SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1996
Commission File Number 2-39310
INTERCONTINENTAL LIFE CORPORATION
New Jersey 22-1890938
(State of Incorporation) (I.R.S. Employer Identification Number)
The Austin Centre,701 Brazos, 12th Floor
Austin, Texas 78701
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (512)404-5000
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
Number of common shares outstanding ($.22 Par Value) at end of
period: 4,206,829.
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
INDEX
Page No.
Part I - Financial Information
Consolidated Balance Sheets
September 30, 1996 and December 31, 1995................ 3
Consolidated Statements of Income
For the three and nine month periods ended
September 30, 1996 and 1995............................. 4
Consolidated Statements of Cash Flows
For the three and nine month periods ended
September 30, 1996 and 1995............................. 6
Notes to Consolidated Financial Statements...................11
Management's Discussion and Analysis of
Financial Conditions and Results of Operations..........13
Part II
Computations of Earnings Per Share...........................19
Part III
Other Information............................................20
Signature Page...............................................21
Item 1. Financial Statements
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
Sept 30, Dec. 31,
1996 1995
Unaudited
ASSETS
Investments:
Fixed maturities, at amortized cost
(market value approximates $8,778
and $14,277) $ 7,260 $ 14,420
Fixed maturities available for sale
at market value (amortized cost of
$466,222 and $463,268) 461,587 483,606
Equity securities at market (cost
approximates $368 and $368) 2,397 1,559
Policy loans 52,822 53,656
Mortgage loans 13,702 14,836
Invested real estate and other
invested assets 29,715 15,467
Short-term investments 78,076 85,994
Total investments 645,559 669,538
Cash and cash equivalents 1,397 6,537
Notes receivable from affiliates 61,477 61,224
Accrued investment income 9,519 8,190
Agent advances and other
receivables 24,777 16,591
Reinsurance receivables 14,403 14,474
Property and equipment, net 4,433 4,460
Real estate occupied by the
Company, net -0- 36,169
Deferred policy acquisition costs 26,588 24,926
Present value of future profits of
acquired businesses 46,772 48,606
Deferred financing costs 814 1,597
Other assets 8,760 6,859
Separate account assets 408,667 416,122
Total Assets $1,253,166 $1,315,293
(See Notes to Consolidated Financial Statements)
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
Sept 30, Dec. 31,
1996 1995
Unaudited
LIABILITIES & SHAREHOLDERS' EQUITY
Liabilities:
Policy liabilities and contractholder
deposit funds
Future policy benefits $ 125,388 $ 128,265
Contractholder deposit funds 535,684 544,621
Unearned premiums 8,995 10,669
Other policy claims & benefits
payable 6,130 6,125
676,197 689,680
Other policyholders' funds 2,735 2,700
Senior loans 24,944 59,385
Deferred federal income taxes 19,662 25,462
Other liabilities 17,438 27,105
Separate account liabilities 406,421 413,876
Total liabilities 1,147,397 1,218,208
Commitments and contingencies
Redeemable preferred stock:
Class A Preferred, $1 par value,
5,000,000 shares authorized and
issued 5,000 5,000
Class B Preferred, $1 par value,
15,000,000 shares authorized and
issued 15,000 15,000
20,000 20,000
Redeemable Preferred Treasury Stock at
cost, 20,000,000 shares (20,000) (20,000)
-0- -0-
Shareholders' equity:
Common stock, $.22 par value,
10,000,000 shares authorized;
5,197,739 and 5,166,239 shares
issued, 4,206,829 and 4,175,329
shares outstanding in 1996 and 1995 1,144 1,137
Additional paid-in capital 3,628 3,521
Net unrealized appreciation of equity
securities 1,319 748
Net unrealized (loss) gain on invest-
ments in fixed maturities available
for sale (3,013) 12,938
Retained earnings 105,709 81,759
108,787 100,103
Common treasury stock, at cost, 990,910
shares in 1996 and 1995 (3,018) (3,018)
Total Shareholders' Equity 105,769 97,085
Total Liabilities and Shareholders'
Equity $1,253,166 $1,315,293
(See Notes to Consolidated Financial Statements)
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTH PERIODS
ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
(in thousands of dollars, except per share data)
3 Months Ended
Sept 30,
1996 1995
Revenues:
Net premiums $ 2,461 $ 2,537
Earned insurance charges 11,726 10,279
Net investment income 14,635 16,779
Gain on sale of real estate -0- -0-
Other 652 858
Total 29,474 30,453
Benefits and expenses:
Interest expense 528 1,443
Interest on insurance policies 8,389 8,213
Benefits and other expenses 15,984 17,025
Total 24,901 26,681
Income from operations 4,573 3,772
Provision for federal income taxes 1,600 1,274
Net income $ 2,973 $ 2,498
Per Share Data:
Common stock and common stock
equivalents 5,361 5,372
Net income per share available to
common shareholders $ .59 $ .50
(See Notes to Consolidated Financial Statements)
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTH PERIODS
ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
(in thousands of dollars, except per share data)
9 Months Ended
Sept 30,
1996 1995
Revenues:
Net premiums $ 7,957 $ 8,212
Earned insurance charges 32,033 30,278
Net investment income 45,340 48,760
Gain on sale of real estate 23,520 -0-
Other 2,041 2,639
Total 110,891 89,889
Benefits and expenses:
Interest expense 2,266 4,550
Interest on insurance policies 24,219 24,252
Benefits and other expenses 47,559 49,260
Total 74,044 78,062
Income from operations 36,847 11,827
Provision for federal income taxes 12,896 4,139
Net income $ 23,951 $ 7,688
Per Share Data:
Common stock and common stock
equivalents 5,400 5,372
Net Income per share available to
common shareholders $ 4.53 $ 1.52
(See Notes to Consolidated Financial Statements)
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS
ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
(in thousands of dollars)
3 Months Ended
Sept 30,
CASH FLOWS FROM OPERATING ACTIVITIES 1996 1995
Net Income $ 2,973 $ 2,498
Adjustments to reconcile net income to net
cash (used in) provided by operating
activities:
Amortization of present value of future
profits of acquired businesses (1,266) 1,447
Amortization of deferred policy acquisition
costs 691 1,014
Depreciation -0- (11)
Net gain on sales of investments -0- 54
Financing costs amortized 277 274
Changes in assets and liabilities:
(Increase) decrease in accrued investment
income (624) 57
(Increase) decrease in agent advances
and other receivables (3,392) 7,608
Policy acquisition costs deferred (1,269) (590)
Decrease in policy liabilities
and contract holder deposit funds (2,393) (4,911)
Increase in other policyholders' funds 2 31
Decrease in other liabilities (8,236) (6,975)
Increase in deferred federal
income taxes 822 1,661
Increase in other assets (464) (1,478)
Other, net 865 (1,446)
Net cash (used in) provided by operating
activities $(12,014) $ (767)
(See Notes to Consolidated Financial Statements)
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS
ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
(In thousands of dollars)
3 Months Ended
Sept 30,
CASH FLOWS FROM INVESTING ACTIVITIES 1996 1995
Investments purchased $(20,633) $ (2,703)
Proceeds from sale and maturities of
investments 15,905 12,054
Net change in short-term investments 13,533 (11,080)
Issuance of notes to affiliate -0- -0-
Payment for purchase of insurance sub-
sidiary, net of cash acquired -0- -0-
Purchase & retirement of equipment, net 7 247
Net cash provided by (used in)
investing activities 8,812 (1,482)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock 74 72
Repayment of debt (5,000) -0-
Net cash (used in) provided by
financing activities (4,926) 72
Net decrease in cash and cash
equivalents (8,128) (2,177)
Cash and cash equivalents, beginning of
period 9,525 3,295
Cash and cash equivalents, end of period $ 1,397 $ 1,118
(See Notes to Consolidated Financial Statements)
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS
ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
(in thousands of dollars)
9 Months Ended
Sept 30,
CASH FLOWS FROM OPERATING ACTIVITIES 1996 1995
Net Income $ 23,951 $ 7,688
Adjustments to reconcile net income to net
cash (used in) provided by operating
activities:
Amortization of present value of future
profits of acquired businesses 1,834 4,584
Amortization of deferred policy acquisition
costs 1,963 2,749
Depreciation -0- -0-
Net gain on sales of investments (23,732) -0-
Financing costs amortized 783 607
Changes in assets and liabilities:
(Increase) decrease in accrued investment
income (1,329) 1,081
(Increase) decrease in agent advances
and other receivables (8,115) 6,527
Policy acquisition costs deferred (3,625) (1,549)
Decrease in policy liabilities
and contract holder deposit funds (13,482) (22,327)
Increase (decrease) in other
policyholders' funds 35 (309)
Decrease in other liabilities (9,669) (7,029)
(Decrease) increase in deferred federal
income taxes (5,800) 16,141
Increase in other assets (1,901) (2,496)
Other, net 7,520 (2,303)
Net cash (used in) provided by
operating activities $(31,567) $ 3,364
(See Notes to Consolidated Financial Statements)
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS
ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
(In thousands of dollars)
9 Months Ended
Sept 30,
CASH FLOWS FROM INVESTING ACTIVITIES 1996 1995
Investments purchased $(43,908) $(17,561)
Proceeds from sale and maturities of
investments 96,970 18,682
Net change in short-term investments 7,918 10,916
Issuance of notes to affiliate (253) -0-
Payment for purchase of insurance
subsidiary, net of cash acquired -0- (17,492)
Purchase & retirement of equipment, net 27 10
Net cash provided by (used in)
investing activities 60,754 (5,445)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock 114 336
Issuance of senior loan -0- 15,000
Repayment of debt (34,441) (17,700)
Net cash used in financing activities (34,327) (2,364)
Net decrease in cash and cash
equivalents (5,140) (4,445)
Cash and cash equivalents, beginning of
period 6,537 5,563
Cash and cash equivalents, end of period $ 1,397 $ 1,118
(See Notes to Consolidated Financial Statements)
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited)
The financial statements included herein reflect all adjustments
which are, in the opinion of management, necessary to present a
fair statement of the interim results. The statements have been
prepared to conform to the requirements of Form 10-Q and do not
necessarily include all disclosures required by generally
accepted accounting principles (GAAP). The reader should refer
to Form 10-K for the year ended December 31, 1995 previously
filed with the Securities and Exchange Commission for financial
statements prepared in accordance with GAAP. Certain prior year
amounts have been reclassified to conform with current year
presentation.
Acquisition of Insurance Subsidiary
On February 14, 1995, the Company, through Investors Life
Insurance Company of North America ("Investors-NA"), purchased
from Meridian Mutual Insurance Company the stock of Meridian Life
Insurance Company, an Indianapolis-based life insurer, for a cash
purchase price of $17.1 million, net of past-closing adjustments.
After the aquisition, Meridian Life changed its name to Investors
Life Insurance Company of Indiana ("Investors-IN"). Investors-IN
is licensed in ten states and markets a variety of individual
life and annuity products through independent agents. This is
not considered a significant subsidiary for Securities and
Exchange Commission reporting purposes.
Under the terms of the purchase agreement, the Company acquired
approximately 82% of the outstanding stock of Investors-IN for
$14 million and Investors-NA acquired approximately 18% of the
outstanding stock of Investors-IN for the remainder of the
purchase price. Immediately following the closing of the
transaction, the Company contributed the shares acquired by it to
the unassigned surplus of Investors-NA. As a result, Investors-
IN became a wholly-owned subsidiary of Investors-NA. This
transaction was financed, in part, through a $15 million increase
in the Company's Senior Loan.
Sale of Home Office Building
Net income for the first nine months of 1996 includes $15.3
million resulting from the sale during the first quarter of 1996
of the Austin Centre, a hotel/office complex, located in Austin,
Texas. The selling price was $62.675 million, less $1 million
paid to a capital reserve account for the purchaser. The
property was purchased in 1991 for $31.275 million. The book
value of the property, $36.8 million, net of improvements and
amortization, was retained and reinvested by Investors-NA. The
balance of the proceeds of the sale, net of federal income tax,
was used to reduce the Company's senior loan obligations by $15
million. The sale closed on March 29, 1996.
New Accounting Pronouncements
In March 1995, the FASB issued FAS No. 121, "Accounting For the
Impairment of Long-Lived Assets and For Long-Lived Assets to be
Disposed of." This Statement requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity
be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. In addition, the Statement requires that
long-lived assets and certain identifiable intangibles to be
disposed of be reported at the lower of carrying amount or fair
value less cost to sell.
FAS No. 121 is effective for fiscal years beginning after 1995.
The Company adopted FAS No 121 effective January 1, 1996. The
adoption of this Statement did not have a material impact on the
Company's financial statements.
In October 1995, the FASB issued FAS No. 123 "Accounting for
Stock-Based Compensation," which encourages companies to adopt
the fair value based method of accounting for stock-based
compensation. This method requires the recognition of
compensation expense equal to the fair value of such equity
securities at the date of the grant. This Statement also allows
companies to continue to account for stock-based compensation
under the intrinsic value based method, as prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," with footnote disclosure of the pro forma
effects of the fair value based method. FAS No. 123 is effective
for transactions entered into in years that begin after December
15, 1995.
The Company plans to adopt FAS No. 123 during 1996 by continuing
to account for stock-based compensation under the intrinsic value
method and disclosing the pro forma effects of the fair value
method in the footnotes to the financial statements.
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations:
For the nine-month period ended September 30, 1996, ILCO's net
income was $23,951,000 ($4.53 per common share), as compared to
$7,688,000 ($1.52 per common share) for the similar period in
1995.
Net income for the first nine months of 1996 includes $15.3
million resulting from the sale of the Austin Centre, a
hotel/office complex, located in Austin, Texas. The selling
price was $62.675 million, less $1 million paid to a capital
reserve account for the purchaser. The property was purchased in
1991 for $31.275 million. A portion of the sale proceeds, equal
to the book value of the property, net of improvements and
amortization ($36.8 million), was retained and reinvested by
Investors Life Insurance Company of North America ("Investors-
NA"). The balance of the proceeds, net of federal income tax, of
the sale was used to reduce the Company's senior loan obligations
by $15 million. The sale closed on March 29, 1996.
The reported results for 1995 include the operations of Investors
Life Insurance Company of Indiana (formerly known as Meridian
Life Insurance Company) for the period from February 14, 1995 to
December 31, 1995. Investors Life Insurance Company of Indiana
(Investors-IN) was purchased by ILCO and Investors-NA for an
adjusted purchase price of $17.1 million; the transaction was
completed on February 14, 1995. The name change was completed in
May, 1995.
The statutory earnings of the Company's insurance subsidiaries,
as required to be reported to insurance regulatory authorities,
before interest expense, capital gains and losses, and federal
income taxes were $15.5 million at September 30, 1996, as
compared to $18.4 million at September 30, 1995. These statutory
earnings are the source to provide for the repayment of ILCO's
indebtedness.
The operating strategy of the Company's management emphasizes
several key objectives: expense management; marketing of
competitively priced insurance products which are designed to
generate an acceptable level of profitability; maintenance of a
high quality portfolio of investment grade securities; and the
provision of quality customer service.
Premium income, net of reinsurance, for the first nine months of
1996 was $7.96 million, as compared to $8.21 million in the same
period of 1995. Reinsurance premiums ceded were $2.4 million in
the first nine months of 1996 and $2.7 million for the first nine
months of 1995.
Earned insurance charges for the first nine months of 1996 were
$32.03 million, as compared to $30.28 million for the similar
period in 1995. This source of revenues is related to the
universal life insurance and annuity books of business of
Investors-NA.
In December, 1995, Investors-NA entered into a reinsurance
agreement with Family Life Insurance Company ("Family Life")(an
insurance company subsidiary of Financial Industries Corporation
and an affiliated company of Investors-NA), pertaining to
universal life insurance written by Family Life. The reinsurance
agreement is on a co-insurance basis and applies to all covered
business with effective dates on and after January 1, 1995. The
agreement applies to only that portion of the face amount of the
policy which is less than $200,000; face amounts of $200,000 or
more are reinsured by Family Life with a third party reinsurer.
As of January, 1996, Investors-NA entered into a reinsurance
agreement with Family Life, pertaining to annuity contracts
written by Family Life. This reinsurance agreement is also on a
co-insurance basis and applies to all covered business with
effective dates on and after January 1, 1996. These arrangements
reflect management's plan to develop universal life and annuity
business at Investors-NA, with Family Life concentrating on the
writing of term life insurance products.
Interest expense was $2.27 million for the first nine months of
1996, as compared to $4.55 million for the similar period in
1995. The decrease is attributable to a reduction in the average
principal balance of the senior loan from $65.96 million for the
nine month period ending September 30, 1995 to $36.58 million for
the nine month period ending September 30, 1996, as well as a
decrease in the average rate of interest paid on the senior loan-
7.78% for the first nine months of 1996 as compared to 8.72% for
the same period in 1995.
The increase in interest rates during the first nine months of
1996, which was related to general economic conditions, had a
negative effect upon the market value of the fixed maturities
available for sale segment of the portfolio. As of September 30,
1996, the market value of the fixed maturities available for sale
segment was $461.6 million, representing a net unrealized loss
of $4.6 million over amortized cost. Such decrease reflects
unrealized losses on such investments. The net of tax effect of
this decrease has been recorded as a reduction in shareholders'
equity.
In January, 1995, ILCO, through Investors-NA, purchased, as an
investment property, an office building project known as One
Bridgepoint Office Square in Austin, Texas, for a cash purchase
price of $9.75 million. The property consists of 20 acres of
land, with four office building sites and two sites for parking
garages. At the time of the purchase, the first stage of the
development had already been completed, consisting of a five-
story office building with 83,474 square feet of rentable space
and a 550-car parking garage. That stage of the development was
completed in 1986. In the fourth quarter of 1995, construction
commenced on a second building on the site, with 110,000 square
feet of rentable space, and the second parking garage. The
second phase of the project was completed in the summer of 1996
and is fully rented. In the first quarter of 1996, construction
commenced on the third building on the site, with approximately
81,000 square feet of rentable space. This third phase is
projected to be finished in late 1996, and is more than 50%
rented. A fourth building, with approximately 92,000 square feet
of rentable space, is currently under construction, with an
expected completion date in the fourth quarter of 1997.
Results of Operations
For the three-month period ended September 30, 1996, the
Company's income from operations before Federal income taxes was
$4,573,000 on revenues of $29,474,000, as compared to
$3,772,000, on revenues of $30,453,000 for the same period in
1995.
For the three-month period ended September 30, 1996, the lapse
rate with respect to universal life insurance policies increased
from the lapse rate experienced in the similar period in 1995.
The rate for the 1996 period was 9.27%, as compared to 7.88% in
the 1995 period. The lapse rate with respect to traditional
(non-universal) life insurance policies increased slightly from
the levels experienced in the third quarter of 1995. The rate
for the three-month period ended September 30, 1996 was 7.77%, as
compared to 7.10% in the similar period in 1995. The lapse
rates experienced during these periods were within the ranges
anticipated by management.
Liquidity and Capital Resources
ILCO is a holding company whose principal assets consist of the
common stock of Investors-NA and its subsidiaries - Investors-IN
and InterContinental Life Insurance Company ("ILIC"). ILCO's
primary source of funds consists of payments under two Surplus
Debentures from Investors-NA.
As of December 31, 1995, the outstanding principal balance of the
ILCO's senior loan obligations was $59.4 million. In January,
1996, the Company made a scheduled payment of $4.5 million under
its Senior Loan. In March, 1996, the Company made the scheduled
payments for April 1st and July 1st, totaling $9 million. At
that same time, the Company made a payment of $941,000, an
additional payment under the terms of the loan applied to the
principal balance. On April 1, 1996, an optional principal
payment in the amount of $15 million was made. In July, 1996,
the Company made the principal payment for October 1st ($4.5
million), plus an optional principal payment of $0.5 million,
thereby reducing the total amount of the outstanding Senior Loan
to $24.94 million.
ILCO's principal source of liquidity consists of the periodic
payment of principal and interest by Investors-NA, pursuant to
the terms of the Surplus Debentures. The Surplus Debentures were
originally issued by Standard Life Insurance Company ("Standard
Life") and their terms were previously approved by the
Mississippi Insurance Commissioner. Upon the merger of Standard
Life into Investors-NA, the obligations of the Surplus Debentures
were assumed by Investors-NA. The terms of the merger were
approved by the Insurance Commissioner of the State of
Washington, the State of domicile of Investors-NA. As of
September 30, 1996, the outstanding principal balance of the
Surplus Debentures was $6.4 million and $35.5 million,
respectively. Since Investors-NA is domiciled in the State of
Washington, the provisions of Washington insurance law apply to
the Surplus Debentures. Under the provisions of the Surplus
Debentures and current law, no prior approval of the Washington
Insurance Commissioner is required for Investors-NA to pay
interest or principal on the Surplus Debentures; provided that,
after giving effect to such payments, the statutory surplus of
Investors-NA is in excess of $10 million (the "surplus floor").
However, Investors-NA has voluntarily agreed with the Washington
Insurance Commissioner that it will provide at least five days
advance notice of payments which it will make under the surplus
debenture. As of September 30, 1996, the statutory capital and
surplus of Investors-NA was $54.3 million, an amount
substantially in excess of the surplus floor. The funds required
by Investors-NA to meet its obligations to the Company under the
terms of the Surplus Debentures are generated from operating
income generated from insurance and investment operations.
In addition to the payments under the terms of the Surplus
Debentures, ILCO has received dividends from Standard Life (now,
from Investors-NA). Washington's insurance code includes the
"greater of" standard for payment of dividends to shareholders,
but has requirements that prior notification of a proposed
dividend be given to the Washington Insurance Commissioner and
that cash dividends may be paid only from earned surplus. Since
the law applies only to dividend payments, the ability of
Investors-NA to make principal and interest payments under the
Surplus Debentures is not affected. ILCO does not anticipate
that Investors-NA will have any difficulty in making principal
and interest payments on the Surplus Debentures in the amounts
necessary to enable ILCO to service the Senior Loan for the
foreseeable future.
Investors-IN is domiciled in the State of Indiana. Under the
Indiana insurance code, a domestic insurer may make dividend
distributions upon proper notice to the Department of Insurance,
as long as the distribution is reasonable in relation to adequate
levels of policy holder surplus and quality of earnings. Under
Indiana law the dividend must be paid from earned surplus.
Extraordinary dividend approval would be required where a
dividend exceeds the greater of 10% of surplus or the net gain
from operations for the prior fiscal year. Investors-IN
currently has earned surplus.
ILCO's net cash flow (used in) provided by operating activities
was $(31.6) million for the nine month period ended September
30, 1996, as compared to $3.4 million for the same period in
1995. This change is primarily due to fluctuations in the amount
of deferred federal income tax related to the market value of
investment assets that are fixed maturities available for sale
and to the net gain realized in connection with the sale of the
Austin Centre.
Management believes that its cash, cash equivalents and short
term investments are sufficient to meet the needs of its business
and to satisfy debt service.
Investments
As of September 30, 1996, the carrying value of the Company's
invested assets totaled $645.6 million, as compared to $669.5
million as of December 31, 1995. The decrease in invested assets
is primarily attributable to a decrease in the market value of
the fixed maturities segment of invested assets. The level of
short-term investments as of September 30, 1996 was $78.1
million, as compared to $86.0 million as of December 31, 1995.
The fixed maturities available for sale portion of invested
assets at September 30, 1996 was $461.6 million. The amortized
cost of the fixed maturities available for sale segment as of
September 30, 1996 was $466.2 million, representing a net
unrealized loss of $4.6 million. This unrealized loss
principally reflects changes in interest rates from the date the
respective investments were purchased. To reduce the exposure to
interest rate changes, portfolio investments are selected so that
diversity, maturity and liquidity factors approximate the
duration of associated policy holder liabilities.
The assets held by ILCO's life insurance subsidiaries must comply
with applicable state insurance laws and regulations. In
selecting investments for the portfolios of its life insurance
subsidiaries, the Company's emphasis is to obtain targeted profit
margins, while minimizing the exposure to changing interest
rates. This objective is implemented by selecting primarily
short- to medium-term, investment grade fixed income securities.
In making such portfolio selections, the Company does not select
new investments which are commonly referred to as "high yield" or
"non-investment grade."
The Company's fixed maturities portfolio (including short-term
investments), as of September 30, 1996, included a non-material
amount (1.07% of total fixed maturities and short-term
investments) of debt securities which, in the annual statements
of the companies as filed with state insurance departments, were
designated under the National Association of Insurance
Commissioners ("NAIC") rating system as "3" (medium quality) or
below. For the year ended December 31, 1995, the percentage was
1.1%.
The consolidated balance sheets of the Company as of December 31,
1995 include $61.5 million of "Notes receivable from affiliates",
represented by (i) a loan of $22.5 million from Investors-NA to
Family Life Corporation and a $2.5 million loan from Investors
Life Insurance Company of California to Financial Industries
Corporation (which is now owned by Investors-NA as a result of
the merger of Investors-CA into Investors-NA) and $2.0 million of
additions to the $2.5 million note made in accordance with the
terms of such note; these loans were granted in connection with
the 1991 acquisition of Family Life Insurance Company by a
wholly-owned subsidiary of FIC (ii) a loan of $30 million by
Investors-NA to Family Life Corporation made in July, 1993, in
connection with the prepayment by the FIC subsidiaries of
indebtedness which had been previously issued to Merrill Lynch as
part of the 1991 acquisition and (iii) a loan of $4.5 million by
Investors-NA to Family Life Insurance Investment Company made in
July, 1993, in connection with the same transaction described
above. The NAIC has assigned a rating of "3" to the notes
described above. These loans have not been included in the
preceding description of NAIC rating percentages.
Management believes that the absence of any material amounts of
"high-yield" or "non-investment grade" investments (as defined
above) in the portfolios of its life insurance subsidiaries
enhances the ability of the Company to service its debt, provide
security to its policy holders and to credit relatively
consistent rates of return to its policy holders.
Accounting Developments
Long-Lived Assets
In March, 1995, the FASB issued FAS No. 121," Accounting For the
Impairment of Long-Lived Assets and For Long-Lived Assets to be
Disposed of." This Statement requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity
be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. In addition, the Statement requires that
long-lived assets and certain identifiable intangibles to be
disposed of be reported at the lower of carrying amount or fair
value less cost to sell.
FAS No. 121 is effective for the fiscal years beginning after
1995. The Company adopted FAS. No. 121 effective January 1,
1996. Management determined that adoption of this Statement did
not have a material impact on the Company's financial statements.
Stock-Based Compensation
In October, 1995, the FASB issued Statement of FAS No. 123,
"Accounting for Stock-Based Compensation." This Statement
encourages companies to adopt a fair value based method of
accounting for employee stock options and other equity
instruments awarded as compensation. Under this method,
compensation expense equal to the fair value of the security at
the award grant date is recognized as compensation expense over
the vesting period of the awarded security. However, the
Statement also allows companies to continue to account for stock-
based compensation under the intrinsic value based method, as
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Under the intrinsic value based method, the
compensation cost is computed as the excess, if any, of the
quoted market price of the equity security at the measurement
date over the amount an employee must pay to acquire the
security. If a company continues to account for stock-based
compensation under the intrinsic value based method, it must make
certain pro-forma disclosures in the footnotes to the financial
statements for the difference in the fair value based method and
the intrinsic value based method. This Statement is effective
for stock-based compensation transactions entered into in fiscal
years that begin after December 15, 1995.
Management intends to continue to account for stock-based
compensation under the intrinsic value based method as prescribed
by APB No. 25, and allowed under FAS No. 123. The company will
make the appropriate pro-forma disclosures required by FAS 123 in
1996.
INTERCONTINENTAL LIFE CORPORATION
PART II
ITEM 6(A)
Net income per share is based on the weighted average common and
common equivalent shares outstanding during each year.
3 Months Ended 9 Months Ended
Sept 30, Sept 30,
1996 1995 1996 1995
(in thousands)
Net income $ 2,973 $ 2,498 $ 23,951 $ 7,688
Interest expense reduc-
tion net of income tax
effect 181 162 524 484
Net income available to
common shareholders $ 3,154 $ 2,660 $ 24,475 $ 8,172
Divide by:
Common shares out-
standing, treasury
stock 4,207 4,145 4,207 4,145
Dilutive common share
equivalents 1,154 1,227 1,193 1,227
Common stock and common
stock equivalents 5,361 5,372 5,400 5,372
Net income per share
available to common
shareholders $ .59 $ .50 $ 4.53 $ 1.52
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
Part III. Other Information
Item 1. Legal Proceedings
The Company and its subsidiaries are defendants in certain legal
actions related to the normal business operations of the Company.
Management believes that the resolution of such legal actions
will not have a material impact upon the financial statements.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Form 10-K Annual Report of Registrant for the year ended
December 31, 1995 heretofore filed by Registrant with the
Securities and Exchange Commission, which is hereby
incorporated by reference.
(b) Reports on Form 8-K:
None
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
INTERCONTINENTAL LIFE CORPORATION
/s/ James M. Grace
James M. Grace
Treasurer
Date: November 14, 1996
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
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