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 March 31, 1998
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: 4,344,085.
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets
March 31, 1998 and December 31, 1997............... 3
Consolidated Statements of Income
For the three month periods ended
March 31, 1998 and 1997............................ 5
Consolidated Statements of Cash Flows
For the three month periods ended
March 31, 1998 and 1997 ........................... 6
Notes to Consolidated Financial Statements.............. 8
Management's Discussion and Analysis of
Financial Conditions and Results of Operations......10
PART II
Other Information........................................19
Signature Page...........................................21
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
<TABLE>
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March 31 Dec. 31
1998 1997
(Unaudited)
ASSETS
Investments:
Fixed maturities, at amortized cost
(market value approximates
$3,172 and $3,332) $ 3,332 $ 3,412
Fixed maturities available for sale,
at market value (amortized cost of
$446,162 and $436,836) 461,562 454,462
Equity securities, at market value
(cost approximates $338 and $369) 3,948 4,902
Policy loans 53,994 53,499
Mortgage loans 10,783 10,862
Invested real estate and other
invested assets 1,203 1,300
Short-term investments 142,562 164,622
Total Investments 677,384 693,059
Cash and cash equivalents 9,614 9,041
Notes receivable from affiliates 52,256 53,792
Accrued investment income 8,194 7,781
Agent advances and other receivables 15,219 11,362
Reinsurance receivables 15,272 20,433
Property and equipment, net 1,899 1,902
Deferred policy acquisition costs 29,511 28,621
Present value of future profits of
acquired businesses 45,961 47,286
Deferred financing costs 80 111
Other assets 13,974 7,929
Separate account assets 465,033 440,336
Total Assets $1,334,397 $1,321,653
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
<TABLE>
<S> <C> <C>
March 31 Dec. 31
1998 1997
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Policy liabilities and contractholder
deposit funds:
Future polilcy benefits $ 131,579 $ 131,720
Contractholder deposit funds 522,211 525,135
Unearned premiums 918 7,701
Other policy claims & beneifts
payable 6,640 7,078
661,348 671,634
Other policyholders' funds 3,167 3,093
Senior loans 10,964 10,964
Deferred federal income taxes 31,036 31,811
Other liabilities 18,610 20,299
Separate account liabilities 462,787 438,090
Total Liabilities 1,187,912 1,175,891
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 15,000 15,000
issued 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;
5,355,739 and 5,343,739 shares
issued,4,344,085 and 4,331,335 shares
outstanding in 1998 and 1997 1,179 1,176
Additional paid-in capital 4,291 4,253
Accumulated other comprehensive income 12,356 14,403
Retained earnings 131,956 129,237
149,782 149,069
Common treasury stock, at cost,
1,011,654 and 1,012,404 shares in
1998 and 1997, respectively (3,297) (3,307)
Total Shareholders' Equity 146,485 145,762
Total Liabilities and Shareholders'
Equity $1,334,397 $1,321,653
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTH PERIODS
ENDED MARCH 31, 1998 and 1997
(in thousands of dollars, except
for per share data)
(unaudited)
<TABLE>
<S> <C> <C>
3 Months Ended
March 31,
1998 1997
Revenues:
Net premiums $ 3,098 $ 1,954
Net investment income 13,955 14,621
Earned insurance charges 10,297 10,217
Other 522 609
Total 27,872 27,401
Benefits and expenses:
Policyholder benefits and expenses 10,356 9,394
Interest expense on contractholder
deposit funds 7,230 8,016
Amortization of present value of
future profits of acquired business 1,326 1,391
Amortization of deferred policy
acquision costs 448 522
Operating expenses 4,054 3,489
Interest expense 275 435
Total 23,689 23,247
Income from operations 4,183 4,154
Provision for federal income taxes 1,464 1,454
Net Income $ 2,719 $ 2,700
Net income per share
Basic:
Weighted average common stock outstanding 4,343 4,246
Basic earnings per share $ 0.63 $ 0.64
Diluted:
Common stock and common stock
equivalents 4,393 4,421
Diluted earnings per share $ 0.62 $ 0.61
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS
ENDED MARCH 31, 1998 and 1997
(in thousands of dollars)
(unaudited)
<TABLE>
<S> <C> <C>
3 Months EndedMarch 31
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,719 $ 2,700
Adjustments to reconcile net income
to net cash (used in) provided by
operating activities:
Amortization of present value of future
profits of acquired businesses 1,326 1,391
Amortization of deferred policy
acquisition costs 448 522
Depreciation 123 515
Financing costs amortized 31 148
Changes in assets and liabilities:
Increase in accrued investment income (413) (492)
Decrease in agent advances and other
receivables 1,304 3,695
Policy acquisition costs deferred (1,338) (1,168)
Decrease in policy liabilities and
contract holder deposit funds (10,286) (3,070)
Increase (decrease) in other
policyholders' funds 74 (202)
Decrease in other liabilities (1,689) (643)
Decrease in deferred federal income taxes (775) (2,771)
Increase in other assets (6,045) (590)
Other, net (1,187) 3,302
Net cash (used in) provided by
operating activities $ (15,708) $ 3,337
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS
ENDED MARCH 31, 1998 and 1997
(in thousands of dollars)
(unaudited)
<TABLE>
<S> <C> <C>
3 Months EndedMarch 31,
1998 1997
CASH FLOWS FROM INVESTING ACTIVITIES
Investments purchased $ (25,589) $ (9,852)
Proceeds from sales and maturities of
investments 18,107 8,035
Net change in short-term investments 22,060 2,804
Purchases & retirements of equipment, net 126 (512)
Decrease in notes receivable from
affiliates 1,536 1,536
Net cash provided by investing activities 16,240 2,011
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 41 232
Repayment of debt -0- (4,580)
Net cash provided by (used in)
financing activities 41 (4,348)
Net increase in cash and cash
equivalents 573 1,000
Cash and cash equivalents,
beginning of year 9,041 3,313
Cash and cash equivalents, end of year $ 9,614 $ 4,313
</TABLE>
The accompanying notes are an integral part of the
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, 1997 previously filed with the
Securities and Exchange Commission for financial statements
prepared in accordance with GAAP.
Acquisition of Subsidiary
In July 1997, ILCO through its subsidiary Investors Life Insurance
Company of Indiana (Investors-IN), an indirect, wholly-owned
subsidiary of ILCO, acquired State Auto Life Insurance Company, an
Ohio based life insurer,for a cash purchase price of $11.8 million,
subject to certain post-closing adjustments. The Company had $22.8
million in assets, $6 million in capital and surplus, total
revenues of $7.9 million, and a good book of business. As part of
the purchase agreement, State Auto was immediately merged with
Investors Life of Indiana. The summary of operations of ILCO for
the three months ended March 31, 1998 reflects State Auto's
operations, as compared to the three months ended March 31, 1997
which does not include any income from State Auto.
New Accounting Pronouncements
In June 1997, the FASB issued Statement of Financial Accounting
Standard (FAS) No. 130, " Reporting Comprehensive Income." The new
standard, which is effective for financial statements issued for
periods ending after December 15, 1997, established standards for
reporting, in addition to net income, other comprehensive income
and its components including, as applicable, foreign currency
income, minimum pension liability adjustments and unrealized gains
and losses on certain investments in debt and equity securities.
Upon adoption, the Company is also required to reclassify financial
statements for earlier periods provided for comparative purposes.
The Company adopted this standard in the first quarter of 1998.
Total comprehensive income for the three months ended March 31,
1998 and March 31, 1997 is $672 thousand and $(3.8) million,
respectively.
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
The following is a reconciliation of total accumulated other
comprehensive income from December 31, 1997 to March 31, 1998 (in
thousands):
Net
Unrealized
Gain on
Investments Net Total
In fixed appreciation accumulated
Maturities (depreciation) other
Available of equity comprehensive
For sale securities income
Balance at
December 31, 1997 $ 11,457 $ 2,946 $ 14,403
Current period
change (1,447) (600) (2,047)
Balance at
March 31, 1998 $ 10,010 $ 2,346 $ 12,356
In June 1997, the FASB issued FAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which
establishes standards for reporting information about operating
segments. Generally, FAS 131 requires that financial information
be reported on the basis that is used internally for evaluating
performance. The Company is required to adopt FAS 131 effective
January 1, 1998, and comparative information for earlier years must
be restated. This statement does not need to be applied to interim
financial statements in the initial year of application.
In February 1998, the FASB issued FAS No. 132, "Employers
Disclosures about Pensions and Other Postretirement Benefits,"
which revises current disclosure requirements for employers'
pension and other retiree benefits. FAS 132 does not change the
measurement or recognition of pension or other postretirement
benefit plans. The Company is required to adopt FAS 132 effective
January 1, 1998, with restatement of disclosures for earlier years
required.
In December 1997, the Accounting Standards Executive Committee
issued Statement of Position ("SOP") 97-3, "Accounting by Insurance
and Other Enterprises for Insurance-Related Assessments," which
provides guidance on accounting for insurance-related assessments.
The Company is required to adopt SOP 97-3 effective January 1,
1999. Previously issued financial statements should not be restated
unless the SOP is adopted prior to the effective date and during an
interim period.
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations:
For the three-month period ended March 31, 1998, InterContinental
Life Corporation's ("ILCO") net income was $2,719,000(basic earnings
of $ 0.63 per common share, or diluted earnings of $0.62 per common
share) as compared to $2,700,000 (basic earnings of $0.64 per
common share, or diluted earnings of $0.61 per common share) in the
first three months of 1997. Earnings per share are stated in
accordance with the requirements of FAS No. 128, which establishes
two measures of earnings per share: basic earnings per share and
diluted earnings per share. Basic earnings per share is computed by
dividing income available to common shareholders by the weighted
average number of common shares outstanding during the period.
Diluted earnings per share reflect the potential dilution that
would occur if securities or other contracts to issue common stock
were convereted or exercised. For the three month period ended
March 31, 1997, earnings per share have been restated to reflect
the effect of FAS No. 128
Results of Operations
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 $3,848,535 for the three-month period ended March 31,
1998, as compared to $4,157,680 for the comparable period in 1997.
These statutory earnings are the source to provide for the
repayment of ILCO's indebtedness.
For the three-month period ended March 31, 1998, the Company's
income before federal income taxes was $4,183,000 on revenues of
$27,872,000 as compared to income of $4,154,000, on revenues of
$27,401,000 for the first three months of 1997.
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 three months of
1998 was $3.1 million, as compared to $1.95 million for the first
three months of 1997. Reinsurance premiums ceded were $1.8 million
for the first three months of 1998, as compared to $1.4 million in
the first three months of 1997. The increase in premium income is
primarily attributable to the inclusion of the business of State
Auto Life Insurance Company. ILCO, through a subsidiary, acquired
State Auto Life Insurance Company in July of 1997.
Earned insurance charges for the three-month period ended March 31,
1998 were $10.3 million, as compared to $10.2 million for the same
period in 1997. This source of revenues is related to the universal
life insurance and annuity book of business of Investors Life
Insurance Company of North America ("Investors-NA").
Interest expense was $0.28 million for the first three months of
1998, as compared to $0.44 million for the first three months of
1997. The decrease is attributable to a reduction in the average
principal balance of the senior loan from $20.5 million for the
first quarter of 1997 to $11.0 million for the first quarter of
1998. The average rate of interest paid on the senior loan
increased slightly - 7.73% for the first three months of 1998, as
compared to 7.67% for the first three months of 1997.
As of March 31, 1998, the market value of the fixed maturities
available for sale segment was $461.6 million as compared to an
amortized cost of $446.2 million, or an unrealized gain of $15.4
million. The increase reflects unrealized gains on such investments
related to changes in interest rates subsequent to the purchase of
such investments. There is no assurance that this unrealized gain
will be realized in the future. The net of tax effect of this
increase ($10.01 million at March 31, 1998) is included in
"Accumulated other comprehensive income" on the Consolidated Balance
Sheets and has been recorded as an increase in shareholders'
equity. As required under the provisions of FAS No. 130, the
determination of "Accumulated other comprehensive income" includes
separate identification of the change in values which occurred
during the current period.
In December 1997, InterContinental Life Insurance Company ("ILIC"),
an indirect subsidiary of the Company, transferred its domicile
from New Jersey to Indiana. Following the completion of the
redomestication, ILIC merged with Investors Life Insurance Company
of Indiana (formerly known as Meridian Life Insurance Company and
referred to as "Pre-Merger Investors-IN" for purposes of identifying
the entity prior to the December, 1997 merger transaction described
below), with ILIC as the surviving entity in the merger process.
Immediately after the merger, ILIC changed its name to Invetors
Life Insurance Company of Indiana. As used hereinafter, the phrase
"Investors-IN" shall be used to refer to the merged entities. The
redomestication, merger and name change was previously described in
detail in the Company's Form 10-K for the year ended December 31,
1997.
For the three-month period ended March 31, 1998, the lapse rate
with respect to universal life insurance policies decreased from
the lapse rate experienced in the similar period in 1997. The rate
for the 1998 period was 6.30%, as compared to 7.53% in the 1997
period. The lapse rate with respect to traditional (non-universal)
life insurance policies increased slightly from the levels
experienced in the first quarter of 1997. The rate for the three-
month period ended March 31, 1998 was 8.93%, as compared to 8.15%
in the similar period in 1997. The lapse rates experienced during
these periods were within the ranges anticipated by management.
In July 1997, ILCO, through a subsidiary, acquired State Auto Life
Insurance Company ("State Auto")for a cash purchase price of $11.8
million. As part of the transaction, State Auto was immediately
merged into that subsidiary. The operations of ILCO for the three
month period ended March 31, 1998 reflect State Auto's operations
as compared to the three months ended March 31, 1997 which does not
include any income from the operations of State Auto.
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 subsidiary - Investors Life Insurance Company of Indiana
(formerly known as InterContinental Life Insurance Company).
ILCO's primary source of funds consists of payments under two
Surplus Debentures from Investors-NA.
As of December 31, 1997, the outstanding principal balance of
ILCO's senior loan obligations was $11.0 million due to the
prepayment by the Company of a payment originally scheduled for the
first quarter of 1998. As a result, the outstanding principal
balance of ILCO's senior loan obligations was $11.0 million at
March 31, 1998.
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. In connection with the 1993 merger of Standard Life
into Investors-NA, the obligations of the Surplus Debentures were
assumed by Investors-NA. As of March 31, 1998, the outstanding
principal balance of the Surplus Debentures was $4.96 million and
$18.34 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 March 31, 1998, the statutory surplus of
Investors-NA was $71.9 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. Under the "greater
of" standard, an insurer may pay a dividend in an amount equal to
the greater of (i) 10% of the policyholder surplus or (ii) the
insurer's net gain from operations for the previous year. As of
March 31, 1998, Investors-NA had earned surplus of $34.7 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.
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 $19.1 million at March 31, 1998.
ILCO's net cash flow provided by (used in) operating activities was
$(15.7 million) for the three month period ended March 31, 1998, as
compared to $3.3 million for the first three months of 1997.
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 March 31, 1998, the book value of the Company's investment
assets totaled $677.4 million, as compared to $650.1 million as of
March 31, 1997. Total assets as of March 31, 1998 ($1.33 billion)
increased slightly from the level as of March 31, 1997 ($1.24
billion).
The level of short-term investments at March 31, 1998 was $142.6
million, as compared to $88.8 million at March 31, 1997.
Invested real estate and other invested assets decreased from $45.0
million at March 31, 1997 to $1.2 million as of March 31, 1998. The
decrease in invested real estate and other assets and the
corresponding increase in the level of short term investments is
attributable to the sale by Investors-NA of its interest in the
Bridgepoint Square Office property during the fourth quarter of
1997.
The fixed maturities available for sale portion of invested assets
at March 31, 1998 was $461.6 million. The amortized cost of the
fixed maturities available for sale segment as of March 31, 1998
was $446.2 million, representing a net unrealized gain of $15.4
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 March 31, 1998, included a non-material amount
(0.70% 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 March 31, 1997, the
comparable percentage was 1.01%. Of these non-investment grade
investments, 0.10% are concentrated in the medium quality (or "3")
category, with 0.60% 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 March 31, 1998
include $52.3 million of "Notes receivable from affiliates",
represented by (i) a loan of $22.5 million from Investors-NA to
Family Life Corporation ("FLC") and a $2.5 million loan from
Investors-CA to Financial Industries Corporation ("FIC") - which
loan 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 Family Life Insurance Investment Company ("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 problem" or "Y2K 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.
The Plan calls for a conversion of certain systems onto the
Company's CK/4 System, a system which is designed to be Y2K
compliant according to the representations of the vendor. Those
systems which are not converted will be upgraded by changing
individual lines of computer code in order to modify current
operating software such that it will become Y2K compliant.
As of March 31, 1998, the Company estimated that it had completed
the necessary conversions and modifications on the administrative
systems which process approximately 35% of the insurance policies
for the Company and its subsidiaries. This included the conversion
of the ALIS System (administering approximately 49,280 policies) to
CK/4 in January of 1998. The TI System (administering approximately
5,244 policies) will be converted to CK/4 in late May, 1998,
bringing the total to approximately 38%. The conversion of the Life
70 system (administering approximately 17,285 policies for
Investors-IN) is scheduled for completion in April, 1999. The
modification of the LifeComm-B system which is responsible for the
19,205 policies assumed after the acquisition of State Auto Life
Insurance Company is also scheduled for completion in April, 1999.
The conversion of the LifeComm-A system (administering
approximately 65,266 policies for Investors-NA) is now scheduled
for completion in September of 1999. The modification of three non-
material systems which administer 6,806 credit life policies, 2,514
group certificates and 15,938 industrial life policies are
scheduled for completion in December of 1998, March of 1999 and
June of 1999 respectively.
In 1997, FIC Computer Services - a subsidiary of FIC which provides
data processing services to ILCO and its affiliates - purchased new
mainframe hardware and accompanying operating software, which the
vendor has represented to be Y2K compliant. This hardware and
software will be tested in 1998. The telephone system has been
tested by the maintenance provider for that system and the Company
has received assurances that the telephone system is Y2K compliant.
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 adopted FAS No. 128 in its annual
financial statements for the year ended December 31, 1997.
In June, 1997, the FASB issued FAS No. 130, "Reporting
Comprehensive Income", which establishes standards for reporting
and display of comprehensive income and its components in a
financial statement with the same prominence as other financial
statements. Total comprehensive income is required to be reported
in condensed interim financial statements. Comprehensive income is
defined as net income adjusted for changes in stockholders' equity
resulting from events other than net income or transactions related
to an entity's capital instruments. The Company adopted FAS 130
effective January 1, 1998, with reclassification of financial
statements for earlier years.
In June, 1997, the FASB issued FAS No. 131, "Disclosure About
Segments of an Enterprise and Related Information", which
establishes standards for reporting information about operating
segments. Generally, FAS No. 131 requires that financial
information be reported on the basis that it is used internally for
evaluating performance. The Company adopted FAS No. 131 effective
January 1, 1998 and comparative information for earlier years must
be restated. This statement does not need to be applied to interim
financial statements in the initial year of application. The
adoption of FAS No. 131 did not have a material impact on the
Company's results of operations, liquidity or financial position.
In February, 1998, the FASB issued FAS No. 132, "Employers'
Disclosures About Pensions and Other Postretirement Benefits",
which revises current disclosure requirements for employers'
pension and other retiree benefits. FAS No. 132 does not change
the measurement or recognition of pension or other postretirement
benefit plans. The Company adopted FAS No. 132 effective January
1, 1998, with restatement of disclosures for earlier years. The
adoption of FAS No. 132 did not have a material impact on the
Company's results of operations, liquidity or financial position.
In December, 1997, the Accounting Standards Executive Committee
issued Statement of Position ("SOP") 97-3, "Accounting by Insurance
and Other Enterprises for Insurance-Related Assessments", which
provides guidance on accounting for insurance-related assessments.
The Company is required to adopt SOP 97-3, effective January 1,
1999. Previously issued financial statements should not be
restated unless the SOP is adopted prior to the effective date and
during an interim period. The adoption of SOP 97-3 is not expected
to have a material impact on the Company's results of operations,
liquidity or financial position.
Subsequent Event
On April 17, 1998, ILCO and Investors-IN, an indirect, wholly-owned
subsidiary of ILCO, entered into an agreement to acquire Grinnell
Life Insurance Company ("Grinnell Life"), an Iowa domiciled life
insurer, from Grinnell Mutual Reinsurance Company, subject to the
approval of the relevant regulatory authorities. Under the terms of
the transaction, Grinnell Life would be merged into Investors-IN.
The Company anticipates that the closing of the transaction will
occur during the second quarter of 1998.
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
Form 10-K Annual Report of Registrant for the year ended
December 31, 1997 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
SIGNATURE
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: May 15, 1998
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR
THE THREE MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 461,562
<DEBT-CARRYING-VALUE> 3,332
<DEBT-MARKET-VALUE> 3,172
<EQUITIES> 3,948
<MORTGAGE> 10,783
<REAL-ESTATE> 1,203
<TOTAL-INVEST> 677,384
<CASH> 9,614
<RECOVER-REINSURE> 15,272
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<TOTAL-ASSETS> 1,334,397
<POLICY-LOSSES> 131,579
<UNEARNED-PREMIUMS> 918
<POLICY-OTHER> 522,211
<POLICY-HOLDER-FUNDS> 6,640
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0
0
<COMMON> 1,179
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<INCOME-CONTINUING> 2,719
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<NET-INCOME> 2,719
<EPS-PRIMARY> 0.63
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<RESERVE-OPEN> 0
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