SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1997
Commission File Number 2-39310
INTERCONTINENTAL LIFE CORPORATION
Texas 22-1890938
(State of Incorporation) (I.R.S. Employer Identification Number)
The Austin Centre, 701 Brazos, 12th Floor
Austin, Texas 78701
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (512)404-5000
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
Number of common shares outstanding ($.22 Par Value) at end of
period: 4,327,829.
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
INDEX
Page No.
Part I - Financial Information
Item I - Financial Statements:
Consolidated Balance Sheets
September 30, 1997 and December 31, 1996................ 3
Consolidated Statements of Income
For the three and nine month periods ended
September 30, 1997 and 1996............................. 4
Consolidated Statements of Cash Flows
For the three and nine month periods ended
September 30, 1997 and 1996............................. 6
Notes to Consolidated Financial Statements.................. 11
Item 2 -
Management's Discussion and Analysis of
Financial Conditions and Results of Operations.............. 13
Part II
Other Information........................................... 20
Signature Page.............................................. 21
Part I - Financial Information
Item 1. Financial Statements
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
Sept.30, Dec. 31,
1997 1996
Unaudited
ASSETS
Investments:
Fixed maturities, at amortized cost
(market value approximates $4,527
and $8,374) $ 4,910 $ 8,165
Fixed maturities available for sale
at market value (amortized cost of
$448,476 and $451,550) 460,596 453,896
Equity securities at market value (cost
approximates $369 and $373) 3,126 2,304
Policy loans 54,490 53,030
Mortgage loans 10,943 13,494
Invested real estate and other
invested assets 50,448 38,696
Short-term investments 93,610 91,556
Total investments 678,123 661,141
Cash and cash equivalents 5,536 3,313
Notes receivable from affiliates 55,329 59,940
Accrued investment income 8,394 7,807
Agent advances and other
receivables 22,623 21,725
Reinsurance receivables 13,801 12,123
Property and equipment, net 1,720 1,785
Deferred policy acquisition costs 28,638 26,938
Present value of future profits of
acquired businesses 48,791 45,240
Deferred financing costs 209 636
Other assets 9,863 8,965
Separate account assets 448,111 414,329
Total Assets $1,321,138 $1,263,942
(See Notes to Consolidated Financial Statements)
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
Sept.30, Dec. 31,
1997 1996
Unaudited
LIABILITIES & SHAREHOLDERS' EQUITY
Liabilities:
Policy liabilities and contractholder
deposit funds
Future policy benefits $ 138,416 $ 119,744
Contractholder deposit funds 518,980 538,505
Unearned premiums 8,396 9,069
Other policy claims & benefits
payable 5,955 5,988
671,747 673,306
Other policyholders' funds 3,117 2,720
Senior loans 18,364 24,944
Deferred federal income taxes 31,817 23,692
Other liabilities 21,312 13,835
Separate account liabilities 445,865 412,084
Total liabilities 1,192,222 1,150,581
Commitments and contingencies
Redeemable preferred stock:
Class A Preferred, $1 par value,
5,000,000 shares authorized and
issued 5,000 5,000
Class B Preferred, $1 par value,
15,000,000 shares authorized and
issued 15,000 15,000
20,000 20,000
Redeemable Preferred Treasury Stock at
cost, 20,000,000 shares (20,000) (20,000)
-0- -0-
Shareholders' equity:
Common stock, $.22 par value,
10,000,000 shares authorized;
5,343,739 and 5,223,739 shares
issued, 4,327,829 and 4,232,829
shares outstanding in 1997 and 1996 1,175 1,150
Additional paid-in capital 4,252 3,752
Net unrealized appreciation of equity
securities 1,792 1,255
Net unrealized gain on investments
in fixed maturities available
for sale 7,877 1,525
Retained earnings 117,176 108,697
132,272 116,379
Common treasury stock, at cost,
1,015,910 shares in 1997 and
990,910 shares in 1996 (3,356) (3,018)
Total Shareholders' Equity 128,916 113,361
Total Liabilities and Shareholders'
Equity $1,321,138 $1,263,942
(See Notes to Consolidated Financial Statements)
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTH PERIODS
ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
(in thousands of dollars, except per share data)
3 Months Ended
Sept. 30,
1997 1996
Revenues:
Net premiums $ 3,581 $ 2,461
Earned insurance charges 10,203 11,726
Net investment income 14,710 14,635
Gain on sale of real estate -0- -0-
Other 812 652
Total 29,306 29,474
Benefits and expenses:
Interest expense 471 528
Interest on insurance policies 7,517 8,389
Benefits and other expenses 16,953 15,984
Total 24,941 24,901
Income from operations 4,365 4,573
Provision for federal income taxes 1,528 1,600
Net income $ 2,837 $ 2,973
Per Share Data:
Common stock and common stock
equivalents 5,248 5,361
Net income per share available to
common shareholders $ .57 $ .59
(See Notes to Consolidated Financial Statements)
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTH PERIODS
ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
(in thousands of dollars, except per share data)
9 Months Ended
Sept. 30,
1997 1996
Revenues:
Net premiums $ 8,341 $7,957
Earned insurance charges 30,609 32,033
Net investment income 43,791 45,340
Gain on sale of real estate -0- 23,520
Other 2,521 2,041
Total 85,262 110,891
Benefits and expenses:
Interest expense 1,310 2,266
Interest on insurance policies 23,483 24,219
Benefits and other expenses 47,425 47,559
Total 72,218 74,044
Income from operations 13,044 36,847
Provision for federal income taxes 4,565 12,896
Net income $ 8,479 $ 23,951
Per Share Data:
Common stock and common stock
equivalents 5,254 5,400
Net income per share available to
common shareholders $ 1.72 $ 4.53
(See Notes to Consolidated Financial Statements)<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS
ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
(in thousands of dollars)
3 Months Ended
Sept.30,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 2,837 $ 2,973
Adjustments to reconcile net income
to net cash used in operating
activities:
Amortization of present value of future
profits of acquired businesses 1,686 (1,266)
Amortization of deferred policy
acquision costs 599 691
Depreciation 478 -0-
Net gain on sales of investments 66 -0-
Financing costs amortized 132 277
Changes in assets and liabilities:
Increase in accrued
investment income (142) (624)
Decrease (increase) in agent advances
and other receivables 262 (3,392)
Policy acquisition costs deferred (1,205) (1,269)
Decrease in policy liabilities
and contract holder deposit funds (5,396) (2,393)
(Decrease) increase in other
policyholders'funds (37) 2
Increase (decrease) in other liabilities 2,888 (8,236)
Increase in deferred federal
income taxes 3,947 822
Increase in other assets (103) (464)
Other, net (315) 865
Net cash provided by (used in)
operating activities $ 5,697 $(12,014)
(See Notes to Consolidated Financial Statements)
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS
ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
(In thousands of dollars)
3 Months Ended
Sept.30,
1997 1996
CASH FLOWS FROM INVESTING ACTIVITIES
Investments purchased $ (3,074) $(20,633)
Proceeds from sale and maturities of
investments 9,290 15,905
Net change in short-term investments 2,915 13,533
Repayment of notes to affiliate 1,537 -0-
Purchase & retirement of equipment, net (418) 7
Net cash provided by investing activities 10,250 8,812
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock 358 74
Purchase of treasury stock (338) -0-
Acquisition of insurance subsidiary (11,688) -0-
Repayment of debt (2,000) (5,000)
Net cash used in financing activities (13,668) (4,926)
Net increase (decrease)in cash and
cash equivalents 2,279 (8,128)
Cash and cash equivalents, beginning of
period 3,257 9,525
Cash and cash equivalents, end of period $ 5,536 $ 1,397
(See Notes to Consolidated Financial Statements)
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS
ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
(in thousands of dollars)
9 Months Ended
Sept.30,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 8,479 $ 23,951
Adjustments to reconcile net income
to net cash used in operating
activities:
Amortization of present value of future
profits of acquired businesses 4,657 1,834
Amortization of deferred policy acquisition
costs 1,778 1,963
Depreciation 1,369 -0-
Net gain on sales of investments -0- (23,732)
Financing costs amortized 427 783
Changes in assets and liabilities:
Increase in accrued investment
income (251) (1,329)
Increase in agent advances and other
receivables (459) (8,115)
Policy acquisition costs deferred (3,478) (3,625)
Decrease in policy liabilities
and contract holder deposit funds (17,472) (13,482)
(Decrease) increase in other
policyholders' funds (234) 35
Increase (decrease) in other liabilities 6,185 (9,669)
Increase (decrease)in deferred federal
income taxes 5,308 (5,800)
Increase in other assets (898) (1,901)
Other, net (622) 7,520
Net cash provided by (used in)
operating activities $ 4,789 $(31,567)
(See Notes to Consolidated Financial Statements)
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS
ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
(In thousands of dollars)
9 Months Ended
Sept.30,
1997 1996
CASH FLOWS FROM INVESTING ACTIVITIES
Investments purchased $ (18,024) $(43,908)
Proceeds from sale and maturities of
investments 30,635 96,970
Net change in short-term investments (403) 7,918
Repayment(issuance)of notes to affiliate 4,611 (253)
Purchase & retirement of equipment, net (1,304) 27
Net cash provided by investing
activities 15,515 60,754
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock 525 114
Purchase of treasury stock (338) -0-
Acquisition of insurance subsidiary (11,688) -0-
Repayment of debt (6,580) (34,441)
Net cash used in financing activities (18,081) (34,327)
Net increase (decrease)in cash and
cash equivalents 2,223 (5,140)
Cash and cash equivalents, beginning of
period 3,313 6,537
Cash and cash equivalents, end of period $ 5,536 $ 1,397
(See Notes to Consolidated Financial Statements)
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited)
The financial statements included herein reflect all adjustments
which are, in the opinion of management, necessary to present a
fair statement of the interim results. The statements have been
prepared to conform to the requirements of Form 10-Q and do not
necessarily include all disclosures required by generally accepted
accounting principles (GAAP). The reader should refer to Form 10-K
for the year ended December 31, 1996 previously filed with the
Securities and Exchange Commission for financial statements
prepared in accordance with GAAP. Certain prior year amounts have
been reclassified to conform with current year presentation.
Sale of Home Office Building
Net income for the nine months ended September 30, 1996 includes
$15.3 million resulting from the sale of the Austin Centre, a
hotel/office complex, located in Austin, Texas. The selling price
was $62.675 million, less $1 million paid to a capital reserve
account for the purchaser. The property was purchased in 1991 for
$31.275 million. The book value of the property, $36.8 million,
net of improvements and amortization, was retained and reinvested
by Investors Life Insurance Company of North America. The balance
of the proceeds of the sale, net of Federal Income Tax, was used to
reduce the Company's senior loan obligations by $15 million. The
sale closed on March 29, 1996. The Company continues to rent space
on three floors under the terms of an operating lease which runs
thru September, 1997. In May, 1997, the company renewed the lease,
for a 5-year period, with options to renew for additional 5-year
periods.
Acquisition of Subsidiary
On March 25, 1997, ILCO and Investors Life Insurance Company of
Indiana (Investors-IN), an indirect, wholly-owned subsidiary of
ILCO, entered into an agreement to acquire State Auto Life
Insurance Company, an Ohio domiciled life insurer, from State
Automobile Mutual Insurance Company, for a cash purchase price of
$11.8 million, subject to certain post-closing adjustments. In
connection with this transaction, the bank group participating in
the Senior Loan agreed to defer payment of $4.5 million otherwise
payable on April 1, 1997 under the terms of the Senior Loan, and to
reduce the amount of the payment otherwise due on July 1, 1997 by
$2.5 million. This deferral results in extending the maturity date
of the Senior Loan to October 1, 1998. Under the terms of the
transaction, State Auto Life would be merged into Investors-IN.
The closing of the transaction took place on July 9, 1997.
New Accounting Pronouncements
In February 1997, the FASB issued FAS No. 128, "Earnings Per
Share," which revises the standards for computing earnings per
share previously prescribed by APB Opinion No. 15, "Earnings Per
Share." The Statement establishes two measures of earnings per
share: basic earnings per share and diluted earnings per share.
Basic earnings per share is computed by dividing income available
to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted earnings per share
reflects the potential dilution that could occur if securities or
other contracts to issue common stock were converted or exercised.
The Statement requires dual presentation of basic and diluted
earnings per share on the face of the income statement for all
entities with potential dilutive securities outstanding. The
Statement also requires a reconciliation of the numerator and
denominator of the basic earnings per share computation to the
numerator and denominator of the diluted earnings per share
computation.
The Statement is effective for interim and annual periods ending
after December 15, 1997. Earlier application is not permitted.
However, an entity may disclose pro forma earnings per share
amounts that would have resulted if the entity had applied the
Statement in an earlier period. The Company intends to adopt FAS
128 in its annual financial statements for the year ended December
31, 1997.
The pro forma unaudited earnings per share amounts that would have
resulted assuming the Company had computed its earnings per share
in accordance with the provisions established by FAS 128 for the
three and nine months ended September 30, 1997 and 1996 are as
follows:
Three Months Ended Three Months Ended
September 30, 1997 September 30, 1996
Basic earnings per share $0.66 $0.71
Diluted earnings per share $0.62 $0.70
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
Basic earnings per share $1.96 $5.69
Diluted earnings per share $1.94 $5.63
Management's Discussion and Analysis of Financial Conditions and
Results of Operations:
For the nine-month period ended September 30, 1997, ILCO's net
income was $8,479,000 ($1.72 per common share) as compared to
$23,951,000 ($4.53 per common share) in the first nine months of
1996.
Net income from continuing operations (excluding the gain resulting
from the Austin Centre as described below) was $8,479,000 ($1.72
per common share) for the nine-month period ended September 30,
1997, as compared to $8,651,000 ($1.71 per common share) for the
first nine months of 1996.
For the nine-month period ended September 30, 1996, net income
included $15.3 million ($2.82 per common share) resulting from the
sale of the Austin Centre, a hotel/office complex, located in
Austin, Texas. The selling price was $62.675 million, less $1
million paid to a capital reserve account for the purchaser. The
property was purchased in 1991 for $31.275 million. A portion of
the sale proceeds, equal to the book value of the property, net of
improvements and amortization ($36.8 million), was retained and
reinvested by Investors Life Insurance Company of North America
("Investors-NA"). The balance of the proceeds, net of federal
income tax, of the sale was used to reduce the Company's senior
loan obligations by $15 million. The sale closed on March 29,
1996. The Company and its affiliates will continue to occupy space
on three floors of the office tower as its headquarters, under a
lease which runs through September 30, 1997. In May 1997, the
Company renewed the lease, for a 5-year period, with options to
renew for additional 5-year periods.
The statutory earnings of the Company's insurance subsidiaries, as
required to be reported to insurance regulatory authorities, before
interest expense, capital gains and losses, and federal income
taxes were $15.2 million for the nine-month period ended September
30, 1997, as compared to $15.5 million for the comparable period
in 1996. These statutory earnings are the source to provide for the
repayment of ILCO's indebtedness.
The operating strategy of the Company's management emphasizes
several key objectives: expense management; marketing of
competitively priced insurance products which are designed to
generate an acceptable level of profitability; maintenance of a
high quality portfolio of investment grade securities; and the
provision of quality customer service.
Premium income, net of reinsurance, for the first nine months of
1997 was $8.34 million, as compared to $7.96 million for the first
nine months of 1996. Reinsurance premiums ceded were $3.3 million
for the first nine months of 1997, as compared to $2.9 million in
the first nine months of 1996.
Earned insurance charges for the nine-month period ended September
30, 1997 were $30.61 million, as compared to $32.03 million for the
same period in 1996. This source of revenues is related to the
universal life insurance and annuity book of business of Investors-
NA.
Interest expense was $1.31 million for the first nine months of
1997, as compared to $2.27 million for the first nine months of
1996. The decrease is attributable to a reduction in the average
principal balance of the senior loan from $36.58 million for the
first nine months of 1996 to $19.76 million for the first nine
months of 1997, as well as a decrease in the average rate of
interest paid on the senior loan - 7.66% for the first nine months
of 1997, as compared to 7.78% for the first nine months of 1996.
The decline in long-term interest rates during the first nine
months of 1997, which was related to general economic conditions,
had a positive effect upon the market value of the fixed maturities
available for sale segment of the portfolio. As of September 30,
1997, the market value of the fixed maturities available for sale
segment was $460.6 million as compared to an amortized cost of
$448.5 million, or an unrealized gain of $12.1 million. Such
increase reflects unrealized gains on such investments. There is no
assurance that this unrealized gain will be realized in the future.
The net of tax effect of this increase has been recorded as an
increase in shareholders' equity.
A subsidiary of the Company, Investors-NA is the owner and
developer of the office complex known as Bridgepoint Square
Offices. The project consists of four office buildings, with a
total rentable space of 364,000 square feet, and two parking
garages. Investors-NA purchased the 20 acre tract of land for this
complex in January 1995, for a cash purchase price of $9.75
million. At that time, the tract included one completed and fully
leased office building, an adjacent parking garage, and sites for
three more office buildings and a second parking garage. Since the
purchase, Investors-NA has completed construction on the second
parking garage and the three remaining building sites. Investors-
NA has leased essentially all of the space in the four buildings.
The investment of Investors-NA in the project is approximately $46
million. Investors-NA has listed the properties for sale.
On March 25, 1997, ILCO and Investors Life Insurance Company of
Indiana ("Investors-IN"), an indirect, wholly-owned subsidiary of
ILCO, entered into an agreement to acquire State Auto Life
Insurance Company, an Ohio domiciled life insurer, from State
Automobile Mutual Insurance Company, for a cash purchase price of
$11.8 million, subject to certain post-closing adjustments. In
connection with this transaction, the bank group participating in
the Senior Loan have agreed to defer payment of $4.5 million
otherwise payable on April 1, 1997 under the terms of the Senior
Loan, and to reduce the amount of the payment otherwise due on July
1, 1997 by $2.5 million. This deferral would result in extending
the maturity date of the Senior Loan to October 1, 1998. Under the
terms of the transaction, State Auto Life would be merged into
Investors-IN. The closing of the transaction took place on July 9,
1997.
At the annual meeting of shareholders, which was held on June 17,
1997, the shareholders approved the redomestication of the company
from the State of New Jersey to the State of Texas. The
redomestication was implemented by a merger of the Company into a
Texas-domiciled company (ILCO-Texas) and, following the merger,
changing the name of ILCO-Texas to InterContinental Life
Corporation.
Results of Operations
For the three-month period ended September 30, 1997, the Company's
income before federal income taxes was $4,365,000 on revenues of
$29,306,000 as compared to income of $4,573,000, on revenues of
$29,474,000 for the same period in 1996.
For the three-month period ended September 30, 1997, the lapse rate
with respect to universal life insurance policies decreased from
the lapse rate experienced in the similar period in 1996. The rate
for the 1997 period was 7.54 %, as compared to 9.27% in the 1996
period. The lapse rate with respect to traditional (non-universal)
life insurance policies increased slightly from the levels
experienced in the third quarter of 1996. The rate for the three-
month period ended September 30, 1997 was 8.05 %, as compared to
7.77% in the similar period in 1996. The lapse rates experienced
during these periods were within the ranges anticipated by
management.
Liquidity and Capital Resources:
ILCO is a holding company whose principal assets consist of the
common stock of Investors Life Insurance Company of North America
and its subsidiaries - Investors Life Insurance Company of Indiana
(formerly known as Meridian Life Insurance Company) and
InterContinental Life Insurance Company ("ILIC"). ILCO's primary
source of funds consists of payments under two Surplus Debentures
from Investors-NA.
As of December 31, 1996, the outstanding principal balance of
ILCO's senior loan obligations was $24.9 million. The Company made
scheduled principal payments under its senior loan on January 1,
1997 and July 1, 1997, reducing the principal balance to $18.4
million at September 30, 1997.
ILCO's principal source of liquidity consists of the periodic
payment of principal and interest by Investors-NA, pursuant to the
terms of the Surplus Debentures. The Surplus Debentures were
originally issued by Standard Life Insurance Company and their
terms were previously approved by the Mississippi Insurance
Commissioner. Upon the merger of Standard Life into Investors-NA,
the obligations of the Surplus Debentures were assumed by
Investors-NA. As of September 30, 1997, the outstanding principal
balance of the Surplus Debentures was $5.0 million and $26.5
million, respectively. Since Investors-NA is domiciled in the
State of Washington, the provisions of Washington insurance law
apply to the Surplus Debentures. Under the provisions of the
Surplus Debentures and current law, no prior approval of the
Washington Insurance Commissioner is required for Investors-NA to
pay interest or principal on the Surplus Debentures; provided that,
after giving effect to such payments, the statutory surplus of
Investors-NA is in excess of $10 million (the "surplus floor").
However, Investors-NA has voluntarily agreed with the Washington
Insurance Commissioner that it will provide at least five days
advance notice of payments which it will make under the surplus
debenture. As of September 30, 1997, the statutory surplus of
Investors-NA was $54.3 million, an amount substantially in excess
of the surplus floor. The funds required by Investors-NA to meet
its obligations to the Company under the terms of the Surplus
Debentures are generated from operating income generated from
insurance and investment operations.
In addition to the payments under the terms of the Surplus
Debentures, ILCO has received dividends from Standard Life (now,
from Investors-NA). Washington's insurance code includes the
"greater of" standard for payment of dividends to shareholders, but
has a requirement that prior notification of a proposed dividend be
given to the Washington Insurance Commissioner and that cash
dividends may be paid only from earned surplus. As of September
30, 1997, Investors-NA had earned surplus of $9.4 million. Since
the law applies only to dividend payments, the ability of
Investors-NA to make principal and interest payments under the
Surplus Debentures is not affected. ILCO does not anticipate that
Investors-NA will have any difficulty in making principal and
interest payments on the Surplus Debentures in the amounts
necessary to enable ILCO to service the Senior Loan for the
foreseeable future.
ILIC, a subsidiary of Investors-NA, is domiciled in the State of
New Jersey. Under the New Jersey insurance code, a domestic insurer
may make dividend distributions upon proper notice to the
Department of Insurance, as long as the distribution is reasonable
in relation to adequate levels of policyholder surplus and quality
of earnings. Any dividend must be paid from earned surplus. A
proposed payment of a dividend or distribution which, together with
dividends or distributions paid during the preceding twelve months,
exceeds the greater of (i) 10% of statutory surplus as of the
preceding December 31 or (ii) statutory net gain from operations
for the preceding calendar year is treated as an "extraordinary
dividend" and may not be paid until either it has been approved, or
a waiting period shall have passed during which it has not been
disapproved, by the insurance commissioner. ILIC had earned surplus
of $5.0 million at September 30, 1997.
Investors-IN is domiciled in the State of Indiana. Under the
Indiana insurance code, a domestic insurer may make dividend
distributions upon proper notice to the Department of Insurance, as
long as the distribution is reasonable in relation to adequate
levels of policyholder surplus and quality of earnings. Under
Indiana law the dividend must be paid from earned surplus.
Extraordinary dividend approval would be required where a dividend
exceeds the greater of 10% of surplus or the net gain from
operations for the prior fiscal year. Investors-IN had earned
surplus of $7.4 million at September 30, 1997.
ILCO's net cash flow used in operating activities was $4.8 million
for the nine month period ended September 30, 1997, as compared to
$(31.6) million for the first nine months of 1996. This change is
primarily due to fluctuations in the amount of deferred federal
income tax related to the market value of investment assets that
are fixed maturities available for sale and the net gain realized
in connection with the sale of the Austin Centre.
Management believes that its cash, cash equivalents and short term
investments are sufficient to meet the needs of its business and to
satisfy debt service.
Investments
As of September 30, 1997, the book value of the Company's
investment assets totaled $678.1 million, as compared to $661.1
million as of December 31, 1996. Total assets as of September 30,
1997 ($1.32 billion) increased slightly from the level as of
December 31, 1996 ($1.26 billion).
The level of short-term investments at September 30, 1997 was $93.6
million, as compared to $91.6 million at the end of 1996.
Invested real estate and other invested assets increased from $38.7
million at December 31, 1996 to $50.4 million as of September 30,
1997. This increase is attributable to the development of the
Bridgepoint property by Investors-NA.
The fixed maturities available for sale portion of invested assets
at September 30, 1997 was $460.6 million. The amortized cost of
the fixed maturities available for sale segment as of September 30,
1997 was $448.5 million, representing a net unrealized gain of
$12.1 million. This unrealized gain principally reflects changes
in interest rates from the date the respective investments were
purchased. To reduce the exposure to interest rate changes,
portfolio investments are selected so that diversity, maturity and
liquidity factors approximate the duration of associated
policyholder liabilities.
The assets held by ILCO's life insurance subsidiaries must comply
with applicable state insurance laws and regulations. In selecting
investments for the portfolios of its life insurance subsidiaries,
the Company's emphasis is to obtain targeted profit margins, while
minimizing the exposure to changing interest rates. This objective
is implemented by selecting primarily short-to-medium term,
investment grade fixed income securities. In making such portfolio
selections, the Company generally does not select new investments
which are commonly referred to as "high yield" or "non-investment
grade."
The Company's fixed maturities portfolio (including short-term
investments), as of September 30, 1997, included a non-material
amount (0.92 % of total fixed maturities and short-term
investments) of debt securities which, in the annual statements of
the companies as filed with state insurance departments, were
designated under the National Association of Insurance
Commissioners ("NAIC") rating system as "3" (medium quality) or
below. As of December 31, 1996, the comparable percentage was
1.1%. Of these non-investment grade investments, 0.243 % are
concentrated in the medium quality (or "3") category, with 0.677%
receiving an NAIC rating of "4" (low quality) and none with a
rating lower than "4".
The consolidated balance sheets of the Company as of September 30,
1997 include $55.3 million of "Notes receivable from affiliates",
represented by (i) a loan of $22.5 million from Investors-NA to
Family Life Corporation and a $2.5 million loan from Investors-CA
to Financial Industries Corporation (which is now owned by
Investors-NA as a result of the merger of Investors-CA into
Investors-NA) and $2.0 million of additions to the $2.5 million
note made in accordance with the terms of such note; these loans
were granted in connection with the 1991 acquisition of Family Life
Insurance Company by a wholly-owned subsidiary of FIC (ii) a loan
of $30 million by Investors-NA to Family Life Corporation made in
July, 1993, in connection with the prepayment by the FIC
subsidiaries of indebtedness which had been previously issued to
Merrill Lynch as part of the 1991 acquisition and (iii) a loan of
$4.5 million by Investors-NA to Family Life Insurance Investment
Company made in July, 1993, in connection with the same transaction
described above. As of June 12, 1996, the provisions of the notes
from Investors-NA to FIC, FLC and FLIIC were modified as follows:
(a) the $22.5 million note was amended to provide for twenty
quarterly principal payments, in the amount of $1,125,000 each, to
commence on December 12, 1996; the final quarterly principal
payment is due on September 12, 2001; the interest rate on the note
remains at 11%, (b) the $30 million note was amended to provide for
forty quarterly principal payments, in the amount of $163,540 each
for the period December 12, 1996 to September 12, 2001; beginning
with the principal payment due on December 12, 2001, the amount of
the principal payment increases to $1,336,458; the final quarterly
principal payment is due on September 12, 2006; the interest rate
on the note remains at 9%, (c) the $4.5 million note was amended to
provide for forty quarterly principal payments, in the amount of
$24,531 each for the period December 12, 1996 to September 12,
2001; beginning with the principal payment due on December 12,
2001, the amount of the principal payment increases to $200,469;
the final quarterly principal payment is due on September 12, 2006;
the interest rate on the note remains at 9%, (d) the $2.5 million
note was amended to provide that the principal balance of the note
is to be repaid in twenty quarterly installments of $125,000 each,
commencing December 12, 1996 with the final payment due on
September 12, 2001; the rate of interest remains at 12%, (e) the
Master PIK note, which was issued to provide for the payment in
kind of interest due under the terms of the $2.5 million note prior
to June 12, 1996, was amended to provide that the principal balance
of the note ($1,977,119) is to be paid in twenty quarterly
principal payments, in the amount of $98,855.95 each, to commence
December 12, 1996 with the final payment due on September 12, 2001;
the interest rate on the note remains at 12%.
The NAIC continued its rating of "3" to the "Notes receivable from
affiliates", as amended. These loans have not been included in the
preceding description of NAIC rating percentages.
Management believes that the absence of any material amounts of
"high-yield" or "non-investment grade" investments (as defined
above) in the portfolios of its life insurance subsidiaries
enhances the ability of the Company to service its debt, provide
security to its policyholders and to credit relatively consistent
rates of return to its policyholders.
Year 2000 Compliance
The Company and its subsidiaries utilize a centralized computer
system to process policyholder records and financial information.
In addition, the Company uses non-centralized computer terminals
in connection with its operations. The software programs used in
connection with these systems will be affected by what is referred
to as the "year 2000 date problem". This refers to the limitations
of the programming code in certain existing software programs to
recognize date sensitive information as the year 2000 approaches.
Unless modified prior to the year 2000, such systems may not
properly recognize such information and could generate erroneous
data or cause a system to fail to operate properly.
The Company has evaluated its centralized computer systems and has
developed a plan to reach year 2000 compliance. A central feature
of the plan is to convert most of the centralized systems to a
common system which is already in compliance with year 2000
requirements. The Company is in the process of this systems
conversion and anticipates that the project will be completed in
advance of the year 2000.
With respect to non-centralized systems (i.e. desktop computers),
the Company anticipates that updated software releases will be
commercially available well in advance of the year 2000.
Accordingly, to the extent that such systems rely on date sensitive
information, the Company expects that the effort needed to correct
for year 2000 problems will be less time intensive than the effort
needed to achieve compliance for its centralized systems.
Accounting Developments
In February 1997, the Financial Accounting Standards Board (FASB)
issued Financial Accounting Standard (FAS) No. 128, "Earnings Per
Share," which revises the standards for computing earnings per
share previously prescribed by APB Opinion No. 15, "Earnings Per
Share." The Statement establishes two measures of earnings per
share: basic earnings per share and diluted earnings per share.
Basic earnings per share is computed by dividing income available
to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted earnings per share
reflects the potential dilution that could occur if securities or
other contracts to issue common stock were converted or exercised.
The Statement requires dual presentation of basic and diluted
earnings per share on the face of the income statement for all
entities with potential dilutive securities outstanding. The
Statement also requires a reconciliation of the numerator and
denominator of the basic earnings per share computation to the
numerator and denominator of the diluted earnings per share
computation.
The Statement is effective for interim and annual periods ending
after December 15, 1997. Earlier application is not permitted.
However, a company may disclose pro forma earnings per share
amounts that would have resulted if it had applied the Statement in
an earlier period. The Company intends to adopt FAS 128 in its
annual financial statements for the year ended December 31, 1997.
The pro forma unaudited earnings per share amounts that would have
resulted assuming the Company had computed its earnings per share
in accordance with the provisions established by FAS 128 for the
nine month periods ended September 30, 1997 and 1996 are as
follows:
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
Basic earnings per share $1.96 $5.69
Diluted earnings per share $1.94 $5.63
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
Part II. Other Information
Item 1. Legal Proceedings
The Company and Investors-NA are defendants in a lawsuit which was
filed in October, 1996, in Travis County, Texas. CIGNA
Corporation, an unrelated company, is also a named defendant in the
lawsuit. The named plaintiffs in the suit (a husband and wife),
allege that the universal life insurance policies sold to them by
INA Life Insurance Company (a company which was merged into
Investors-NA in 1992) utilized unfair sales practices. The named
plaintiffs seek reformation of the life insurance contracts and an
unspecified amount of damages. The named plaintiffs also seek a
class action as to similarly situated individuals. No
certification of a class has been granted as of the date hereof.
The Company believes that the suit is without merit and intends to
vigorously defend this matter.
In August, 1997, another individual filed a similar action in
Travis County, Texas against the corporate entities identified
above. The lawsuit involves the same type of policy and includes
allegations which are substantially identical to the allegations in
the first action. The named plaintiff also seeks class
certification. The Company believes that the court would consider
class certification with respect to only one of these actions. The
Company also believes that this action is without merit and intends
to vigorously defend this matter.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(i) Computation of Earnings Per Share
(ii) Form 10-K Annual Report of Registrant for the year
ended December 31, 1996 heretofore filed by Registrant
with the Securities and Exchange Commission, which is
hereby incorporated by reference.
(b) Reports on Form 8-K:
None
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
INTERCONTINENTAL LIFE CORPORATION
/s/ James M. Grace
James M. Grace
Treasurer
Date: November 14, 1997
Exhibit Index
Exhibit Page Description
Number Number
11 (a) 1 Computation of Earnings Per Share
Exhibit 11(a)
Net income per share is based on the weighted average common and
common equivalent shares outstanding during each year.
3 Months Ended 9 Months Ended
Sept 30, Sept 30,
1997 1996 1997 1996
(in thousands)
Net income $ 2,837 $2,973 $8,479 $ 23,951
Interest expense reduc-
tion net of income tax
effect 148 181 542 524
Net income available to
common shareholders $ 2,985 $3,154 $9,021 $ 24,475
Divide by:
Common shares out-
standing, less
treasury
stock 4,328 4,207 4,328 4,207
Dilutive common share
equivalents 920 1,154 926 1,193
Common stock and common
stock equivalents 5,248 5,361 5,254 5,400
Net income per share
available to common
shareholders $ .57 $ .59 $ 1.72 $ 4.53
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000050982
<NAME> INTERCONTINENTAL LIFE CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 460,596
<DEBT-CARRYING-VALUE> 4,910
<DEBT-MARKET-VALUE> 4,527
<EQUITIES> 3,126
<MORTGAGE> 10,943
<REAL-ESTATE> 50,448
<TOTAL-INVEST> 678,123
<CASH> 5,536
<RECOVER-REINSURE> 13,801
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<POLICY-LOSSES> 138,416
<UNEARNED-PREMIUMS> 8,396
<POLICY-OTHER> 518,980
<POLICY-HOLDER-FUNDS> 5,955
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0
0
<COMMON> 1,175
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8,341
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<EPS-PRIMARY> 1.72
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