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, 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:.4,374,835
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<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
INDEX
Page No.
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997................................3
Consolidated Statements of Income
For the three and nine month periods ended
September 30, 1998 and 1997.............................................5
Consolidated Statements of Cash Flows
For the three and nine month periods ended
September 30, 1998 and 1997.............................................7
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...........................................................21
Signature Page..............................................................23
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<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
<TABLE>
<S> <C> <C>
Sept. 30, Dec. 31,
1998 1997
(Unaudited)
ASSETS
Investments:
Fixed maturities, at amortized cost
(market value approximates $3,059
and $3,332) .............................. $ 3,027 $ 3,412
Fixed maturities available for sale,
at market value (amortized cost
of $447,886 and $436,836) ................ 470,015 454,462
Equity securities, at market value
(cost approximates $338 and $369) ......... 2,681 4,902
Policy loans ................................ 55,011 53,499
Mortgage loans .............................. 10,390 10,862
Invested real estate and other
invested assets ........................... 1,442 1,300
Short-term investments ...................... 164,275 164,622
---------- ----------
Total Investments ....................... 706,841 693,059
Cash and cash equivalents ........................ 8,410 9,041
Notes receivable from affiliates ................. 49,182 53,792
Accrued investment income ........................ 8,719 7,781
Agent advances and other receivables ............. 24,067 11,362
Reinsurance receivables .......................... 16,314 20,433
Property and equipment, net ...................... 2,566 1,902
Deferred policy acquisition costs ................ 31,414 28,621
Present value of future profits of
acquired businesses .............................. 44,703 47,286
Deferred financing costs ......................... -0- 111
Other assets ..................................... 12,969 7,929
Separate account assets .......................... 426,942 440,336
---------- ----------
Total Assets ................... $1,332,127 $1,321,653
========== ==========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
<TABLE>
<S> <C> <C>
Sept. 30, Dec. 31,
1998 1997
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Policy liabilities and contractholder
deposit funds:
Future policy benefits ............................................... $ 134,492 $ 131,720
Contractholder deposit funds ......................................... 549,811 525,135
Unearned premiums .................................................... 1,043 7,701
Other policy claims & benefits payable ............................... 5,672 7,078
----------- -----------
691,018 671,634
Other policyholders' funds ........................................... 3,065 3,093
Senior loans ......................................................... -0- 10,964
Deferred federal income taxes ........................................ 33,959 31,811
Other liabilities .................................................... 23,607 20,299
Separate account liabilities ......................................... 424,696 438,090
----------- -----------
Total Liabilities ................................................ 1,176,345 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 issued .................................. 15,000 15,000
----------- -----------
Redeemable preferred treasury stock
at cost, 20,000,000 shares ............................................... 20,000 20,000
----------- -----------
(20,000) (20,000)
----------- -----------
-0- -0-
Shareholders' equity:
Common stock, $.22 par value, 10,000,000 shares
authorized; 5,385,739 and 5,343,739 shares issued,
4,374,835 and 4,331,335 shares outstanding in 1998
and 1997 ................................................................ 1,185 1,176
Additional paid-in capital ................................................ 4,385 4,253
Accumulated other comprehensive income .................................... 15,906 14,403
Retained earnings ......................................................... 137,593 129,237
----------- -----------
159,069 149,069
Common treasury stock, at cost, 1,010,904 and
1,012,404 shares in 1998 and 1997, respectively ........................ (3,287) (3,307)
----------- -----------
Total Shareholders' Equity ................................................ 155,782 145,762
----------- -----------
Total Liabilities and Shareholders' Equity ................................ $ 1,332,127 $ 1,321,653
</TABLE>
The accompanying notes are an
integral part of the
consolidated financial
statements.
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1998 and 1997
(in thousands of dollars, except for per share data)
(unaudited)
<TABLE>
<S> <C> <C>
3 Months Ended
September 30,
1998 1997
Revenues:
Net premiums ................ $ 2,629 $ 3,581
Net investment income ....... 13,939 14,710
Earned insurance charges .... 10,176 10,203
Other ....................... 525 812
------- -------
Total ................. 27,269 29,306
Benefits and expenses:
Policyholder benefits and expenses 8,604 10,269
Interest expense on contractholder
deposit funds ................... 8,026 7,517
Amortization of present value of
future profits of acquired
business ........................ 1,457 1,685
Amortization of deferred policy
acquision costs ................. 407 581
Operating expenses ............... 4,074 4,418
Interest expense ................. 124 471
------- -------
Total ................. 22,692 24,941
Income from operations ........... 4,577 4,365
Provision for federal income taxes 1,748 1,528
------- -------
Net Income ....................... $ 2,829 $ 2,837
======= =======
Net income per share
Basic:
Weighted average common stock
outstanding ..................... 4,375 4,328
------- -------
Basic earnings per share ......... $ 0.65 $ 0.66
======= =======
Diluted:
Common stock and common stock
equivalents ..................... 4,400 4,486
------- -------
Diluted earnings per share ....... $ 0.64 $ 0.63
======= =======
</TABLE>
The accompanying notes are an
integral part of the
consolidated financial
statements.
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1998 and 1997
(in thousands of dollars, except
for per share data)
(unaudited)
<TABLE>
<S> <C> <C>
9 Months Ended
September 30,
1998 1997
Revenues:
Net premiums ....................... $ 8,393 $ 8,341
Net investment income .............. 41,737 43,791
Earned insurance charges ........... 30,806 30,609
Other .............................. 1,732 2,521
------- -------
Total ............................. 82,668 85,262
Benefits and expenses:
Policyholder benefits and expenses ...... 28,026 28,596
Interest expense on contractholder
deposit funds .......................... 23,028 23,483
Amortization of present value of
future profits of acquired business .... 4,402 4,657
Amortization of deferred policy
acquision costs ........................ 1,380 1,778
Operating expenses ...................... 12,106 12,394
Interest expense ........................ 645 1,310
------- -------
Total ............................. 69,587 72,218
Income from operations .................. 13,081 13,044
Provision for federal income taxes ...... 4,725 4,565
------- -------
Net Income .............................. $ 8,356 $ 8,479
======= =======
Net income per share
Basic:
Weighted average common stock outstanding 4,375 4,328
------- -------
Basic earnings per share ................ $ 1.91 $ 1.96
======= =======
Diluted:
Common stock and common stock equivalents 4,400 4,367
------- -------
Diluted earnings per share .............. $ 1.90 $ 1.94
======= =======
</TABLE>
The accompanying notes are an
integral part of the
consolidated financial
statements.
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE AND NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1998 and 1997
(in thousands of dollars)
(unaudited)
<TABLE>
<S> <C> <C>
3 Months Ended
September 30,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................. $ 2,829 $ 2,837
Adjustments to reconcile net income
to net cash provided by
operating activities:
Amortization of present value of
future profits of acquired businesses ..... 1,457 1,686
Amortization of deferred policy
acquisition costs ......................... 407 599
Net gain on sale of investments ............ 76 66
Depreciation ............................... 113 478
Financing costs amortized .................. 56 132
Changes in assets and liabilities:
Decrease in accrued investment income ...... (120) (142)
Increase in agent advances and other
receivables ............................... (4,631) 262
Policy acquisition costs deferred .......... (1,325) (1,205)
Decrease in policy liabilities and contract
holder deposit funds ...................... (2,464) (5,396)
Decrease in other policyholders'
funds ..................................... (4) (37)
Increase in other liabilities .............. 5,807 2,888
Increase in deferred federal income taxes .. 2,050 3,947
Increase in other assets ................... (4,138) (103)
Other, net ................................. 2,619 (315)
------- -------
Net cash provided by operating activities .. $ 2,732 $ 5,697
</TABLE>
The accompanying notes are an
integral part of the
consolidated financial
statements.
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE AND NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1998 and 1997
(in thousands of dollars)
(unaudited)
<TABLE>
<S> <C> <C>
3 Months Ended
September 30,
1998 1997
------ -----
CASH FLOWS FROM INVESTING ACTIVITIES
Investments purchased ........................... $ (52) $ (3,074)
Proceeds from sales and maturities of investments 22,424 9,290
Net change in short-term investments ............ (23,586) 2,915
Purchases & retirements of equipment, net ....... (722) (418)
Decrease in notes receivable from affiliates .... 1,537 1,537
-------- --------
Net cash (used in) provided by investing
activities ..................................... (399) 10,250
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock ........................ 21 358
Purchase of treasury stock ...................... -0- (338)
Purchase of subsidiary .......................... -0- (11,688)
Repayment of debt ............................... (3,564) (2,000)
-------- --------
Net cash used in financing activities............ (3,543) (13,668)
-------- --------
Net (decrease) increase in cash and cash
equivalents .................................... (1,210) 2,279
Cash and cash equivalents, beginning of year ... 9,620 3,257
-------- --------
Cash and cash equivalents, end of year .......... $ 8,410 $ 5,536
======== ========
</TABLE>
The accompanying notes are an
integral part of the
consolidated financial
statements.
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE AND NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1998 and 1997
(in thousands of dollars)
(unaudited)
<TABLE>
<S> <C> <C>
9 Months Ended
September 30,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................ $ 8,356 $ 8,479
Adjustments to reconcile net income
to net cash (used in) provided by
operating activities:
Amortization of present value of
future profits of acquired businesses .... 4,402 4,657
Amortization of deferred policy
acquisition costs ........................ 1,380 1,778
Net gain on sales of investments .......... -0- -0-
Depreciation .............................. 321 1,369
Financing costs amortized ................. 111 427
Changes in assets and liabilities:
Increase in accrued investment income ..... (253) (251)
Increase in agent advances and other
receivables .............................. (12,593) (459)
Policy acquisition costs deferred ......... (4,173) (3,478)
Decrease in policy liabilities and contract
holder deposit funds ..................... (19,528) (17,472)
Decrease in other policyholders' funds .... (659) (234)
Increase in other liabilities ............. 2,440 6,185
Increase in deferred federal income taxes . 1,419 5,308
Increase in other assets .................. (5,017) (898)
Other, net ................................ (1,072) (622)
-------- --------
Net cash (used in) provided by operating
activities ............................... $(24,771) $ 4,789
</TABLE>
The accompanying notes are an
integral part of the
consolidated financial
statements.
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE AND NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1998 and 1997
(in thousands of dollars)
(unaudited)
<TABLE>
<S> <C> <C>
9 Months Ended
September 30,
1998 1997
CASH FLOWS FROM INVESTING ACTIVITIES
Investments purchased ........................... $(25,402) $(18,024)
Proceeds from sales and maturities of investments 57,810 30,635
Net change in short-term investments ............ 347 (403)
Purchases & retirements of equipment, net ....... (985) (1,304)
Decrease in notes receivable from affiliates .... 4,610 4,611
-------- --------
Net cash provided by investing activities ....... 36,380 15,515
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock ........................ 141 525
Purchase of treasury stock ...................... -0- (338)
Purchase of subsidiary .......................... (1,322) (11,688)
Repayment of debt ............................... (10,964) (6,580)
-------- --------
Net cash used in financing activities ........... (12,145) (18,081)
-------- --------
Net (decrease) increase in cash and cash
equivalents .................................... (631) 2,223
Cash and cash equivalents, beginning of year ... 9,041 3,313
-------- --------
Cash and cash equivalents, end of year .......... $ 8,410 $ 5,536
======== ========
</TABLE>
The accompanying notes are an
integral part of the
consolidated financial
statements.
<PAGE>
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.
On June 30, 1998, ILCO, through a subsidiary, acquired Grinnell Life Insurance
Company ("Grinnell Life") for a base purchase price of $16.4 million, subject to
certain post-closing adjustments. As part of the transaction, Grinnell Life was
immediately merged with and into that subsidiary, with that subsidiary being the
surviving entity.
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 nine months ended
September 30, 1998 and September 30, 1997 is $9.9 million and $15.4 million,
respectively.
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited)
New Accounting Pronouncements, continued
The following is a reconciliation of total accumulated other comprehensive
income from December 31, 1997 to September 30, 1998 (in thousands):
<TABLE>
<S> <C> <C> <C>
Net unrealized Net Total
gain on appreciation accumulated
investments (depreciation) other
in fixed of equity comprehensive
maturities securities income
available for
sale
Balance at December 31, 1997 $ 11,457 $ 2,946 $ 14,403
Current period change 2,927 (1,424) 1,503
--------- ---------- ----------
Balance at September 30, 1998 $ 14,384 $ 1,522 $ 15,906
======== ========= =========
</TABLE>
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 adopted FAS 131 effective January 1, 1998, and
comparative information for earlier years will 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 132 does not
change the measurement or recognition of pension or other postretirement benefit
plans. The Company adopted FAS 132 effective January 1, 1998, with the effect of
such adoption to be reflected in year-end financial statements. The adoption of
FAS No. 132 is not expected to 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.
In June 1998, the FASB issued FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. FAS 133 is applicable to financial statements for all fiscal
quarters of fiscal years beginning after June 15, 1999. As the Company does not
have significant investments in derivative financial instruments, the adoptions
of FAS 133 does not have a material impact on the Company's results of
operations, liquidity or financial position.
- 3 -
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Conditions and Results
of Operations:
For the nine-month period ended September 30, 1998, InterContinental Life
Corporation's ("ILCO") net income was $8,356,000 (basic earnings of $1.91 per
common share, or diluted earnings of $1.90 per common share) as compared to
$8,479,000 (basic earnings of $1.96 per common share, or diluted earnings of
$1.94 per common share) in the first nine months of 1997. Earnings per share are
stated in accordance with the requirements of Financial Accounting Standard
(FAS) No. 128, which establishes two measures of earnings per share: basic
earnings per share and diluted earnings per share. Basic earnings per share is
computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding during the period. Diluted earnings
per share reflect the potential dilution that would occur if securities or other
contracts to issue common stock were converted or exercised. For the nine month
period ended September 30, 1997, earnings per share have been restated to
reflect the effect of FAS No. 128
Results of Operations
For the three-month period ended September 30, 1998, the Company's income before
federal income taxes was $4,577,000 on revenues of $27,269,000 as compared to
income of $4,365,000 on revenues of $29,306,000 for the same period in 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 nine months of 1998 was $8.39
million, as compared to $8.34 million for the first nine months of 1997.
Reinsurance premiums ceded were $2.5 million for the first nine months of 1998,
as compared to $1.5 million in the first nine months of 1997. The increase in
premium income is primarily attributable to the inclusion of the business of
Grinnell Life Insurance Company. ILCO, through a subsidiary, acquired Grinnell
Life Insurance Company in June of 1998.
Earned insurance charges for the nine-month period ended September 30, 1998 were
$30.81 million, as compared to $30.61 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 $645,000 for the first nine months of 1998, as compared to
$1.31 million for the first nine months of 1997. The decrease is attributable to
a reduction in the average principal balance of the senior loan from $19.76
million for the nine month period ending September 30, 1997
- 4 -
<PAGE>
to $7.3 million for the nine month period ending September 30, 1998. The average
rate of interest paid on the senior loan decreased slightly - 7.63% for the
first nine months of 1998, as compared to 7.66% for the first nine months of
1997. The final installment on the senior loan scheduled for October 1, 1998,
was prepaid by the Company on September 30, 1998. Accordingly, the senior loan
has been fully discharged effective September 30, 1998.
As of September 30, 1998, the market value of the fixed maturities available for
sale segment was $470.0 million as compared to an amortized cost of $447.9
million, or an unrealized gain of $22.1 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 ($14.4 million at September 30, 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.
For the three-month period ended September 30, 1998, the annualized lapse rate
with respect to universal life insurance policies decreased slightly from the
lapse rate experienced in the similar period in 1997. The rate for the 1998
period was 7.08 %, as compared to 7.54% in the 1997 period. The lapse rate with
respect to traditional (non-universal) life insurance policies increased from
the levels experienced in the third quarter of 1997. The annualized lapse rate
for the three-month period ended September 30, 1998 was 8.67%, as compared to
8.05% in the similar period in 1997. The lapse rates experienced during these
periods were within the ranges anticipated by management.
On June 30, 1998, ILCO, through a subsidiary, acquired Grinnell Life Insurance
Company ("Grinnell Life") for a base purchase price of $16.4 million, subject to
certain post-closing adjustments. As part of the transaction, Grinnell Life was
immediately merged with and into that subsidiary, with that subsidiary being the
surviving entity.
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, which reflected the prepayment by the Company of
the payment originally scheduled for January 1, 1998. A regular payment, in the
amount of $3.7 million, was made on April 1, 1998 and a prepayment of the July
1, 1998 installment, in the amount of $3.7 million, was made on June 30, 1998.
The outstanding principal balance of ILCO's senior loan obligations was $3.6
million at June 30, 1998. The final installment on the senior loan obligation
scheduled for October 1, 1998, was
- 5 -
<PAGE>
prepaid on September 30, 1998. As a result, the senior loan obligation of ILCO
was fully discharged effective September 30, 1998.
Financial Industries Corporation ("FIC") currently owns, directly and indirectly
through its subsidiary Family Life Insurance Company, 1,966,346 shares
(approximately 45%) of ILCO's common stock. Prior to the discharge of ILCO's
senior loan obligation, FIC held options to acquire an additional 1,702,155
shares of ILCO common stock. The options were granted under an option agreement
between FIC and ILCO which was entered into in March, 1986 ("Option Agreement").
The Option Agreement provided that it continued in effect as long as FIC
guaranteed indebtedness of ILCO. Since the senior loan was fully discharged by
ILCO on September 30, 1998, FIC's rights under the Option Agreement expired on
September 30, 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 September 30, 1998, the outstanding principal balance of the
Surplus Debentures was $4.4 million and $11.5 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,
1998, the statutory surplus of Investors-NA was $66.1 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 September 30, 1998, Investors-NA had earned surplus of
$37.5 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 for the foreseeable future.
Investors-IN is domiciled in the State of Indiana. Under the Indiana insurance
code, a domestic
- 6 -
<PAGE>
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 $17.4 million at September 30, 1998.
ILCO's net cash flow (used in) provided by operating activities was $(24.9)
million for the nine month period ended September 30, 1998, as compared to $4.8
million for the first nine months of 1997. The change in the 1998 period is
primarily attributable to the payment of Federal income taxes related to the
sale of Bridgepoint Square in December, 1997, payments made in connection with
the 1997 sale of the accident and health business and payments made for the
purchase of Grinnell Life Insurance Company in June, 1998.
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, 1998, the book value of the Company's investment assets
totaled $706.8 million, as compared to $693.1 million as of December 31, 1997.
Total assets as of September 30, 1998 ($1.33 billion) increased from the level
at of December 31, 1997 ($1.32 billion).
The level of short-term investments at September 30, 1998 was $164.3 million, as
compared to $164.6 million at December 31, 1997.
Invested real estate and other invested assets decreased from $50.4 million at
September 30, 1997 to $1.4 million at September 30, 1998. The decrease in
invested real estate and other invested assets as of September 30, 1998 and the
corresponding increase in the level of short term investments as compared to the
same period in 1997 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 September
30, 1998 was $470.0 million. The amortized cost of the fixed maturities
available for sale segment as of September 30, 1998 was $447.9 million,
representing a net unrealized gain of $22.1 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."
- 7 -
<PAGE>
The Company's fixed maturities portfolio (including short-term investments), as
of September 30, 1998, included a non-material amount (0.59% 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 September 30, 1997, the
comparable percentage was 0.92%. Of these non-investment grade investments,
0.469% are of the low quality (or "4") category, with 0.117% receiving an NAIC
rating of "5" ("lower quality"). The securities in category "5" represent a
reclassification of existing investments.
The consolidated balance sheets of the Company as of September 30, 1998 include
$49.2 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%.
- 8 -
<PAGE>
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. Based on its initial analysis, the Company expects that the
cost of implementing and completing the Plan will result in a after-tax expense
of approximately $510,000 for the three-year (1997 - 1999) conversion period.
For the nine month period ended September 30, 1998, the Company has incurred an
after tax expense of approximately $129,000 in connection with the completion of
the Plan. Between January 1, 1997 and September 30, 1998, the Company has
expended approximately 55% of the three-year expected after-tax cost discussed
above.
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 September 30, 1998, the Company estimated that it had completed the
necessary conversions and modifications on the administrative systems which
process approximately 40% of the insurance policies for the Company and its
subsidiaries. This included the conversion of the ALIS System (administering
approximately 49,280 policies at the time of conversion) to CK/4 in January of
1998, and the TI System conversion (administering approximately 5,240 policies
at the time of conversion) to CK/4 which was completed the end of May, 1998. The
conversion of the Life 70 system (administering approximately 16,120 active
policies for Investors-IN) is scheduled for completion
- 9 -
<PAGE>
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 62,410 active
policies for Investors-NA) is now scheduled for completion in September of 1999.
The modification of three smaller systems which administer 3,686 active credit
life policies, 2,668 active group certificates and 15,551 active 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 and 1999.
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.
The Company also faces the risk that one or more of its external suppliers of
goods or services ("third party providers") will not be in a position to
properly interact with the Company due to the inability of such third party
provider to resolve its own Y2K issues. The Company has completed an inventory
of its third party provider relationships. In order to assess the Y2K readiness
of such third party providers, the Company has developed and forwarded a
detailed questionnaire to such providers. As the responses to the questionnaires
are received, the Company will evaluate the overall Y2K readiness of its third
party provider relationships. However, the Company does not have sufficient
information at the current time to determine whether the computer systems of its
third party providers will be in compliance with the Y2K requirements as the
year 2000 approaches.
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.
In the event that a major administrative system fails to operate properly due to
the Y2K problem, or the Company does not complete the necessary systems
conversions prior to January 1, 2000, the Company has developed a plan to
respond to such a contingency. FIC Computer services has assigned certain
personnel to be members of an emergency response team to resolve Y2K operations
problems. Additionally, insurance policies would be administered manually if the
necessary systems conversions were not completed prior to January 1, 2000,
or subsequent Y2K operations problems persist. Manual policy administration
would require additional personnel. If substantial additional personnel become
necessary for manual policy administration, the training and salary expenses of
such personnel could materially affect the Company's business and results of
operations.
- 10 -
<PAGE>
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. 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 will 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
the effect of such adoption to be reflected in year-end financial statements.
The adoption of FAS No. 132 is not expected to 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
- 11 -
<PAGE>
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.
In June, 1998, the FASB issued FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. FAS No. 133 is applicable to financial statements for all
fiscal quarters of fiscal years beginning after June 15, 1999. As the Company
does not have significant investments in derivative financial instruments, the
adoptions of FAS 133 does not have a material impact on the Company's results of
operations, liquidity or financial position.
Cautionary Statements for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act of 1995
Except for historical factual information set forth in this Management's
Discussion and Analysis, certain statements made in this report are forward
looking and contain information about financial results, economic conditions,
Y2K risks and other risks and known uncertainties. The Company cautions the
reader that actual results could differ materially from those anticipated by the
Company, depending upon the eventual outcome of certain factors, including: (1)
heightened competition for new business, (2) significant changes in interest
rates, (3) adverse regulatory changes affecting the business of insurance and
(4) adverse changes in the Y2K readiness of the Company or its significant third
party providers.
Subsequent Event
On October 29, 1998 Investors-NA purchased two (2) adjoining tracts of land
located in Austin, Texas totalling 47.995 acres. The aggregate purchase price
for these tracts was $8.1 million. Prior to October 29, 1998, Investors-NA
obtained preliminary approval of a site plan development proposal for these
tracts. On October 29, 1998, A City of Austin Site Plan Development Permit
("Development Permit") for the aforesaid tracts was issued and released to
Investors-NA. The Development Permit allows for the construction of seven office
buildings totalling approximately 600,000 square feet, with asscociated parking,
drives and related improvements.
- 12 -
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
Part II. Other Information
Item 1. Legal Proceedings
The Company and Investors-NA are defendants in two lawsuits which were filed in
Travis County, Texas in which the named plaintiffs 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 also seek a class action as to similarly situated individuals.
A more detailed discussion of these lawsuits is contained in Part II, Item 1
Legal Proceedings of the Company's Form 10-Q for the three-month period ended
March 31, 1998 and the Company's Form 10-K for the year ended December 31, 1997.
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
- 13 -
<PAGE>
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: November 13, 1998
- 14 -
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY BY
REFERENCE
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 470,015
<DEBT-CARRYING-VALUE> 3,027
<DEBT-MARKET-VALUE> 3,059
<EQUITIES> 2,681
<MORTGAGE> 10,390
<REAL-ESTATE> 1,442
<TOTAL-INVEST> 706,841
<CASH> 8,410
<RECOVER-REINSURE> 16,314
<DEFERRED-ACQUISITION> 31,414
<TOTAL-ASSETS> 1,332,127
<POLICY-LOSSES> 134,492
<UNEARNED-PREMIUMS> 1,043
<POLICY-OTHER> 549,811
<POLICY-HOLDER-FUNDS> 5,672
<NOTES-PAYABLE> 0
0
0
<COMMON> 1,185
<OTHER-SE> 154,597
<TOTAL-LIABILITY-AND-EQUITY> 1,332,127
8,393
<INVESTMENT-INCOME> 41,737
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 1,732
<BENEFITS> 28,026
<UNDERWRITING-AMORTIZATION> 1,380
<UNDERWRITING-OTHER> 12,106
<INCOME-PRETAX> 13,081
<INCOME-TAX> 4,725
<INCOME-CONTINUING> 8,356
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,356
<EPS-PRIMARY> 1.91
<EPS-DILUTED> 1.90
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
