured, net of the ceding fees
payable. Due primarily to a requirement by insurance regulatory authorities to
transfer such investments upon termination of the reinsurance agreements at
their fair value, the Company increased its basis in the CFLIC preferred stock
by investing an additional $26,212,000 (including $21,078,000 cash and a
$5,134,000 receivable) immediately prior to the terminations to enable CFLIC to
have sufficient assets (other than the Company's securities being transferred to
the Company upon redemption of the CFLIC preferred stock) to complete the
terminations. A substantial portion of such amount was attributable to a decline
in the fair value of the 83% interest in ICH Funding subsequent to the Company's
transfer of such investment to CFLIC in June 1993. In conjunction with the
termination of the CFLIC reinsurance agreement relating to the business written
by Southwestern, annuity reserve liabilities totaling $323,305,000 were assumed
by ERC and invested assets with a fair value of $289,414,000 were transferred by
CFLIC to ERC. The difference between the reserve liabilities assumed by ERC and
the assets transferred from CFLIC, totaling $33,891,000, represented the
aggregate ceding fee paid to CFLIC to effect the termination. Immediately
thereafter, Southwestern recaptured $107,163,000 of the reserve liabilities from
ERC and received invested assets from ERC totaling $93,942,000. The assets
consisted of cash, short-term investments and marketable fixed maturity
investments totaling $25,455,000, CFLIC's investment in ICH Funding and certain
pass-through certificates issued by a special purpose trust with an estimated
fair value totaling $12,528,000, collateral loans due from James M. Fail and
CFSB Corporation totaling $50,640,000, and other assets, principally mortgage
loans, totaling $5,319,000. The difference between the reserve liabilities
recaptured by Southwestern and the assets transferred from ERC, totaling
$13,221,000, represented a ceding fee paid by Southwestern, and reduced ERC's
net ceding fees incurred to effect the CFLIC reinsurance termination to
$20,670,000. The reinsurance agreement between Southwestern and ERC was amended
to provide that ERC will be permitted to recover the net ceding fees incurred
out of the future profits on the portion of Southwestern's annuity business it
retained, together with interest at 2% per annum on the unamortized balance of
such ceding fees. For financial reporting purposes, the reinsurance arrangement
between Southwestern and ERC will be reflected as a financing arrangement and,
accordingly, will not be reflected in the Company's financial statements except
for the interest paid to ERC.
The amount of the ceding fees paid to CFLIC in connection with the recapture
was determined by management of the Company utilizing the methodology developed
by an independent actuarial firm, with appropriate adjustments in assumptions to
reflect changes in market interest rates and other factors.
9
<PAGE>
SOUTHWESTERN LIFE CORPORATION
(FORMERLY I.C.H. CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. TRANSACTIONS WITH CONSOLIDATED FIDELITY LIFE INSURANCE COMPANY (CONTINUED):
Pursuant to the 1993 Agreement, the Company agreed to bear the federal
income tax consequences resulting from the termination of the CFLIC reinsurance
agreements. Upon closing of the CFLIC termination, the Company agreed to
indemnify CNC and CFLIC for tax liabilities of CFLIC and Marquette arising
through June 30, 1994, and deposited into an escrow account $8,825,000 of cash
which the Company was to have received upon CFLIC's repurchase of its preferred
stock as a source of funds for the payment of taxes for which the Company is
responsible. With the payment of such tax liabilities, the Company will be
entitled to all tax refunds to which CFLIC is entitled through the carryback of
capital losses resulting from the termination of the CFLIC reinsurance
agreements or as a result of any redetermination of CFLIC's tax liabilities
through the first taxable period of CFLIC and Marquette ending after such
termination. Management of the Company has estimated that CFLIC will be entitled
to tax refunds totaling approximately $5.8 million through the carryback of
capital losses. Upon collection of the tax refund, the Company will utilize a
portion of the proceeds to satisfy the remaining $5,134,000 receivable held by
CFLIC.
For financial reporting purposes, the Company recorded the redemption of its
preferred stocks received from CFLIC at their stated value, which in
management's opinion, approximated the fair value of such securities as of the
date the 1993 Agreement was entered into. The 620,423 shares of the Company's
Common Stock received from CFLIC were recorded at their market value, or $5.25
per share, as of the date of closing. The termination of the CFLIC reinsurance
agreements, the receipt of a payment-in-kind dividend from CFLIC representing
dividends on such preferred stock from the date of issuance through the date of
redemption, and the redemption of the Company's securities resulted in a pre-tax
gain totaling approximately $8,735,000 and an after-tax gain totaling
approximately $1,936,000. Because the redemption of the CFLIC preferred stock
involved the receipt by the Company of its own equity securities, approximately
$12.9 million of the tax basis loss on such exchange cannot be deducted for
federal income tax purposes and, as a consequence, the income tax effects
associated with these transactions approximated 78% of the pre-tax gain.
9. CHANGE IN CONTROL:
On February 11, 1994, the Company purchased all of the 100,000 shares of its
Class B Common Stock held by CNC for total cash consideration of $500,000. The
Class B Common Stock had entitled CNC to elect 75% of the Company's Board of
Directors. Upon the purchase, the Class B shares were automatically converted
into an identical number of shares of Common Stock and at June 30, 1994, have
been reflected as Treasury Shares. Concurrently with the purchase of such stock,
the Company entered into Independent Contractor and Services Agreements
(Services Agreements) with Robert T. Shaw and C. Fred Rice, the controlling
shareholders of CNC. The Services Agreements provide for a lump sum payment to
Messrs. Shaw and Rice totaling $2 million as of the closing date and additional
payments totaling $8,575,000 over a ten-year period. In addition, the Company
agreed to provide customary employee benefits to Messrs. Shaw and Rice and their
dependents. In the event of the deaths of Messrs. Shaw or Rice, any amounts not
previously paid under the Services Agreements will become immediately payable to
their estates. In consideration for the Services Agreements, Messrs. Shaw and
Rice agreed that they would attempt to identify business opportunities in the
insurance industry which may be suitable for the Company and to consult with the
Company regarding such other matters as the Company may reasonably request. In
addition, Mr. Rice continues to serve as an executive officer of the Company and
was re-elected to serve on the Company's Board of Directors. The Services
Agreements replaced a management and consulting contract with CNC that provided
for annual payments to CNC totaling $2 million. In addition, Mr. Shaw was
granted an option to acquire the two aircraft owned by the Company at their
depreciated book values. In cash
10
<PAGE>
SOUTHWESTERN LIFE CORPORATION
(FORMERLY I.C.H. CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
9. CHANGE IN CONTROL (CONTINUED):
transactions completed on June 30 and August 5, 1994, an entity controlled by
Mr. Shaw purchased one aircraft for $1,144,000 and an unrelated third party to
whom the option was assigned purchased the other aircraft for $4,005,000,
respectively. The Company provided a liability for the present value of amounts
payable under the Services Agreements totaling $9,050,000 in its financial
statements for the year ended December 31, 1993.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES:
On February 11, 1994, SLC purchased all of the 100,000 shares of its Class B
Common Stock from Consolidated National Corporation (CNC) for total cash
consideration of $500,000. As a result of the repurchase, and subsequent
conversion, SLC is no longer authorized to issue Class B Common Stock and all
references in SLC's Certificate of Incorporation to the Class B Common Stock
have been eliminated. Concurrent with the repurchase of the Class B Common
Stock, Stephens Inc. (Stephens) and Torchmark Corporation (Torchmark) purchased
4,457,000 shares and 4,667,000 shares, respectively, of SLC Common Stock from
CNC, which reduced CNC and its subsidiaries' holding in SLC Common Stock to
approximately 1,620,000 shares, or 3.4% of SLC's then outstanding shares.
Additional information regarding the repurchase of the Class B Common Stock and
other terms of the transaction are included in Note 9 of the Notes to Financial
Statements included elsewhere in this Form 10-Q/A. Management believes the
repurchase of the Class B Common Stock is significant for various reasons. Most
importantly, management believes that SLC's access to both debt and equity
capital markets has been limited because of the control position held by CNC
through the Class B Common Stock, and that the repurchase and conversion of the
Class B Common Stock and considerable reduction in CNC's holdings of SLC Common
Stock could ultimately enhance SLC's ability to refinance its currently
outstanding debt. In May 1994, SLC engaged Stephens, an investment banking firm,
to conduct a review of SLC in order to provide advice and recommendations to
SLC's Board of Directors concerning SLC's strategic plans.
On June 30, 1994, reinsurance agreements involving certain annuity business
written by SLC's subsidiary, Southwestern Life Insurance Company (Southwestern),
and SLC's former subsidiary, Bankers Life and Casualty Company (Bankers), that
had been reinsured through an independent third party reinsurer, Employers
Reassurance Corporation (ERC), to Consolidated Fidelity Life Insurance Company
(CFLIC), a subsidiary of CNC, were terminated in accordance with an agreement
entered into among SLC, CNC and CFLIC effective June 15, 1993, as amended. See
Note 8 of the Notes to Financial Statements included elsewhere in this Form
10-Q/A for additional information and a more detailed discussion of the terms of
these transactions.
The termination of the CFLIC reinsurance agreements, the receipt of a $3.9
million payment-in-kind dividend from CFLIC representing dividends on its
preferred stock from the date of issuance through the date of repurchase, and
the redemption of certain of SLC's securities resulted in a pre-tax gain
totaling approximately $8.7 million and an after-tax gain totaling approximately
$1.9 million which have been reflected in SLC's statement of earnings for the
three months and the six months ended June 30, 1994. In addition, there were no
dividends declared or paid on the SLC preferred stocks received in the
transaction for the three months ending June 30, 1994, resulting in dividend
savings totaling approximately $.8 million. Because the redemption of the CFLIC
preferred stock involved the receipt by SLC of its own equity securities,
approximately $12.9 million of the tax basis loss on such exchange cannot be
deducted for federal income tax purposes and, as a consequence, the income tax
effects associated with these transactions approximated 78% of the pre-tax gain.
Management believes the completion of the CFLIC transactions as described above
and in Note 8 to the Financial Statements is significant in that it has
eliminated a significant transaction with a former affiliate, has reduced
outstanding debt and preferred stock, has simplified SLC's structure and has
reduced state insurance regulatory concerns. Based on the prime rate in effect
as of June 30, 1994, the retirement of SLC's senior secured loan is expected to
result in annual interest expense savings totaling approximately $2.5 million,
and the retirement of the SLC preferred stocks will result in a reduction in
annual preferred dividend requirements totaling $3.3 million. In addition, CNC's
and CFLIC's ownership in shares of SLC Common Stock was further reduced to 2.1%
of SLC's outstanding shares as a result of these transactions.
12
<PAGE>
During the six months ended June 30, 1994, SLC experienced a significant
decline in the fair value of its available for sale fixed maturity investments,
primarily as a result of increases in market interest rates. Because such
securities are reflected at their fair value for financial reporting purposes,
the decline in fair value, coupled with a loss after preferred dividend
requirements in the first six months of 1994, had a significant impact on
stockholders' equity and book value per common share. Common stockholders'
equity declined $151.7 million, from $265.9 million, or $5.55 per share, at
year-end 1993 to $125.4 million, or $2.65 per share, at June 30, 1994. Of this
decline, $94.4 million, or $2.00 per share, was attributable to the change in
unrealized investment gains and losses. Because of its available liquidity and
other factors, management does not anticipate that SLC will be required to
liquidate a substantial portion of its available for sale fixed maturity
portfolio over the near-term. See "Investment Portfolio" below for additional
information regarding SLC's available for sale fixed maturities.
At June 30, 1994, the parent company held cash, short-term investments and
readily-marketable fixed maturity investments (at fair value) totaling
approximately $69.2 million. As discussed in more detail in the Company's 1993
Annual Report, SLC has considerable flexibility in determining whether it will
utilize cash to make a $100 million sinking fund installment with respect to its
11 1/4% Senior Subordinated Notes due 1996 (Old Notes). Assuming that a sinking
fund installment relative to the Old Notes is not made utilizing available cash
in 1994, management believes that SLC has sufficient liquidity with which to
meet its debt service and preferred dividend requirements over the next twelve
months. Depending on market conditions and other factors, SLC may from
time-to-time utilize its available liquidity to purchase some of its Old Notes
or other outstanding securities in open-market or private placement
transactions.
The following table reflects SLC's cash sources and requirements on a
projected basis for 1994, based on actual results through June 30, 1994, (in
millions):
<TABLE>
<S> <C>
Cash sources:
Dividends from insurance subsidiaries............................ $ 32.6
Dividends from noninsurance subsidiaries......................... 6.6
Other............................................................ 22.5
---------
Total sources................................................ 61.7
---------
Cash requirements/uses:
Long-term debt principal payments................................ 8.5
Early retirement of subordinated debt............................ 10.0
Interest......................................................... 50.1
Preferred dividends.............................................. 14.8
Purchase Old Notes from subsidiaries............................. 34.1
Additional investment in CFLIC preferred stock................... 21.1
Other............................................................ 10.2
---------
Total requirements/uses...................................... 148.8
---------
Net cash required during year.................................... (87.1)
---------
Cash available, beginning of year................................ 132.1
---------
Cash and marketable securities available, end of year............ $ 45.0
---------
---------
</TABLE>
SLC's projected 1994 cash sources as reflected in the above table exceed the
previously projected 1994 cash sources, as reflected in SLC's 1993 Annual Report
on Form 10-K, by appoximately $11.1 million. Included in the increase in such
cash sources is a $5.0 million prepayment on a note receivable, anticipated
receipts from CFLIC totaling $4.1 million, and other miscellaneous sources
totaling $2.0 million. SLC's projected cash requirements/uses as reflected in
the above table exceed the previously projected cash requirements by
approximately $46.1 million. Included in the increase in such cash
requirements/uses is a $21.1 million additional investment in the preferred
stock of
13
<PAGE>
CFLIC (see Note 8 of the Notes to Financial statements included elsewhere in
this Form 10-Q/A). In addition, other cash uses not previously projected include
the use of $10.0 million cash to purchase $10.0 million principal amount of Old
Notes in July 1994 and the adjustment of other miscellaneous uses totaling $5.8
million. Included in the projected uses of cash in 1994 is the purchase by SLC
of $34.1 million of its Old Notes from certain of its subsidiaries, although SLC
is not obligated to purchase $21.5 million of such Old Notes during 1994 and may
decide not to utilize its available cash for such purposes.
INVESTMENT PORTFOLIO:
In 1993, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" issued by the Financial Accounting Standards Board (FASB), which
established new standards of accounting and reporting for, among other things,
all investments in debt securities. SFAS No. 115 expanded the use of fair value
accounting (which is defined as the amount at which a financial instrument could
be exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale) and required financial institutions to classify
their fixed maturity investments in one of three categories: held-to-maturity,
available-for-sale, or trading. The Company classified its fixed maturity
investments as either held-to-maturity or available-for-sale. Under SFAS No.
115, securities classified as "held-to-maturity" are carried at amortized cost
and declines in value do not result in a writedown to fair value unless such
losses are determined to be other than temporary. Securities classified as
"available-for-sale" are carried at their fair value and losses are reflected as
unrealized losses, unless the decline in value is determined to be other than
temporary, in which case the losses must be reflected as realized losses and
charged to earnings. SFAS No. 115 also indicates that a decline in value of a
security below its amortized cost is properly classified as other than temporary
if the value of the security cannot reasonably be expected to increase to at
least its amortized cost in the near future.
In 1993, the Emerging Issues Task Force (EITF) of the FASB issued EITF Issue
No. 93-18, "Impairment Recognition for Purchased Investment in a Collateralized
Mortgage Obligation Investment or in a Mortgage-Backed Interest Only
Certificate", which provided an analytical framework for measuring the
impairment of certain "high-risk" CMO's and which has been widely used to
provide guidance as to when write-downs should be taken on other CMO investments
in accordance with SFAS No. 115. Under EITF No. 93-18, if the future cash flows
from an investment on a discounted basis utilizing a "risk-free" rate of return
are projected to be less than the investment's amortized cost on the basis of
generally accepted accounting principles (GAAP), a write-down to present value
is required.
In light of SFAS No. 115 and positions taken by the EITF, the Company
classified its investments in certain Class B pass-through certificates issued
by Fund America Investors Corporation II (the Fund America Investment) and the
residual interest in a special purpose trust, the Secured Investors Structured
Trust 1993-1 (the SIST Residual), as available-for-sale and reduced the carrying
value of such investments from $95.5 million to $67.1 million at December 31,
1993. The reduction in fair value of $28.4 million was determined to be
temporary and thus was accounted for as an unrealized investment loss and
reported as a charge to stockholders' equity.
The Fund America Investment and the SIST Residual are both highly sensitive
to changes in mortgage loan prepayment rates and changes in market interest
rates, particularly the London Interbank Offered Rate (LIBOR) upon which
interest payments to holders of senior classes of these investments are
generally based. During the first three months of 1994, mortgage loan prepayment
rates and LIBOR both increased, as a consequence, the aggregate unrealized
losses on the Fund America Investment and SIST Residual increased to $46.4
million at March 31, 1994. At June 30, 1994, the investment banking firm that
provides valuations modified the methodology for assessing the value of these
investments to reflect perceived uncertainties and illiquidity of the market for
CMO's. Based in part on the new valuation methodology, the aggregate unrealized
losses on the Fund America Investment and the SIST Residual increased to $69.1
million. Based on a decline in mortgage
14
<PAGE>
loan prepayment rates toward the end of March 1994 (and continuing through June
1994), management initially determined that the declines in value of the Fund
America Investment and the SIST Residual were temporary in nature and,
accordingly, adjustments in fair value were reflected as unrealized losses in
stockholders' equity.
The Fund America Investment and the SIST Residual are collateralized by the
principal component of bonds (the RFCO Strips) issued by the Resolution Funding
Corporation, a mixed-ownership government corporation established for the sole
purpose of providing financing for the Resolution Trust Corporation, the agency
charged with resolving failed savings and loan associations. By their terms, the
payment of the RFCO Strips are due in full in single payments in April 2030 (in
the case of the Fund America Investment) and in January 2021 (in the case of the
SIST Residual) in amounts sufficient to assure the full recovery of SLC's Fund
America Investment and SIST Residual. Although not obligations of, or guaranteed
as to principal by, the United States of America, the Offering Circulars for the
RFCO Strips stated that the principal amounts of the RFCO Strips would be fully
repaid from proceeds of noninterest bearing obligations of the United States
issued by the Secretary of the Treasury and deposited in a separate account at
the Federal Reserve Bank in New York. Accordingly, management believed that
these investments were not "high risk" CMOs, as defined in current authoritative
accounting literature, and that, if held to maturity, there was no permanent
impairment in the value of these investments.
Subsequent to the filing of its June 30, 1994, Report on Form 10-Q, the
Company, after consulting with its independent accountants and other advisors,
re-evaluated the Fund America Investment and the SIST Residual. Notwithstanding
the collateral provided by the RFCO Strips as discussed above, on the basis of
its review of these investments, and the application of SFAS No. 115 and EITF
No. 93-18, the Company determined that the declines in value of these
investments at March 31, 1994 were other than temporary and that a restatement
of the financial statements contained in its Report on Form 10-Q for such period
to reflect a reduction in earnings was appropriate. Accordingly, at March 31,
1994, SLC reflected a charge to earnings for the writedown of these investments
from their GAAP book value totaling $96.4 million to their fair value totaling
$50.0 million, or a total charge of $46.4 million. For financial reporting
purposes, the $50.0 million fair value of these investments became their new
cost basis for periods after March 31, 1994. Prior to March 31, 1994, SLC and
its subsidiaries had accrued investment income on these investments at an annual
rate of 6% of their prior GAAP book values, or approximately $5.7 million of
annual investment income. Because the fair values of these investments at March
31, 1994 were determined based on an assumed 11% discount rate, investment
income on these investments has been accrued at 11% of their new cost basis for
periods subsequent to that date, or approximately $5.5 million of annual
investment income. As a consequence, the writedowns reflected at March 31, 1994,
have not and are not expected to have a significant effect on the Company's
reported results of operations. However, as discussed below, significant
additional writedowns in future periods could ultimately have a significant
effect on reported results.
The declines in value of the Fund America Investment and the SIST Residual
have not had, and are not expected to have any effect on the Company's operating
cash flows. For purposes of statutory accounting, the Investment Working Group
of the National Association of Insurance Commissioners (NAIC) has tentatively
decided not to follow or adopt the GAAP accounting standards of SFAS No. 115 and
EITF No. 93-18 described above.
Although no further writedowns of the Fund America Investment and the SIST
Residual were required at June 30, 1994, further increases in interest rates and
continued unsettled activity in the market for CMOs may necessitate further
substantial writedowns of these investments. Any such additional writedowns will
be reported as a charge to earnings for the period or periods in which they are
realized. Although the Company is unable to predict the size or timing of any
such additional writedowns, it believes that there is a likelihood that such
writedowns will be required at some point in the future. Such writedowns, if
required, could result in a significant reduction in subsequently
15
<PAGE>
reported earnings. In connection with preparing its financial statements for the
nine month period ended September 30, 1994, the Company intends to re-evaluate
the Fund America Investment and the SIST Residual to determine whether an
additional writedown is required as of such date.
At December 31, 1993, SLC reflected unrealized investment gains of
$20,458,000 and at June 30, 1994, reflected unrealized investment losses of
$73,901,000 Following is an analysis of the major components of such unrealized
gains (losses) (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1993
---------- ------------
<S> <C> <C>
Available for sale fixed maturities................................ $ (95,290) $ 21,424
Equity securities.................................................. 1,107 7,271
Equity in unrealized gains of limited partnerships................. 4,921 5,349
Other.............................................................. 393 (159)
---------- ------------
(88,869) 33,885
Less effect on other balance sheet accounts:
Deferred policy acquisition costs................................ 19,699 (16,647)
Unearned revenue reserves........................................ (4,731) 6,266
---------- ------------
Gross unrealized investment gains (losses)......................... (73,901) 23,504
Minority interest in unrealized losses............................. 5,180
Deferred income taxes.............................................. (8,226)
---------- ------------
Net unrealized investment gains (losses)....................... $ (73,901) $ 20,458
---------- ------------
---------- ------------
</TABLE>
The fair values of other than the above discussed mortgage-backed debt
securities declined approximately $122.4 million between the two dates primarily
as a result of increases in market interest rates and the negative effect of
such rate increases on the fair values of such securities. At year-end 1993,
unrealized investment losses totaling $28.4 million had been reflected relative
to the Fund America Investment and the SIST Residual. As a result of the $46.4
million writedown of such investments at March 31, 1994, the $28.4 million of
unrealized investment losses at year-end 1993 were eliminated; however,
subsequent to March 31, 1994, additional unrealized losses on such investments
totaling $22.7 million have been reflected.
Unless determined to be other than temporary, changes in the fair values of
available for sale fixed maturities have no effect on SLC's reported results of
operations, but can have a volatile effect on SLC's stockholders' equity and
book value per common share, as the carrying values of available for sale fixed
maturities are adjusted in SLC's balance sheet to their fair values at each
reporting date through a charge or credit to stockholders' equity. In addition,
unrealized investment losses generally have a more significant impact on
stockholders' equity than unrealized gains because of deferred income tax
effects. Net unrealized investment gains must be tax-effected, or reduced for
the potential income tax expense associated with such gains, through a provision
of a deferred income tax liability. Net unrealized investment losses are
likewise tax-effected, or reduced for the potential income tax benefits
associated with such losses; however, if such tax-effecting results in a
deferred income tax asset, consideration must be given to providing a valuation
allowance against such deferred income tax asset. At present, the Company does
not have sufficient unrealized investment gains to offset its unrealized
investment losses and cannot predict its ability to realize the potential income
tax benefits if its unrealized investment losses were actually incurred.
Accordingly, a valuation allowance has been provided against the Company's
deferred income tax asset related to unrealized investment losses, which
effectively eliminates the recognition of any portion of the income tax benefits
associated with such unrealized losses. Because of its available liquidity and
other factors, such as its seasoned block of traditional life insurance
business, SLC has no current plans, and management believes that SLC will not
have the need over the near-term or the foreseeable future, to liquidate any
significant portion of
16
<PAGE>
its available for sale fixed maturity investments at a loss. Following is an
analysis of gross unrealized investment gains and losses on available for sale
fixed maturities as of June 30, 1994 and December 31, 1993 (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1993
---------- ------------
<S> <C> <C>
Gross unrealized gains............................................. $ 12,602 $ 63,535
Gross unrealized losses............................................ (82,688) (42,111)
---------- ------------
Net unrealized gains (losses).................................. $ (95,290) $ 21,424
---------- ------------
---------- ------------
</TABLE>
The following table sets forth the carrying value and quality for each of
the two categories of fixed maturities as of June 30, 1994, classified in
accordance with the rating assigned by Standard & Poor's Corporation (S&P) or,
if not rated by S&P, based on ratings assigned by the National Association of
Insurance Commissioners, with Class 1 treated as A, Class 2 treated as BBB-,
Class 3 treated as BB- and Classes 4, 5 and 6 treated as B and below (in
millions):
<TABLE>
<CAPTION>
PERCENT
AVAILABLE HELD TO PERCENT OF OF
FOR SALE MATURITY AT TOTAL TOTAL TOTAL
AT FAIR AMORTIZED FIXED FIXED INVESTED
INVESTMENT QUALITY VALUE COST MATURITIES MATURITIES ASSETS
- ----------------------------------- --------- ----------- ---------- ---------- -----
<S> <C> <C> <C> <C> <C>
AAA................................ $ 619.6 $ 1.8 $ 621.4 38.3% 25.7%
AA................................. 202.2 202.2 12.4 8.4
A.................................. 446.9 446.9 27.6 18.5
BBB+............................... 73.3 73.3 4.5 3.0
BBB................................ 80.0 80.0 4.9 3.3
BBB-............................... 90.0 90.0 5.6 3.7
--------- ----- ---------- ----- -----
Total investment-grade......... 1,512.0 1.8 1,513.8 93.3 62.6
--------- ----- ---------- ----- -----
BB+................................ 27.8 27.8 1.7 1.1
BB and BB-......................... 42.6 42.6 2.6 1.8
B and Below........................ 24.8 13.5 38.3 2.4 1.6
--------- ----- ---------- ----- -----
Total noninvestment-grade...... 95.2 13.5 108.7 6.7 4.5
--------- ----- ---------- ----- -----
Total fixed maturities..... $ 1,607.2 $15.3 $ 1,622.5 100.0% 67.1%
--------- ----- ---------- ----- -----
--------- ----- ---------- ----- -----
</TABLE>
Fixed maturities classified as held to maturity are principally private
placement corporate securities and gross unrealized losses on such investments
totaled $2.3 million as of June 30, 1994.
The amortized cost and fair value of noninvestment-grade fixed maturities
totaled $120.2 million and $108.2 million, respectively, at June 30, 1994.
Effective March 31, 1994, SLC's subsidiaries sold substantially all of their
commercial mortgage loans with remaining principal balances of less than
$300,000 for approximately $9.0 million. No significant gains or losses were
incurred as a result of such sale. SLC is considering the sale of substantially
all of its remaining commercial mortgage loan portfolio. At June 30, 1994,
mortgage loans represented approximately 5% of ICH's total investment portfolio.
Cash and short-term investments declined from $366.9 million at year-end
1993 to $272.0 million at June 30, 1994, primarily as a result of reinvestments
made in higher-yielding longer duration securities.
As discussed in the 1993 Annual Report, the claims-paying ratings assigned
to certain of SLC's subsidiaries by various nationally recognized statistical
rating organizations were lowered over the past two years. Except as discussed
below, management believes SLC's subsidiaries have not experienced more than
normal policy surrenders and withdrawals as a result of these ratings
downgrades. For the six months ended June 30, 1994, policyholder contract
deposits totaled $87.8 million and
17
<PAGE>
policyholder contract withdrawals totaled $91.7 million. Approximately $50.0
million of such withdrawals represented scheduled maturities of guaranteed
investment contracts (GICs) which were not reinvested with an SLC subsidiary.
Because of its available liquidity and readily marketable securities, the
subsidiary has not encountered, and management does not anticipate that the
subsidiary will encounter, any difficulty in meeting its obligations relative to
such withdrawals. Exclusive of the GIC withdrawals, policyholder contract
deposits exceeded policyholder withdrawals by $46.1 million.
RESULTS OF OPERATIONS:
For the six months ended June 30, 1994, SLC reflected an operating loss and
net loss, before preferred dividend requirements, of $34.6 million. The 1994
first half results compare to a restated gain from operations for the same
period in 1993 of $97.1 million and net earnings, before preferred dividend
requirements, totaling $94.0 million. Preferred dividend requirements totaled
$7.8 million in the first six months of 1994, as compared to $15.4 million in
the first six months of 1993. Results in the 1993 first half also included a
charge for a change in accounting for postretirement benefits totaling $1.8
million and extraordinary losses related to the early retirement of debt
totaling $1.4 million.
The results for the first six months of 1993 have been restated to reflect
the reclassification of a previously reported non-operating gain as a component
of operating earnings and to reflect a correction for certain accounting errors
discovered during the preparation of SLC's 1993 year-end financial statements.
See Note 1 of the Notes to Financial Statements included elsewhere in this Form
10-Q/A for a summary of the effects of the reclassification and the correction
of the accounting errors.
SLC's results for the first six months of both 1994 and 1993 were affected
by several items of an infrequent and non-recurring nature, including the gain
recognized on the stock offering by BLHC in 1993, gains from the termination of
reinsurance arrangements in both periods and significant writedowns of
mortgage-backed securities in 1994. In addition, in the first six months of
1993, SLC included in its results of operations its equity in the earnings of
BLHC. Following is a condensed summary of results for the six months ended June
30, 1994 and 1993, by major sources of income and expense (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1994 1993
---------- ----------
<S> <C> <C>
Operating earnings before non-recurring income (charges), equity in the
earnings of BLHC, realized investment gains (losses), interest expense on
long-term debt, and provision for income taxes................................ $ 22,333 $ 16,834
Gain on BLHC stock offering.................................................... 99,376
Gain on reinsurance terminations............................................... 8,735 17,117
Equity in operating earnings of BLHC........................................... 20,539
Realized investment gains (losses)............................................. (45,101) 13,369
Interest expense on long-term debt............................................. (25,109) (30,991)
Income tax (expense) credit.................................................... 4,511 (39,097)
---------- ----------
Operating earnings (loss)...................................................... (34,631) 97,147
Less dividends on preferred stock.............................................. (7,825) (15,400)
---------- ----------
Operating earnings (loss) attributable to common stock..................... $ (42,456) $ 81,747
---------- ----------
---------- ----------
</TABLE>
18
<PAGE>
For the six months ended June 30, 1994, premium income and other
considerations decreased $6.9 million, or 3%, as compared to the corresponding
period 1993. Following is a summary of premiums by major line of business for
each of the respective periods (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
1994 1993
----------- -----------
<S> <C> <C>
Individual life and annuity......................................... $ 61,519 $ 59,286
Individual health................................................... 108,610 109,859
Group and other..................................................... 59,576 67,454
----------- -----------
$ 229,705 $ 236,599
----------- -----------
----------- -----------
</TABLE>
Group and other premium income declined $7.9 million, or 12%, primarily as a
result of terminating several large unprofitable group health cases in late 1993
and early 1994. SLC's subsidiaries presently derive substantial revenues from
their interest-sensitive and universal life products; however, for financial
reporting purposes, these types of products are treated as deposit products and,
therefore, premiums received are not reflected as a component of premium income.
During the six months ended June 30, 1994, net investment income decreased
$24.2 millon, or 23%, as compared to the corresponding period in 1993. Net
investment income includes 1) earnings on surplus investments and assets
invested to support the reserve liabilities of the Company's traditional and
interest-sensitive life and health insurance products (general investment
portfolio) and 2) investment activity related to separately held assets
supporting a GIC product, the credited rate on which is indexed to the S&P 500
Stocks Composite Average (S&P 500). In addition, in 1993, net investment income
included investment income on certain mortgage-backed securities held in a
special purpose trust (the Trust) securing the Trust's collateralized mortgage
note obligation. The accounts of the Trust are no longer consolidated with those
of the Company for periods after July 30, 1993, as the result of SLC's sale of a
75% interest in the Trust. Assets supporting the S&P 500 GIC product include,
among other investments, put and call options on various equity based index
futures, including the S&P 500. The return on such investments is highly
volatile and, under certain market conditions, such as the overall decline in
equity markets experienced in the first six months of 1994, can result in
investment losses, or negative investment yields. The negative investment yield
experienced in the first six months 1994 on the assets supporting the indexed
GIC product was more than offset by a reduction in GIC benefits as discussed
below under the analysis of change in policyholder benefits. Following is a
summary of investment income (loss) for the three categories of investments as
described above for the six months ended June 30, 1994 and 1993 (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------
1994 1993
------- --------
<S> <C> <C>
General investment portfolio..................... $93,543 $ 87,154
Investments supporting indexed GIC product....... (6,907) 13,139
Mortgage-backed securities held in the Trust..... 11,995
------- --------
Gross investment income.......................... 86,636 112,288
Less investment expenses......................... (4,632) (6,102)
------- --------
Net investment income........................ $82,004 $106,186
------- --------
------- --------
</TABLE>
The increase in investment income from the general investment portfolio was
attributable, in part, to a $3.9 million payment-in-kind dividend received on
the CFLIC preferred stock and a $2.0 million fee received upon the prepayment of
certain notes by Financial Benefit Group. In addition, beginning April 1, 1994,
the effective date of the CFLIC reinsurance recaptures, the Company has
reflected investment income on the investments transferred from CFLIC to ERC.
Investment income
19
<PAGE>
on such assets approximated $5.7 million in the 1994 period. Exclusive of the
non-recurring dividend from CFLIC and the fee received from Financial Benefit
Group, yields on the general investment portfolio averaged approximately 7.1% in
1994 as compared to 6.7% in 1993.
Realized investment losses totaled $45.1 million for the first six months of
1994, as compared to investment gains totaling $13.4 million for the comparable
1993 period. Substantially all of the investment losses in 1994 were
attributable to writedowns of certain mortgage-backed securities, as discussed
under "Investment Portfolio." Investment gains in 1993 included $8.2 million of
gains resulting from BLHC's redemption of certain of its securities utilizing
proceeds of its stock offering. Other gains in 1993 resulted primarily from
sales of fixed maturities and equity securities, which were offset, in part, by
a $5.0 million writeoff of the Company's investment in a partnership owning
equity securities in a company which had filed for bankruptcy. See Note 6 of the
Notes to Financial Statements included elsewhere in this Form 10-Q/A for a
comparative analysis of realized investment gains and losses.
Equity in the earnings (losses) of equity investees and limited partnerships
includes SLC's pro rata share of the operating earnings of BLHC and other
investments in limited partnerships which are accounted for by the equity
method. Following is an analysis of the components of such earnings (in
thousands):
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE
30,
-------------
1994 1993
---- -------
<S> <C> <C>
Equity in operating earnings of:
BLHC............................................... $20,539
Limited partnership investments.................... $843 3,983
---- -------
$843 $24,522
---- -------
---- -------
</TABLE>
In 1994, other income includes a $4.8 million gain on the termination of the
CFLIC reinsurance agreement and the redemption of certain of SLC's debt and
equity securities, as previously discussed. In 1993, other income included $17.1
million of non-recurring income associated with the termination of a reinsurance
agreement between Bankers and an SLC subsidiary. Excluding the income from the
reinsurance transaction, other income decreased from $16.2 million in 1993 to
$6.5 million in 1994. A substantial portion of the decline in other income was
as a result of the recapture of the CFLIC reinsurance. Previously, the Company
had reflected its share of the profits from such reinsurance as an experience
refund under the other income caption. Effective April 1, 1994, the Company
recaptured such business and has subsequently reflected the results in the
various line items of its statement of earnings, including primarily net
investment income and policyholder benefits.
Following is a summary of policyholder benefits by major business segment
(in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------
1994 1993
-------- --------
<S> <C> <C>
Individual life and annuity..................... $ 76,964 $ 74,539
Individual health............................... 75,595 69,092
Group and other................................. 38,778 45,978
Accumulation products........................... (1,068) 26,944
-------- --------
$190,269 $216,553
-------- --------
-------- --------
</TABLE>
Life and annuity benefits increased approximately $2.4 million, or 3%. A
substantial portion of the increase in such benefits was attributable to the
recapture of the CFLIC reinsurance effective April 1, 1994, and the reflection
of the related benefits in the 1994 second quarter, which was offset, in part,
by a reduction in credited rates on interest-sensitive life insurance policies
between the periods. Individual health benefits increased $6.5 million,
reflecting a deterioration in the individual health
20
<PAGE>
benefit ratio from 62.9% in 1993 to 69.6% in 1994. The benefit ratio applicable
to the Company's medicare supplement business increased from 67.3% in the first
six months of 1993 to 77.5% in the comparable 1994 period, reflecting a
deficiency in premiums charged for medicare supplement products in 1994. The
Company received rate increases for some of these products in 1994 and may seek
approval for additional rate increases in 1995. Group benefits decreased
approximately $7.2 million, or 16%, primarily as a result of the termination of
several large group health cases, as previously discussed. The group benefit
ratio decreased from 68.2% in 1993 to 65.1% in 1994. Benefits related to
accumulation products include primarily interest credited to annuity and GIC
account balances. As previously discussed, benefits attributable to the GIC
product indexed to the S&P 500 totaled a negative $8.9 million in the first six
months of 1994 as compared to benefit expense totaling $13.2 million in 1993.
Other operating expenses decreased approximately $19.4 million from the 1993
period to the 1994 period. Following is a summary of the major items included in
other operating expenses (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------
1994 1993
------- -------
<S> <C> <C>
Non-deferrable commissions........................ $19,603 $20,157
General and administrative expenses............... 44,153 58,783
Taxes, licenses and fees.......................... 8,593 8,411
Placement fee for collateralized mortgage note
obligations...................................... 4,413
------- -------
$72,349 $91,764
------- -------
------- -------
</TABLE>
Non-deferrable commissions decreased primarily as a result of a reduction in
the sale of new group health insurance products. General and administrative
expenses decreased primarily as a result of the expense reduction and
consolidation programs implemented during 1993. The placement fee in 1993
relates to the refinancing of a previously-consolidated subsidiary's
collateralized mortgage note obligations.
Interest expense declined $11.2 million, or approximately 31% in the first
six months of 1994 as compared to the same period in 1993. In 1994, SLC incurred
interest expense only on its outstanding long-term debt, whereas in 1993 it had
two categories of interest expense, including interest on long-term debt and
collateralized mortgage obligations. Interest expense relative to long-term
debt, declined $5.9 million, or 19%, primarily as a result of the retirement of
approximately $120.9 million of SLC's 16 1/2% Senior Subordinated Debentures
during 1993. During the first six month of 1993, SLC's consolidated results
included the accounts of the Trust that held mortgage-backed securities used to
collateralize certain promissory notes payable to unaffiliated parties. SLC,
through ICH Funding, sponsored the formation of and held a residual equity
interest in the Trust. Interest expense related to the Trust's obligations and
included in SLC's consolidated results totaled $5.3 million for the first six
months of 1993. In July 1993, SLC's and an affiliate's ownership interests were
reduced through a sale of a 75% interest in the Trust. As a consequence of the
sale, the accounts of the Trust are no longer included in SLC's consolidated
results and no similar interest expense was incurred in 1994.
An income tax credit in the 1994 first six month period totaled $4.5 million
on a pre-tax loss of $39.1 million, representing 12% of the pre-tax loss. In the
first six months of 1993, income tax expense represented 29% of pre-tax
earnings. The unusual relationship in 1994 resulted primarily from the
amortization of excess cost for which there are no income tax consequences, the
loss of approximately $4.5 million in income tax benefits as a result of SLC's
redemption of its own equity securities in the CFLIC transactions (see Note 8 of
the Notes to Financial Statements included elsewhere in this Form 10-Q/A), and a
$5.0 million increase in the deferred income tax asset valuation allowance due
to uncertainties as to the Company's ability to generate future investment gains
in an amount sufficient to utilize all of the losses resulting from the
writedown of certain mortgage-backed securities. In 1993, the effective tax rate
differed from the then-expected 34% rate as a result of amortization of excess
21
<PAGE>
cost and an $8.8 million reduction in the valuation allowance relative to SLC's
deferred income tax assets. SLC's deferred income tax assets, before valuation
allowance, declined from $145.1 million at year-end 1992 to $51.3 million at
June 30, 1993, primarily as a result of the gain recognized on the BLHC stock
offering and other realized and unrealized investment gains in the first six
months of 1993. Accordingly, the valuation allowance relative to SLC's deferred
income tax assets totaling $24.1 million at year-end 1992 was reduced to $15.3
million at June 30, 1993, based on management's assessment that SLC's ability to
realize the benefits of its remaining tax assets, specifically its capital loss
carryforwards, had been significantly enhanced.
SLC recognized a $1.8 million charge in 1993, net of $.9 million in deferred
taxes, for the cumulative effect to January 1, 1993, of the adoption of
Statement of Financial Accounting Standards (SFAS) No. 106, "Employers'
Accounting for Postretirement Benefits Other than Pensions." SLC had previously
provided a liability totaling $20.1 million for postretirement benefits for
retirees of certain acquired companies through its purchase accounting relative
to such companies. The 1993 charge reflected the cost of providing
postretirement benefits for its remaining employees. SLC also reported
extraordinary losses in 1993 totaling $1.4 million, net of tax effects, related
to early extinguishment of debt. See Note 7 of the Notes to Financial Statements
included elsewhere in this Form 10-Q/A for additional information regarding such
extraordinary losses.
Preferred dividend requirements declined $7.6 million from $15.4 million in
the first six months of 1993 to $7.8 million in the 1994 comparable period.
Utilizing proceeds from the sale of its interest in BLHC, SLC redeemed $50
million stated value of its 11% Series 1987-A Preferred Stock on September 30,
1993, and $50 million stated value of its 16% Series 1987-C Preferred Stock on
December 2, 1993. In addition, SLC redeemed $29.2 million stated value of its
preferred stocks in the CFLIC transaction and there were no dividends declared
on such preferred stocks during the 1994 second quarter.
The results for the three months ended June 30, 1994 reflected improvement
over the results as reported for the three months ended March 31, 1994.
Following is condensed comparative statement of earnings information for the
respective periods (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------
JUNE 30, MARCH 31,
1994 1994
-------- ---------
<S> <C> <C>
Revenues...................................... $175,058 $103,718
-------- ---------
-------- ---------
Operating earnings (loss) before income
taxes........................................ $ 12,441 $(51,583)
Income tax expense (credit)................... 7,703 (12,214)
-------- ---------
Net earnings (loss)........................... 4,738 (39,369)
Less dividends on preferred stock............. (3,500) (4,325)
-------- ---------
Net earnings (loss) applicable to common
stock........................................ $ 1,238 $(43,694)
-------- ---------
-------- ---------
Net earnings (loss) per common share.......... $ .03 $ (.91)
-------- ---------
-------- ---------
</TABLE>
Revenues increased $71.3 million in the second quarter of 1994 as compared
to the first quarter of 1994. The Company incurred $46.4 million of investment
writedowns in the first quarter of 1994 and had no similar writedowns in the
1994 second quarter. Other increases were primarily as a result of a $22.0
million increase in net investment income. Approximately $9.2 million of the
increase in investment income was related to an improvement in the yields on
assets supporting the indexed GIC product. As previously discussed, the earnings
on such assets are highly volatile, depending on changes in the S&P 500 Stocks
Composite Average. Investment income on such assets totaled a negative $8.0
million during the first quarter, as compared to a positive $1.2 million in the
second quarter. Other factors contributing to the increase in invested income
included the $3.9 million dividend from CFLIC and the $2.0 million fee received
from Financial Benefit Group, both as previously discussed. In addition,
beginning in the 1994 second quarter, SLC's investment income included
22
<PAGE>
approximately $5.7 million of earnings on the assets transferred from CFLIC to
ERC as a result of the CFLIC reinsurance primarily attributable to the
reinvestment of a portion of available cash into higher yielding long-term
investments. The remaining $1.2 million increase in investment income is
primarily attributable to improvements in yields on investments.
The pre-tax operating gain in the second quarter of 1994 totaled
approximately $12.4 million, as compared to a pre-tax operating loss of $51.6
million in the 1994 first quarter, or an improvement of $64.0 million. There
were no additional writedowns of mortgage-backed securities in the second
quarter of 1994, accounting for $46.4 million of the improvement. In addition,
approximately $8.7 million of the improvement represented the aggregate gain on
the CFLIC transactions and $2.0 million represented the termination fee from
Financial Benefit Group. The remainder, or approximately $5.9 million,
represented an improvement in the Company's pre-tax operating results in the
1994 second quarter, as compared to the first quarter of 1994. A substantial
portion of the improvement was attributable to decreases in individual life and
group health claims between the periods and the above discussed improvement in
investment yields. Individual life claims, which can vary significantly from
quarter to quarter, had significantly exceeded expected claims in the 1994 first
quarter but returned to more normalized levels in the 1994 second quarter,
accounting for approximately $2.3 million of the improvement in pre-tax
operating earnings. In addition, the Company's group health operations continued
to reflect improvements resulting from the corrective actions taken at year-end
1993 (as discussed in the 1993 Annual Report) and improved its pre-tax operating
results in the second quarter by approximately $1.7 million. The income tax
provision for the 1994 second quarter represented 62% of pre-tax operating
earnings, primarily as a result of the loss of $4.5 million in tax benefits as a
result of SLC's redemption of certain of its equity securities in the CFLIC
transaction, as previously discussed. Preferred dividend requirements declined
an approximate $.8 million in the 1994 second quarter, as a result of SLC's
redemption of the preferred stocks previously held by CFLIC.
Reporting results of insurance operations on a quarterly basis necessitates
numerous estimates throughout the year, principally in the calculation of
reserves and in the determination of the effective rate for federal income
taxes. It is the Company's practice to review its estimates at the end of each
quarter and, if necessary, make appropriate refinements, with the resulting
effect being reported in current operations. Only at year-end is the Company
able to assess retrospectively the precision of its previous quarter estimates.
The Company's fourth quarter results contain the effect of the difference
between previous estimates and final year end results, and therefore, the
results for an interim period may not be indicative of the results for the
entire year.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SOUTHWESTERN LIFE CORPORTATION
By /s/ JOHN T. HULL
-----------------------------------
John T. Hull,
EXECUTIVE VICE PRESIDENT,
TREASURER AND PRINCIPAL ACCOUNTING
OFFICER
Date: October 14, 1994
24
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- --------------------------------------------------------------------------------------------- -------------
<C> <S> <C>
11.1 Computation of Earnings (Loss) Per Share of Common Stock on Average Shares Outstanding and
Fully Diluted Bases for the Three Months and the Six Months Ended June 30, 1994 and 1993....
</TABLE>
<PAGE>
EXHIBIT 11.1
SOUTHWESTERN LIFE CORPORATION
(FORMERLY I.C.H. CORPORATION)
COMPUTATION OF EARNINGS (LOSS) PER SHARE OF COMMON STOCK
ON AVERAGE SHARES OUTSTANDING AND FULLY DILUTED BASES
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1994 1993 1994 1993
----------- ----------- ----------- -----------
(RESTATED)
<S> <C> <C> <C> <C>
Computation for statements of earnings:
Operating earnings (loss)................................... $ 4,738 $ (8,476) $ (34,631) $ 97,147
Less dividends on preferred stock........................... (3,500) (7,700) (7,825) (15,400)
----------- ----------- ----------- -----------
Operating earnings (loss) applicable to common stock........ 1,238 (16,176) (42,456) 81,747
Cumulative effect to January 1, 1993 of change in method of
accounting for postretirement benefits..................... (1,812)
Extraordinary losses........................................ (129) (1,360)
----------- ----------- ----------- -----------
Net earnings (loss) applicable to common stock.............. $ 1,238 $ (16,305) $ (42,456) $ 78,575
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average common shares outstanding.................. 47,829,460 47,918,802 47,853,939 47,913,409
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings (loss) per common share:
Operating earnings (loss)................................. $.03 $(.34) $(.89) $1.71
Cumulative effect to January 1, 1993 of change in method
of accounting for postretirement benefits................ (.04)
Extraordinary losses...................................... (.03)
--- ---- ---- ----
Net earnings (loss)..................................... $.03 $(.34) $(.89) $1.64
--- ---- ---- ----
--- ---- ---- ----
Additional computations (A):
Weighted average common shares outstanding.................. 47,829,460 47,918,802 47,853,939 47,913,409
Incremental common shares applicable to common stock options
based on the common stock daily average market price during
the period................................................. 528,046 873,128 688,831 933,785
----------- ----------- ----------- -----------
Weighted average common shares, as adjusted................. 48,357,506 48,791,930 48,542,770 48,847,194
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average common shares outstanding.................. 47,829,460 47,918,802 47,853,939 47,913,409
Incremental common shares applicable to common stock options
based on the more dilutive of the common stock ending or
daily average market price during the period............... 528,046 873,128 689,018 960,635
Assumed conversion of convertible preferred shares.......... 6,153,755 7,867,466 6,153,755 7,867,466
----------- ----------- ----------- -----------
Weighted average common shares, assuming full dilution...... 54,511,261 56,659,396 54,696,712 56,741,510
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net earnings (loss) applicable to common stock assuming
conversion of convertible preferred stock.................. $ 4,738 $ (12,127) $ (34,631) $ 86,931
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings (loss) per common share:
Average shares outstanding:
Operating earnings (loss)................................. $.03 $(.33) $(.87) $1.68
Cumulative effect to January 1, 1993 of change in method
of accounting for postretirement benefits................ (.04)
Extraordinary losses...................................... (.03)
--- ---- ---- ----
Net earnings (loss)..................................... $.03 $(.33) $(.87) $1.61
--- ---- ---- ----
--- ---- ---- ----
Fully diluted, assuming conversion of all applicable
securities (B):
Operating earnings (loss)................................. $.09 $(.21) $(.63) $1.58
Cumulative effect to January 1, 1993 of change in method
of accounting for postretirement benefits................ (.03)
Extraordinary losses...................................... (.02)
--- ---- ---- ----
Net earnings (loss)..................................... $.09 $(.21) $(.63) $1.53
--- ---- ---- ----
--- ---- ---- ----
<FN>
- ------------------------------
(A) These calculations are submitted in accordance with Securities Exchange Act
of 1934 Release No. 9083, although not required by footnote 2 to paragraph
14 of Accounting Principles Board Opinion No. 15 because they result in
dilution of less than 3% or antidilution.
(B) Fully diluted earnings in 1994 and the three months ended June 30, 1993 as
reflected in this exhibit are considered "antidilutive" because they result
in per share earnings that exceed per share earnings as determined on the
primary basis or per share losses that are less than per share losses as
determined on the primary basis. Fully diluted earnings per share in 1994
and the three months ended June 30, 1993 as reflected in the consolidated
statement of earnings (loss) were determined based on primary earnings per
share calculations as a result of such antidilution.
</TABLE>
