SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission File Number 0-7288
INTERCONTINENTAL LIFE CORPORATION
(Exact name of registrant as specified in its charter)
Texas 22-1890938
(State of Incorporation) (I.R.S. Employer identification number)
701 Brazos, Suite 1400, Austin, Texas 78701
(Address of Principal Executive Offices) (Zip Code)
(512) 404-5000
(Registrant's Telephone Number)
Securities Registered pursuant to Section 12(b) of the Act: None
Securities Registered pursuant to Section 12(g) of the Act:
Common Stock, $.22 par value
(Title of Class)
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 and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO
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The aggregate market value of the voting stock held by non-affiliates of the
Registrant on March 15, 1999, based on the closing sales price in The Nasdaq
Small-Cap Market ($16.75 per share), was $38,813,636.
As of March 15, 1999, Registrant had 4,394,706 shares of its Common Stock
outstanding (excluding shares held in Treasury and not entitled to vote).
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulations S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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PART I
Item 1. Business
General
InterContinental Life Corporation ("ILCO", the "Company" or the "Registrant")
was originally incorporated in 1969 under the laws of the State of New Jersey.
During 1997, ILCO transferred its domicile from New Jersey to the State of
Texas. This change was approved by vote of the shareholders at the annual
meeting of shareholders held on June 19, 1997. Its executive offices are located
at 701 Brazos, Suite 1400, Austin, Texas 78701.
The Company is principally engaged, through its subsidiaries, in administering
existing portfolios of life insurance policies and annuity products. Prior to
the end of 1997, the life insurance subsidiaries also administered an in-force
book of accident and health insurance business. In December, 1997, the life
insurance subsidiaries entered into an agreement, effective as of June 30, 1997,
with a third party insurer whereby the obligations under the accident and health
insurance and the disability income business of the companies was assumed by the
reinsurer. The arrangement provides for an initial period of reinsurance on a
coinsurance basis, pending applicable approvals of the assumption arrangement.
The Company's insurance subsidiaries are also engaged in the business of
marketing and underwriting individual life insurance and annuity products in 49
states and the District of Columbia. Such products are marketed through
independent, non-exclusive general agents.
The Company is controlled by Financial Industries Corporation ("FIC"), a life
insurance holding company, through FIC's ownership of approximately 45% of the
Company's outstanding common stock. FIC, ILCO and their insurance subsidiaries
have substantially identical managements, and a majority of the directors of
ILCO are also directors of FIC and ILCO's and FIC's insurance subsidiaries.
Officers allocate their time between ILCO and FIC in accordance with the
comparative requirements of both companies and their subsidiaries. Roy F. Mitte,
Chairman, President and Chief Executive Officer of FIC, the Company and their
insurance subsidiaries, is the beneficial owner of approximately 29.54% of the
outstanding shares of FIC's common stock. FIC owns Family Life Insurance
Company, a Washington domiciled underwriter of mortgage protection life
insurance.
The Company was organized in 1969 to be the publicly owned holding company for
InterContinental Life Insurance Company ("ILIC"). The Company acquired Standard
Life Insurance Company ("Standard Life") in 1986, Investors Life Insurance
Company of California ("Investors-CA") and Investors Life Insurance Company of
North America ("Investors-NA") in 1988, Meridian Life Insurance Company, renamed
Investors Life Insurance Company of Indiana ("Investors-Indiana"), in February
1995, State Auto Life Insurance Company (via merger of that company into
Investors- Indiana in 1997) and Grinnell Life Insurance Company (via merger of
that company into Investors- Indiana in 1998).
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Acquisitions
Strategy. The Company's strategy has been and continues to be to grow internally
and through acquisitions, while maintaining an emphasis on cost controls.
Management believes that, under appropriate circumstances, it is more
advantageous to acquire companies with books of in-force life insurance than to
produce new business, because initial underwriting costs have already been
incurred and mature business is generally less likely to terminate, making
possible more predictable profit analysis. However, the Company's insurance
subsidiaries continue to market those products that are profitable, as well as
develop new products and streamline distribution channels. See "Agency
Operations". It is also management's belief that the continuing consolidation in
the life insurance industry presents attractive opportunities for the Company to
acquire life insurance companies that complement or fit within the Company's
existing marketing structure and product lines. The Company's objective is to
improve the profitability of acquired businesses by consolidating and
streamlining the administrative functions of these businesses, eliminating
unprofitable products and distribution channels, applying its marketing
expertise to the acquired company's markets and agents, and benefitting from
economies of scale. The Company's ability to make future acquisitions will be
dependent on its being able to obtain the necessary financing. In addition,
since FIC has the same acquisition strategy as ILCO, a conflict of interest
could arise in the future between ILCO and FIC with respect to acquisition
opportunities.
Acquisition of Standard Life. In November 1986, the Company acquired Standard
Life, headquartered in Jackson, Mississippi, for a gross purchase price of
$54,500,000. A portion of the funds used by the new life insurance company
formed by the Company to make the acquisition ("New Standard") was the proceeds
of a loan extended to the Company by a national bank in the principal amount of
$15,000,000 (the "Standard Term Loan"). This sum was, in turn, loaned by the
Company to New Standard, and the loan was evidenced by a surplus debenture. New
Standard was merged into Standard Life in June 1988.
Acquisition of Investors-NA and Investors-CA. In December 1988, the Company,
through Standard Life, purchased Investors-CA and Investors-NA from CIGNA
Corporation for a purchase price of $140 million. The Company obtained the funds
used for the acquisition from: (a) a senior loan in the amount of $125,000,000
(maturity date December 31, 1996, payable in twenty -seven quarterly
installments of $4 million each, commencing on July 1, 1989, followed by four
quarterly installments of $4.25 million each) provided by six financial
institutions (the "Senior Loan"), (b) a $10,000,000 subordinated loan (a
nine-year note, with an interest rate of 13.25%) provided by two insurance and
financial service organizations and (c) the sale of $5,000,000 of Class A
Preferred Stock (principal amount of $5 million; dividend rate of 13.25%) to
CIGNA and $15,000,000 of Class B Preferred Stock (principal amount of $15
million; dividend rate of 13.25%) to the subordinated lenders. Approximately
$15,000,000 of these funds were used to discharge the Standard Term Loan. The
balance of these funds were loaned by the Company to Standard Life. To evidence
this indebtedness, Standard Life issued a $140,000,000 surplus debenture to the
Company. In connection with the subordinated debt and preferred stock financing,
the Company issued
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detachable warrants entitling the holders to purchase 1,107,480 shares of the
Company's Common Stock at $3.33 per share.
In May 1990, the Company effected an exchange agreement with the holders of its
Class A Preferred Stock and its Class B Preferred Stock . Under the provisions
of the exchange agreement, the holders of the Class A Preferred Stock received
$5 million principal amount of a 13.25% 1998 Series Subordinated Notes, due
November 1, 1998, together with a make whole amount equal to 13.25% of the then
outstanding balance of the Note. The holders of the Class B Preferred Stock
received $15 million principal amount of a 13.25% 1999 Series Subordinated
Notes, due November 1, 1999.
The Company prepaid the subordinated debt and purchased the warrants in early
1993. See "Senior Loan".
Acquisition of Investors-Indiana. On February 14, 1995, ILCO, through
Investors-NA, purchased from Meridian Mutual Insurance Company the stock of
Meridian Life Insurance Company, an Indianapolis-based life insurer, for a cash
purchase price of $17.1 million. After the acquisition, Meridian Life changed
its name to Investors Life Insurance Company of Indiana ("Investors-Indiana").
Acquisition of State Auto Life. On July 9, 1997, ILCO and Investors-Indiana
acquired State Auto Life Insurance Company, an Ohio domiciled life insurer, from
State Automobile Mutual Insurance Company, for an adjusted cash purchase price
of $11.8 million. In connection with this transaction, the bank group
participating in the Senior Loan agreed to defer payment of $4.5 million
otherwise payable on April 1, 1997 under the terms of the Senior Loan, and to
reduce the amount of the payment otherwise due on July 1, 1997 by $2.5 million.
This deferral resulted in extending the maturity date of the Senior Loan to
October 1, 1998. Under the terms of the transaction, State Auto Life was merged
into Investors-Indiana.
Acquisition of Grinnell Life. On June 30, 1998, ILCO, through a subsidiary,
acquired Grinnell Life Insurance Company ("Grinnell Life") for an adjusted
purchase price of $16.6 million. A portion of the purchase price ($12.37
million) was paid by way of a dividend to the seller immediately prior to the
closing of the transaction; the balance of the purchase price was paid by ILCO's
subsidiary. As part of the transaction, Grinnell Life was immediately merged
with and into that subsidiary, with that subsidiary being the surviving entity.
Merger of Insurance Subsidiaries. Investors-NA redomesticated from Pennsylvania
to Washington in December of 1992. Investors-CA merged into Investors-NA on
December 31, 1992, and Standard Life merged into Investors-NA on June 29, 1993.
The mergers have achieved cost savings, such as reduced auditing expenses
involved in auditing one combined company; the savings of expenses and time
resulting from the combined company being examined by one state insurance
department (Washington), rather than three (California, Pennsylvania and
Mississippi); the reduction in the number of tax returns and other annual
filings with 45 states; and smaller annual fees to do business and reduced
retaliatory premium taxes in most states.
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In December, 1997, ILIC transferred its domicile from New Jersey to Indiana.
Following completion of the redomestication, ILIC merged with Investors-Indiana,
with ILIC as the surviving entity in the merger process. Immediately after the
merger, ILIC changed its name to Investors Life Insurance Company of Indiana. As
used hereinafter, the phrase "Investors-IN" shall be used to refer to the merged
entities. As a result of the merger, Investors-IN is licensed in 44 states. As
of December 31, 1998, it had assets of $188 million and capital and surplus of
$23.1 million.
Management believes that these acquisitions and consolidations have caused a
reduction in expenses and have further strengthened the financial condition of
the combined companies.
Operations
The Company has developed management techniques to reduce operating expenses by
centralizing, standardizing and more efficiently performing many functions
common to most life insurance companies, such as underwriting and policy
administration, accounting and financial reporting, marketing, regulatory
compliance, actuarial services and asset management. The Company has selectively
recruited personnel in sales, marketing and various administrative departments.
The Company's centralized management techniques resulted in significant employee
reductions and expense savings in the life insurance companies acquired by the
Company. During 1998, the general insurance expenses of the Company's insurance
subsidiaries on a statutory basis were $15,172,682, as compared to $15,574,265
in 1997 and $12,008,163 in 1996. The level of expenses for the year 1998 was
affected by expenses incurred in connection with Year 2000 compliance (see the
discussion under the caption "Data Processing"), as well as the expenses
incurred in connection with the acquisition of Grinnell Life Insurance Company.
The increase in 1997, as compared to 1996, resulted primarily from expenses
incurred in connection with ILCO's acquisition of State Auto Life in July, 1997
and expenses related to the modification of data processing systems for Year
2000 compliance. Management is committed to maintaining the general insurance
expenses of the Company's insurance subsidiaries at a level which will generate
an acceptable level of profitability while maintaining the competitive pricing
of their insurance products.
In June 1991, FIC acquired Family Life Insurance Company. Following the
acquisition of Family Life by FIC, management integrated the sales, marketing,
underwriting, accounting, contract and licensing, investments, personnel, data
processing, home office support and other departments of Family Life and the
life insurance subsidiaries of ILCO. Management believes this integration has
resulted in cost savings for ILCO's insurance subsidiaries and Family Life.
During 1992, the Company's insurance operations were centralized at the
Company's headquarters in Austin, Texas, with the exception of certain services
performed in Seattle, Washington. Management believes that relocating
administrative functions to Austin has reduced costs and improved the efficiency
of the insurance companies' operations. The number of employees within the
Company and its subsidiaries (including employees who also perform
administrative services for Family Life) was approximately 322 at December 31,
1998.
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Principal Products
The Company's insurance subsidiaries are engaged primarily in administering
existing portfolios of life insurance policies and annuity products.
Approximately 80.6 % of the total collected premiums for 1998 were derived from
renewal premiums on insurance policies and annuity products sold by the
insurance subsidiaries prior to their acquisition by the Company.
The Company's insurance subsidiaries are also engaged in marketing and
underwriting individual life insurance and annuity products in 49 states and the
District of Columbia. These products are marketed through independent,
non-exclusive general agents.
The products currently being distributed include several versions of universal
life insurance, which provide permanent life insurance protection while
crediting company-declared current interest rates to the cash value of the
policy. The universal life insurance portfolio of the Company's insurance
subsidiaries consists primarily of flexible premium universal life insurance
policies. Under the flexible premium policies, policyholders may vary the
amounts of their coverage (subject to minimum and maximum limits) as well as the
date of payment and frequency of payments.
Direct statutory premiums received from all types of universal life products
were $38.9 million in 1998, as compared to $40.6 million in 1997, and $40.6
million in 1996. Investors-NA received reinsurance premiums from Family Life of
$2.5 million in 1998, pursuant to the reinsurance agreement for universal life
products written by Family Life. In 1998, premium income from all life insurance
products was derived from all states in which the Company's insurance
subsidiaries are licensed, with significant amounts derived from Pennsylvania
(14 %), Ohio (8 %) and New Jersey (8 %).
The Company's insurance subsidiaries received premium income from health
insurance policies. In 1998, premium income from all health insurance policies
was $1.0 million as compared to $0.9 million in each of 1997 and 1996. Premium
income from health insurance in 1998 was derived from all of the states in which
those two insurance subsidiaries are licensed, with significant amounts derived
from Illinois (22 %), New Jersey (16%) and Pennsylvania (15%). As described
below, the health insurance business of the Company's subsidiaries is 100%
reinsured with a third party reinsurer.
In December, 1997, ILCO's life insurance subsidiaries entered into a reinsurance
treaty under which all of the contractual obligations and risks under accident
and health insurance policies were assumed by a third party reinsurer. The
transfer was effective as of July 1, 1997. These risks and contractual
obligations were sold pursuant to, first, a coinsurance reinsurance agreement.
Following applicable regulatory approvals, the reinsurer will assume the direct
obligations of the companies, on an assumption reinsurance basis. The decision
to dispose of this book of business was based on management's analysis that the
business was not generating targeted profit objectives and that the products
were not part of the core business of the subsidiaries. The sale permits the
companies to focus on its primary business - life insurance and annuity sales.
In connection with the transaction,
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the total amount of net reserves transferred by the subsidiaries was $6,327,504.
In addition to the transfer of reserves, the life companies paid the reinsurer
$1,037,150 in connection with the transaction, which amount was accounted for as
an expense for the year ended December 31, 1997. In 1997, the transferred
business generated approximately $791,000 in annualized premiums.
Investors-NA sponsors a variable annuity separate account, which offers single
premium and flexible premium policies. The policies provide for the contract
owner to allocate premium payments among four different portfolios of Putnam
Variable Trust (the "Putnam Fund"), a series fund which is managed by Putnam
Investment Management, Inc. Prior to April, 1995, the underlying investment
vehicle for the variable annuity contracts was the CIGNA Annuity Funds Group. A
substitution of the Putnam Fund for the CIGNA Funds was completed in April,
1995. The plan of substitution was approved by the Securities and Exchange
Commission. Following such approval, the plan was submitted to policyholders for
approval, which was obtained. As of December 31, 1998, the assets held in the
separate account were $51.3 million. During 1998, the premium income realized in
connection with these variable annuity policies was $156,419, which was received
from existing contract owners.
Investors-NA also maintains a closed variable annuity separate account, with
approximately $21.6 million of assets as of December 31, 1998. The separate
account was closed to new purchases in 1981, as a result of an IRS ruling which
adversely affected the status of variable annuity separate accounts which invest
in publicly-available mutual funds. The ruling did not adversely affect the
status of in-force contracts.
During 1997, ILCO's life companies expanded their marketing efforts in the fixed
annuity market. Direct deposits from the sale of fixed annuity products were
$6.1 million in 1998, as compared to $3.5 million in 1997, and $1.7 million in
1996. Investors-NA also received reinsurance premiums from Family Life of $1.7
million in 1998, pursuant to a reinsurance agreement for annuity products
between Investors-NA and Family Life Insurance Company.
During the fourth quarter of 1998, Investors-NA developed a group deposit
administration product, designed for use in connection with the funding of
deferred compensation plans maintained by government employers under section 457
of the Internal Revenue Code. The company has established a marketing
relationship with a third-party administrator based in San Antonio, Texas, which
has established relationships with school districts in Texas. The company
anticipates that enrollments will commence during the second quarter of 1999.
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The following table sets forth, for the three years ended December 31, 1998, the
combined premium income and other considerations received by the Company's
insurance subsidiaries from sales of their various lines of insurance.
<TABLE>
Year Ended December 31,
<S> <C> <C> <C>
Type of Insurance Premium 1998 1997 1996
(In thousands)
Individual:
Life .............................. $ 10,528 $ 10,163 $ 8,780
Accident & Health ................. 994 792 1,035
Total Individual Lines ............ 11,522 10,955 9,815
Group:
Life .............................. 2,323 2,639 2,018
Accident & Health ................. 11 40 0
Total Group Lines ................. 2,334 2,679 2,018
Credit:
Life .............................. (21) (27) (85)
Accident & Health ................. (3) 14 (57)
Total Credit Lines ................ (24) (13) (142)
Total Premium ..................... 13,832 13,621 11,691
Reinsurance Premiums Ceded ........ (2,942) (2,590) (1,711)
Total Net Premium ............. 10,890 11,031 9,980
Amount Received on
Investment Type Contracts ......... 48,739 47,862 47,135
Total Premiums and
Deposits Received ............. $ 59,629 $ 58,893 $ 57,115
</TABLE>
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Investment of Assets
The assets held by the Company's insurance subsidiaries must comply with
applicable state insurance laws and regulations pertaining to life insurance
companies. The investment portfolio of the Company's insurance subsidiaries is
tailored to reflect the nature of the insurance obligations, business needs,
regulatory requirements and tax considerations relating to the underlying
insurance business with respect to such assets. This is particularly the case
with respect to interest-sensitive life insurance and deferred annuity products,
where the investment emphasis is to obtain a targeted margin of profit over the
rate of interest credited to policyholders, while endeavoring to minimize the
portfolio's exposure to changing interest rates. To reduce the exposure to such
rate changes, portfolio investments are selected so that diversity, maturity and
liquidity factors approximate the duration of associated policyholder
liabilities.
The investment objective of the Company's insurance subsidiaries emphasizes the
selection of short to medium term high quality fixed income securities, rated
Baa-3 (investment grade) or better by Moody's Investors Service, Inc. At
December 31, 1998, only 1.5% of the Company's total assets were invested in
mortgage loans or real estate. Non-affiliated corporate debt securities that
were non-investment grade represented 0.3% of the Company's total assets at
December 31, 1998. The Company had investments in debt securities of affiliated
corporations aggregating approximately
$47.6 million as of December 31, 1998.
Investments in mortgage-backed securities included collateralized mortgage
obligations ("CMOs") of $212.1 million and mortgage-backed pass-through
securities of $32.1 million at December 31, 1998. Mortgage-backed pass-through
securities, sequential CMOs and support bonds, which comprised approximately
42.6% of the book value of the Company's mortgage-backed securities at December
31, 1998, are sensitive to prepayment and extension risks. The Company has
reduced the risk of prepayment associated with mortgage-backed securities by
investing in planned amortization class ("PAC"), target amortization class
("TAC") instruments, accretion directed bonds and scheduled bonds. These
investments are designed to amortize in a predictable manner by shifting the
risk of prepayment of the underlying collateral to other investors in other
tranches ("support classes") of the CMO. PAC and TAC instruments and accretion
directed and scheduled bonds represented approximately 37.8% and sequential and
support classes represented approximately 34.6% of the book value of the
Company's mortgage-backed securities at December 31, 1998. In addition, the
Company limits the risk of prepayment of CMOs by not paying a premium for any
CMOs. The Company does not invest in mortgage-backed securities with increased
prepayment risk, such as interest-only stripped pass-through securities and
inverse floater bonds. The prepayment risk that certain mortgage-backed
securities are subject to is prevalent in periods of declining interest rates,
when mortgages may be repaid more rapidly than scheduled as individuals
refinance higher rate mortgages to take advantage of the lower current rates. As
a result, holders of mortgage-backed securities may receive large prepayments on
their investments which cannot be reinvested at an interest rate comparable to
the rate on the prepaying mortgages. The Company did not make additional
investments in CMOs during 1998, and the current investment objectives of the
Company do not contemplate additions to the portfolio of CMO investments during
1999.
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The Company does not invest in non-agency mortgage-backed securities, which have
a greater credit risk than that of agency mortgage-backed securities.
The Company does not make new mortgage loans on commercial properties.
Substantially all of the Company's mortgage loans were made by its subsidiaries
prior to their acquisition by the Company. At December 31, 1998, 0.8% of the
total book value of mortgage loans held by the Company had defaulted as to
principal or interest for more than 90 days, and none of the Company's mortgage
loans were in foreclosure. During 1998, none of the Company's mortgage loans
were converted to foreclosed real estate or were restructured while the Company
owned them.
Another key element of the Company's investment strategy is to avoid large
exposure in other investment categories which the Company believes carry higher
credit or liquidity risks, including private placements, partnerships and bank
participation. These categories accounted for approximately 0.4% of the
Company's invested assets at December 31, 1998.
Investors-NA was the owner and developer of Bridgepoint Square Offices.
Following the completion of the construction, the project consisted of four
office buildings, with a total rentable space of approximately 364,000 square
feet, and two parking garages. Investors-NA purchased the 20 acre tract of land
for this complex in January, 1995. At that time, the tract included one
completed and fully leased office building, an adjacent parking garage, and
sites for three more office buildings and another parking garage. Investors-NA
completed construction of the three remaining office buildings and parking
garage in 1997.
In May 1996, Family Life Insurance Company ("FLIC"), an indirect, 100% owned
subsidiary of FIC, purchased a 7.1 acre tract adjacent to the original
Bridgepoint Square tract. This second tract contained one building site and one
garage site. In January, 1997, FLIC began construction on a four-story office
building, with rentable space of approximately 76,793 square feet, and the
parking garage, with 350 parking spaces. In May, 1997, the entire rentable space
was leased to a major tenant in the technology business. Construction of the
parking garage and the building shell was completed in October, 1997.
In November, 1997, Investors-NA and Family Life entered into a sale agreement
with an independent third party for the sale of their respective interests in
Bridgepoint Square Offices. The transaction, which closed on December 5, 1997,
was for an aggregate price of $78 million. The sale resulted in a net pre-tax
profit to Investors-NA of approximately $14.0 million, and a net pre-tax profit
to Family Life of approximately $4.5 million. See Item 2. Properties.
In October, 1998, Investors-NA purchased two adjoining tracts of land located in
Austin, Texas totaling 47.995 acres. The aggregate purchase price for these
tracts was $8.1 million. Investors-NA has obtained approval of a site plan
development proposal for these tracts. The development permit provides for the
construction of seven office buildings totaling 600,000 square feet, with
associated parking, drives and related improvements. The initial phase of the
project ("Phase One") will consist
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of two office buildings, associated parking and the infrastructure for the
entire project. Construction on Phase One began during the first quarter of
1999.
The Company has established and staffed an investment department, which manages
portfolio investments and investment accounting functions for ILCO's life
insurance subsidiaries.
Agency Operations
ILCO's insurance subsidiaries collectively market through the "Investors"
distribution system. Independent non-exclusive agents, general agents and
brokers are recruited nation-wide to sell the products. Such agents and brokers
also sell insurance products for companies in competition with ILCO's insurance
subsidiaries. In order to attract agents and enhance the sale of its products,
the Company's insurance subsidiaries pay competitive commission rates and
provide other sales inducements. The Investors sales distribution system is
presently concentrating its efforts on the promotion and sale of universal life,
term life and fixed annuity products.
Marketing and sales for all of the Company's insurance subsidiaries are directed
by the Executive Vice President of Marketing and Sales. The Senior Vice
President for Investors Sales directs Regional Vice Presidents who are
responsible for the recruitment and maintenance of the general agents and
managing general agents for individual insurance sales. Beginning in 1999, the
Company will implement a plan to restructure the compensation arrangements for
Regional Vice Presidents, so as to emphasize the role of personal production by
the RVPs.
Data Processing
Since December, 1994, the data processing needs of ILCO's and FIC's insurance
subsidiaries have been provided to ILCO's and FIC's Austin, Texas and Seattle,
Washington facilities by FIC Computer Services, Inc., a subsidiary of FIC. See
Item 13 - Certain Relationships and Related Transactions with Management.
As the provider of data processing for the Company and its subsidiaries and
affiliates, FIC Computer Services, Inc. utilizes 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 by 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.
In response to the potential operations and policy administration problems
caused by the computer calendar change on January 1, 2000, the management of the
Company instructed FIC Computer Services, Inc. to analyze its system
capabilities and the operational requirements of the Company and its respective
subsidiaries and affiliates with respect to the Y2K problem. In 1996, FIC
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Computer Services, Inc. conducted the analysis of all of the Company's systems.
After reviewing that analysis, the Company determined that a plan should be
devised to prevent the data processing errors that may be encountered due to the
Y2K problem. In November, 1996, a three-year plan outlining a proposed solution
(the "Plan") was established and approved by the Company to ensure that all of
the data processing systems would be Y2K compliant or converted onto Y2K
compliant systems. The Company began the major work under this Plan in 1997 and
it is scheduled to be completed by the Fall of 1999.
The Company established this Plan because FIC Computer Services, Inc.'s analysis
revealed that those systems that are not converted or modified into Y2K
compliant systems, may produce policy administration errors as a result of the
calendar change, requiring that the life insurance subsidiaries manually
administer those policies. This would result in a material increase in
administrative costs incurred by the life insurance subsidiaries of both ILCO
and FIC.
The Company's analysis also indicated that, in addition to potential policy
administration errors in the life insurance subsidiaries, any machine which
contains a microchip is subject to error due to the Y2K problem. Such an
occurrence could not only create errors in the Company's internal systems, but
those of the Company's suppliers and service providers. In order to prepare for
this contingency, the Plan called for the acquisition of new mainframe hardware
and software, and the modification and conversion of the Company's telephones,
voice mail and desk-top personal computers.
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.
Under the Plan, FIC Computer Services, Inc. will utilize its own personnel,
acquire Y2K compliant operating software, and engage the assistance of outside
consultants to facilitate the systems conversions and modifications. 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 Company has increased the
budget for the implementation and completion of the Plan from the prior years
estimate. As of December 31, 1997, the Company had budgeted approximately
$470,000 for implementing the Plan. Based on its current analysis, the Company
expects that the cost of implementing and completing the Plan will result in an
after-tax expense of approximately $587,000 for the three-year (1997 - 1999)
conversion period. For the twelve month period ended December 31, 1998, the
Company has incurred an after tax expense of approximately $158,000 in
connection with the completion of the Plan. Between January 1, 1997 and December
31, 1998, the Company has expended approximately 50.7% of the three-year
expected after-tax cost discussed above. In the event that the Plan does not
achieve full compliance by the target dates, or if unforeseen matters involving
Y2K appear before or after January 1, 2000, the Company will utilize the staff
of FIC Computer Services, Inc. to identify and resolve such issues as and if
they arise.
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In order to continuously evaluate the effectiveness of the modifications and
conversions made to the various systems, FIC Computer Services, Inc. has
acquired testing software to simulate dates on or after January 1, 2000.
Additionally, FIC Computer Services, Inc. runs the systems through model office
cycles and also conducts visual inspections of screen displays to determine
whether the systems are functioning in a Y2K compliant manner.
As of March 1, 1999, FIC Computer Services, Inc. estimated that it had completed
the necessary conversions and modifications on the administrative systems which
process approximately 66 % of the insurance policies for the Company and its
subsidiaries. This included the conversion of the ALIS System (administering
approximately 42,000 active policies) to CK/4 in February, 1998, the System 38
(administering approximately 9,400 active policies) conversion in January, 1997,
the TI System (administering approximately 5,240 active policies) conversion to
CK/4 in July, 1998 and the conversion of the Lifecomm-B system (which is
responsible for approximately 18,000 policies assumed after the acquisition of
State Auto Life) in February,1999. The conversion of the Life 70 system
(administering approximately 16,120 active policies for Investors-IN) is
scheduled for completion in May, 1999. The conversion of the Lifecomm-A system
(administering approximately 62,410 active policies for Investors-NA) is
scheduled for completion in September of 1999. The modification of one of the
Company's smaller systems which administers approximately 3,680 active credit
life policies was completed on schedule in December, 1998. The modification of a
smaller system which administers approximately 15,550 active industrial life
policies is scheduled for completion in June of 1999.
The various software applications described above are licensed to the Company
under agreements which permit the Company's subsidiaries to process business on
its computer systems utilizing such software.
In 1997, FIC Computer Services, Inc. purchased new mainframe hardware and
accompanying operating software, which the vendor has represented to be Y2K
compliant. FIC Computer Services, Inc. has completed the installation and
testing of such new mainframe hardware and software for compliance with the
requirements of the Year 2000 conversion. In addition, FIC Computer Services has
purchased certain third-party software which is run on the mainframe. This
software has been represented by the vendor as being in compliance with Year
2000 requirements. Testing is currently being done on such third-party software,
which testing is expected to be completed by September 1, 1999. The telephone
system, which includes both PBX and voice mail systems, 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
has obtained updated software releases and new hardware designed to be Y2K
compliant according to the representations of the vendors. The Company expects
that the effort needed to correct for Y2K problems on such systems will be less
time intensive than the effort needed to achieve compliance for its centralized
systems. The installation of such new PC hardware and software was commenced in
early 1999 and is expected to be completed by September 1, 1999.
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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. Pursuant to the Plan, 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.
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 operational problems arise. 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. The Company is not able to estimate the likelihood that manual
administration will be needed or the amount of any expense which it would incur
in connection with such manual administration.
Competition
There are many life and health insurance companies in the United States. A
significant number of casualty companies also market health insurance. Agents
placing insurance business with ILCO's life insurance subsidiaries are
compensated on a commission basis. However, some companies pay higher
commissions and charge lower premium rates and many companies have more
substantial resources.
The principal cost and competitive factors that affect the Company's ability to
sell its life insurance and annuity products on a profitable basis are: (1) the
general level of premium rates for comparable products; (2) the extent of
individual policy holder services required to service each product category; (3)
general interest rate levels; (4) competitive commission rates and related
marketing costs; (5) legislative and regulatory requirements and restrictions;
(6) the impact of competing insurance and other financial products; and (7) the
condition of the regional and national economies.
Reinsurance and Reserves
Reinsurance Ceded:
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In accordance with general practices in the insurance industry, the Company's
insurance subsidiaries limit the maximum net losses that may arise from large
risks by reinsuring with other carriers. Such reinsurance provides for a portion
of the mortality risk to be retained (the "Retention") with the excess being
ceded to a reinsurer at a premium set forth in a schedule based upon the age and
risk classification of the insured. The reinsurance treaties provide for
allowances that help the Company's insurance subsidiaries offset the expense of
writing new business. Investors-IN generally retains the first $60,000 to
$100,000 of risk on the life of any individual, depending upon the type of
coverage being written. Investors-NA generally retains the first $100,000 to
$250,000 of risk on the life of any individual, depending on the type of
coverage being issued.
Investors-NA maintains a bulk reinsurance treaty, under which it reinsured all
of its risks under accidental death benefit policies. The treaty was most
recently renegotiated with the current reinsurer in January, 1997.
As discussed above (see "Principal Products"), in December, 1997, ILCO's life
insurance subsidiaries entered into a reinsurance treaty under which all of the
contractual obligations and risks under individual accident and health insurance
policies were assumed by a third party reinsurer. In connection with the
transaction, the total amount of net reserves transferred by the subsidiaries
was $6,327,504. In addition to the transfer of reserves, the life companies paid
the reinsurer $1,037,150 in connection with the transaction, which amount was
accounted for as an expense for the year ended December 31, 1997.
Although reinsurance does not eliminate the exposure of the Company's insurance
subsidiaries to losses from risks insured, the net liability of such
subsidiaries will be limited to the portion of the risk retained, provided that
the reinsurers meet their contractual obligations.
The Company's insurance subsidiaries carry reserves on their books to meet
future obligations under their outstanding insurance policies. Such reserves are
believed to be sufficient to meet policy obligations as they mature and are
calculated using assumptions for interest, mortality, expenses and withdrawals
in effect at the time the policies were issued.
Reinsurance Assumed:
In 1995, Investors-NA entered into a reinsurance agreement with Family Life
pertaining to universal life insurance written by Family Life. The reinsurance
agreement is on a co-insurance basis and applies to all covered business with
effective dates on and after January 1, 1995. The agreement applies to only that
portion of the face amount of the policy which is less than $200,000; face
amounts of $200,000 or more are reinsured by Family Life with a third party
reinsurer. In 1996, Investors-NA entered into a reinsurance agreement with
Family Life, pertaining to annuity contracts written by Family Life. The
agreement applies to contracts written on or after January 1, 1996. These
reinsurance arrangements reflect management's plan to develop universal life and
annuity business at Investors-NA, with Family Life concentrating on the writing
of term life insurance products.
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FIC's Acquisition of Control of the Company
In January 1985, FIC acquired 26.53% of ILCO's common stock. FIC and Family Life
subsequently acquired additional shares of ILCO's common stock and as of March
15, 1999, FIC owned, directly and indirectly through Family Life, approximately
45% of the outstanding shares of ILCO's common stock. Prior to October 1, 1998,
FIC held options to acquire up to 1,702,155 additional shares of ILCO Common
Stock. As a result of the final repayment on ILCO's Senior Loan (see discussion
under the caption "Senior Loan") on September 30, 1998, FIC's options to acquire
shares of ILCO's Common Stock expired.
FIC's Acquisition of Family Life
After FIC acquired control of ILCO, FIC's primary involvement in the insurance
industry was its indirect investment, through ILCO, in ILCO's insurance
subsidiaries. In June 1991, FIC acquired Family Life Insurance Company, ("Family
Life"), based in Seattle, Washington, from Merrill Lynch Insurance Group, Inc.
Family Life underwrites and sells mortgage protection life insurance to
customers who are mortgage borrowers from financial institutions where Family
Life has marketing relationships. Family Life distributes its insurance products
primarily through a national career sales force in 49 states and the District of
Columbia.
The $114 million purchase price for Family Life and an additional $5 million for
transaction costs, working capital and other related purposes were financed by:
(a) a $50 million senior loan provided by a group of banks, (b) $44 million
subordinated notes issued to the seller and its affiliates and (c) $25 million
senior subordinated notes issued to Investors-CA and Investors-NA. In addition,
FIC granted to Investors-CA and Investors-NA nontransferable options to purchase
up to a total of 9.9% of FIC's common stock at a price of $10.50 per share,
equivalent to the then current market price, subject to adjustment to prevent
dilution. As a result of the five-for-one stock split implemented by FIC,
effective in November, 1996, the exercise price of the options was changed to
$2.10 per share. The initial terms of the option provided for their expiration
on June 12, 1998, if not previously exercised. In connection with the 1996
amendments to the subordinated loans held by Investors-NA, the expiration date
of the options was extended to September 12, 2006. For a discussion of the 1996
amendments, see Item 13, "Certain Relationships and Related Transactions with
Management" . In July 1993, the subordinated notes held by the seller and its
affiliates were prepaid. The primary source of the funds used to prepay the
subordinated debt was a new subordinated loan of $34.5 million obtained from
Investors-NA. See Item 13.
Senior Loan
The Senior Loan of ILCO was originally arranged in connection with the 1988
acquisition of Investors-NA and Investors-CA. In January, 1993, the Company
refinanced its Senior Loan. That
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transaction was done in connection with the prepayment of the subordinated
indebtedness and the purchase of warrants which had been issued as part of the
financing of the 1988 acquisitions. The terms of the amended and restated credit
facility are substantially the same as the terms and provisions of the 1988
senior loan. The maturity date, which had been December 31, 1996, was extended
to July 1, 1998 for the Senior Loan. The average interest rate paid by the
Company on its Senior Loan was approximately 7.76% during 1996, 7.68% during
1997 and 7.63% during 1998.
In February, 1995, the Company borrowed an additional $15 million under the
Senior Loan to help finance the acquisition of Investors-IN, and the maturity
date of the Senior Loan was further extended to July 1, 1999. As of December 31,
1995, the outstanding principal balance of ILCO's senior loan obligations was
$59.4 million. In January, 1996, the Company made a scheduled payment of $4.5
million under its Senior Loan. In March, 1996, the Company made the scheduled
payments for April 1st and July 1st, totaling $9 million. At that same time, the
Company made a payment of $941,000, an additional payment under the terms of the
loan applied to the principal balance. On April 1, 1996, an optional principal
payment in the amount of $15 million was made, which resulted in advancing the
scheduled payoff date of the Senior Loan to April 1, 1998. In July, 1996, the
Company made the principal payment for October 1st ($4.5 million), plus an
optional principal payment of $0.5 million. In connection with the acquisition
of State Auto Life Insurance Company in July, 1997, the Senior Loan agreement
was modified to extend the maturity date to October 1, 1998.
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 prepaid on September 30, 1998. As a result,
the senior loan obligation of ILCO was fully discharged effective September 30,
1998.
Regulation
General. The Company's insurance subsidiaries are subject to regulation and
supervision by the states in which they are licensed to do business. Such
regulation is designed primarily to protect policy owners. Although the extent
of regulation varies by state, the respective state insurance departments have
broad administrative powers relating to the granting and revocation of licenses
to transact business, licensing of agents, the regulation of trade practices and
premium rates, the approval of form and content of financial statements and the
type and character of investments.
These laws and regulations require the Company's insurance subsidiaries to
maintain certain minimum surplus levels and to file detailed periodic reports
with the supervisory agencies in each of the states in which they do business
and their business and accounts are subject to examination
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by such agencies at any time. The insurance laws and regulations of the
domiciliary states of the Company's insurance subsidiaries require that such
subsidiaries be examined at specified intervals.
Investors-NA and Investors-IN are domiciled in the states of Washington and
Indiana, respectively. In December 1992, Investors-NA redomesticated from
Pennsylvania to Washington, and Investors-CA merged into Investors-NA. In June,
1993, Standard Life merged into Investors-NA. Prior to December, 1997,
Investors-IN was domiciled in the State of New Jersey. In December, 1997,
Investors-IN transferred its domicile to the State of Indiana.
A number of states regulate the manner and extent to which insurance companies
may test for acquired immune deficiency syndrome (AIDS) antibodies in connection
with the underwriting of life insurance policies. To the extent permitted by
law, the Company's insurance subsidiaries consider AIDS information in
underwriting coverage and establishing premium rates. An evaluation of the
financial impact of future AIDS claims is extremely difficult, due in part to
insufficient and conflicting data regarding the incidence of the disease in the
general population and the prognosis for the probable future course of the
disease.
Risk-Based Capital Requirements. The National Association of Insurance
Commissioners ("NAIC") has imposed Risk-Based Capital ("RBC") requirements to
evaluate the adequacy of statutory capital and surplus in relation to investment
and insurance risks associated with; (i) asset quality; (ii) mortality and
morbidity; (iii) asset and liability matching; and (iv) other business factors.
The states will use the RBC formula as an early warning tool to discover
potential weakly capitalized companies for the purpose of initiating regulatory
action. The RBC requirements are not intended to be a basis for ranking the
relative financial strength of insurance companies. In addition, the formula
defines a new minimum capital standard which will supplement the prevailing
system of low fixed minimum capital and surplus requirements on a state-by-state
basis.
The RBC requirements provide for four different levels of regulatory attention
in those states that adopt the NAIC regulations, depending on the ratio of the
company's Total Adjusted Capital (which generally consist of its statutory
capital, surplus and asset valuation reserve) to its Authorized Control Level
RBC. A "Company Action Level Event" is triggered if a company's Total Adjusted
Capital is less than 200% but greater than or equal to 150% of its Authorized
Control Level RBC, or if a negative trend has occurred (as defined by the
regulations) and Total Adjusted Capital is less than 250% but more than 200% of
its Authorized Control Level RBC. When a Company Action Level Event occurs, the
company must submit a comprehensive plan to the regulatory authority which
discusses proposed corrective actions to improve its capital position. A
"Regulatory Action Level Event" is triggered if a company's Total Adjusted
Capital is less than 150% but greater than or equal to 100% of its Authorized
Control Level RBC. When a Regulatory Action Level Event occurs, the regulatory
authority will perform a special examination of the company and issue an order
specifying corrective actions that must be followed. An "Authorized Control
Level Event" is triggered if a company's Total Adjusted Capital is less than
100% but greater than or equal to 70% of its Authorized Control Level RBC, and
the regulatory authority may take any action it deems necessary, including
placing the company under regulatory control. A "Mandatory Control Level
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Event" is triggered if a company's total adjusted capital is less than 70% of
its Authorized Control Level RBC, and the regulatory authority is mandated to
place the company under its control.
Calculations using the NAIC formula and the statutory financial statements of
the Company's insurance subsidiaries as of December 31, 1998 indicate that the
Total Adjusted Capital of each of the Company's insurance subsidiaries is above
640% of its respective Authorized Control Level RBC.
Solvency Laws Assessments. The solvency or guaranty laws of most states in which
the Company's insurance subsidiaries do business may require the Company's
insurance subsidiaries to pay assessments (up to certain prescribed limits) to
fund policyholder losses or liabilities of insurance companies that become
insolvent. Recent insolvencies of insurance companies increase the possibility
that such assessments may be required. These assessments may be deferred or
forgiven under most guaranty laws if they would threaten an insurer's financial
strength and, in certain instances, may be offset against future premium taxes.
The insurance companies record the expense for guaranty fund assessments in the
period assessed. The net amount of such assessment for the Company's insurance
subsidiaries was approximately $7,000 in the year ended December 31, 1998. That
amount is net of the amounts that can be offset against future premium taxes.
The likelihood and amount of any other future assessments cannot be estimated
and are beyond the control of the Company.
Surplus Debentures and Dividends. The Company receives payments from
Investors-NA under the terms of two surplus debentures . The surplus debentures
were originally issued by Standard Life. Upon the merger of Standard Life into
Investors-NA, the obligations of the surplus debentures were assumed by
Investors-NA. 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, Investors-NA can pay
interest and principal on the surplus debentures without having to obtain the
prior approval of the Washington Insurance Commissioner; provided that, after
giving effect to such payments, the statutory surplus of Investors-NA is in
excess of $10 million. As of December 31, 1998, the statutory surplus of
Investors-NA was $68.2 million. Investors-NA does give five-days prior
notification to the Washington Insurance Department of each proposed payment on
the surplus debentures in accordance with an agreement between Investors-NA and
the Department. ILCO does not anticipate that Investors-NA will have any
difficulty in making principal and interest payments on the surplus debentures.
Pursuant to the surplus debentures, Investors-NA paid to the Company principal
and interest on the surplus debentures of $36,288,469 in 1996, $14,093,711 in
1997 and $13,382,361 in 1998.
In addition to the payments under the terms of the Surplus Debentures, ILCO has
received dividends from its insurance subsidiaries. Washington's insurance code
includes the "greater of" standard for payment of dividends to shareholders, but
has requirements that prior notification of a proposed dividend be given to the
Washington Insurance Commissioner and that cash dividends may be paid only from
earned surplus. Under the "greater of" standard, an insurer may pay a dividend
in an
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amount equal to the greater of (i) 10% of policyholder surplus or (ii) the
insurer's net gain from operations for the previous year. As of December 31,
1998, Investors-NA had earned surplus of $39.3 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 .
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 $18.1 million at December 31, 1998.
Valuation Reserves. Commencing in 1992, the Mandatory Securities Valuation
Reserve ("MSVR") required by the NAIC for life insurance companies was replaced
by a mandatory Asset Valuation Reserve ("AVR") which is expanded to cover
mortgage loans, real estate and other investments. During 1997, a change in the
NAIC's AVR procedures resulted in a one-time reduction in the amount of the
reserves held by ILCO's life insurance subsidiaries, with a corresponding
one-time increase in the amount of surplus. For Investors-NA, the amount of the
increase in surplus was $2,395,000; for Investors-IN, the amount of the increase
in surplus was $590,000. A new mandatory Interest Maintenance Reserve ("IMR"),
designed to defer realized capital gains and losses due to interest rate changes
on fixed income investments and to amortize those gains and losses into future
income, is also effective for 1992. Previously, realized capital gains
attributable to interest rate changes were credited to the MSVR and had the
effect of reducing the required MSVR contributions of ILCO's insurance
subsidiaries. Effective in 1992, such realized capital gains are credited to the
IMR. As a result of these changes, management believes that the Company's
insurance subsidiaries are required to accrue greater aggregate asset valuation
reserves. The combination of the AVR and IMR will affect statutory capital and
surplus and may reduce the ability of the Company's insurance subsidiaries to
pay dividends and make payments on the surplus debentures.
Insurance Holding Company Regulation. Investors-NA and Investors-IN are subject
to regulation under the insurance and insurance holding company statutes of
Washington and Indiana. The insurance holding company laws and regulations vary
from jurisdiction to jurisdiction, but generally require insurance and
reinsurance subsidiaries of insurance holding companies to register with the
applicable state regulatory authorities and to file with those authorities
certain reports describing, among other information, their capital structure,
ownership, financial condition, certain intercompany transactions and general
business operations. The insurance holding company statutes also require prior
regulatory agency approval or, in certain circumstances, prior notice of certain
material intercompany transfers of assets as well as certain transactions
between insurance companies, their parent companies and affiliates.
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Under the Washington and Indiana insurance holding company laws, unless (i)
certain filings are made with the respective department of insurance, (ii)
certain requirements are met, including a public hearing and (iii) approval or
exemption is granted by the respective insurance commissioner, no person may
acquire any voting security or security convertible into a voting security of an
insurance holding company, such as the Company, which controls an insurance
company domiciled in that state, or merge with such a holding company, if as a
result of such transaction such person would "control" the insurance holding
company. "Control" is presumed to exist if a person directly or indirectly owns
or controls 10% or more or the voting securities of another person.
Potential Federal Regulation. Although the federal government generally does not
directly regulate the insurance industry, federal initiatives often have an
impact on the business. Congress and certain federal agencies are investigating
the current condition of the insurance industry (encompassing both life and
health and property and casualty insurance) in the United States in order to
decide whether some form of federal role in the regulation of insurance
companies would be appropriate. Congress is currently conducting a variety of
hearings relating in general to the solvency of insurers. It is not possible to
predict the outcome of any such congressional activity nor the potential effects
thereof on the Company's insurance subsidiaries.
Congressional initiatives directed at repeal of the McCarran-Ferguson Act (which
exempts the "business of insurance" from most federal laws, including the
antitrust laws, to the extent it is subject to state regulation) and judicial
decisions narrowing the definition of "business of insurance" for
McCarran-Ferguson Act purposes may limit the ability of insurance companies in
general to share information with respect to rate-setting, underwriting and
claims management practices. Current and proposed federal measures which may
also significantly affect the insurance industry include minimum solvency
requirements and removal of barriers preventing banks from engaging in the
insurance business.
Federal Income Taxation
The Revenue Reconciliation Act of 1990 amended the Internal Revenue Code of 1986
to require a portion of the expenses incurred in selling insurance products to
be deducted over a period of years, as opposed to an immediate deduction in the
year incurred. Since this change only affects the timing of the deductions, it
does not affect tax expense as shown on the Company's financial statements
prepared in accordance with GAAP. However, the change will increase the tax for
statutory accounting purposes in the first few years, which will reduce
statutory surplus and, accordingly, may decrease the amount of cash dividends
that Investors-NA can pay to the Company. For the years ended December 31, 1996,
1997 and 1998, the decreases in the current income tax provisions of the
Company's insurance subsidiaries due to this change were $90,413, $269,633 and
$253,411, respectively. The change has a negative tax effect for statutory
accounting purposes when the premium income of the Company's insurance
subsidiaries increases, but has a positive tax effect when their premium income
decreases.
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Segment Information
The principal operations of the Company's insurance subsidiaries are the
underwriting of life insurance and annuities. Accordingly, no separate segment
information is required to be provided by the Registrant for the three-year
period ending December 31, 1998.
Item 2. Properties
The Registrant's headquarters are currently located at Austin Centre, 701
Brazos, Suite 1400, Austin, Texas. Investors-NA purchased Austin Centre, an
office-hotel property in downtown Austin in August 1991 for a purchase price of
$31,275,000 from an unrelated seller that had previously acquired the property
through foreclosure. In September 1995, Investors-NA entered into a contract to
sell Austin Centre to an Austin-based real estate investment firm for a purchase
price of $62.675 million, less $1 million to be paid to a capital reserve
account for the purchaser. The sale was consummated on March 29, 1996. A portion
of the sale proceeds equal to the amount that Investors- NA presently had
invested in Austin Centre were retained and reinvested by Investors-NA. The
balance of the net proceeds of the sale were used to reduce ILCO's bank
indebtedness by approximately $15 million. Following the sale of the Austin
Centre, the Company and its affiliates continued to occupy three floors of the
office space under a lease arrangement. The current lease, which was entered
into in May, 1997, is for a five (5) year term ending in October, 2002, with
options to renew for three successive five (5) year terms thereafter.
In January, 1995, ILCO, through Investors-NA, purchased, as an investment
property, an office building project known as Bridgepoint Office Square in
Austin, Texas for a cash purchase price of $9.75 million. The property consists
of 20 acres of land with four office building sites and two parking structure
sites. The first phase of development of the property was completed in 1986 and
consists of a five-story office building with 83,474 square feet of rentable
space and a 550-car parking garage.
In the fourth quarter of 1995, construction began on the second office building,
containing approximately 109,000 rentable square feet, and the other parking
garage containing approximately 871 spaces. That phase of the project was
completed in September 1996. In March 1996, construction commenced on the third
office building, with approximately 79,000 rentable square feet of office space
and was completed in December, 1996. Construction began on the fourth building
in July 1996, and was completed in July, 1997. The fourth building contains
approximately 92,459 rentable square feet.
On May 3, 1996, Family Life Insurance Company, an indirect, 100% owned
subsidiary of FIC, purchased a tract of land adjoining the Bridgepoint Office
Square tract for a cash purchase price of $1.3 million. The property consists of
7.1 acres of land with one office building site and one parking structure site.
Family Life began construction of the fifth building (known as "Bridgepoint
Five")
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on the new site in January 1997. Construction of the parking garage and the
building shell was completed in October, 1997.
On November 24, 1997, Investors-NA and Family Life entered into a contract with
Health and Retirement Properties Trust, a Maryland real estate investment trust
(the "Purchaser") to sell their respective interests in the Bridgepoint Square
Office complex. The aggregate purchase price for the project was $78,000,000.
The transaction closed on December 5, 1997. The purchase price was allocated
approximately 78.5% to Investors-NA and 21.5% to Family Life. The sale of
Bridgepoint Office Square resulted in a net profit to Investors-NA of
approximately $14.0 million ($9.1 million after tax) that was included in ILCO's
fourth quarter earnings for the period ended December 31, 1997. For Family Life,
the sale resulted in a net profit of approximately $4.5 million ($3.2 million
after tax) that was included in FIC's fourth quarter earnings for the period
ended December 31, 1997.
On October 29, 1998, Investors-NA purchased two adjoining tracts of land located
in Austin, Texas totaling 47.995 acres. The aggregate purchase price for these
tracts was $8.1 million. Prior to the closing, Investors-NA obtained approval of
Site Development Permit from the City of Austin for the tracts. The Site
Development Permit allows for the construction of seven office buildings
totaling 600,000 square feet, with associated parking, drives and related
improvements. The initial phase of the project ("Phase One") will consist of two
office buildings, associated parking and the infrastructure for the entire
project, which is known as River Place Pointe. Construction on Phase One
commenced during the first quarter of 1999.
ILCO leases a building located at 40 Parker Road, Elizabeth, New Jersey. This
building, which was formerly the Company's headquarters building, contains
approximately 41,000 square feet of office space. The remaining term of the
lease is 7 years, and the lease calls for a minimum base rental of $450,000 per
annum. The lease provides that all costs including, but not limited to, those
for maintenance, repairs, insurance and taxes be borne by ILCO. The Company has
sub-leased the space in the property to third parties.
Investors-IN owns three buildings which are adjacent to the 40 Parker Road
building. One building, which is leased to third parties, contains approximately
3,500 square feet of space. The second building contains approximately 2,500
square feet of space and is leased to persons who perform maintenance services
for Investors-IN's and ILCO's properties in Elizabeth, New Jersey. The third
building, purchased during 1985, contains approximately 3,500 square feet of
space, and is partially leased to third parties .
Investors-NA owns an office building, located at 206 West Pearl Street, Jackson,
Mississippi. This building is 68 years old and contains approximately 85,000
square feet (65,000 net rentable square feet) of office space. Investors-NA
currently occupies a nominal portion of the space in this property and leases
space to various commercial tenants.
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<PAGE>
The Company believes that its properties and leased space are adequate to meet
its foreseeable requirements.
Item 3. 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 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fourth quarter of the fiscal year ended
December 31, 1998 to a vote of security holders.
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<PAGE>
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
A. Market Information
The following table sets forth the quarterly high and low sales prices for the
Company's Common Stock in The Nasdaq Small-Cap Market for 1998 and 1997. The
quotations set forth below have not been adjusted to give retroactive effective
to the stock dividend (one share for each issued and outstanding share) which
was paid on March 17, 1999.
Prices
High Low
1998:
1st Quarter. . . . . . . $ 23.00 $18.75
2nd Quarter. . . . . . . 27.813 22.00
3rd Quarter. . . . . . . 27.00 19.50
4th Quarter. . . . . . . 21.00 17.25
1997:
1st Quarter. . . . . . . $ 15.00 $13.00
2nd Quarter. . . . . . . 15.00 12.25
3rd Quarter. . . . . . . 20.375 14.75
4th Quarter. . . . . . . 24.25 19.00
The Common Stock of the Company is traded in The Nasdaq Small-Cap Market (NASDAQ
Symbol: ILCO). Quotations are furnished by the National Association of
Securities Dealers Automated Quotation System (NASDAQ).
B. Holders
The approximate number of record holders of the Common Stock of the Registrant
as of March 15, 1999 was 1,456.
C. Dividends
No dividend was declared or paid by the Company during 1996, 1997 or 1998. Under
the terms of its Senior Loan the Company was not permitted to declare or pay any
dividends on its Common
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<PAGE>
Stock during the loan term. As discussed above, under the caption "Senior Loan",
the Senior Loan of the Company was fully repaid on September 30, 1998.
The ability of an insurance holding company, such as ILCO, to pay dividends to
its shareholders may be limited by the company's ability to obtain revenue, in
the form of dividends and other payments, from its operating insurance
subsidiaries. The right of such subsidiaries to pay dividends is generally
restricted by the insurance laws of their domiciliary states. See Item 1.
Business Regulation - Surplus Debentures and Dividends.
Item 6. Selected Financial Data (in thousands, except per share data.)
<TABLE>
Years Ended December 31,
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
Revenues ............. $ 109,462 $ 127,683 $ 138,244 $ 122,390 $ 114,842
Benefits & Expenses .. 91,876 96,081 96,801 105,907 99,142
Income from operations 17,586 31,602 41,443 16,483 15,700
Provisions for federal
income taxes ......... 6,467 11,062 14,505 5,769 5,783
Net Income ........... $ 11,119 $ 20,540 $ 26,938 $ 10,714 $ 9,917
Common Stock and
Common Stock
Equivalents .......... 4,462 4,369 4,441 4,342 4,473
Net income per share
Basic ................ $ 2.54 $ 4.75 $ 6.36 $ 2.57 $ 2.41
Diluted .............. $ 2.49 $ 4.70 $ 6.07 $ 2.47 $ 2.22
Cash Dividend ........ -0- -0- -0- -0- -0-
Long Term Debt ....... -0- $ 10,964 $ 24,944 $ 59,385 $ 66,585
Total Assets ......... $1,350,248 $1,321,653 $1,263,942 $1,315,293 $1,148,994
</TABLE>
Net income per share for the years 1994, 1995 and 1996 has been restated to
reflect the effect of FAS 128.
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<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
For the year ended December 31, 1998, ILCO's net income was $11,119,000 (basic
earnings of $2.54 per common share, or diluted earnings of $2.49 per common
share) as compared to $20,540,000 (basic earnings of $4.75 per common share, or
diluted earnings of $4.70 per common share) in 1997, and $26,938,000 (basic
earnings of $6.36 per common share, or diluted earnings of $6.07 per common
share) in 1996. 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 year 1996, earnings per share have been
restated to reflect the effect of FAS No. 128.
Earnings per share have not been adjusted to give retroactive effect to the
stock dividend (one share of common stock for each outstanding share of common
stock) which was paid on March 17, 1999.
Results of Operations
Net income from continuing operations (excluding the gain resulting from the
sale of Bridgepoint Square Offices in 1997 and the sale of the Austin Centre in
1996, as described below) was $11,119,000 (basic earnings of $2.54 per common
share, or diluted earnings of $2.49 per common share) for the year ended
December 31, 1998, as compared to $11,443,000 (basic earnings of $2.64 per
common share, or diluted earnings of $2.62 per common share) for the year ended
December 31, 1997 and $11,650,000 (basic earnings of $2.75 per common share, or
diluted earnings of $2.62 per common share) for the year ended December 31,
1996.
Net income for 1997 includes $9.1 million resulting from the sale of the
Bridgepoint Square Offices, an office complex located in Austin, Texas. The
selling price was $78 million, which was allocated approximately 78.5% to
Investors-NA ($61.3 million). The sale closed on December 5, 1997. As part of
the decision to sell the Bridgepoint properties, the Company canceled its plans
to move its headquarters to one of the Bridgepoint buildings and entered into a
new lease at the Austin Centre. Under the provisions of the lease, Investors-NA
received a payment from the owner of the Austin Centre in the amount of $1.7
million. That amount is included in net income for the year ended December 31,
1997.
Net income for 1996 includes $15.3 million resulting from the sale of the Austin
Centre, a hotel/office complex, located in Austin, Texas. The selling price was
$62.67 million, less $1 million paid to a capital reserve account for the
purchaser. The sale closed on March 29, 1996.
The results for 1998 include, for the period beginning on June 30, 1998, the
operations of Grinnell Life Insurance Company. Grinnell Life was acquired on
June 30, 1998, through a subsidiary of ILCO, for an adjusted purchase price of
$16.6 million. A portion of the purchase price ($12.37
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<PAGE>
million) was paid by way of a dividend to the seller immediately prior to the
closing of the transaction; the balance of the purchase price was paid by ILCO's
subsidiary. As part of the transaction, Grinnell Life was immediately merged
with and into that subsidiary, with that subsidiary being the surviving entity.
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 $17,079,000 at December
31, 1998, as compared to $20,192,000 at December 31, 1997, and $21,965,000 at
December 31, 1996. These statutory earnings are the source to provide for the
repayment of ILCO's indebtedness.
The operating strategy of the Company's management emphasizes several key
objectives: expense management; marketing of competitively priced insurance
products which are designed to generate an acceptable level of profitability;
maintenance of a high quality portfolio of investment grade securities; and the
provision of quality customer service.
Premium income, net of reinsurance, for the year 1998 was $10.89 million, as
compared to $11.03 million in 1997, and $ 9.98 million in 1996. Reinsurance
premiums ceded were $2.94 million in 1998, as compared to $2.59 million in 1997
and $1.71 million in 1996. For the year 1997, ceded reinsurance includes the
results of the sale of the accident and health and disability income insurance
business of the Company's life insurance subsidiaries. In December, 1997, ILCO's
life insurance subsidiaries entered into a reinsurance treaty under which all of
the contractual obligations and risks under accident and health and disability
income insurance policies were assumed by a third party reinsurer. These risks
and contractual obligations were sold pursuant to, first, a coinsurance
reinsurance agreement. Following applicable regulatory approvals, the reinsurer
will assume the direct obligations of the companies, on an assumption
reinsurance basis. The decision to dispose of this book of business was based on
management's analysis that the business was not generating targeted profit
objectives and that the products were not part of the core business of the
subsidiaries. The sale permits the companies to focus on its primary business -
life insurance and annuity sales. In connection with the transaction, the total
amount of net reserves transferred by the subsidiaries was $6.33 million. In
addition to the transfer of reserves, the life companies paid the reinsurer
$1.04 million in connection with the transaction, which amount was accounted for
as an expense for the year ended December 31, 1997. In 1997, the transferred
business generated approximately $791,000 in annualized premiums.
Earned insurance charges for the year ended December 31, 1998 were $41.1
million, as compared to $40.9 million for 1997 and $42.24 million for 1996. This
source of revenues is related to the universal life insurance and annuity book
of business of Investors-NA.
In 1995, Investors-NA entered into a reinsurance agreement with Family Life
Insurance Company (an insurance company subsidiary of Financial Industries
Corporation and an affiliated company of Investors-NA), pertaining to universal
life insurance written by Family Life. The reinsurance agreement is on a
co-insurance basis and applies to all covered business with effective dates on
and
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<PAGE>
after January 1, 1995. The agreement applies to only that portion of the face
amount of the policy which is less than $200,000; face amounts of $200,000 or
more are reinsured by Family Life with a third party reinsurer. In 1996,
Investors-NA entered into a reinsurance agreement with Family Life, pertaining
to annuity contracts written by Family Life. The agreement applies to contracts
written on or after January 1, 1996. These reinsurance arrangements reflect
management's plan to develop universal life and annuity business at
Investors-NA, with Family Life concentrating on the writing of term life
insurance products.
Interest expense was $0.7 million for the year 1998, as compared to $1.7 million
for the year 1997, and $2.8 million for the year 1996. The decrease is
attributable to a reduction in the average principal balance of the Senior Loan
from $33.7 million for the year ending December 31, 1996 to $18.5 million for
the year ending December 31, 1997 and $5.4 million for the year ending December
31, 1998, as well as a decrease in the average rate of interest paid on the
senior loan (7.63% for the year 1998, as compared to 7.68% for the year 1997 and
7.76% for the year 1996).
The decline in long-term interest rates during 1998, which was related to
general economic conditions, had a positive effect upon the market value of the
fixed maturities available for sale segment of the portfolio. As of December 31,
1998, the market value of the fixed maturities available for sale segment was
$450.15 million as compared to an amortized cost of $435.13 million, or an
unrealized gain of $15.02 million. The net of tax effect of this increase has
been recorded as an increase in shareholders' equity. There is no assurance that
this unrealized gain will be realized in the future.
During 1998, the lapse rate with respect to universal life insurance policies
decreased slightly from the lapse rate experienced in 1997. The rate in 1998 was
7.3 %, as compared to 8.9 % in 1997. The lapse rate with respect to traditional
(non-universal) life insurance policies also decreased from the levels
experienced in 1997. The rate in 1998 was 7.1% as compared to 8.9% in 1997. The
lapse rates experienced during the 1998 period were within the ranges
anticipated by management.
Liquidity and Capital Resources:
ILCO is a holding company whose principal assets consist of the common stock of
Investors Life Insurance Company of North America and its subsidiary - Investors
Life Insurance Company of Indiana (formerly 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
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<PAGE>
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 prepaid on September 30, 1998. As
a result, the senior loan obligation of ILCO was fully discharged effective
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. Upon the merger of Standard Life into Investors-NA, the
obligations of the Surplus Debentures were assumed by Investors-NA. As of
December 31, 1998, the outstanding principal balance of the Surplus Debentures
was $4.5 million and $11.4 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 December 31, 1998, the
statutory surplus of Investors-NA was $68.2 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 its life insurance subsidiaries. Washington's insurance
code includes the "greater of" standard for payment of dividends to
shareholders, but has a requirement that prior notification of a proposed
dividend be given to the Washington Insurance Commissioner and that cash
dividends may be paid only from earned surplus. As of December 31, 1998,
Investors-NA had earned surplus of $39.3 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 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 $18.1 million at December 31, 1998.
ILCO's net cash flow provided by (used in) operating activities was ($17.33)
million for the year ended December 31, 1998, as compared to $3.96 million for
the year ended December 31, 1997 and
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<PAGE>
($23.46) million for the same period in 1996. The change between the 1997 and
1998 periods is primarily due to the payments made in connection with the
reinsurance of the health insurance business and the payment in 1998 of income
taxes relating to the gain on the sale of Bridgepoint Square Offices.
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 December 31, 1998, the book value of the Company's investment assets
totaled $702.1 million, as compared to $693.1 million as of December 31, 1997.
Total assets as of December 31, 1998 ($1.35 billion) increased from the level as
of December 31, 1997 ($1.32 billion).
The level of short-term investments at the end of 1998 was $171.8 million, as
compared to $164.6 million at the end of 1997.
Invested real estate and other invested assets increased from $1.3 million at
December 31, 1997 to $10.03 million as of December 31, 1998. This increase is
related to the purchase by Investors-NA of the 47.995 acres of land in Austin,
Texas for the development of the River Place Pointe project. The land was
purchased in October, 1998 by Investors-NA, for an aggregate purchase price of
$8.1 million. Prior to the closing of the transaction, Investors-NA obtained a
Site Development Permit for the tracts from the City of Austin. The Site
Development Permit allows for the construction of seven office buildings
totaling 600,000 square feet, with associated parking, drives and related
improvements. Development of the initial phase of the project commenced during
the first quarter of 1999; when completed, the first phase will consist of two
office buildings, a parking garage and the infrastructure for the entire
project. Investors-NA plans to commence development of the additional stages of
the project following completion and leasing of Phase One.
The fixed maturities available for sale portion of invested assets at December
31, 1998 was $450.15 million. The amortized cost of the fixed maturities
available for sale segment as of December 31, 1998 was $435.13 million,
representing a net unrealized gain of $15.02 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
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<PAGE>
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 December 31, 1998, included a non-material amount (0.6% of total fixed
maturities and short-term investments) of debt securities which, in the annual
statements of the companies as filed with state insurance departments, were
designated under the National Association of Insurance Commissioners ("NAIC")
rating system as "3" (medium quality) or below. For the year ended December 31,
1997, the comparable percentage was 0.9%.
The consolidated balance sheets of the Company as of December 31, 1998 include
$47.65 million of "Notes receivable from affiliates", represented by (i) a loan
of $22.5 million from Investors-NA to Family Life Corporation and a $2.5 million
loan from Investors-CA to Financial Industries Corporation (which is now owned
by Investors-NA as a result of the merger of Investors-CA into Investors-NA) and
$2.0 million of additions to the $2.5 million note made in accordance with the
terms of such note; these loans were granted in connection with the 1991
acquisition of Family Life Insurance Company by a wholly-owned subsidiary of FIC
(ii) a loan of $30 million by Investors-NA to Family Life Corporation made in
July, 1993, in connection with the prepayment by the FIC subsidiaries of
indebtedness which had been previously issued to Merrill Lynch as part of the
1991 acquisition and (iii) a loan of $4.5 million by Investors-NA to Family Life
Insurance Investment Company made in July, 1993, in connection with the same
transaction described above.
As of June 12, 1996, the provisions of the notes from Investors-NA to FIC, FLC
and FLIIC were modified as follows: (a) the $22.5 million note was amended to
provide for twenty quarterly principal payments, in the amount of $1,125,000
each, to commence on December 12, 1996; the final quarterly principal payment is
due on September 12, 2001; the interest rate on the note remains at 11%, (b) the
$30 million note was amended to provide for forty quarterly principal payments,
in the amount of $163,540 each for the period December 12, 1996 to September 12,
2001; beginning with the principal payment due on December 12, 2001, the amount
of the principal payment increases to $1,336,458; the final quarterly principal
payment is due on September 12, 2006; the interest rate on the note remains at
9%, (c) the $4.5 million note was amended to provide for forty quarterly
principal payments, in the amount of $24,531 each for the period December 12,
1996 to September 12, 2001; beginning with the principal payment due on December
12, 2001, the amount of the principal payment increases to $200,469; the final
quarterly principal payment is due on September 12, 2006; the interest rate on
the note remains at 9%, (d) the $2.5 million note was amended to provide that
the principal balance of the note is to be repaid in twenty quarterly
installments of $125,000 each, commencing December 12, 1996 with the final
payment due on September 12, 2001; the rate of interest remains at 12%, (e) the
Master PIK note, which was issued to provide for the payment in kind of interest
due under the terms of the $2.5 million note prior to June 12, 1996, was amended
to provide that the principal balance of the note ($1,977,119) is to be paid in
twenty quarterly principal payments, in the amount of $98,855.95 each, to
commence December 12, 1996 with the final payment due on September 12, 2001; the
interest rate on the note remains at 12%.
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<PAGE>
In December, 1998, FLIIC was dissolved. In connection with the dissolution, all
of the assets and liabilities of FLIIC became the obligations of FLIIC's sole
shareholder (FIC). Accordingly, the obligations under the provisions of the $4.5
million note described above are now the obligations of FIC.
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". 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.
Under the Plan, the Company will utilize its own personnel and personnel of its
affiliated company, FIC Computer Services, Inc., acquire Y2K compliant operating
software, and engage the assistance of outside consultants to facilitate the
systems conversions and modifications. 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 Company has increased the budget for the implementation
and completion of the Plan from the prior years estimate. As of December 31,
1997, the Company had budgeted approximately $470,000 for implementing the Plan.
Based on its current analysis, the Company
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<PAGE>
expects that the cost of implementing and completing the Plan will result in an
after-tax expense of approximately $587,000 for the three-year (1997 - 1999)
conversion period. For the twelve month period ended December 31, 1998, the
Company has incurred an after tax expense of approximately $158,000 in
connection with the completion of the Plan. Between January 1, 1997 and December
31, 1998, the Company has expended approximately 50.7% of the three-year
expected after-tax cost discussed above. In the event that the Plan does not
achieve full compliance by the target dates, or if unforeseen matters involving
Y2K appear before or after January 1, 2000, the Company will utilize the staff
of FIC Computer Services, Inc. to identify and resolve such issues as and if
they arise.
In order to continuously evaluate the effectiveness of the modifications and
conversions made to the various systems, FIC Computer Services has acquired
testing software to simulate dates on or after January 1, 2000. Additionally,
FIC Computer Services runs the systems through model office cycles and also
conducts visual inspections of screen displays to determine whether the systems
are functioning in a Y2K compliant manner.
As of March 1, 1999, FIC Computer Services, Inc. estimated that it had completed
the necessary conversions and modifications on the administrative systems which
process approximately 66 % of the insurance policies for the Company and its
subsidiaries. This included the conversion of the ALIS System (administering
approximately 42,000 active policies) to CK/4 in February, 1998, the System 38
(administering approximately 9,400 active policies) conversion in January, 1997,
the TI System (administering approximately 5,240 active policies) conversion to
CK/4 in July, 1998 and the conversion of the Lifecomm-B system (which is
responsible for approximately 18,000 policies assumed after the acquisition of
State Auto Life) in February,1999. The conversion of the Life 70 system
(administering approximately 16,120 active policies for Investors-IN) is
scheduled for completion in May, 1999. The conversion of the Lifecomm-A system
(administering approximately 62,410 active policies for Investors-NA) is
scheduled for completion in September of 1999. The modification of one of the
Company's smaller systems which administers approximately 3,680 active credit
life policies was completed on schedule in December 1998. The modification of a
smaller system which administers approximately 15,550 active industrial life
policies is scheduled for completion in June of 1999.
The various software applications described above are licensed to the Company
under agreements which permit the Company's subsidiaries to process business on
its computer systems utilizing such software.
In 1997, FIC Computer Services, Inc. purchased new mainframe hardware and
accompanying operating software, which the vendor has represented to be Y2K
compliant. FIC Computer Services, Inc. has completed the installation and
testing of such new mainframe hardware and software for compliance with the
requirements of the Year 2000 conversion. In addition, FIC Computer Services has
purchased certain third-party software which is run on the mainframe. This
software has been represented by the vendor as being in compliance with Year
2000 requirements. Testing is currently being done on such third-party software,
which testing is expected to be completed by September
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1, 1999. The telephone system, which includes both PBX and voice mail systems,
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
has obtained updated software releases and new hardware designed to be Y2K
compliant according to the representations of the vendors. The Company expects
that the effort needed to correct for Y2K problems on such systems will be less
time intensive than the effort needed to achieve compliance for its centralized
systems. The installation of such new PC hardware and software was commenced in
early 1999 and is expected to be completed by September 1, 1999.
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. Pursuant to the Plan, 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.
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 operational problems arise. 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. The Company is not able to estimate the likelihood that manual
administration will be needed or the amount of any expense which it would incur
in connection with such manual administration.
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<PAGE>
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.
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 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. 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
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it is used internally for evaluating performance. The Company adopted FAS No.
131 effective January 1, 1998 and comparative information for earlier years has
been 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 impact upon the Company's reporting of financial information.
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 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.
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
adoption of FAS 133 does not have a material impact on the Company's results of
operations, liquidity or financial position.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
General:
ILCO's principal assets are financial instruments, which are subject to market
risks. Market risk is the risk of loss arising from adverse changes in market
rates and prices, principally interest rates on fixed rate investments. For a
discussion of the Company's investment portfolio and the management of that
portfolio to reflect the nature of the underlying insurance obligations of the
Company's insurance subsidiaries, please refer to the section entitled
"Investment of Assets" in Item I of this report and the information set forth in
"Management's Discussion and Analysis of Financial Condition and Operations -
Investments".
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<PAGE>
The following is a discussion of the Company's primary market risk sensitive
instruments. It should be noted that this discussion has been developed using
estimates and assumptions. Actual results may differ materially from those
described below. Further, the following discussion does not take into account
actions which could be taken by management in response to the assumed changes in
market rates. In addition, the discussion does not take into account other types
of risks which may be involved in the business operations of the Company, such
as the reinsurance recoveries on reinsurance treaties with third party insurers.
The primary market risk to the Company's investment portfolio is interest rate
risk. The Company does not use derivative financial instruments.
Interest Rate Risk:
Assuming an immediate increase of 100 basis points in interest rates, the net
hypothetical loss in fair market value related to the financial instruments
segment of the Company's balance sheet is estimated to be $17.1 million at
December 31, 1998 and $25.9 million at December 31, 1997. For purposes of the
foregoing estimate, the following categories of the Company's fixed income
investments were taken into account: (i) fixed maturities, including fixed
maturities available for sale, (ii) short-term investments and (iii) notes
receivable from affiliates. The market value of such assets was $672.6 million
at December 31, 1998 and $676.3 million at December 31, 1997.
The fixed income investments of the Company include certain mortgage-backed
securities. The market value of such securities was $250.8 million at December
31, 1998 and $299.7 million at December 31, 1997. Assuming an immediate increase
of 100 basis points in interest rates, the net hypothetical loss in the fair
market value related to such mortgage-backed securities is estimated to be $7.1
million at December 31, 1998 and $14.0 million at December 31, 1997.
Separate account assets have not been included, since gains and losses on those
assets generally accrue to the policyholders. The hypothetical effect of the
interest rate risk on fair values was estimated by applying a commonly used
model. The model projects the impact of interest rate changes on a range of
factors, including duration and potential prepayment.
Item 8. Financial Statements and Supplementary Data
The following Financial Statements of ILCO and its consolidated subsidiaries
have been filed as part of this report:
1. Report of PricewaterhouseCoopers LLP, Independent Accountants, dated March
26, 1999.
2. Consolidated Balance Sheets, as of December 31, 1998 and December 31, 1997.
3. Consolidated Statements of Income for the years ended December 31, 1998,
1997 and 1996.
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4. Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 1998, 1997 and 1996.
5. Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996.
6. Notes to Consolidated Financial Statements.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
No independent accountant who audited the Registrant's financial statements has
resigned or been dismissed during the two most recent fiscal years.
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PART III
Item 10. Directors and Executive Officers of Registrant
(a) Directors of the Registrant
The names and ages of the current directors of the Registrant, their principal
occupations or employment during the past five years and other data regarding
them are set forth below. All of the directors were elected at the 1998 annual
shareholders meeting. The data supplied below is based on information provided
by the directors, except to the extent that such data is known to the
Registrant.
Director
Name Age Director Principal Occupation
Since and Other Information
Robert A.Bender 45 1997 Director of ILCO since October,
1997. Vice President of Family
Life Insurance Company since
January 1997. Vice President of
Investors Life Insurance Company
of North America since January
1997. Vice President of
Investors-IN, formerly known as
InterContinental Life Insurance
Company since January 1997.
Assistant Vice President of
Investors Life Insurance Company
of North America form February
1994 to January 1997. Assistant
Vice President of Investors-
Indiana from February 1994 to
January 1997. Assistant Vice
President of Investors- IN,
formerly known as
InterContinental Life Insurance
Company from February 1994 to
January 1997. Assistant Vice
President of Family Life
Insurance Company from February
1994 to January 1997. Retired
from 22 years of service in the
U.S. Army in February 1994.
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<PAGE>
Jeffrey H. Demgen 46 1995 Director of FIC since May 1995.
Vice President of FIC since
August 1996. Vice President and
Director of ILCO since August
1996. Director of FIC since May
1995. Executive Vice President
and Director of Family Life
Insurance Company since August
1996. Senior Vice President and
Director of Family Life
Insurance Company from October
1992 to August 1996. Executive
Vice President and Director of
Investors Life Insurance Company
of North America since August
1996. Senior Vice President and
Director of Investors Life
Insurance Company of North
America from October 1992 to
June 1995. Executive Vice
President of Investors-IN,
formerly known as
InterContinental Life Insurance
Company since August 1996.
Senior Vice President of
Investors-IN, formerly known as
InterContinental Life Insurance
Company from October 1992 to
June 1995. Executive Vice
President and Director of
Investors-Indiana from August
1996 to December 1997. Senior
Vice President of United
Insurance Company of America
from September 1984 to July 1992
Theodore A. Fleron 59 1991 Vice President and Director of
ILCO since May 1991. Assistant
Secretary since June 1990. Vice
President and Director of FIC
since August 1996. Senior Vice
President, General Counsel,
Assistant Secretary and Director
of Investors Life Insurance
Company of North America and
Investors-IN, formerly known as
InterContinental Life Insurance
Company since July 1992. General
Counsel, Assistant Secretary and
Director of Investors Life
Insurance Company of North
America and Investors- IN,
formerly known as
InterContinental Life Insurance
Company from January 1989 to
July 1992.Senior Vice President,
General Counsel, Director
and Assistant Secretary of
Investors-Indiana from June
1995 to December 1997. Senior
Vice President, General Counsel
Director and Assistant Secretary
of Family Life Insurance
Company since August 1996.
W. Lewis 67 1988 Dentist practicing in San
Gilcrease Marcos, Texas. Director of
ILCO since 1988. Director of
FIC from 1979 to July 6, 1991.
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<PAGE>
James M. Grace 55 1984 Vice President and Treasurer of
the Company since January, 1985.
Executive Vice President,
Treasurer and Director of
Investors-IN, formerly known as
InterContinental Life Insurance
Company since 1989. Vice
President,Treasurer and Director
of Financial Industries
Corporation since July, 1976.
Executive Vice President and
Treasurer of Investors Life
Insurance Company of North
America since 1989; Executive
Vice President, Treasurer and
Director of Family Life
Insurance Company (a subsidiary
of Financial Industries
Corporation) since June 1991.
Director, Executive Vice
President and Treasurer of
Investors-Indiana from February
1995 to December 1997.
Richard A. 66 1981 Certified Public Accountant and
Kosson a partner in the firm of
Manheim, Kosson & Novick in
Millburn, New Jersey. Director
of ILCO since 1981.
Roy F. Mitte 67 1984 Chairman of the Board and Chief
Executive Officer of the Company
and Investors-IN formerly known
as InterContinental Life
Insurance Company sinceJanuary,
1985. President of the Company
since April, 1985. Chairman of
the Board, President and Chief
Executive Officer of Financial
Industries Corporation since
1976. Chairman of the Board,
President and Chief Executive
Officer of Investors Life
Insurance Company of North
America since December, 1988.
Chairman of the Board, President
and Chief Executive Officer of
Family Life Insurance Company
since June 1991. Chairman of
the Board, President and Chief
Executive Officer of Investors-
Indiana from February 1995 to
December 1997. Chairman, ILG
Securities Corporation since
December 1988.
Elizabeth T. Nash 49 1998 Member of the Board of Regents,
Texas State University System
since 1993, Chairman from 1997
to 1998, Vice-Chairman from 1996
to 1997. Trustee of the
Development Foundation of
Southwest Texas State University
since 1987, Chairman from 1992
to 1997, Vice-Chairman from 1989
to 1992. Director of ILCO since
1998.
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<PAGE>
Eugene E. Payne 56 1989 Vice President of ILCO since
December 1988 and Director and
Secretary since May 1989. Vice
President and Director of
Financial Industries Corporation
since February 1992. Executive
Vice President, Secretary and
Director of Investors Life
Insurance Company of North
America since December 1988.
Executive Vice President since
December 1988 and Director since
May 1989 of Investors- IN,
formerly known as
InterContinental Life Insurance
Company. Executive Vice
President, Secretary and
Director of Family Life
Insurance Company since June
1991. Director, Executive Vice
President and Secretary of
Investors-Indiana from February
1995 to December 1997.
H. Gene Pruner 70 1995 Director of ILCO since August
1996. Director of Investors-IN
since February, 1995. President
of Market Share, Inc. since
April 1985.
Steven P. Schmitt 52 1994 Senior Vice President since
April 1992 and Director, Vice
President and Assistant
Secretary since August 1989 of
Investors Life Insurance Company
of North America and Investors-
IN, formerly known as
InterContinental Life Insurance
Company. Senior Vice President
since April 1992 and Director
and Vice President since June
1991 of Family Life Insurance
Company. Director, Senior Vice
President and Assistant
Secretary of Investors-Indiana
from June 995 to December 1997.
The incumbent directors have been nominated for submission to vote of the
shareholders for reelection at the 1999 annual shareholders' meeting.
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<PAGE>
(b) Executive Officers of the Registrant
The following table sets forth the names and ages of the persons who have served
as Registrant's Executive Officers during 1998 together with all positions and
offices held by them with the Registrant. Officers are elected to serve at the
will of the Board of Directors or until their successors have been elected and
qualified.
Name Age Positions and Offices
Roy F. Mitte 67 Chairman of the Board, President
and Chief Executive Officer
James M. Grace 55 Vice President and Treasurer
Eugene E. Payne 56 Vice President and Secretary
Jeffrey H. Demgen 46 Vice President
In May 1991, Roy F. Mitte suffered a stroke, resulting in partial paralysis
affecting his speech and mobility. Mr. Mitte continues to make the requisite
decisions in his capacity as Chief Executive Officer, although his ability to
communicate and his mobility are impaired.
(c) Identification of certain significant employees
Not Applicable.
(d) Family relationships
Not Applicable.
(e) Business experience
All of the executive officers of the Company are members of the Board of
Directors and their business experience has been outlined in Item 10(a).
(f) Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
beneficial ownership on Form 3 and changes in beneficial ownership on Forms 4
and 5 with the Securities and Exchange Commission. Officers, directors and
greater than ten-percent shareholders are required by SEC regulation to furnish
the Company with copies of all Section 16(a)
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forms they file. Based solely on review of the copies of such forms furnished to
the Company, or written representations that no Forms 5 were required, the
Company believes that for the period from January 1, 1998 through December 31,
1998 all Section 16(a) filing requirements applicable to its officers, directors
and greater than ten-percent beneficial owners were complied with.
Item 11. Executive Compensation
Summary Compensation Table
The following table sets forth information concerning the compensation of the
Company's Chief Executive Officer and each of the three other persons who were
serving as executive officers of the Company at the end of 1998 and received
cash compensation exceeding $100,000 during 1998.
<TABLE>
Annual Compensation
<S> <C> <C> <C> <C> <C> <C>
Long Term
Compens-
Name and ation Awards All Other
Principal Stock Options Compensa-
Position Year Salary(1) Bonus(7) Other(2) (Shares) tion8
Roy F. Mitte,
Chairman,
President and 1998 $ 356,679 $1,535,000 -0- -0- -0-
Chief Executive 1997 $ 252,253 751,500 -0- -0- -0-
Officer 1996 $ 286,643 -0- -0- -0- $2,446,397(3)
James M.
Grace, Vice 1998 195,000 25,000 2,365
President and 1997 195,000 40,000 -0-(4) -0- 19,024
Treasurer 1996 195,000 15,000 -0- -0- -0-
Eugene E.
Payne, Vice 1998 195,000 20,000 2,365
President and 1997 195,000 40,000 -0-(5) -0- 17,925
Secretary 1996 195,000 15,000 -0- -0- -0-
Jeffrey H. 1998 $ 145,384 $ 15,000 -0- -0- -0-
Demgen, Vice 1997 $ 117,884 $ 30,000 -0- -0- -0-
President6 1996 $ 102,500 $ 7,500 -0- -0- -0-
</TABLE>
(1) The executive officers of the Company have also been executive officers of
the Company's insurance subsidiaries and FIC and FIC's insurance subsidiary,
Family Life. FIC and/or Family Life reimbursed the Company (or, in the case of
Mr. Mitte, authorized payment of) the following amounts as FIC's or Family
Life's share of these executive officers' cash compensation and bonus for 1996,
1997 and 1998: (i) Mr. Mitte: $216,857, $999,746, and $1,111,821 respectively,
which amounts are
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not included in the above table; (ii) Mr. Grace: $83,987, $68,150 and $64,152
respectively, which amounts are included in the above table; (iii) Dr. Payne:
$83,987, $68,150 and $61,447 respectively, which amounts are included in the
above table; and (iv) Mr. Demgen $46,125, $66,548 and $72,173, respectively,
which amounts are included in the above table. Dr. Payne elected to defer a
portion ($13,000) of his 1998 compensation under the provisions of the Company's
Non-Qualified Deferred Compensation Plan. See also, Note 7.
(2) Does not include the value of perquisites and other personal benefits
because the aggregate amount of any such compensation does not exceed the lesser
of $50,000 or 10 percent of the total amount of annual salary and bonus for any
named individual.
(3) During 1996, the Company paid Mr. Mitte: (i) $1,862,000 for the cancellation
in 1996 of options to purchase 121,500 shares of the Company's common stock,
plus interest at the rate of 8% per year on such amount for a one year period
(for a total of $2,011,737); (ii) $120,700 for the federal income tax
reimbursement relating to the cancellation in 1995 of options to purchase 50,000
shares of the Company's common stock; and (iii) $313,960 for the federal income
tax reimbursement relating to the 1996 options cancellation described above in
this footnote. Each of these payments was made pursuant to a contract entered
into between the Company and Mr. Mitte in 1993, pertaining to cancellation of
options which had been granted to him in 1989.
(4) Mr. Grace exercised stock options in 1998 to purchase 12,000 shares of the
Company's Common Stock under the Non-Qualified Option Plan. See "Aggregated
Option Exercises in 1998" below.
(5) Dr. Payne exercised stock options in 1997 to purchase 6,000 shares of the
Company's Common Stock under the Non-Qualified Stock Option Plan . See
"Aggregated Option Exercises in 1998" below.
(6) Mr. Demgen became an executive officer of the Company in August, 1996.
(7) The data in this column represents the amount of annual bonus awarded. The
bonuses for Mr. Grace, Dr. Payne and Mr. Demgen for the year 1997 represent
amounts paid in 1997, but include the bonuses awarded with respect to the years
1996 and 1997. Dr. Payne elected to defer the amounts shown for 1997 and 1998
into the Company's Non-Qualified Deferred Compensation Plan. The Plan was
established in 1997 to permit Mr. Grace and Dr. Payne to defer a portion of
their compensation. Under the provisions of the Plan, contributions are invested
on a money purchase basis and plan benefits are based on the value of the
account at retirement or other distribution. In accordance with applicable tax
law requirements, amounts allocated to the Plan are subject to the claims of
general creditors of the Company. See also, Note 8.
(8) The data in this column represents the amount paid by the Company in 1997
and 1998 to Mr. Grace and Dr. Payne to supplement the benefits under the
Company's Pension Plan. The supplement relates to each of the past service years
for Mr. Grace and Dr. Payne which were affected by the limitation on
compensation which the Pension Plan may take into account for benefit accrual
purposes. Under federal pension rules, an employee's benefits under a qualified
pension plan, such
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as the ILCO Pension Plan, are limited to certain maximum amounts. The amount of
the payments made in 1997 was determined by comparing the accrued benefit for
the listed individuals under the ILCO Pension Plan through December 31, 1996 to
the accrued benefit which the individual would have had under the Plan's benefit
formula without application of the limitations applicable to tax qualified
retirement plans. The value of the difference, representing an amount payable
for life commencing at normal retirement age, was then commuted to its present
value, which amount is included in this column. In 1998, the Company made a
similar payment, with respect to benefit accruals for the year 1997 only. Mr.
Grace and Dr. Payne elected to defer their respective amounts into the Company's
Non-Qualified Deferred Compensation Plan. The Company intends to make a similar
payment with respect to benefit accruals for subsequent years; however, there is
no obligation for it to do so. See also, Note 7.
Option Grants in 1998
No options were granted to any executive officers of the Company during the year
1998.
Aggregated Option Exercises in 1998
The following table sets forth information concerning each exercise of stock
options during 1998 by each of the individuals who were executive officers of
the Company as of December 31, 1998.
Shares
Acquired Value
Name On Exercise (#) Realized ($)
James M. Grace 12,000 $227,040
Eugene E. Payne 6,000 $100,020
Aggregated Stock Option Values
The following table sets forth information with respect to the unexercised
options held by the executive officers of the Company.
<TABLE>
Number of Unexercised Value of Unexercised
Options Held at In-the-Money Options at
December 31, 1998 December 31, 19981
Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
James M. Grace 12,000 -0- $200,040 $ -0-
Eugene E. Payne 6,000 -0- $100,020 $ -0-
</TABLE>
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<PAGE>
(1) Based on the closing price of the Company's Common Stock on NASDAQ on
December 31, 1998 ($20.00).
Members of Compensation Committee
W. Lewis Gilcrease, Richard A. Kosson and Elizabeth T. Nash are the members of
the Company's Compensation Committee, which makes recommendations to the Board
of Directors with respect to the Chief Executive Officer's compensation.
Compensation Committee Interlocks and Insider Participation
Roy F. Mitte determines the compensation of all executive officers of the
Company, other than the Chief Executive Officer. Mr. Mitte is the Chairman of
the Board, President and Chief Executive Officer of the Company and FIC. He also
determines the compensation of all executive officers of FIC, other than the
Chief Executive Officer.
Pension Plan Table
The following table sets forth estimated annual pension benefits payable upon
retirement at age of 65 under the Company's noncontributory defined benefit plan
("Pension Plan") to an employee in the final pay and years of service
classifications indicated, assuming a straight life annuity form of benefit. The
amounts shown in the table do not reflect the reduction related to Social
Security benefits referred to below.
Years of Service
30 or
Remuneration 15 20 25 more
$125,000 $29,437 $ 39,250 $ 49,062 $ 58,875
150,000 35,325 47,100 58,875 70,650
160,000 37,680 50,240 62,800 75,360
175,000 41,212 54,950 68,687 82,425
200,000 47,100 62,800 78,500 94,200
The normal retirement benefit provided under the Pension Plan is equal to 1.57%
of final average eligible earnings less 0.65% of the participant's Social
Security covered compensation multiplied by the number of years of credited
service (up to 30 years). The compensation used in determining benefits under
the Pension Plan is the highest average earnings received in any five
consecutive full- calendar years during the last ten full-calendar years before
the participant's retirement date. The maximum amount of annual salary and bonus
that can be used in determining benefits under the Pension Plan is $200,000 for
any year prior to 1994 and is $150,000 for 1994, 1995, and 1996 and is $160,000
for 1997 and each subsequent year.
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The annual eligible earnings, for 1998 only, covered by the Pension Plan (salary
up to $160,000) with respect to the individuals reported in the Summary
Compensation Table were as follows, with their respective years of credited
service under the Pension Plan at December 31, 1998 being shown in parentheses:
Mr. Mitte, $160,000 (11 years), Mr. Grace, $160,000 (11 years), Dr. Payne,
$160,000 (10 years), and Mr. Demgen, $145,384 (6 years).
Compensation of Directors
Directors who are not officers or employees of the Company are paid a $5,000
annual fee, and are compensated $1,000 for each regular or special meeting of
the Board of Directors which they attend in person. In the case of telephonic
meetings of the Board, non-employee directors who participate in such telephonic
meetings are compensated $500 for such meeting. Directors who participate via
telephone in a regular or special meeting which is held by other than conference
telephone are not entitled to a fee for such a meeting.
Non-employee directors serving on committees of the Board are compensated in the
amount of $500 for each committee meeting they attend whether such participation
is in person or by telephone, provided that the committee meeting is held on a
day other than that on which the Board meets.
Employment Agreements and Change In Control Arrangements
The terms and conditions of employment agreements that the Company would enter
into upon the occurrence of certain events that result in the agreements taking
effect were approved by the Board of Directors with respect to Messrs. Grace and
Payne in 1991. Each agreement would include two independent provisions with
respect to the effective date and the term of each agreement. First, the term of
the agreement would begin on the earlier of (i) the date of retirement (early,
normal or deferred) of Roy F. Mitte from his position as Chairman, President and
Chief Executive Officer of the Company or (ii) the date of death or disability
of Mr. Mitte, and would terminate on the last day of the twelfth month next
following the commencement date of the term of the agreement, unless extended
upon mutually acceptable terms.
Independently, the term of the agreement would commence upon the date that any
person who is not currently a control person with respect to the Company
acquires, or enters into an agreement to acquire, control of the Company,
directly or indirectly, and would end on the last day of the twelfth month next
following the date on which the employee receives notice of the termination of
his employment with the Company or the life insurance subsidiaries of the
Company.
During the term of the agreement, the employee would be entitled to perform all
of the duties of the position or positions held by the employee with the Company
and all subsidiaries of the Company on the date immediately preceding the
commencement date of the agreement.
During the term of the agreement, the employee would be entitled to an annual
rate of compensation which is not less than the annual rate of compensation in
effect as of the date immediately preceding the commencement date of the
agreement. During the term of the agreement, the employee would be entitled to
participate in and benefit from all employee benefit plans and other fringe
benefits on
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<PAGE>
the same basis as such plans and benefits are made available to other executive
personnel of the Company.
The agreement may be terminated by the Company only in the event that the
employee is guilty of theft of property of the Company or commits a wrongful act
which has a material adverse effect upon the business of the Company and with
respect to which the employee would not be entitled to indemnification under the
provisions of the Bylaws of the Company in effect as of the commencement date of
the agreement. The employee may terminate the agreement upon thirty days advance
written notice to the Company.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table presents information as of March 15, 1999 as to all persons
who, to the knowledge of the Company, were beneficial owners of five (5%)
percent or more of the Common Stock of the Company.
Amount and Nature
Name and Address of Beneficial Ownership Percent of Class
Financial Industries Corp.
701 Brazos, Suite 1400
Austin, TX 78701 1,966,346 44.74 % (5)
Roy F. Mitte
701 Brazos, Suite 1400
Austin, TX 78701 1,993,245 (1, 2) 45.36 % (5)
Investors Life Insurance
Company of North America
701 Brazos, Suite 1400
Austin, TX 78701 334,960 (3) 7.62% (5)
Investors Life Insurance
Company of Indiana
701 Brazos, Suite 1400
Austin, TX 78701 281,560 (4) 6.41 % (5)
Fidelity Management &
Research Company
82 Devonshire Street
Boston, MA 02109 433,900 (6) 9.87% (5)
-51-
<PAGE>
Heartland Advisors, Inc.
790 North Milwaukee Street
Milwaukee, WI 53202 264,800 (7) 6.03 % (5)
1. As of March 15, 1999, Mr. Mitte, jointly with his wife Joann, owns
1,493,216 common shares of Financial Industries Corporation ("FIC"). The
holdings of Mr. Mitte of FIC's common stock constitutes 29.54% of the
outstanding common stock of that company. In addition, Mr. Mitte holds the
position of Chairman, President and Chief Executive Officer of FIC. Since
FIC holds a controlling interest in ILCO, Mr. Mitte's personal holdings in
the Company have been combined with the holdings of FIC in determining the
amount and percentage of Mr. Mitte's beneficial ownership of the Company.
2. Includes 15,999 shares allocated to Mr. Mitte's account under the Employees
Savings and Investment Plan and 10,900 shares owned directly by Mr. Mitte.
3. Represents 281,560 shares owned by Investors-IN (formerly InterContinental
Life Insurance Company and 53,400 shares owned directly by Investors-NA.
Investors-IN is a life insurance company subsidiary of Investors-NA. All of
these shares are treated as treasury shares.
4. All are directly owned by Investors-IN and are treated as treasury shares.
5. Assumes that outstanding stock options available to other persons have not
been exercised.
6. As reported to the Company on a Schedule 13(G) and a Schedule 13(G)/A filed
by FMR Corporation, the parent company of Fidelity Management & Research
Company ("Fidelity"). According to the Schedule 13(G) and the Schedule
13(G)/A, Fidelity acts as investment advisor to the Fidelity Low-Priced
Stock Fund, a registered investment company, and the Fund is the owner of
432,700 shares of ILCO common stock, of which 418,300 shares were reported
on a Schedule 13(G) filed on February 14, 1997, 14,400 additional shares
which were reported on a Schedule 13(G)/A filed on February 14, 1998 and
1,200 additional shares which were reported on a Schedule 13(G)/A filed on
February 1, 1999.
7. As reported to the Company on a schedule 13(G) filed by Heartland Advisors,
Inc. ("Heartland") on January 21, 1999. According to the Schedule 13(G),
Heartland acts as investment advisor with respect to certain investment
advisory accounts, with respect to which various persons have the right to
receive or the power to direct the receipt of dividends from, or the
proceeds from the sale of securities. The Schedule 13(G) identifies that
the interests of one such account, the Heartland Value Fund, a series of
Heartland Group, Inc., a registered investment company, relates to more
than 5% of the common stock of ILCO.
The following table contains information as of March 15, 1999 as to the Common
Stock of the Company beneficially owned by each director, nominee and executive
officer and by all executive
-52-
<PAGE>
officers and directors of the Company as a group. The information contained in
the table has been obtained by the Company from each director and executive
officer except for information known to the Company. Except as indicated in the
notes to the table, each beneficial owner has sole voting power and sole
investment power as to the shares listed opposite his name.
Amount and Nature of Percent of
Name Beneficial Ownership Class
Robert A. Bender 1,005 (3) *
Jeffrey H. Demgen 4,019 (3) *
Theodore A. Fleron 15,730 (3,4) *
W. Lewis Gilcrease -0-
James M. Grace 1 62,456 (2,3) 1.42 %
Richard A. Kosson 200 *
Roy F. Mitte 1,993,245 (3) 45.36 %
Elizabeth T. Nash 100 *
Eugene E. Payne 1 11,146 (3) *
H. Gene Pruner -0-
Steven P. Schmitt 13,573 (3,4) *
All Executive
Officers and
Directors as a
group, all of
whom are listed
above 2,101,474 (1,2,3,4) 47.82%
* Less than 1%
(1) As an executive officer and/or director of FIC which as of March 15, 1999
beneficially owned 1,966,346 shares of the Company's Common Stock . In
addition to the shareholdings of Mr. Mitte in FIC (see Note 1, above), Mr.
Grace owns 5,600 shares of FIC Common Stock.
-53-
<PAGE>
(2) Includes 12,000 shares issuable upon exercise of options granted under the
Non-Qualified Stock Option Plan during 1988 to Mr. Grace at a price of
$3.33 (as adjusted) per share, which are currently available for exercise.
(3) Includes shares beneficially acquired through participation in the
Company's ESOP, 401K and/or the Employee Stock Purchase Plan, which are
group plans for eligible employees.
(4) Includes 6,000 shares issuable upon exercise of options granted under the
Non-Qualified Stock Option Plan during 1988 to each of Messrs. Fleron and
Schmitt at a price of $3.33 (as adjusted) per share, which are currently
exercisable.
Item 13. Certain Relationships and Related Transactions with Management
a. Prior to the repayment of the ILCO Senior Loan on September 30, 1998, the
obligations of ILCO under the Senior Loan were guaranteed by FIC. FIC
presently owns 1,966,346 shares of the company's Common Stock, constituting
44.74% of such shares outstanding.
b. As part of the financing arrangement for the acquisition of Family Life
Insurance Company, Family Life Corporation ("FLC"), a subsidiary of FIC,
entered into a Senior Loan agreement under which $50 million was provided
by a group of banks. The balance of the financing consisted of a $30
million subordinated note issued by FLC to Merrill Lynch Insurance Group,
Ins. ("Merrill Lynch") and $14 million borrowed by another subsidiary of
FIC from an affiliate of Merrill Lynch and evidenced by a senior
subordinated note in the principal amount of $12 million and a junior
subordinated note in the principal amount of $2 million and $25 million
lent by two insurance company subsidiaries of ILCO. The latter amount was
represented by a $22.5 million loan from Investors-NA to FLC and a $2.5
million loan provided directly to FIC by Investors-CA. In addition to the
interest provided under those loans, Investors-NA and Investors-CA were
granted by FIC non-transferable options to purchase, in the amounts
proportionate to their respective loans, up to a total of 9.9 percent of
shares of FIC's common stock at a price of $10.50 per share ($2.10 per
share as adjusted for the five-for-one stock split in November, 1996),
equivalent to the then current market price, subject to adjustment to
prevent dilution. The original provisions of the options provided for their
expiration on June 12, 1998 if not previously exercised. In connection with
the 1996 amendments to the subordinated notes, as described below, the
expiration date of the options were extended to September 12, 2006.
On July 30, 1993, the subordinated indebtedness owed to Merrill Lynch and
its affiliate was prepaid. The Company paid $38 million plus accrued
interest to retire the indebtedness, which had a principal balance of
approximately $50 million on July 30, 1993. The primary source of the funds
used to prepay the subordinated debt was new subordinated loans totaling
$34.5 million that FLC and another subsidiary of FIC obtained from
Investors-NA. The principal amount of the new subordinated debt is payable
in four equal annual installments in 2000, 2001, 2002 and 2003 and bears
interest at an annual rate of 9%. The other terms of
-54-
<PAGE>
the new debt are substantially the same as those of the $22.5 million
subordinated loans that Investors-NA had previously made to FLC and that
continue to be outstanding.
In June, 1996, the provisions of the notes from Investors-NA to FIC, Family
Life Corporation ("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%.
In December, 1998, FLIIC was dissolved. In connection with the dissolution,
all of the assets and liabilities of FLIIC became the obligations of
FLIIC's sole shareholder (FIC). Accordingly, the obligations under the
provisions of the $4.5 million note described above are now the obligations
of FIC.
c. The data processing needs of ILCO's and FIC's insurance subsidiaries are
provided by FIC Computer Services, Inc. ("FIC Computer"), a subsidiary of
FIC. Under the provisions of the data processing agreement, FIC Computer
provides data processing services to each subsidiary for fees equal to such
subsidiary's proportionate share of FIC Computer's actual costs of
providing those services to all of the subsidiaries. The Company's
insurance subsidiaries paid $2.82 million and Family Life paid $1.61
million to FIC Computer for data processing services provided during the
year ended December 31, 1998.
d. In 1995, Investors-NA entered into a reinsurance agreement with Family Life
pertaining to universal life insurance written by Family Life. The
reinsurance agreement is on a co-insurance basis and applies to all covered
business with effective dates on and after January 1, 1995. The agreement
applies to only that portion of the face amount of the policy which
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<PAGE>
is less than $200,000; face amounts of $200,000 or more are reinsured by
Family Life with a third party reinsurer.
e. In 1996, Investors-NA entered into a reinsurance agreement with Family
Life, pertaining to annuity contracts written by Family Life. The agreement
applies to contracts written on or after January 1, 1996.
f. Roy F. Mitte serves as Chairman, President and Chief Executive Officer of
both FIC and ILCO. James M. Grace serves as Vice President, Treasurer and
Director of both companies and Secretary of FIC. Dr. Payne serves as Vice
President, Secretary and Director of both companies. Messrs. Demgen and
Fleron serve as Vice Presidents and Directors of both companies. Mr. Roy
Mitte holds beneficial ownership of 29.54% of the outstanding shares of FIC
(see "Security Ownership of Certain Beneficial Owners and Management").
g. Mr. Joseph F. Crowe retired from active service with the Company in
January, 1997 and served on the ILCO Board until October, 1997; he
continues to serve on the Board of Directors of FIC. Following Mr. Crowe's
retirement, the Company entered into a consulting agreement with him. Under
the terms of the agreement, Mr. Crowe is to be available for periodic
consultation on actuarial matters related to the operations of the life
insurance companies. The agreement provides for a payment of $25,000 per
year for a period of five- years.
h. In November, 1998, FIC and Family Life Insurance Company purchased 373,304
shares of FIC's common stock from the Roy F. and Joann C. Mitte Foundation,
a Texas non-profit corporation (the "Foundation"). These shares had been
previously donated to the Foundation by Mr. and Mrs. Mitte. The
transaction, which was privately negotiated between FIC, Family Life
Insurance Company and the Foundation, involved approximately 6.8% of the
outstanding shares of FIC. The purchase price was at the then current
market price of FIC's common stock ($18.625 per share). Family Life
Insurance Company acquired 272,000 shares for its investment portfolio and
FIC acquired 101,304 shares.
-56-
<PAGE>
Part IV
Item 14. Exhibits, Financial Statements, Schedules, and
Reports on Form 8-K
(a) The following documents have been filed as part of this Report.
1. Financial Statements as identified in Item 8 above.
2. Financial Statement Schedules Required to be filed by Item 8.
a. Schedule I-Summary of Investments other than Investments in
Related Parties.
b. Schedule II -Condensed Financial Statements of Registrant.
c. Schedule IV-Reinsurance.
3. Exhibits filed with this report or incorporated herein by reference are
as listed in the Index to Exhibits on page EX-1.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the last quarter of
the fiscal year ended December 31, 1998.
-57-
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
FORM 10-K--ITEM 14 (a)(1) and (2)
LIST OF FINANCIAL STATEMENTS
TABLE OF CONTENTS
(1) The following consolidated financial statements of InterContinental
Life Corporation and Subsidiaries are included in Item 8:
Report of Independent Accountants .................................F-2
Consolidated Balance Sheets,
December 31, 1998 and 1997........ ................................F-3
Consolidated Statements of Income, for the
years ended December 31, 1998, 1997 and 1996.......................F-5
Consolidated Statements of Changes in Shareholders' Equity,
for the years ended December 31, 1998, 1997 and 1996...............F-6
Consolidated Statements of Cash Flows, for the years
ended December 31, 1998, 1997 and 1996.............................F-9
Notes to Consolidated Financial Statements...................,.....F-12
(2) The following consolidated financial statement schedules of
InterContinental Life Corporation and Subsidiaries are included:
Schedule I - Summary of Investments Other
Than Investments in Related Parties................................F-44
Schedule II - Condensed Financial Statements of
Registrant.........................................................F-45
Schedule IV - Reinsurance..........................................F-49
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions, or are not applicable, and therefore have been omitted.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
InterContinental Life Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page F-1 present fairly, in all
material respects, the financial position of InterContinental Life Corporation
and its subsidiaries (the "Company") at December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Dallas, Texas
March 26, 1999
F-2
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
<TABLE>
December 31,
<S> <C> <C>
1998 1997
ASSETS
Investments:
Fixed maturities, at
amortized cost (market value
approximates $3,059 and $3,332) $ 3,005 $ 3,412
Fixed maturities available for sale,
at market value (amortized cost
$435,130 and $436,836) 450,149 454,462
Equity securities, at market value
(cost approximates $338 and $369) 3,121 4,902
Policy loans 53,614 53,499
Mortgage loans 10,332 10,862
Invested real estate and other invested
assets 10,025 1,300
Short-term investments 171,840 164,622
Total investments 702,086 693,059
Cash and cash equivalents 12,206 9,041
Notes receivable from affiliates 47,645 53,792
Accrued investment income 7,768 7,781
Agent advances and other receivables 20,753 11,362
Reinsurance receivables 18,847 20,433
Property and equipment, net 3,470 1,902
Deferred policy acquisition costs 31,953 28,621
Present value of future profits of
acquired businesses 43,666 47,286
Deferred financing costs 0 111
Other assets 10,643 7,929
Separate account assets 451,211 440,336
Total Assets $ 1,350,248 $ 1,321,653
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-3
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
(in thousands of dollars)
<TABLE>
<S> <C> <C>
December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
Policy liabilities and contractholder
deposit funds:
Future policy benefits $ 135,463 $ 131,720
Contractholder deposit funds 545,908 525,135
Unearned premiums 2,124 2,507
Other policy claims and benefits payable 10,856 12,272
694,351 671,634
Other policyholders' funds 3,056 3,093
Senior loan - 0 - 10,964
Deferred federal income taxes 30,185 31,811
Other liabilities 20,127 20,299
Separate account liabilities 448,294 438,090
Total Liabilities 1,196,013 1,175,891
Commitments and Contingencies(Note 13)
Redeemable preferred stock:
Class A Preferred, $1 par value,
5,000,000 shares authorized, issued 5,000 5,000
Class B Preferred, $1 par value,
15,000,000 shares authorized, issued 15,000 15,000
20,000 20,000
Redeemable preferred stock held
in treasury (20,000) (20,000)
-0- -0-
Shareholders' Equity:
Common Stock, $.22 par value,
15,000,000 shares authorized;
5,385,739 and 5,343,739 shares issued,
and 4,376,706 and 4,331,335 shares
outstanding in 1998 and 1997,
respectively 1,185 1,176
Additional paid-in capital 4,385 4,253
Accumulated other comprehensive income 11,571 14,403
Retained earnings 140,356 129,237
157,497 149,069
Common treasury stock, at cost,
1,009,033 and 1,012,404 in 1998
and 1997, respectively (3,262) (3,307)
Total Shareholders' Equity 154,235 145,762
Total Liabilities and Shareholders'
Equity $ 1,350,248 $ 1,321,653
</TABLE>
The accompanying notes are an integral part
of the consolidated financial
statements.
F-4
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars, except for per share data)
<TABLE>
Year Ended December 31,
<S> <C> <C> <C>
1998 1997 1996
Revenues:
Premium $ 10,890 $ 11,031 $ 9,980
Net investment income 54,619 57,740 59,836
Earned insurance charges 41,067 40,853 42,238
Gain on sale of real estate -0- 14,630 23,520
Other 2,886 3,429 2,670
109,462 127,683 138,244
Benefits and expenses:
Policyholder benefits and expenses 38,367 37,962 40,091
Interest expense on contract holders
deposit funds 29,966 30,533 32,068
Amortization of present value of future
profits of acquired businesses 5,903 6,311 3,366
Amortization of deferred policy
acquisition costs 2,128 2,818 2,574
Operating expenses 14,853 16,798 15,884
Interest expense 659 1,659 2,820
91,876 96,081 96,801
Income from operations 17,586 31,602 41,443
Provision for federal income taxes:
Current 6,899 9,005 10,227
Deferred (432) 2,057 4,278
6,467 11,062 14,505
Net income $ 11,119 $ 20,540 $ 26,938
Basic:
Weighted average common stock
outstanding 4,375 4,328 4,233
Basic earnings per share 2.54 $ 4.75 $ 6.36
Diluted:
Common stock and common stock
equivalents 4,462 4,369 4,441
Diluted earnings per share $ 2.49 $ 4.70 $ 6.07
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
Additional
Common Stock Paid-in
Shares Amount Capital
<S> <C> <C> <C>
Balance at December 31, 1995 5,166 $ 1,137 $ 3,521
Comprehensive Income:
Net income Other comprehensive income:
Change in net unrealized appreciation
of equity securities
Change in net unrealized gain on
investments in fixed maturities
available for sale
Total comprehensive income
Options exercised 58 13 231
Balance at December 31, 1996 5,224 1,150 3,752
Comprehensive income:
Net income Other comprehensive income:
Change in net unrealized appreciation
of equity securities
Change in net unrealized gain on
investments in fixed maturities
available for sale
Total comprehensive income
Treasury stock purchased
Options exercised 120 26 501
Balance at December 31, 1997 5,344 1,176 4,253
Comprehensive income:
Net income Other comprehensive income:
Change in net unrealized appreciation
of equity securities
Change in net unrealized gain on
investments in fixed maturities
available for sale
Total comprehensive income
Treasury stock reissued
Options exercised 42 9 132
Balance at December 31, 1998 5,386 $ 1,185 $ 4,385
</TABLE>
The accompanying notes are an integral part
of these consolidated financial
statements.
F-6
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands of dollars)
<TABLE>
Accumulated Other Comprehensive Income
Net Unrealized
Gain on
Net Investments Total
Unrealized In Fixed Accumulated
Appreciation Maturities Other
of Equity Available Comprehensive
Securities For Sale Income
<S> <C> <C> <C>
Balance at December 31, 1995 $ 748 $ 12,938 $ 13,686
Comprehensive income:
Net income Other comprehensive income:
Change in net unrealized appreciation
of equity securities 507 507
Change in net unrealized gain on
investments in fixed maturities
available for sale (11,413) (11,413)
Total comprehensive income 507 (11,413) (10,906)
Options exercised
Balance at December 31, 1996 1,255 1,525 2,780
Comprehensive income:
Net income Other comprehensive income:
Change in net unrealized appreciation
of equity securities 1,691 1,691
Change in net unrealized gain on
investments in fixed maturities
available for sale 9,932 9,932
Total comprehensive income 1,691 9,932 11,623
Treasury stock purchased
Options exercised
Balance at December 31, 1997 2,946 11,457 14,403
Comprehensive income:
Net income Other comprehensive income:
Change in net unrealized appreciation of
equity securities (1,137) (1,137)
Change in net unrealized gain on
investments in fixed maturities
available for sale (1,695) (1,695)
Total comprehensive income (1,137) (1,695) (2,832)
Treasury stock reissued
Options exercised
Balance at December 31, 1998 $ 1,809 $ 9,762 $ 11,571
</TABLE>
The accompanying notes are an integral part
of these consolidated financial
statements.
F-7
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands of dollars)
<TABLE>
Common Total
Retained Treasury Shareholders'
Earnings Stock Equity
<S> <C> <C> <C>
Balance at December 31, 1995 $ 81,759 $ (3,018) $ 97,085
Comprehensive income:
Net income 26,938 26,938
Other comprehensive income:
Change in net unrealized appreciation
of equity securities 507
Change in net unrealized loss on
investments in fixed maturities
available for sale (11,413)
Total comprehensive income 26,938 16,032
Options exercised 244
Balance at December 31, 1996 108,697 (3,018) 113,361
Comprehensive income:
Net income 20,540 20,540
Other comprehensive income:
Change in net unrealized appreciation
of equity securities 1,691
Change in net unrealized loss on
investments in fixed maturities
available for sale 9,932
Total comprehensive income 20,540 32,163
Treasury stock purchased (289) (289)
Options exercised 527
Balance at December 31, 1997 129,237 (3,307) 145,762
Comprehensive income:
Net income 11,119 11,119
Other comprehensive income:
Change in net unrealized appreciation
of equity securities (1,137)
Change in net unrealized loss on
investments in fixed maturities
available for sale (1,695)
Total comprehensive income 11,119 8,287
Treasury stock reissued 45 45
Options exercised 141
Balance at December 31, 1998 $ 140,356 $ (3,262) $ 154,235
</TABLE>
The accompanying notes are an integral part
of these consolidated financial
statements.
F-8
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
<TABLE>
Year Ended December 31,
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING 1998 1997 1996
ACTIVITIES
Net Income $ 11,119 $ 20,540 $ 26,938
Adjustments to reconcile net income to
net cash (used in) provided by
operating activities:
Amortization of present value of future
profits of acquired businesses 5,903 6,311 3,366
Amortization of deferred policy
acquisition costs 2,128 2,819 2,572
Depreciation 551 2,398 1,356
Net gain on sales of investments (988) (14,805) (23,394)
Financing costs amortized 111 525 961
Amortization of deferred gain on sale of
real estate (110) (110) (110)
Changes in assets and liabilities:
Decrease in accrued investment income 698 362 383
(Increase) decrease in agent advances and
other receivables (7,686) 4,170 (2,783)
Policy acquisition costs deferred (5,460) (4,502) (4,584)
Decrease in policy liabilities and
contractholder deposit funds (16,194) (17,585) (16,374)
(Decrease) increase in other policyholders'
funds (668) (258) 20
(Decrease) increase in other liabilities (1,036) 5,172 (13,270)
(Decrease) increase in deferred federal
income taxes (2,355) 5,302 (1,770)
(Increase) decrease in other assets (2,691) 1,036 (2,106)
Other, net (653) (7,416) 5,331
Net cash (used in) provided by operating
activities (17,331) 3,959 (23,464)
</TABLE>
The accompanying notes are an integral part
of these consolidated financial
statements.
F-9
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
<TABLE>
Year Ended December 31,
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING 1998 1997 1996
ACTIVITIES
Purchase of insurance subsidiary (1,322) (11,688) -0-
Investments purchased (41,915) (24,276) (55,395)
Proceeds from sales and maturities of
investments 77,700 117,025 112,791
Net change in short-term investments (7,218) (71,415) (5,562)
Purchases & retirements of equipment (2,119) (283) 1,319
Decrease in notes receivable
from affiliates 6,148 6,148 1,284
Net cash provided by investing
activities 31,274 15,511 54,437
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance (purchase) of treasury stock 45 (289) -0-
Issuance of common stock 141 527 244
Repayment of debt (10,964) (13,980) (34,441)
Net cash used in financing activities (10,778) (13,742) (34,197)
Net increase (decrease) in cash and cash
equivalents 3,165 5,728 (3,224)
Cash and cash equivalents, beginning of
year
9,041 3,313 6,537
Cash and cash equivalents, end of year $ 12,206 $ 9,041 $ 3,313
</TABLE>
The accompanying notes are an integral part
of these consolidated financial
statements.
F-10
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in thousands of dollars)
Supplemental Cash Flow Disclosures:
Year Ended December 31,
1998 1997 1996
Income taxes paid $ 12,362 $ 2,200 $ 13,567
Interest paid $ 871 $ 1,925 $ 3,377
Supplemental Schedule of Non-Cash Investing Activities:
The Company purchased the outstanding capital stock of two life insurers in the
second quarter of 1998 and the third quarter of 1997 for cash purchase prices of
$16.6 million (including a $12.4 million dividend paid by the acquired company
to its former parent) and $11.8 million, respectively, net of post closing
adjustments. The consolidated statements of cash flows reflect the impact of
these acquisitions. These purchases resulted in the Company receiving tangible
assets and assuming liabilities as follows:
1998 1997
Assets $ 57,745 $ 32,420
Liabilities $ 41,135 $ 20,653
The accompanying notes are an integral part
of these consolidated financial
statements.
F-11
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Organization
InterContinental Life Corporation (ILCO or the "Company") is principally
engaged, through its subsidiaries, in administering existing portfolios of
individual life insurance and annuity products. The Company's insurance
subsidiaries are also engaged in the business of marketing and underwriting
individual life insurance and annuity products in 49 states and the District of
Columbia. Such products are marketed through independent, non-exclusive general
agents.
Principles of Consolidation
The consolidated financial statements include the accounts of InterContinental
Life Corporation and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Basis of Presentation
The financial statements have been prepared in conformity with generally
accepted accounting principles which differ from statutory accounting principles
required by regulatory authorities for the Company's insurance subsidiaries.
Significant accounting policies followed by the Company are:
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results will differ from those estimates.
Investments
The Company's general investment philosophy is to hold fixed maturity securities
until maturity. However, fixed maturities may be sold prior to the maturity
dates in response to changing market conditions, duration of liabilities,
liquidity factors, interest rate movements and other investment factors.
Accordingly, most fixed maturity investments are classified as available for
sale and are carried at market value. All other fixed maturities are carried at
the lower of amortized cost or net realizable value as management has the
positive intent and the Company has the ability to hold such investments to
maturity. Unrealized gains and losses on securities available for sale are not
recognized in earnings but are reported as a separate component of equity in
accumulated other comprehensive income, net of income tax effect.
F-12
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Premiums and discounts on collateralized mortgage obligations (CMOs) are
amortized over the estimated redemption period as opposed to the stated
maturities.
Equity securities are carried at market value. Unrealized gains and losses on
equity securities, net of deferred income taxes, if applicable, are reflected
directly in shareholders' equity. Mortgage loans and policy loans are recorded
at unpaid balances. Short-term investments are carried at cost, which
approximates market value, and generally consist of those fixed maturities and
other investments that are intended to be held less than one year from the date
of purchase.
Real estate is carried at cost less accumulated depreciation, which is generally
calculated using the straight-line method over 20 to 40 years. Accumulated
depreciation on investments in real estate is $5,501,545 and $5,243,720 at
December 31, 1998 and 1997, respectively. Interest is capitalized on funds
expended for construction of facilities for the Company's own use and for
facilities intended for sale or lease. Interest cost capitalized and included as
a component of the historical cost of the assets was approximately $-0- and
$237,000 in 1998 and 1997, respectively.
Realized gains and losses on disposal of investments are included in net income.
The cost of investments sold is determined on the specific identification basis,
except for equity securities, for which the first-in, first-out method is
employed. When an impairment of the value of an investment is considered other
than temporary, the decrease in value is reported in net income as a realized
investment loss and a new cost basis is established.
Cash and Cash Equivalents
Short-term investments with maturities of three months or less at the time of
purchase are reported as cash equivalents.
Sale of Real Estate
Net income for 1997 includes $14.0 million (before federal income tax) resulting
from the sale during the fourth quarter of 1997 of the Bridgepoint Square office
complex. The aggregate selling price was $78 million which was allocated
approximately 78.5% to Investors-NA and 21.5% to Family Life. The sale closed on
December 5, 1997.
Net income for 1996 includes $23.5 million (before federal income tax) resulting
from the sale during the first quarter of 1996 of the Austin Centre, a
hotel/office complex, located in Austin, Texas, which served as the Company's
home office building. The selling price was $62.67 million, less $1 million paid
to a capital reserve account for the purchaser. The property was purchased in
1991 for $31.275 million. The book value of the property, $36.8 million, net of
improvements and amortization, was retained and reinvested by the Company. The
balance of the proceeds of the sale, net of federal income tax, was used to
reduce the Company's senior loan obligations by $15 million. The sale closed on
March 29, 1996.
F-13
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is calculated using straight-line and accelerated methods over
estimated useful lives of 10 to 33 years for buildings and improvements and 10
years for furniture and equipment. Maintenance and repairs are charged to
expense when incurred. Accumulated depreciation for property and equipment and
home office real estate was $5,091,033 and $4,517,477 at December 31, 1998 and
1997, respectively.
Deferred Acquisition Costs
The cost of acquiring new and renewal business, principally first year
commissions and certain expenses of the policy issuance and underwriting
departments, which vary with and are primarily related to the production of new
and renewal business, have been deferred to the extent recoverable. Acquisition
costs related to universal life products are deferred and amortized in
proportion to the ratio of estimated annual gross profits to total estimated
gross profits over the expected lives of the contracts. Acquisition costs
related to traditional life insurance business are deferred and amortized over
the premium paying period of the related policies.
Present Value of Future Profits
The present value of future profits of acquired traditional life business is
amortized over the premium paying period of the related policies in proportion
to the ratio of the annual premium revenue to total anticipated premium revenue
applicable to such policies. Interest on the unamortized balance is accreted at
rates from 7.0% to 8.5%.
For interest-sensitive products, these costs are amortized in relation to the
present value, using the current credited interest rate, of expected gross
profits of the policies over the anticipated coverage period.
Retrospective adjustments of these amounts are made periodically upon the
revision of estimates of current or future gross profits on universal life-type
products to be realized from a group of policies. Recoverability of present
value of future profits is evaluated periodically by comparing the current
estimate of future profits to the unamortized asset balances.
Anticipated investment returns, including realized gains and losses, from the
investment of policyholder balances are considered in determining the
amortization of present value of future profits acquired.
F-14
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred Financing Costs
Financing costs associated with the Company's Senior Loan were deferred and were
amortized over the borrowing periods using the interest method.
Separate Accounts
Separate account assets, carried at market value, and liabilities represent
policyholder funds maintained in accounts having specific investment objectives.
The net investment income, gains and losses of these accounts, less applicable
contract charges, generally accrue directly to the policyholders and are not
included in the Company's statement of income.
Solvency Laws Assessments
The solvency or guaranty laws of most states in which the Company's insurance
subsidiaries do business may require the Company's insurance subsidiaries to pay
assessments (up to certain prescribed limits) to fund policyholder losses or
liabilities of insurance companies that become insolvent. These assessments may
be deferred or forgiven under most guaranty laws if they would threaten an
insurer's financial strength and, in certain instances, may be offset against
future premium taxes. The Company's insurance subsidiaries' expense for guaranty
fund assessment from states which do not allow premium tax offsets is not
material.
Policy Liabilities and Contractholder Deposit Funds
Liabilities for future policy benefits related to traditional life products are
computed using the net level premium method or an equivalent actuarial method.
Assumptions for future investment yields are incorporated in these liabilities
(principally 8% for guaranteed premium products). Assumptions for mortality and
withdrawal, based on industry and Company experience for all products, include
provisions for possible unfavorable deviations. The liability for future policy
benefits for traditional life policies is graded to reserves stipulated by
regulatory authorities over a 30-year period or the end of the premium paying
period, if less.
Contractholder deposit funds are liabilities for universal life and annuity
products. These liabilities consist of deposits received from customers and
accumulated net investment income on their fund balances, less administrative
charges. Universal life fund balances are also assessed mortality charges. The
cash value benefit for these products is based on actual crediting rates, which
are lower than assumed investment yields.
Liabilities for future policy benefits related to non-cancelable and guaranteed
renewable accident and health contracts are computed based on industry and
Company experience and estimated future investment yields ranging from 4 1/2% to
6%. Unearned premium reserves for credit life and accident and health contracts
are computed on either the sum-of-the-year's digits or pro rata methods
F-15
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
depending upon the type of coverage. In December, 1997, ILCO's life insurance
subsidiaries entered into a reinsurance treaty under which all of the
contractual obligations and risks under accident and health insurance policies
were assumed by a third party reinsurer. (See Note 8.)
Other Policy Claims and Benefits Payable
The liability for other policy claims and benefits payable represents
management's estimate of unpaid losses on claims and other miscellaneous
liabilities to policyholders. Estimated unpaid losses on claims are comprised of
losses on claims that have been reported but not yet paid, including estimates
of additional development of initial claims estimates, and claims that have been
incurred but not yet reported (IBNR) to the Company.
The liability for other policy claims and benefits payable is subject to the
impact of changes in claim severity, frequency and other factors. Although there
is considerable variability inherent in such estimates, management believes that
the liability recorded is adequate.
Revenue Recognition
Premiums on traditional life and health products are recognized as revenue over
the premium paying period when due. Credit life and credit health insurance
premiums are recognized over the contract period on a pro rata basis, or the sum
of years digits basis. Benefits and expenses are associated with earned
premiums, so as to result in recognition of profits over the lives of the
contracts.
Proceeds from investment-related products and universal life products are
recorded as liabilities when received. Revenues for investment-related products
consist of contract charges assessed against the deposit fund values and net
investment income. Related benefit expenses primarily consist of interest
credited to the fund values after deductions for investment and policy charges.
Revenues for universal life products consist of net investment income, mortality
and administration charges against deposits and fund values and surrender
charges assessed against the fund values. Related benefit expenses include
universal life benefit claims in excess of fund values and interest credited to
universal life fund values.
Net Income Per Share
Net income per share is calculated based on two methods, 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. Both methods are
presented on the face of the income statement.
F-16
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Federal Income Taxes
In February, 1992, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109).
The Company adopted FAS 109 on a prospective basis effective January 1, 1993.
FAS 109 mandates the asset and liability method for computing deferred income
taxes. Under this method, balance sheet amounts for deferred income taxes are
computed based on the tax effect of the differences between the financial
reporting and federal income tax basis of assets and liabilities using the tax
rates which are expected be in effect when these differences are anticipated to
reverse.
New Accounting Pronouncements
In February 1997, the Financial Standards Board ("FASB") issued FAS No. 128,
"Earnings Per Share", which revises the standards for computing earnings per
share previously prescribed by APB Opinion No. 15, "Earnings Per Share". The
Statement establishes two measures of earnings per share. Basic earnings per
share 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 potentially 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 SFAS No.
128 for the year ended December 31, 1997 and has restated the earnings per share
computations for 1996 to conform to this pronouncement.
In June 1997, the FASB issued FAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for the reporting and display of comprehensive
income and its components. 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 has adopted FAS 130 for the year ended December 31, 1998 and has
restated the financial statement presentation for 1997 and 1996 as required by
this pronouncement.
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 SFAS 131 for the year ended December 31, 1998.
As described in Note 1, the Company is principally engaged, through its
F-17
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
subsidiaries, in administering existing portfolios of individual life insurance
and annuity products. The Company's insurance subsidiaries are also engaged in
the business of marketing and underwriting individual life insurance and annuity
products in 49 states and the District of Columbia. Such products are marketed
through independent, non-exclusive general agents. Management considers the
Company's insurance operations to constitute one reportable segment. Premium
revenues for traditional insurance products and earned insurance charges on
universal life and annuity products are presented in the accompanying
consolidated statements of income. No single customer accounts for 10 percent or
more of the Company's revenue. The Company has no foreign operations.
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 for the year ended December 31, 1998, and
restated disclosures for 1997 and 1996 as required by this pronouncement.
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 this SOP is not expected to have a material
impact on the Company's financial statements.
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
adoption of FAS 133 does not have a material impact on the Company's results of
operations, liquidity or financial position.
Reclassification
Certain prior years' amounts have been reclassified to conform with the 1998
presentation.
F-18
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Investments
Fixed Maturities
The amortized cost, gross unrealized gains and losses and market values of fixed
maturities available for sale and fixed maturities held to maturity at December
31, 1998 and 1997, respectively were as follows (in thousands):
<TABLE>
Amortized Gross Unreal- Gross Unreal- Market
Cost ized Gains ized Losses Value
<S> <C> <C> <C> <C>
Fixed Maturities Available for Sale as of
December 31, 1998:
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $ 37,360 $ 3,293 $ 1 $ 40,652
Obligations of states and political
subdivisions 4,690 383 -0- 5,073
Corporate securities 148,989 4,755 110 153,634
Mortgage-backed securities 244,091 7,067 368 250,790
Total fixed Maturities Available
For Sale 435,130 15,498 479 450,149
Fixed Maturities Held to Maturity:
Private placements-corporate 3,005 54 0 3,059
Total Fixed Maturities $ 438,135 $ 15,552 $ 479 $453,208
Fixed Maturities Available For Sale as
of December 31, 1997
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $ 24,556 $ 1,334 $ 65 $ 25,825
Obligations of states and political
subdivisions 4,686 349 -0- 5,035
Corporate securities 119,847 4,696 630 123,913
Mortgage-backed securities 287,747 12,458 516 299,689
Total Fixed Maturities Available For Sale
436,836 18,837 1,211 454,462
Fixed Maturities Held to Maturity:
Private placements-corporate
3,412 20 100 3,332
Total Fixed Maturities $ 440,248 $ 18,857 $ 1,311 $ 457,794
</TABLE>
F-19
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amounts of unrealized gains and losses on fixed maturities available for
sale included in accumulated other comprehensive income reflected in the balance
sheet have been reduced by estimated deferred taxes in the amount of $5,257,000
and $6,169,000 in 1998 and 1997, respectively.
The amortized cost and market value of fixed maturities available for sale and
fixed maturities held to maturity at December 31, 1998 is shown below by
contractual maturity. Actual maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
Fixed Maturities Available for Sale
Amortized Market
Cost Value
(in thousands)
Due in one year or less $ 23,437 $ 23,578
Due after one through five years 47,730 49,263
Due after five through ten years 27,610 29,215
Due after ten years 92,263 97,303
Mortgage backed securities 244,090 250,790
Total Fixed Maturities Available
for Sale $435,130 $ 450,149
Fixed Maturities Held to Maturity
Amortized Market
Cost Value
(in thousands)
Due in one year or less $ -0- $ -0-
Due after one through five years 2,148 2,171
Due after five through ten years 760 777
Due after ten years 97 111
Mortgage backed securities -0- -0-
Total Fixed Maturities Held to Maturity $ 3,005 $ 3,059
Proceeds from sales and maturities of investments in fixed maturities during
1998, 1997 and 1996 were approximately $77,700,000, $57,840,000, and
$53,888,000. Gross gains of approximately $178,000, $293,000, and $322,000 and
gross losses of approximately $16,000 $123,000, and $100,000 were realized on
those sales and maturities in 1998, 1997 and 1996, respectively.
F-20
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Equity Securities
The change in net unrealized appreciation for equity securities was $(1,749,000)
and $2,601,000 for the years ended December 31, 1998 and 1997, respectively.
Amounts as of December 31 were as follows (in thousands):
1998 1997
Unrealized appreciation $ 2,796 $ 4,543
Unrealized depreciation (13) (11)
Net unrealized appreciation before tax 2,783 4,532
Less: Federal income tax (974) (1,586)
Net unrealized appreciation $ 1,809 $ 2,946
Equity securities included a $3,083,438 investment, ($318,390 at cost), in
189,750 shares of common stock of Financial Industries Corporation (FIC) (See
note 9). This represents 3.5% of FIC's outstanding common stock at December 31,
1998.
The net change in unrealized investment gains (losses) represents the only
component of other comprehensive income for the years ended December 31, 1998,
1997 and 1996. The following is a summary of the change in unrealized investment
gains (losses) net of related deferred income taxes which are reflected in
accumulated other comprehensive income for the periods presented:
Change in Unrealized Gains (Losses)
on Investments 1998 1997 1996
(in thousands)
Fixed maturities $ (2,607) $ 15,280 $ (17,558)
Equity securities (1,749) 2,602 780
(4,356) 17,882 (16,778)
Deferred federal income taxes (1,524) 6,259 (5,872)
Net change in unrealized gains
(losses) on investments $ (2,832) $ 11,623 $ (10,906)
F-21
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the reclassification adjustments required for the
years ended December 31, 1998, 1997 and 1996:
Reclassification Adjustments 1998 1997 1996
(in thousands)
Unrealized holding gains (losses)
on investments arising during
the period $ (2,621) $ 11,733 $ (10,761)
Reclassification adjustments for
gains included in net income 211 110 145
Unrealized gains (losses) on
investments, net of reclassification
adjustment $ (2,832) $ 11,623 $ (10,906)
Net Investment Income
The components of net investment income are summarized as follows (in
thousands):
Year Ended December 31,
1998 1997 1996
Fixed maturities $ 47,322 $ 46,570 $ 47,448
Equity securities 7 10 12
Other, including policy loans,
real estate and mortgage loans 8,275 14,826 15,708
55,604 61,406 63,168
Investment expenses (985) (3,666) (3,332)
Net Investment Income $ 54,619 $ 57,740 $ 59,836
Realized Gains and Losses
Net realized gains (losses) included in net investment income are summarized
below (in thousands):
Year Ended December 31,
1998 1997 1996
Fixed maturities available for sale $ 161 $ 171 $ 222
Equity securities 164 (2) 1
Other investments 663 6 (256)
988 175 33
Income taxes 346 61 12
Net realized gains $ 642 $ 114 $ 21
F-22
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Mortgage loans and invested real estate
The Company's mortgage loans and invested real estate are diversified by
property type, location and issuer. Mortgage loans are collateralized by the
related properties and such loans generally range from 15% to 80% of the
property's value at the time the loan is made. No new mortgage loans were made
during the three year period ended December 31, 1998.
Non-income producing investments
The carrying value of non-income producing investments were as follows as of
December 31:
1998 1997
(in thousands)
Fixed Maturities $ -0- $ -0-
Mortgage loans 81 81
Total $ 81 $ 81
3. Disclosures about Fair Value of Financial Instruments
The estimated fair value of the Company's financial instruments at December 31,
1998 are as follows:
Carrying Fair
Amount Value
(in thousands)
Financial assets:
Fixed maturities $ 453,154 $ 453,208
Policy loans 53,614 53,614
Mortgage loans 10,332 10,883
Short-term investments 171,840 171,840
Cash and cash equivalents 12,206 12,206
Notes receivable from affiliates 47,645 47,645
Carrying Fair
Amount Value
(in thousands)
Financial liabilities:
Deferred annuities $ 134,062 $ 132,208
Supplemental contracts 14,859 14,228
F-23
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial investments:
Fixed maturities
Fair values are based on quoted market prices or dealer quotes.
Policy loans
Policy loans are, generally, issued with coupon rates below market rates and are
considered early payment of the life benefit. As such, the carrying amount of
these financial instruments is a reasonable estimate of their fair value.
Mortgage loans
The fair value of mortgage loans is estimated using a discounted cash flow
analysis using rates for BBB- rated bonds with similar coupon rates and
maturities.
Cash and cash equivalents and short-term investments
The carrying amount of these instruments approximates market value.
Notes receivable from affiliates
The fair value is based on redemption value.
Senior loans
The fair value has been set at the price to call the debt.
Deferred annuities and supplemental contracts
The fair value of deferred annuities is estimated using cash surrender values.
Fair values for supplemental contracts is estimated using a discounted cash flow
analysis, based on interest rates currently offered on similar products.
F-24
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Present Value of Future Profits of Acquired Business
An analysis of the present value of future profits of acquired businesses is as
follows:
1998 1997
(in thousands)
Beginning balance $ 47,286 $ 45,240
Acquisition of insurance subsidiary 1,981 8,357
Accretion of interest 3,559 3,786
Amortization (9,160) (10,097)
Ending Balance $ 43,666 $ 47,286
Amortization of the present value of future profits included in the consolidated
statements of income is presented net of the accretion of interest.
The estimated amount of present value of future profits to be amortized net of
interest accretion during each of the next five years is as follows:
(in thousands)
1999 $ 3,800
2000 $ 3,506
2001 $ 3,142
2002 $ 2,912
2003 $ 2,668
5. Acquisition of Business
On June 30, 1998, ILCO, through its subsidiary, Investors-Indiana, acquired
Grinnell Life Insurance Company ("Grinnell Life") an Iowa-domiciled life
insurer, from Grinnell Mutual Life Insurance Company for an adjusted purchase
price of $16.6 million. As part of the transaction, Grinnell Life was
immediately merged with and into Investors-Indiana, with Investors-Indiana being
the surviving entity.
On July 9, 1997, ILCO and Investors-Indiana acquired State Auto Life Insurance
Company, an Ohio domiciled life insurer, from State Automobile Mutual Insurance
Company, for an adjusted cash purchase price of $11.8 million. The transaction
was accounted for as a purchase business combination. Accordingly, the results
of State Auto Life's operations are included in income from the date of the
acquisition. The purchase price was allocated to the fair values of the assets
and liabilities acquired including the present value of future profits disclosed
in Note 4. Under the terms of the transaction, State Auto Life was merged into
Investors-Indiana.
On February 14, 1995, the Company and Investors-NA completed the purchase of
Meridian Life Insurance Company (MLIC), a life insurer domiciled in Indiana,
from Meridian Mutual Insurance Company. Under the terms of the agreement, the
Company acquired approximately 82% of the outstanding common stock of MLIC for
F-25
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$14 million. Investors-NA acquired the remaining 18% for $3 million. Immediately
after finalizing the transaction, ILCO contributed its acquired shares to
unassigned surplus of Investors-NA, resulting in MLIC being a wholly owned
subsidiary of Investors-NA. ILCO's senior loans were increased by $15 million
(through an amendment to the loan agreement) to fund its portion of the purchase
price. Subsequent to the purchase, MLIC's name was officially changed to
Investors Life Insurance Company of Indiana (Investors-Indiana). The transaction
was accounted for as a purchase business combination. Accordingly, the results
of Investors-Indiana's operations are included in income from the date of the
acquisition. The purchase price was allocated to the fair values of the assets
and liabilities acquired, including the present value of future profits
disclosed in Note 4.
6. Senior Loans
The Senior Loan of ILCO was originally arranged in connection with the 1988
acquisition of Investors-NA and Investors-CA. In January, 1993, the Company
refinanced its Senior Loan. That transaction was done in connection with the
prepayment of the subordinated indebtedness and the purchase of warrants which
had been issued as part of the financing of the 1988 acquisitions. The terms of
the amended and restated credit facility were substantially the same as the
terms and provisions of the 1988 senior loan. The average interest rate paid by
the Company on its Senior Loan was approximately 7.76% during 1996, 7.68% during
1997 and 7.63% during 1998. The maturity date, which had been December 31, 1996,
was extended to July 1, 1998 for the Senior Loan.
In February, 1995, the Company borrowed an additional $15 million under the
Senior Loan to help finance the acquisition of Investors-IN, and the maturity
date of the Senior Loan was further extended to July 1, 1999. As of December 31,
1995, the outstanding principal balance of ILCO's senior loan obligations was
$59.4 million. In January, 1996, the Company made a scheduled payment of $4.5
million under its Senior Loan. In March, 1996, the Company made the scheduled
payments for April 1st and July 1st, totaling $9 million. At that same time, the
Company made a payment of $941,000, an additional payment under the terms of the
loan applied to the principal balance. On April 1, 1996, an optional principal
payment in the amount of $15 million was made, which resulted in advancing the
scheduled payoff date of the Senior Loan to April 1, 1998. In July, 1996, the
Company made the principal payment for October 1st ($4.5 million), plus an
optional principal payment of $0.5 million. In connection with the acquisition
of State Auto Life Insurance Company in July, 1997, the Senior Loan agreement
was modified to extend the maturity date to October 1, 1998.
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 prepaid on September 30, 1998. As a result,
the senior loan obligation of ILCO was fully discharged effective September 30,
1998.
F-26
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Income Taxes
The Company files consolidated federal income tax returns with its non-life
subsidiaries. The Company's life insurance subsidiaries file a separate life
consolidated federal income tax return. In accordance with the Company's tax
allocation agreement, federal income tax expense or benefit is allocated to each
member of the consolidated group as if each member were filing a separate
return.
The U.S. federal income tax provision (benefit) charged to continuing operations
for the years ended December 31, was as follows:
1998 1997 1996
(in thousands)
Current tax provision $ 6,899 $ 9,005 $ 10,227
Deferred tax provision (432) 2,057 4,278
Total provision for income
taxes $ 6,467 $ 11,062 $ 14,505
Provision has not been made for state and foreign income tax expense since
expense is minimal. Premium taxes are paid to various states where premium
revenues are earned. Premium taxes are included in the statement of income as
operating expenses.
The provision for income taxes differs from the amount of income tax determined
by applying the U.S. statutory federal income tax rate of 35% to pre-tax income
from continuing operations as a result of the following differences:
1998 1997 1996
(in thousands)
Income taxes at the U.S. Statutory rate $ 6,155 $ 11,062 $ 14,505
Increase (decrease in taxes resulting from:
Non-deductible compensation 312 -0- -0-
Total provision for income taxes $ 6,467 $ 11,062 $ 14,505
F-27
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred taxes are recorded for temporary differences between the financial
reporting bases and the federal income tax bases of the Company's assets and
liabilities. The sources of these differences and the estimated tax effect of
each are as follows:
<TABLE>
December 31,
<S> <C> <C>
1998 1997
Deferred Tax Liability: (in thousands)
Deferred policy acquisition costs $ 6,897 $ 5,773
Present value of future profits 12,718 13,689
Net unrealized appreciation on
marketable securities 6,231 7,755
Acquisition discounts on mortgages/
policy loans 1,213 1,458
Reinsurance recoverable 5,607 6,212
Other taxable temporary differences 2,782 1,960
Total deferred tax liability 35,448 36,847
Deferred Tax Asset:
Policy reserves 1,896 2,858
Invested assets 1,759 413
Net operating loss carry forward 1,298 1,465
Minimum tax credit 310 300
Total deferred tax asset 5,263 5,036
Net deferred tax liability $ 30,185 $ 31,811
</TABLE>
Deferred federal income tax expense (benefit) of $(1,524,000) and $6,258,000 for
1998 and 1997, respectively, have been provided on the unrealized appreciation
(depreciation) of marketable securities and included in the balance of the
deferred tax liability account. This increase or decrease in deferred tax
liability has been recorded as a reduction or increase to the equity adjustment
due to the net change in unrealized appreciation or depreciation and has not
been reflected in the deferred income tax expense included in net income from
operations.
Under the provisions of pre-1984 life insurance company income tax regulations,
a portion of "gain from operations" of Investors-IN and Investors-NA was not
subject to current taxation but was accumulated, for tax purposes, in special
tax memorandum accounts designated as "policyholders' surplus accounts". Subject
to certain limitations,"policyholders' surplus" is not taxed until distributed
or the insurance company no longer qualifies to be taxed as a life insurance
F-28
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
company. The accumulation in these accounts for Investors-NA and Investors-IN at
December 31, 1998 was $8,225,000 and $4,357,000, respectively. Federal income
tax of $2,879,000 and $1,525,000 would be due if the entire balance is
distributed at a tax rate of 35%.
The Company does not anticipate any transactions that would cause any part of
the policyholders' surplus accounts to become taxable and, accordingly, deferred
taxes have not been provided on such amounts. At December 31, 1998, Investors-NA
and Investors-IN have approximately $131,000,000 and $15,500,000, respectively,
in the aggregate in their shareholders' surplus accounts from which
distributions could be made without incurring any federal tax liability.
At December 31, 1998, the Company and its non-life wholly-owned subsidiaries
have net operating loss carry forwards of approximately $3.7 million.
At December 31, 1998, there were no IRS examinations in progress for the Company
or its subsidiaries.
8. Reinsurance
The Company reinsures portions of certain policies thereby providing greater
diversification of risk and minimizing exposure on larger policies. The
Company's retention on any one individual ranges from $60,000 to $250,000
depending on the risk. The Company remains liable to the extent the reinsurance
companies are unable to meet their obligations under the reinsurance agreements.
In December, 1997, ILCO's life insurance subsidiaries entered into a reinsurance
treaty under which all of the contractual obligations and risks under accident
and health insurance policies were assumed by a third party reinsurer. The
transfer is effective as of July 1, 1997. These risks and contractual
obligations were sold pursuant to, first, a coinsurance reinsurance agreement.
Following applicable regulatory approvals, the reinsurer will assume the direct
obligations of the companies, on an assumption reinsurance basis. The decision
to dispose of this block of business was based on management's analysis that the
business was not generating targeted profit objectives and that the products
were not part of the core business of the subsidiaries. The sale permits the
company to focus on its primary business: life insurance and annuity sales. In
connection with the transaction, the total amount of net reserves transferred by
the subsidiaries was $6,327,504. In addition to the transfer of reserves, the
life companies paid the reinsurer $1,037,150 in connection with the transaction,
which amount was accounted for as an expense for the year ended December 31,
1997. In 1997, the transferred business generated approximately $791,000 in
annualized premiums.
F-29
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amounts reported in the consolidated financial statements for reinsurance
ceded are as follows:
December 31,
1998 1997
(in thousands)
Future policy benefits $ 10,178 $ 10,008
Unearned premiums 1,878 2,307
Other policy claims and benefits payable 4,225 5,434
Amounts recoverable on paid claims 2,566 2,684
Reinsurance receivables 18,847 $ 20,433
Year ended December 31,
1998 1997 1996
(in thousands)
Premiums $ 11,511 $ 10,438 $ 7,962
Policyholder benefits and expenses $ 20,311 $ 15,286 $ 14,712
9. Shareholders' Equity
Financial Industries Corporation ("FIC"), a life insurance holding company,
retains ownership of approximately 45% of the Company's outstanding common
stock. FIC held options to purchase up to an additional 1,702,155 shares of the
Company's authorized but unissued common stock at a price equal to the average
market value during the six months preceding the exercise date. These options
expired on September 30, 1998.
The Company's ability to pay dividends to its shareholders is affected, in part,
by the receipt of dividends from Investors-NA, which is organized under the laws
of the state of Washington. Under current Washington law, any proposed payment
of a dividend or distribution which, together with dividends or distributions
paid during the preceding twelve months, exceeds the greater of (i) 10% of
statutory surplus as of the preceding December 31 or (ii) statutory net gain
from operations for the preceding calendar year is called an "extraordinary
dividend" and may not be paid until either it has been approved, or a waiting
period shall have passed during which it has not been disapproved, by the
insurance commissioner.
In addition, Washington laws require that prior notification of a proposed
dividend be given to the Washington Insurance Commissioner and that dividends
may be paid only from earned surplus.
F-30
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net income (before surplus debenture interest expense) and capital and surplus
of Investors-NA as reported to insurance regulators and as determined in
accordance with statutory accounting practices are as follows:
Year Ended December 31,
1998 1997 1996
Net Income $ 14,246 $ 25,925 $ 33,068
Capital and Surplus $ 70,627 $ 73,932 $ 56,174
The insurance regulations of the state of Washington limit the amount an insurer
may invest in the obligations of any one corporation to four percent of the
insurer's statutory admitted assets. Investors-NA held $40,903,140 and
$46,057,300 in subordinated notes issued by Family Life Corporation, a
wholly-owned subsidiary of FIC, at December 31, 1998 and 1997, respectively.
This investment exceeds the limit on investments prescribed by the state of
Washington by $-0- and $2,606,560 at December 31, 1998 and 1997, respectively.
Prior to the acquisition of these notes, Investors-NA received written approval
from the Washington State Insurance Department for the inclusion of the full
amount of these notes in its statutory admitted assets. At December 31, 1998 and
1997, this permitted practice increased statutory surplus by $-0- and $2,606,560
over what it would have been under prescribed statutory accounting practices.
In 1998, the NAIC adopted the Codification of Statutory Accounting Principles
guidance, which will replace the current Accounting Practices and Procedures
manual as the NAIC's primary guidance on statutory accounting. The NAIC is now
considering amendments to the Codification guidance that would also be effective
upon implementation. The Codification provides guidance for areas where
statutory accounting has been silent and changes current statutory accounting in
some areas, e.g. deferred income taxes are recorded. It is not known whether the
Company's insurance subsidiaries states of domicile Insurance Departments will
adopt the Codification, and whether the Departments will make any changes to
that guidance. The Company has not estimated the potential effect of the
Codification guidance on statutory net income and statutory capital and surplus
if adopted by the Department. However, the actual effect of adoption could
differ as changes are made to the Codification guidance, prior to its
recommended effective date of January 1, 2001.
In 1988, the Company authorized the issuance of 10 million shares of Class C
Preferred Stock, $1.00 par value. The Company was not permitted, under the
provisions of the Senior Loan Agreements (See Note 6), to issue any preferred
stock except Class A and Class B issued in connection with the acquisition of
the Investors Life Companies. The Company has reacquired the Class A and Class B
Preferred Stock and holds the shares in treasury.
F-31
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Retirement Plans and Employee Stock Plans
Retirement Plan
The Company maintains a retirement plan, ("ILCO Pension Plan"), covering
substantially all employees of the Company. The plan is a non-contributory,
defined benefit pension plan, which covers each eligible employee who has
attained 21 years of age and has completed one year or more of service. Each
participating subsidiary company contributes an amount necessary (as actuarially
determined) to fund the benefits provided for its participating employees.
The Plan's basic retirement income benefit at normal retirement age is 1.57% of
the participant's average annual earnings less 0.65% of the participant's final
average earnings up to covered compensation multiplied by the number of his/her
years of credited service. For participants who previously participated in the
plan maintained by the Company for the benefit of former employees of the IIP
Division of CIGNA Corporation (the IIP Plan), the benefit formula described
above applies to service subsequent to May 31, 1996. With respect to service
prior to that date, the benefit formula provided by the IIP Plan is applicable,
with certain exceptions applicable to former IIP employees who are classified as
highly compensated employees.
Former eligible IIP employees commenced participation automatically. The Plan
also provides for early retirement, postponed retirement and disability benefits
to eligible employees. Participant benefits become fully vested upon completion
of five years of service, as defined, or attainment of normal retirement age, if
earlier.
The pension costs for the plan includes the following components:
1998 1997 1996
(in thousands)
Service cost for benefits earned
during the period $ 460 $ 390 $ 502
Interest cost on projected benefit
obligation 793 693 686
Expected return on plan assets (1,235) (1,226) (1,128)
Amortization of unrecognized prior
service cost (229) (229) (229)
Pension benefit $ (211) $ (372) $ (169)
F-32
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarizes the funded status of the plan at December 31:
1998 1997
(in thousands)
Change in benefit obligation:
Benefit obligation at beginning
of period $ 11,162 $ 8,936
Service cost 460 390
Interest cost 793 693
Benefits paid (443) (399)
(Gain)/Loss due to change in
assumptions 804 -0-
(Gain)/Loss due to experience (50) 1,542
Benefit Obligation at end of year $ 12,726 $ 11,162
Change in plan assets:
Fair value of plan assets at
beginning of year $ 15,681 $15,322
Actual return on plan assets 1,000 758
Benefits paid (443) (399)
Fair value of plan assets at end of year $ 16,238 $ 15,681
Funded Status:
Funded status at end of year $ 3,512 $ 4,519
Unrecognized prior service cost (469) (698)
Unrecognized actuarial net
(gain) loss 1,683 693
Prepaid pension expense at end
of year $ 4,726 $ 4,514
The significant assumptions for the plans are as follows:
The discount rate for projected benefit obligations was 7.25%, 7.75% and 7.75%
F-33
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
in 1998, 1997 and 1996. The assumed long-term rate of compensation increases was
5.0%, 6.0% and 6.0% for 1998, 1997 and 1996. The assumed long-term rate of
return on plan assets was 8.0% for 1998, 1997 and 1996. Assumed expenses as a
percentage of plan assets were 0%, 0% and .5% for 1998, 1997 and 1996,
respectively.
Savings and Investment Plan
The Company maintains a Savings and Investment (401(k)) Plan that allows
eligible employees who have met a one-year service requirement to make
contributions to the Plan on a tax-deferred basis. A Plan participant may elect
to contribute up to 16% of eligible earnings on a tax deferred basis, subject to
certain limitations applicable to "highly compensated employees" as defined in
the Internal Revenue Code. Plan participants may allocate contributions, and
earnings thereon, between investment options selected by participants. The
Account Balance of each Participant attributable to employee contributions is
100% vested at all times. Prior to January 1, 1990, the Company made matching
contributions of up to 50% of the first 6% of eligible compensation contributed
by the plan participants. Vesting of such Company contributions is based on
number of years of service. The employer contributions were discontinued
effective January 1, 1990.
During 1995, the Plan was amended to allow for the addition of Family Life
Insurance Company (FLIC), a wholly-owned subsidiary of FIC, as a participating
employer, thus allowing FLIC employees to participate in the Plan. The amendment
did not affect the Plan's tax-qualified status.
In 1997, the Plan was amended to provide for a matching contribution by the
Company. The match, which is in the form of shares of ILCO common stock, is
equal to 100% of an eligible participant's elective deferral contributions, as
defined in the Plan, not to exceed 1% of the participant's plan compensation.
Allocations are made on a quarterly basis to the account of participants who
have at least 250 hours of service in that quarter.
Employee Stock Ownership Plan
During 1979, the Company established an Employee Stock Ownership Plan and a
related trust for the benefit of its employees. The Plan generally covers
employees who have attained the age of 21 and have completed one year of
service. Vesting of benefits to employees is based on number of years of
service. No contributions were made to the Plan in 1998, 1997 or 1996. At
December 31, 1998, the Plan had a total of 319,488 shares which are allocated to
participants.
During 1995, the Plan was amended to allow for the addition of FLIC as a
participating employer, thus allowing FLIC employees to participate in the Plan.
The amendment did not affect the Plan's tax-qualified status.
F-34
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Option Plans
The Company applies APB Opinion No. 25 and related Interpretations in accounting
for its stock option plans, which are described below accordingly. No
compensation cost has been recognized by the Company in the accompanying income
statement for its stock option plans. Had compensation cost for the Company's
stock option plans been determined based on the fair market value at the grant
dates for awards under those plans consistent with the method provided by FAS
No. 123, the impact to the Company's net income would have been immaterial.
Under the Company's Incentive Stock Option Plan, options to purchase shares of
the Company's common stock, at 100% of fair market value on the date of grant,
have been granted to key employees. A total of 315,000 shares of the Company's
common stock are currently reserved for issuance under this plan. As of December
31, 1998, options to purchase 327,850 shares have been granted since the plan's
inception. As of December 31, 1998, 241,750 options have been exercised and
86,100 options have been terminated.
At December 31, 1998 there were no options remaining under the ISO Plan to
purchase shares of the Company's common stock. The number of options exercised
in 1998, 1997 and 1996 were -0-, 72,000 and 9,500, respectively.
Under the Non-Qualified Stock Option Plan for certain officers, directors,
agents and others, the Board of Directors is authorized to issue options to
purchase up to 600,000 shares of the Company's common stock at 100% of the fair
market value on the date of grant but in no case less than $3.33 per share. In
1988, options to purchase 330,000 shares were granted at a price of $3.33 per
share. In 1990, options to purchase 30,000 shares expired. In 1991, options to
purchase 50,000 shares were granted at prices ranging from $8.75 to $9.25. In
1992 options to purchase 60,000 shares expired. In 1995, options to purchase
60,000 shares were granted at a price of $11.12 per share. These same options,
along with 20,000 other options, were terminated in 1996. In 1997 42,000 options
were canceled. There were no options granted in 1998, 1997 and 1996. The number
of options exercised in 1998, 1997 and 1996 were 42,000, 48,000, and 48,000,
respectively.
F-35
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarized activity under all Plans for each of the three
years ended December 31, 1998:
1996 Weighted Average
Shares Exercise Price
(000's)
Outstanding at the beginning of the year 384 $ 5.75
Granted 0 0
Exercised (58) 4.24
Canceled (80) 10.65
Outstanding at the end of the year 246 $ 4.50
Options exercisable at year end 120 $ 4.38
Weighted average fair value of options
granted during the year $ -0-
1997 Weighted Average
Shares Exercise Price
(000's)
Outstanding at the beginning of the year 246 $ 4.50
Granted 0 0.00
Exercised (120) 4.38
Canceled (42) 7.20
Outstanding at the end of the year 84 $ 3.33
Options exercisable at year end -0- $ -0-
Weighted average fair value of options
granted during the year $ -0-
1998 Weighted Average
Shares Exercise Price
(000's)
Outstanding at the beginning of the year 84 $ 3.33
Granted -0- 0.00
Exercised (42) 3.33
Canceled -0- 0.00
Outstanding at the end of the year 42 $ 3.33
Options exercisable at year end -0- $ -0-
Weighted average fair value of options
granted during the year $ -0-
F-36
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1998:
Options Outstanding
Number Outstanding weighted-average remaining
Range of exercise prices December 31, 1998 contractual Life (years)
$3.33 42,000 1 year
Weighted Average
Range of exercise prices Exercise prices
$3.33 $3.33
Number exercisable Weighted average
Range of Exercise prices December 31, 1998 exercise price
$3.33 -0- $3.33
11. Leases
The Company and its subsidiaries occupy office facilities under lease agreements
which expire at various dates through 2005. Certain office space leases may be
renewed at the option of the Company.
Rent expense in 1998, 1997, and 1996 was $2,283,198, $3,147,037, and $2,466,679,
respectively, under these lease agreements. Minimum annual future rentals are as
follows:
(in thousands)
1999 1,783
2000 1,783
2001 1,766
2002 1,400
2003 671
Thereafter 1,273
$ 8,676
12. Related Party Transactions
The obligations of the Company under the Senior Loan were guaranteed by FIC. FIC
presently owns 1,966,346 shares of the company's Common Stock, constituting
44.93% of such shares outstanding. FIC held options to acquire an additional
1,702,155 shares at the average bid price of such shares during the six-month
period preceding the date of any such purchase as long as ILCO's debt guaranteed
by FIC (the Senor Loans) remained outstanding.. As described in Note 6, the
current Senior Loan of ILCO was fully repaid on September 30, 1998. Accordingly,
FIC's rights under the 1986 option agreement expired on September 30, 1998.
F-37
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIC Property Management, Inc., ("FIC Property"), a subsidiary of FIC, conducted
the leasing activities for the Bridgepoint Square properties previously owned by
Investors-NA. As described in Note 1, these properties were sold in 1997.
In connection with the December, 1997 sale of Bridgepoint Square Offices by
Investors-NA and Family Life Insurance Company, FIC Realty Services, Inc., ("FIC
Realty"), a subsidiary of FIC, received a commission in the amount of $156,000,
of which $122,538 was paid by Investors-NA and $33,462 by Family Life. In
connection with the 1996 sale of Austin Centre by Investors-NA, FIC Realty
received a commission in the amount of $123,350 from Investors-NA.
As part of the financing arrangement for the acquisition of Family Life
Insurance Company, Family Life Corporation ("FLC"), a subsidiary of FIC, entered
into a senior loan agreement under which $50 million was provided by a group of
banks. The balance of the financing consisted of a $30 million subordinated note
issued by FLC to Merrill Lynch Insurance Group, Ins. ("Merrill Lynch") and $14
million borrowed by another subsidiary of FIC from an affiliate of Merrill Lynch
and evidenced by a senior subordinated note in the principal amount of $12
million and a junior subordinated note in the principal amount of $2 million and
$25 million lent by two insurance company subsidiaries of ILCO. The latter
amount was represented by a $22.5 million loan from Investors-NA to FLC and a
$2.5 million loan provided directly to FIC by Investors-CA. In addition to the
interest provided under those loans, Investors-NA and Investors-CA were granted
by FIC non-transferable options to purchase, in the amounts proportionate to
their respective loans, up to a total of 9.9 percent of shares of FIC's common
stock at a price of $10.50 per share ($2.10 per share as adjusted for the
five-for-one stock split in November, 1996), equivalent to the then current
market price, subject to adjustment to prevent dilution. The original provisions
of the options provided for their expiration on June 12, 1998 if not previously
exercised. In connection with the 1996 amendments to the subordinated notes, as
described below, the expiration date of the options was extended to September
12, 2006.
On July 30, 1993, the subordinated indebtedness owed to Merrill Lynch and its
affiliate was prepaid. The Company paid $38 million plus accrued interest to
retire the indebtedness, which had a principal balance of approximately $50
million on July 30, 1993. The primary source of the funds used to prepay the
subordinated debt was new subordinated loans totaling $34.5 million that FLC and
Family Life Insurance Investment Company ("FLIIC"), another subsidiary of FIC,
obtained from Investors-NA. The principal amount of the new subordinated debt
was payable in four equal annual installments in 2000, 2001, 2002 and 2003 and
bears interest at an annual rate of 9%. The other terms of the new debt are
substantially the same as those of the $22.5 million subordinated loans that
Investors-NA had previously made to FLC and that continue to be outstanding.
In June, 1996, the provisions of the notes from Investors-NA to FIC, FLC and
FLIIC were modified as follows: (a) the $22.5 million note was amended to
provide for twenty quarterly principal payments, in the amount of $1,125,000
each, to commence on December 12, 1996; the final quarterly principal payment is
due on September 12, 2001; the interest rate on the note remains at 11%, (b) the
$30 million note was amended to provide for forty quarterly principal payments,
in the amount of $163,540 each for the period December 12, 1996 to September 12,
2001; beginning with the principal payment due on December 12, 2001, the amount
of the principal payment increases to $1,336,458; the final quarterly principal
payment is due on September 12, 2006; the interest rate on the note remains at
F-38
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $1,977,119 principal balance of the note 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%.
In December 1998 FLIIC was dissolved. In connection with the dissolution, all of
the assets and liabilities of FLIIC became the obligations of FLIIC's sole
shareholder, FIC. Accordingly, the obligations under the provisions of the $4.5
million note described above are now the obligations of FIC.
The Company reimbursed FIC for rental expenses and certain other operating
expenses incurred during 1998, 1997 and 1996 on behalf of the Company. The
amount of such reimbursement was approximately $-0-, $822,000 and $305,000,
respectively.
Data processing services for ILCO's and FIC's insurance subsidiaries are
provided by FIC Computer Service, Inc. ("FIC Computer"), a subsidiary of FIC.
Each of FIC's and ILCO's insurance subsidiaries has entered into a data
processing agreement with FIC Computer whereby FIC Computer provides data
processing services to each subsidiary for fees equal to such subsidiary's
proportionate share of FIC Computer's actual costs of providing those services
to all of the subsidiaries. The Company's insurance subsidiaries paid
$2,818,095, $3,010,110 and $2,243,234 and Family Life paid $1,610,397, $824,425
and $1,055,639 to FIC Computer for data processing services provided during the
years ended December 31, 1998, 1997 and 1996, respectively.
In 1995, Investors-NA entered into a reinsurance agreement with Family Life
pertaining to universal life insurance written by Family Life. The reinsurance
agreement is on a co-insurance basis and applies to all covered business with
effective dates on and after January 1, 1995. The agreement applies to only that
portion of the face amount of the policy which is less than $200,000; face
amounts of $200,000 or more are reinsured by Family Life with a third party
reinsurer.
In 1996, Investors-NA entered into a reinsurance agreement with Family Life,
pertaining to annuity contracts written by Family Life. The agreement applies to
contracts written on or after January 1, 1996.
ILCO received $11 million, $14 million, and $14 million from Family Life for
direct costs incurred by ILCO on behalf of Family Life's operations in 1998,
1997 and 1996, respectively. Under an agreement between ILCO and Family Life all
direct costs incurred on behalf of the other are to be reimbursed.
F-39
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Commitments and Contingencies
The Company and its subsidiaries are defendants in certain legal actions related
to the normal business operations of the Company. Management believes that the
resolution of such matters will not have a material impact on the financial
statements.
14. Net Income Per Share
The following table reflects the calculation of basic and diluted earnings per
share:
<TABLE>
Year Ended December 31,
<S> <C> <C> <C>
1998 1997 1996
(in thousands except per share amounts)
Basic:
Net income available to common shareholders $ 11,119 $ 20,540 $26,938
Weighted average common stock outstanding 4,375 4,328 4,233
Basic earnings per share $ 2.54 $ 4.75 $ 6.36
Diluted:
Net income available to common shareholders $ 11,119 $ 20,540 $26,938
Weighted average common stock outstanding 4,375 4,328 4,233
Common stock options 1,319 88 1,993
Repurchase of treasury stock (1,232) (47) (1,785)
Common stock and common stock equivalents 4,462 4,369 4,441
Diluted earnings per share $ 2.49 $ 4.70 $ 6.07
</TABLE>
The options held by FIC to purchase ILCO stock were excluded from the 1997
diluted EPS calculation as they were anti dilutive.
F-40
<PAGE>
INTERCONTENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
15. Quarterly Financial Data (unaudited) ( in thousands, except per share
amounts)
Three Months Three Months
Ended Ended
March 31, June 30,
1998 1997 1998 1997
Net Operating Revenue $ 27,872 $ 27,401 $ 27,527 $ 28,555
Net Income $ 2,719 $ 2,700 $ 2,808 $ 2,942
Basic earnings per share $ 0.63 $ 0.64 $ 0.64 $ 0.68
Diluted earnings per share $ 0.62 $ 0.61 $ 0.62 $ 0.67
Three Months Three Months
Ended Ended
September 30, December 31,
1998 1997 1998 1997
Net Operating Revenue $ 27,269 $ 29,306 $ 26,793 $ 42,421
Net Income $ 2,829 $ 2,837 $ 2,763 $ 12,061
Basic earnings per share $ 0.65 $ 0.66 $ 0.63 $ 2.79
Diluted earnings per share $ 0.64 $ 0.62 $ 0.63 $ 2.69
16. Subsequent Events
On March 6, 1999, the Company's Board of Directors approved a stock dividend in
the amount of one share of ILCO common stock for each share issued and
outstanding. The stock dividend was paid on March 17, 1999, to holders of record
on March 8, 1999.
F-41
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES SCHEDULE I -
SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN
RELATED PARTIES December 31, 1998
(in thousands of dollars)
<TABLE>
Column A Column B Column C Column D
<S> <C> <C> <C>
Amount at which Shown
in the Balance Sheet
Type of Investment Costs Value
Fixed maturities available for sale:
United States Government and
government agencies and
authorities $ 37,360 $ 40,652 $ 40,652
States, municipalities and political
subdivisions 4,690 5,073 5,073
Corporate securities 148,989 153,634 153,634
Mortgage-backed securities 244,091 250,790 250,790
Total fixed maturities available for
sale 435,130 450,149 450,149
Fixed maturities held to maturity 3,005 3,059 3,005
Total fixed maturities 438,135 453,208 453,154
Equity securities:
Public utilities 2 2 2
Industrial, miscellaneous and all
other 18 36 36
Total equity securities 20 38 38
Policy loans 53,614 53,614 53,614
Mortgage loans 10,332 10,883 10,332
Real estate 10,025 10,025 10,025
Short term investments 171,840 171,840 171,840
Total investments $ 683,966 $ 699,608 $ 699,003
</TABLE>
F-42
<PAGE>
INTERCONTINENTAL LIFE CORPORATION (PARENT COMPANY)
SCHEDULE II - CONDENSED FINANCIAL STATEMENTS OF REGISTRANT
BALANCE SHEETS
December 31, 1998 and 1997
(in thousands of dollars)
ASSETS 1998 1997
Short-term investments $ 3,732 $ 692
Cash and cash equivalents 157 99
Subordinated debenture receivables
from Investors Life Insurance
Company of North America, due
September 30, 1999 15,896 27,796
Investments in and advances to
subsidiaries
134,437 128,305
Accounts receivable 4,960 4,940
Property, plant and equipment, net 265 271
Other assets 388 493
Total Assets $ 159,835 $ 162,596
F-43
<PAGE>
INTERCONTINENTAL LIFE CORPORATION (PARENT COMPANY)
SCHEDULE II - CONDENSED FINANCIAL STATEMENTS OF REGISTRANT
BALANCE SHEETS, continued
December 31, 1998 and 1997
(in thousands of dollars)
<TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Liabilities: 1998 1997
Accounts payable and accrued
expenses $ 2,409 $ 2,570
Senior loan -0- 10,964
Deferred gain on sale of
real estate 738 847
Total Liabilities 3,147 14,381
Redeemable preferred stock:
Class A preferred stock, $1 par value,
shares authorized and issued 5,000 5,000
Redeemable preferred stock:
Class B preferred stock, $1 par value, 15,000 15,000
shares authorized and issued 20,000 20,000
Redeemable preferred stock,
repurchased and held as
treasury stock (20,000) (20,000)
-0- -0-
Shareholders' Equity:
Common stock, $.22 par value,
15,000,000 shares authorized;
5,385,739 and 5,343,739 shares
issued, 4,376,706 and 4,331,335
shares outstanding in 1998 and
1997, respectively 1,185 1,176
Additional paid-in capital 4,385 4,253
Accumulated other comprehensive
income 11,571 14,403
Retained earnings (including
$135,423 and $125,452 of
undistributed earnings of
subsidiaries at December 31,
1998 and 1997, respectively) 140,356 129,237
157,497 149,069
Common treasury stock, at cost,
684,273 and 687,644 shares in
1998 and 1997 (809) (854)
Total Shareholders' Equity 156,688 148,215
Total Liabilities and
Shareholders' Equity $ 159,835 $ 162,596
</TABLE>
F-44
<PAGE>
INTERCONTINENTAL LIFE CORPORATION (PARENT COMPANY)
SCHEDULE II - CONDENSED FINANCIAL STATEMENTS OF REGISTRANT,
STATEMENTS OF INCOME
Years Ended December 31, 1998, 1997 and 1996
(in thousands of dollars)
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
Revenues charged to subsidiaries:
Interest income $ 2,391 $ 3,345 $ 4,915
Other income 138 131 133
2,529 3,476 5,048
Operating expenses 348 958 2,513
Interest expense 415 1,417 2,613
763 2,375 5,126
Income (loss) from operations 1,766 1,101 (78)
Federal income tax provision (benefit) 618 385 (27)
undistributed earnings from subsidiaries 1,148 716 (51)
Equity in undistributed earnings from
subsidiaries 9,971 19,824 26,989
Net income $ 11,119 $ 20,540 $ 26,938
</TABLE>
F-45
<PAGE>
INTERCONTINENTAL LIFE CORPORATION (PARENT COMPANY)
SCHEDULE II - CONDENSED STATEMENTS OF REGISTRANT
STATEMENTS OF CASH FLOWS
(in thousands of dollars)
<TABLE>
Year ended December 31,
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING 1998 1997 1996
ACTIVITIES:
Net income $ 11,119 $ 20,540 $ 26,938
Adjustments to reconcile net
income to net cash provided
by (used in) operating activities:
Amortization of deferred gain
on sale of real estate (110) (109) (110)
Unrealized appreciation of equity
securities held by insurance
subsidiaries (1,137) 1,691 507
Decrease in accounts receivable (20) 1,023 -0-
Increase in investment in and
advances to subsidiaries (7,820) (26,618) (26,284)
(Decrease) increase in accounts
payable and accrued expenses (161) 344 (3,067)
Decrease in other assets 105 1,215
Other -0- 6 2
Net cash provided by (used in) operating
activities 1,976 (2,594) (799)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Change in short term investments (3,040) 5,560 770
Net cash (used in) provided by investing
activities (3,040) 5,560 770
CASH FLOWS FROM FINANCING
ACTIVITIES:
Repayment of debt (10,964) (13,980) (34,441)
Stock options exercised 141 527 244
Purchase of treasury stock 45 (290) -0-
Payment received on subordinated
debenture receivable 11,900 10,750 34,289
Net cash provided by (used in)
financing activities 1,122 (2,993) 92
Net increase (decrease) in cash 58 (27) 63
Cash, beginning of year 99 126 63
Cash, end of year $ 157 $ 99 $ 126
</TABLE>
F-46
<PAGE>
INTERCONTINENTAL LIFE CORPORATION (PARENT COMPANY) SCHEDULE IV - REINSURANCE
(in thousands of dollars)
Ceded to Assumed
Direct Other From Other
1998 Amount Companies Companies
Life insurance in -force $ 7,258,662 $ 1,531,981 $ 331,133
Life insurance $ 12,782 $ 2,112 $ 48
Accident-health insurance 1,001 830 1
Total $ 13,783 $ 2,942 $ 49
1997
Life insurance in-force $ 7,788,147 $ 1,636,371 $ 174,777
Life insurance $ 12,661 $ 2,186 $ 114
Accident-health insurance 809 404 37
Total $ 13,470 $ 2,590 $ 151
1996
Life insurance in -force $ 6,934,547 $ 1,112,318 $ 93,927
Life insurance $ 10,611 $ 1,913 $ 101
Accident-health insurance 947 (202) 32
Total $ 11,588 $ 1,711 $ 133
F-47
<PAGE>
INTERCONTINENTAL LIFE CORPORATION (PARENT COMPANY)
SCHEDULE IV - REINSURANCE, continued
(in thousands of dollars)
Percentage
Net Of Amount
Amount Assumed
1998
Life insurance in-force $ 6,057,814 5.47%
Premium:
Life insurance $ 10,718 0.45%
Accident-health insurance 172 0.58%
Total $ 10,890 0.45%
1997
Life insurance in-force $ 6,326,553 2.76%
Premium:
Life insurance $ 10,589 1.08%
Accident-health insurance 442 8.37%
Total $ 11,031 1.37%
1996
Life insurance in-force $ 5,916,156 1.59%
Life insurance $ 8,799 1.15%
Accident-health insurance 1,181 2.71%
Total $ 9,980 1.33%
F-48
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities 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
(Registrant)
By: /s/ Roy F. Mitte By: /s/ James M. Grace
-------------------------- ---------------------------
Roy F. Mitte, Chairman of James M. Grace, Treasurer,
the Board, President and Principal Accounting
Chief Executive Officer and Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on March 29, 1999.
/s/ Roy F. Mitte /s/ James M. Grace
Roy F. Mitte, Director James M. Grace, Director
/s/ Eugene E. Payne /s/ Jeffrey H. Demgen
Eugene E. Payne, Director Jeffrey H. Demgen, Director
/s/ Robert A. Bender /s/ Theodore A. Fleron
Robert A. Bender, Director Theodore A. Fleron, Director
/s/ W. Lewis Gilcrease /s/ Richard A. Kosson
W. Lewis Gilcrease, Director Richard A. Kosson, Director
/s/ Elizabeth T. Nash /s/ H. Gene Pruner
Elizabeth T. Nash, Director H. Gene Pruner, Director
/s/ Steven P. Schmitt
Steven P. Schmitt, Director
-58-
<PAGE>
Exhibit Index
Exhibit Page Description
Number Number
3(a) Certificate of Incorporation of
InterContinental Life Corporation
filed May 22, 1969 and Amendments
thereto (2)
(i) Amendment filed July 16, 1973
(ii) Amendment filed August 4, 1977
(iii) Amendment filed February 10, 1983
(iv) Amendment filed December 14, 1988
(v) Amendment filed February 9, 1990
3(b) By-laws of InterContinental Life Corporation. (3)
3(c) Articles of Incorporation of InterContinental
Life Corporation of Texas. (15)
3(d) Amendment to Articles of Incorporation of
InterContinental Life Corporation of Texas. (15)
3(e) By-Laws of InterContinental Life Corporation of
Texas. (15)
3(f) Articles of Merger of InterContinental Life
Corporation and InterContinental Life Corporation
of Texas. (15)
3(g) Plan and Agreement of Merger Between
InterContinental Life Corporation and
InterContinental Life Corporation of Texas. (15)
10(a) Registrant's Incentive Stock Option Plan. (1)
10(m) Lease dated December 20, 1985 between Registrant
and Parker Road Associates for the rental of 40
Parker Road, Elizabeth, New Jersey. (4)
Ex - 1
<PAGE>
10(o) (i) Grid Note dated December 18, 1985
in the amount of $800,000 made by the
Registrant and payable to Midlantic National
Bank. (4)
(ii) Demand Note dated December 18, 1985 in
the amount of $491,165.03 made by Registrant
and payable to Midlantic National Bank. (4)
10(ah) Credit Agreement for $125,000,000
dated as of December 28, 1988 among
Registrant and certain banks
identified therein.
(5)
10(ai) Note Purchase Agreement dated as of December 31, 1988
between Registrant and a Rhode Island based
insurance/financial services company. A Note Purchase
Agreement in substantially identical form was
executed with seven other entities identified in
these exhibit. (5)
10(aj) Class A Preferred Stock Purchase Agreement dated as
of December 1, 1988 between Registrant and Insurance
Company of North America. (5)
10(ak) Class B Preferred Stock Purchase
Agreement dated as of December 1,
1988 between Registrant and a Rhode
Island based insurance/financial
services company. A Class B
Preferred Stock Purchase Agreement
in substantially identical form was
executed with seven other entities
identified in this exhibit. (5)
10(al) Pledge Agreement dated as of
December 28, 1988 between Registrant
and The First National Bank of
Chicago, as Agent.
(5)
10(am) Surplus Debenture dated as of December 28, 1988 in
the amount of $140,000,000 made by Standard to
Registrant. (5)
10(an) Warrant Agreement dated as of December 29, 1988
between Registrant and a Connecticut based insurance/
financial services company. A Warrant Agreement in
substantially identical form was executed with seven
other entities. (5)
10(aq) Registrant's Defined Benefit Pension Plan, effective
as of January 1, 1988.
Ex - 2
<PAGE>
10(ar) Registrant's Employee Stock Purchase Plan, effective
as of August 25, 1989. (6)
10(as) Registrant's Non-Qualified Stock Option Plan. (6)
10(at) Exchange and Amendment Agreement dated July 30, 1990
between Registrant and the holders of its Class A
Preferred Stock and its Class B Preferred Stock. (7)
10(au) Amendment dated July 30, 1990 to Senior Loan Agreement
among the Registrant and certain banks identified
therein. (7)
10(av) InterCreditor Agreement dated June
12, 1991, among Investors Life
Insurance Company of North America,
Investors Life Insurance Company of
California, Merrill Lynch Insurance
Group, Inc. and Merrill Lynch & Co.,
Inc.
(8)
10(aw) Note dated June 12, 1991 in the
amount of $22.5 million made by
Family Life Corporation in favor of
Investors Life Insurance Company of
North America. (8)
10(ax) Note dated June 12, 1991 in the amount of $2.5 million
made by Financial Industries Corporation in favor of
Investors Life Insurance Company of California. (8)
10(ay) InterCreditor Agreement among Investors Life Insurance
Company of North America, Investors Life Insurance
Company of California and the Agent under the Credit
Agreement dated as of June 12, 1991. (8)
10(az) Option Agreement by Financial Industries Corporation in
favor of Investors Life Insurance Company of North
America and Investors Life Insurance Company of
California. (8)
10(aaa) Hotel Lease Agreement dated as of August 22, 1991
between Investors Life Insurance Company of North
America and FIC Realty Services, Inc. (9)
10(aab) Management Agreement dated as of September 4, 1991
between Investors Life Insurance Company of North
America and FIC Property Management, Inc. (9)
Ex - 3
<PAGE>
10(aac) Amended and Restated Credit Agreement dated January 29,
1993 among the Registrant and certain banks identified
therein. (10)
10(aad) Amended and Restated Pledge Agreement dated January 29,
1993 between the Registrant and the agent bank named
therein. (10)
10(aae) Stock Option Agreement dated March 8, 1986 between
Registrant and Financial Industries Corporation. (10)
10(aaf) Surplus Debenture dated as of
November 13, 1986 in the amount of
$15,000,000 made by New Standard to
Registrant.
(10)
10(aag) Terms and Conditions of Employment Contracts of James M
Grace, Eugene E. Payne and Joseph F. Crowe approved by
Registrant's Board of Directors on May 16, 1991, ((10)
10(aah) Letter agreement and addendum dated July 23, 1992
between Investors Life Insurance Company of North
America and Mr. and Mrs. Theodore A. Fleron. (10)
10(aai) Letter agreement dated October 15, 1992 between Roy F.
Mitte and Registrant evidencing surrender and
cancellation of stock options. (10)
10(aaj) Note dated July 30, 1993 in the amount of $30 million
made by Family Life Corporation in favor of Investors
Life Insurance Company of North America. (11)
10(aak) Note dated July 30, 1993 in the amount of $4.5 million
made by Family Life Insurance Investment Company in
favor of Investors Life Insurance Company of North
America. (11)
10(aal) Amendment No. 1 dated July 30, 1993 between Family Life
Corporation and Investors Life Insurance Company of
North America amending $22.5 million note. (11)
10(aam) Cancellation of Stock Option Agreement dated October 21
1993 between Registrant and Roy F. Mitte. (11)
10(aan) Waiver and Amendment Agreement dated
as of July 23, 1993 among the
Registrant and certain banks
identified therein.
(12)
Ex - 4
<PAGE>
10(aao) Amendment Agreement dated as of
December 20, 1993 among the
Registrant and certain banks
identified therein.
(12)
10(aap) Amendment Agreement dated as of March 12, 1994 among
the Registrant and certain banks identified therein.
(12)
10(aaq) Amendment Agreement dated as of
December 22, 1994 among the
Registrant and certain banks
identified therein.
(12)
10(aar) Amendment Agreement dated as of February 10, 1995 among
the Registrant and certain banks identified therein.
(12)
10(aas) Data Processing Agreement dated as of November 30, 1994
between InterContinental Life Insurance Company and FIC
Computer Services, Inc. (12)
10(aat) Data Processing Agreement dated as of November 30, 1994
between Investors Life Insurance Company of North
America and FIC Computer Services, Inc. (12)
10(aau) Data Processing Agreement dated as of November 30, 1994
between Family Life Insurance Company and FIC Computer
Services, Inc. (12)
10(aav) Lease Agreement dated as of September 30, 1994 between
FIC Realty Services, Inc. and Atrium Beverage
Corporation. (12)
10(aaw) Management Agreement dated as of September 30, 1994
between HCD Austin Corporation as agent for FIC Realty
Services, Inc. and Atrium Beverage Corporation. (12)
10(aax) Amendment Agreement dated as of August 8, 1995 among
the Registrant and certain banks identified therein.(13)
10(aay) Amendment Agreement dated as of
December 15, 1995 among the
Registrant and certain banks
identified therein.
(13)
10(aaz) Agreement of Sale dated as of
September 5, 1995 between Omni
Congress Joint venture as Buyer and
Investors Life
Ex - 5
<PAGE>
Insurance Company of North America as Seller,
with exhibits, amendments and assignment. (13)
10(aaaa) Amendment No. 2 dated December 12,
1996, effective June 12, 1996 to the
note dated June 12, 1991 in the
amount of $22.5 million made by
Family Life Corporation in favor of
Investors Life Insurance Company of
North America. (14)
10(aaab) (i) Amendment No. 1 dated December 12, 1996,
effective June 12, 1996 to the note dated June
12, 1991 in the amount of $2.5 million made by
Financial Industries Corporation in favor of
Investors Life Insurance Company of California.
(14)
(ii) Amendment No. 1 dated
December 12, 1996,
effective June 12, 1996 to
the "payment in kind"
provisions of the note
dated June 12, 1991 in the
amount of $2.5 million made
by Financial Industries
Corporation in favor of
Investors Life Insurance
Company of North America.
(14)
10(aaac) Amendment No. 1 dated December 12, 1996,
effective June 12, 1996 to the note dated July
30, 1993 in the amount of $30 million made by
Family Life Corporation in favor of Investors
Life Insurance Company of North America.(14)
10(aaad) Amendment No. 1 dated December 12, 1996,
effective June 12, 1996 to the note dated July
30, 1993 in the amount of $4.5 million made by
Family Life Insurance Investment Company in favor
of Investors Life Insurance Company of North
America. (14)
10(aaae) Amendment Agreement dated as of
April 24, 1996 between Registrant
and certain banks identified
therein.(14)
10(aaaf) Waiver Agreement dated as of
December 12, 1996 between Registrant
and certain banks identified
therein.(14)
10(aaag) Amendment Agreement dated December 12, 1996 to
the Option Agreement by Financial Industries
Corporation in favor of Investors Life Insurance
Company of North America and Investors Life
Insurance Company of California. (14)
Ex - 6
<PAGE>
10(aaah) Amendment and Waiver Agreement dated
as of March 31, 1997 among the
Registrant and certain banks
identified therein. (16).
10(aaai) Amendment and Waiver Agreement dated
as of December 9, 1997 among the
Registrant and certain banks
identified therein. (16).
10(aaaj) Ex-9 Assignment Agreement dated December 23, 1998,
from Family Life Insurance Investment Company to
Financial Industries Corporation, assigning the
9% Senior Subordinated Note dated July 30, 1993
in the amount of $4.5 million made by Family
Life Insurance Investment Company in favor of
Investors Life Insurance Company of North
America.
21 Ex-11 Subsidiaries of the Registrant.
23 Ex-12 Consent of PricewaterhouseCoopers, LLP.
(1) Filed with the Registrant's Annual Report of Form 10-K for the fiscal
year ended December 31, 1983, Commission File No. 0-7290, and
incorporated herein by reference.
(2) Filed with the Registrant's Registration Statement on Form S-8
(Registration No. 2085333) and incorporated herein by reference; except
Amendment filed December 14, 1988 (item (iv)), which was filed with
Registrant's Current Report of Form 8-K dated January 12, 1989, and
incorporated herein by reference; and Amendment filed February 9, 1990,
which was filed with Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1989, and incorporated herein by
reference.
(3) Filed with the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1984 and incorporated herein by reference.
(4) Filed with the Registrant's Annual Report of Form 10-K for the fiscal
year ended December 31, 1985 and incorporated herein by reference.
(5) Filed with Registrant's Annual Report of Form 10-K for the fiscal year
ended December 31, 1988, and incorporated herein by reference,
(6) Filed with Registrants Annual Report on Form 10-K for the fiscal year
ended December 31, 1989, and incorporated herein by reference.
(7) Filed with Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1990, and incorporated herein by reference.
Ex - 7
<PAGE>
(8) Filed with Financial Industries Corporation's Current Report on Form
8-K dated June 25, 1991, and incorporated herein by reference.
(9) Filed with Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1991, and incorporated herein by reference.
(10) Filed with Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1992, and incorporated herein by reference.
(11) Filed with Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993, and incorporated herein by reference.
(12) Filed with Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994, and incorporated herein by reference.
(13) Filed with Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995, and incorporated herein by reference.
(14) Filed with Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996, and incorporated herein by reference.
(15) Filed with Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1997, and incorporated herein by reference.
(16) Filed with Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997, and incorporated herein by reference.
Ex - 8
<PAGE>
Exhibit 10(aaaj)
Assignment of 9% Senior Subordinated Note Dated July 30, 1993
This Assignment Agreement ("Assignment") is entered into effective December 23,
1998 , 1998 by and between Family Life Insurance Investment Corporation
("Assignor"), Financial Industries Corporation ("Assignee") and Investors Life
Insurance Company of North America ("Payee").
WHEREAS, Assignor is the obligor and Payor under that certain 9%
Subordinated Senior Note dated July 30, 1993 in the principal amount
of $4,500,000, as amended by Amendment No. 1 dated December 12, 1996,
with a current principal balance of $4,279,221 (as amended, the
"Note"), and
WHEREAS, Investors Life Insurance Company of North America is the
Payee under the Note, and
WHEREAS, Assignor will dissolve pursuant to a Plan of Dissolution and
Articles of Dissolution dated November 30, 1998 which were prepared by
the Board of Directors of Assignor and approved by the shareholders of
Assignor, and
WHEREAS, Assignee has agreed to assume all of the rights, duties and
obligations of Assignor under the Note, and
WHEREAS, Payee has agreed to release Assignor from Assignor's duties
and obligations under the Note once the Note is assumed by Assignee,
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree
as follows:
1. Capitalized terms used herein and not otherwise defined in
this Assignment shall have the meanings attributed to such
terms in the Note.
2. Assignor hereby assigns and sets over to Assignee all of
Assignor's rights, duties and obligations under the Note.
3. Assignee hereby accepts all of Assignor's rights, duties and
obligations under the Note and agrees to perform all of the
duties and obligations contained in the Note.
4. By consenting to this Assignment, Payee agrees that Assignee
shall assume all of Assignor's rights, duties and obligations
under the Note.
Ex - 9
<PAGE>
IN WITNESS WHEREOF, Family Life Insurance Investment Company,
Financial Industries Corporation and Investors Life Insurance Company
of North America have executed this Assignment as of December 23 ,
1998
Assignor:
FAMILY LIFE INSURANCE
INVESTMENT CORPORATION
By: /s/ James M. Grace
Name: James M. Grace
Title: Executive Vice President
Assignee:
FINANCIAL INDUSTRIES
CORPORATION
By: /s/ Roy F. Mitte
Name: Roy F. Mitte
Title: President
Approved and Agreed to by Payee:
INVESTORS LIFE INSURANCE COMPANY
OF NORTH AMERICA
By: /s/ Roy F. Mitte
Name: Roy F. Mitte
Title: President
Ex - 10
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
Investors Life Insurance Company of North America
Investors Life Insurance Company of Indiana
ILG Securities Corporation
ILG Sales Corporation
InterContinental Growth Plans, Inc.
InterContinental Life Agency, Inc. *
*Wholly-owned subsidiary of InterContinental Growth Plans, Inc.
Ex - 11
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-71074) of InterContinental Life Corporation of our
report dated March 26, 1999 appearing on page F-2 of this Form 10-K.
PricewaterhouseCoopers LLP
Dallas, Texas
March 26, 1999
Ex - 12
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K FOR
THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 450,149
<DEBT-CARRYING-VALUE> 3,005
<DEBT-MARKET-VALUE> 3,059
<EQUITIES> 3,121
<MORTGAGE> 10,332
<REAL-ESTATE> 10,025
<TOTAL-INVEST> 702,086
<CASH> 12,206
<RECOVER-REINSURE> 18,847
<DEFERRED-ACQUISITION> 31,953
<TOTAL-ASSETS> 1,305,248
<POLICY-LOSSES> 135,463
<UNEARNED-PREMIUMS> 2,124
<POLICY-OTHER> 545,908
<POLICY-HOLDER-FUNDS> 10,856
<NOTES-PAYABLE> 0
0
0
<COMMON> 1,185
<OTHER-SE> 153,050
<TOTAL-LIABILITY-AND-EQUITY> 1,350,248
10,890
<INVESTMENT-INCOME> 54,619
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 2,886
<BENEFITS> 38,367
<UNDERWRITING-AMORTIZATION> 2,128
<UNDERWRITING-OTHER> 14,853
<INCOME-PRETAX> 17,586
<INCOME-TAX> 6,467
<INCOME-CONTINUING> 11,119
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,119
<EPS-PRIMARY> 2.54
<EPS-DILUTED> 2.49
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
