SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2000
Commission File Number 2-39310
INTERCONTINENTAL LIFE CORPORATION
(Exact Name of Registrant as specified in its charter)
Texas 22-1890938
(State of Incorporation) (I.R.S. Employer Identification Number)
6500 River Place Blvd., Building I
Austin, Texas 78730
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (512) 404-5000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
Number of common shares outstanding ($.22 Par Value) at end of period: 8,123,071
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INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
INDEX
Page No.
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 2000 and December 31, 1999................................. 3
Consolidated Statements of Income
For the three and nine month periods ended
September 30, 2000 and September 30, 1999.................................5
Consolidated Statements of Cash Flows
For the three and nine month periods ended
September 30, 2000 and September 30, 1999.................................7
Notes to Consolidated Financial Statements................................... 11
Item 2. Management's Discussion and Analysis of
Financial Conditions and Results of Operations...........................12
Item 3. Quantitative and Qualitative Disclosures
About Market Risk........................................................18
Part II
Other Information.............................................................19
Signature Page................................................................21
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INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
September 30, December 31,
<TABLE>
2000 1999
<CAPTION>
<S> <C> <C>
ASSETS (Unaudited)
Investments:
Fixed maturities, at
amortized cost (market value
approximates $1,393 and $2,056) $ 1,406 $ 2,088
Fixed maturities available for sale,
at market value (amortized cost
$448,885 and $411,532) 445,610 404,217
Equity securities, at market value
(cost approximates $338) 1,745 1,943
Policy loans 48,954 50,882
Mortgage loans 6,681 6,844
Invested real estate and
other invested assets 42,511 21,145
Short-term investments 125,915 191,695
Total investments 672,822 678,814
Cash and cash equivalents 4,246 3,358
Notes receivable from affiliates 36,886 41,497
Accrued investment income 9,632 7,529
Agent advances and other receivables 24,700 24,230
Reinsurance receivables 17,431 18,769
Property and equipment, net 4,455 4,416
Deferred policy acquisition costs 38,357 35,598
Present value of future profits of
acquired businesses 36,919 39,831
Other assets 7,553 9,304
Separate account assets 461,789 457,853
Total Assets $ 1,314,790 $ 1,321,199
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
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INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
(in thousands of dollars)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)
<S> <C> <C>
Liabilities:
Policy liabilities and contractholder deposit funds:
Future policy benefits $ 132,019 $ 130,092
Contractholder deposit funds 517,697 533,869
Unearned premiums 1,959 1,977
Other policy claims and benefits payable 9,901 9,893
661,576 675,831
Other policyholders' funds 3,015 3,012
Deferred federal income taxes 23,151 21,741
Other liabilities 12,802 14,635
Separate account liabilities 457,267 454,289
Total Liabilities 1,157,811 1,169,508
Commitments and Contingencies
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; 10,855,478 and 10,855,478 shares issued,
8,123,071 and 8,827,941 shares outstanding in 2000
and 1999, respectively 2,388 2,388
Additional paid-in capital 4,526 4,526
Accumulated other comprehensive income (1,215) (3,712)
Retained earnings 161,525 151,932
167,224 155,134
Common treasury stock, at cost, 2,732,407 and
2,027,537 in 2000 and 1999, respectively (10,245) (3,443)
Total Shareholders' Equity 156,979 151,691
Total Liabilities and
Shareholders' Equity $ 1,314,790 $ 1,321,199
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
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INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars, except for per share data)
(unaudited)
Three Months Ended Sept. 30,
<TABLE> 2000 1999
<CAPTION>
Revenues:
<S> <C> <C>
Premium $ 4,081 $ 2,446
Net investment income 13,400 12,209
Earned insurance charges 9,497 10,161
Other 652 483
27,630 25,299
Benefits and expenses:
Policyholder benefits and expenses 9,204 7,048
Interest expense on contract holders
deposit funds 7,441 7,524
Amortization of present value of future
profits of acquired businesses 908 995
Amortization of deferred policy
acquisition costs 678 461
Operating expenses 4,289 4,328
22,520 20,356
Income from operations 5,110 4,943
Provision for federal income taxes 1,872 1,808
Net income $ 3,238 $ 3,135
Net income per share:
Basic:
Weighted average common stock
outstanding 8,172 8,791
Basic earnings per share $ 0.40 $ 0.36
Diluted:
Common stock and common stock equivalents 8,186 8,817
Diluted earnings per share $ 0.40 $ 0.36
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars, except for per share data)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
Revenues:
<S> <C> <C>
Premium $ 8,665 $ 7,604
Net investment income 37,914 38,084
Earned insurance charges 29,182 30,308
Other 2,539 2,266
78,300 78,262
Benefits and expenses:
Policyholder benefits and expenses 23,641 23,642
Interest expense on contract holders
deposit funds 22,035 23,599
Amortization of present value of future
profits of acquired businesses 2,912 2,883
Amortization of deferred policy
acquisition costs 1,881 1,676
Operating expenses 12,687 12,682
63,156 64,482
Income from operations 15,144 13,780
Provision for federal income taxes 5,551 5,057
Net income $ 9,593 $ 8,723
Net income per share:
Basic:
Weighted average common stock
outstanding 8,408 8,791
Basic earnings per share $ 1.14 $ 0.99
Diluted:
Common stock and common stock equivalent 8,415 8,817
Diluted earnings per share $ 1.14 $ 0.99
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
CASH FLOWS FROM OPERATING 2000 1999
ACTIVITIES
<S> <C> <C>
Net Income $ 3,238 $ 3,135
Adjustments to reconcile net income to
net cash (used in) provided by
operating activities:
Amortization of present value of future
profits of acquired businesses 908 995
Amortization of deferred policy
acquisition costs 678 461
Net gain on sale of investments 0 73
Depreciation 283 120
Changes in assets and liabilities
Increase in accrued investment income (1,499) (394)
(Increase) decrease in agent advances and
other receivables (1,992) 7,717
Policy acquisition costs deferred (1,503) (1,537)
Increase (decrease) in policy liabilities and
contractholder deposit funds 898 (3,944)
Increase (decrease) in other policyholders' funds 27 (16)
Decrease in other liabilities (8,443) (7,048)
Increase (decrease) in deferred federal income taxes 1,689 (997)
Decrease in other assets 3,239 882
Other, net 80 (4,419)
Net cash used in operating activities $ (2,397) $ (4,972)
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30, ed
CASH FLOWS FROM INVESTING 2000 1999
ACTIVITIES
<S> <C> <C>
Investments purchased $ (8,982) $ (27,343)
Proceeds from sales and
maturities of investments 3,624 29,596
Net change in short-term investments 1,387 3,220
Purchases and retirements of equipment (296) (170)
Decrease in notes receivable from affiliates 1,537 1,537
Net cash (used in) provided by investing activities (2,730) 6,840
CASH FLOWS FROM FINANCING ACTIVITIES
(Purchase) issuance of treasury stock (924) 27
Net cash (used in) provided by
financing activities (924) 27
Net (decrease) increase in cash and cash equivalents (6,051) 1,895
Cash and cash equivalents,
beginning of period 10,297 9,688
Cash and cash equivalents, end of period $ 4,246 $ 11,583
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,ed
CASH FLOWS FROM OPERATING 2000 1999
ACTIVITIES (unaudited)
<S> <C> <C>
Net Income $ 9,593 $ 8,723
Adjustments to reconcile net income to
net cash used in operating activities:
Amortization of present value of future
profits of acquired businesses 2,912 2,883
Amortization of deferred policy
acquisition costs 1,881 1,676
Net gain on sale of investments 0 (149)
Depreciation 419 347
Changes in assets and liabilities:
Increase in accrued investment income (2,103) (312)
Decrease in agent advances and
other receivables 868 669
Policy acquisition costs deferred (4,640) (4,382)
Decrease in policy liabilities and
contractholder deposit funds (14,255) (15,055)
Increase in other policyholders' funds 3 9
Decrease in other liabilities (1,833) (2,685)
Increase (decrease) in deferred
federal income taxes 1,410 (5,056)
Decrease (increase) in other assets 1,751 (1,068)
Other, net (336) (710)
Net cash used in operating activities $ (4,330) $ (15,110)
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
(unaudited)
<TABLE>
Nine Months Ended
September 30,
CASH FLOWS FROM INVESTING 2000 1999
ACTIVITIES
<S> <C> <C>
Investments purchased $ (84,945) $ (54,825)
Proceeds from sales and maturities of investments 27,044 83,254
Net change in short-term investments 65,768 (18,176)
Purchases and retirements of equipment (458) (497)
Decrease in notes receivable from affiliates 4,611 4,611
Net cash provided by investing activities 12,020 14,367
CASH FLOWS FROM FINANCING ACTIVITIES
(Purchase) Issuance of treasury stock (6,802) 33
Issuance of common stock 0 87
Net cash (used in) provided by financing activities (6,802) 120
Net increase (decrease) in cash
and cash equivalents 888 (623)
Cash and cash equivalents, beginning of year 3,358 12,206
Cash and cash equivalents, end of period $ 4,246 $ 11,583
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The financial statements included herein reflect all adjustments which are, in
the opinion of management, necessary to present a fair statement of the interim
results. The statements have been prepared to conform to the requirements of
Form 10-Q and do not necessarily include all disclosures required by generally
accepted accounting principles (GAAP). The reader should refer to Form 10-K for
the year ended December 31, 1999 previously filed with the Securities and
Exchange Commission for financial statements prepared in accordance with GAAP.
Comprehensive Income
The following is a reconciliation of total accumulated other comprehensive
income from December 31, 1999 to September 30, 2000 (in thousands):
<TABLE>
<CAPTION>
Net unrealized Net Total
gain on appreciation accumulated
investments (depreciation) other
in fixed of equity comprehensive
maturities securities income
available for
sale
<S> <C> <C> <C>
Balance at December 31, 1999 $ (4,755) $ 1,043 $ (3,712)
Current period change 2,626 (129) 2,497
Balance at September 30, 2000 $ (2,129) $ 914 $ (1,215)
</TABLE>
New Accounting Pronouncements
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, 2000, as amended by FAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No.133."
As the Company does not have significant investments in derivative financial
instruments, the adoption of FAS No. 133 is not anticipated to have a material
impact on the Company's results of operations, liquidity or financial position.
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations
For the nine-month period ended September 30, 2000, InterContinental Life
Corporation's ("ILCO") net income was $9,593,000 (basic and diluted earnings of
$1.14 per common share) as compared to $8,723,000 (basic earnings and diluted
earnings of $0.99 per common share) in the first nine months of 1999. Earnings
per share are stated in accordance with the requirements of FAS No. 128, which
establishes two measures of earnings per share: basic earnings per share and
diluted earnings per share. Basic earnings per share is computed by dividing
income available to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted earnings per share reflect the
potential dilution that would occur if securities or other contracts to issue
common stock were converted or exercised.
Results of Operations
For the nine-month period ended September 30, 2000, the Company's income before
federal income taxes was $15,144,000 on revenues of $78,300,000 as compared to
income of $13,780,000 on revenues of $78,262,000 for the first nine months of
1999.
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
quality customer service.
Premium income, net of reinsurance, for the first nine months of 2000 was $8.67
million, as compared to $7.60 million for the first nine months of 1999.
Reinsurance premiums ceded were $1.21 million for the first nine months of 2000,
as compared to $1.59 million in the first nine months of 1999. Earned insurance
charges for the nine-month period ended September 30, 2000 were $29.2 million,
as compared to $30.3 million for the same period in 1999. This source of
revenues is related to the universal life insurance and annuity book of business
of the insurance subsidiaries of the Company.
As of September 30, 2000, the market value of the fixed maturities available for
sale segment was $445.6 million as compared to an amortized cost of $448.9
million, or an unrealized loss of $3.3 million. The decrease reflects unrealized
losses on such investments related to changes in interest rates subsequent to
the purchase of such investments. The net of tax effect of this decrease ($2.14
million at September 30, 2000) is included in "Accumulated other comprehensive
loss" on the Consolidated Balance Sheets and has been recorded as a decrease in
shareholders' equity. As required under the provisions of FAS No. 130, the
determination of "Accumulated other comprehensive income" includes separate
identification of the change in values which occurred during the current period.
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<PAGE>
For the three-month period ended September 30, 2000, the lapse rate with respect
to universal life insurance policies decreased from the lapse rate experienced
in the similar period in 1999. The rate for the 2000 period was 5.60 %, as
compared to 5.89 % in the 1999 period. The lapse rate with respect to
traditional (non-universal) life insurance policies decreased significantly from
the levels experienced in the third quarter of 1999. The rate for the
three-month period ended September 30, 2000 was 5.31 %, as compared to 8.56 % in
the similar period in 1999. The lapse rates experienced during these periods
were within the ranges anticipated by management.
Liquidity and Capital Resources
ILCO is a holding company whose principal assets consist of the common stock of
Investors Life Insurance Company of North America ("Investors-NA") and its
subsidiary - Investors Life Insurance Company of Indiana ("Investors-IN").
Financial Industries Corporation ("FIC") currently owns, directly and indirectly
through its subsidiary Family Life Insurance Company, 3,932,692 shares
(approximately 48 %) of ILCO's common stock.
Prior to June 30, 2000, ILCO's principal source of liquidity consisted of the
periodic payment of principal and interest by Investors-NA, pursuant to the
terms of the Surplus Debentures. The Surplus Debentures were originally issued
by Standard Life Insurance Company and their terms were previously approved by
the Mississippi Insurance Commissioner. In connection with the 1993 merger of
Standard Life into Investors-NA, the obligations of the Surplus Debentures were
assumed by Investors-NA. As of June 30, 2000, the outstanding principal balance
of the Surplus Debentures was completely paid off. For periods subsequent to
June 30, 2000, ILCO's available source of liquidity would be from dividends paid
to it from its subsidiaries. Applicable state insurance laws may limit the
ability of such subsidiaries to pay dividends to ILCO. Investors-NA is domiciled
in the State of Washington. The Washington insurance law includes the "greater
of" standard for payment of dividends to shareholders, but has a requirement
that prior notification of a proposed dividend be given to the Washington
Insurance Commissioner and that cash dividends may be paid only from earned
surplus. Under the "greater of" standard, an insurer may pay a dividend in an
amount equal to the greater of (i) 10% of the policyholder surplus or (ii) the
insurer's net gain from operations for the previous year. As of September 30,
2000, Investors-NA had earned surplus of $52.9 million.
Investors-IN is domiciled in the State of Indiana. Under the Indiana insurance
law, 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 $20.86 million at September 30, 2000. In
June, 1999, Investors-IN paid a dividend in the amount of $3 million to its sole
shareholder, Investors-NA. The amount of the dividend was less than the net gain
from operations for the prior fiscal year; accordingly, no prior approval was
required for the payment of the dividend. Advance notice of the payment was
provided to the Indiana Department of Insurance, in accordance with the
provisions of the Indiana Insurance Code.
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<PAGE>
ILCO's net cash flow used in operating activities was $4.33 million for the
nine-month period ended September 30, 2000, as compared to $15.11 million for
the first nine months of 1999. The change is primarily related to a decrease in
other receivables and deferred federal income taxes.
Management believes that its cash, cash equivalents and short term investments
are sufficient to meet the needs of its business and to satisfy debt service.
Investments
As of September 30, 2000, the Company's investment assets totaled $672.8
million, as compared to $678.8 million as of December 31, 1999. Total assets as
of September 30, 2000 ($1.315 billion) decreased slightly from the level as of
December 31, 1999 ($1.321 billion).
The level of short-term investments at September 30, 2000 was $125.9 million, as
compared to $191.7 million at December 31, 1999.
Invested real estate and other invested assets increased from $21.1 million at
December 31, 1999 to $42.5 million as of September 30, 2000. This increase is
related to the development of the River Place Pointe project (the "Project") by
Investors-NA. The Project consists of 47.995 acres of land in Austin, Texas,
which 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. Construction on the first phase of the Project, which consists of
two office buildings and an associated parking garage, commenced during the
first quarter of 1999 and has been completed.
ILCO began moving its corporate headquarters to Building I of the Project in
June, 2000 and completed the move in July, 2000. The cost of the move,
approximately $375,713, was treated as a period cost in the third quarter of
2000. In connection with the move, Investors-NA (the tenant under the lease of
the former Austin Centre space), entered into a termination agreement with the
owner of the Austin Centre to terminate its lease at the Austin Centre as of
July 30, 2000. As part of the termination agreement, Investors-NA agreed to pay
rent for the month of August, 2000 in the amount of $113, 258 and the landlord
agreed to pay Investors-NA $7,252.30 per month for a period of seven years,
which latter amount includes a reimbursement to Investors-NA over the seven-year
period of the amount of the rental for the month of August. The present value of
the series of payments to be received by Investors-NA is $480,518, which amount
was recorded as income in the third quarter of 2000.
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<PAGE>
As of September 30, 2000, approximately 75,000 rentable square feet was leased
in Building II of the Project to two tenants, both of whom moved into the
building in July, 2000. During the second quarter of 2000, construction began on
the third office building of the Project. The third building will contain
approximately 116,000 square feet. In July, Investors-NA completed negotiations
to lease all of the space in Building III to a single tenant. The lease is for a
seven-year term, with its commencement date in the first quarter of 2001, upon
completion of the construction of Building III.
The fixed maturities available for sale portion of invested assets at September
30, 2000 was $445.6 million. The amortized cost of the fixed maturities
available for sale segment as of September 30, 2000 was $448.9 million,
representing a net unrealized loss of $3.3 million. This unrealized loss
principally reflects changes in interest rates from the date the respective
investments were purchased. To reduce the exposure to interest rate changes,
portfolio investments are selected so that diversity, maturity and liquidity
factors approximate the duration of associated policyholder liabilities.
The assets held by ILCO's life insurance subsidiaries must comply with
applicable state insurance laws and regulations. In selecting investments for
the portfolios of its life insurance subsidiaries, the Company's emphasis is to
obtain targeted profit margins, while minimizing the exposure to changing
interest rates. This objective is implemented by selecting primarily
short-to-medium term, investment grade fixed income securities. In making such
portfolio selections, the Company generally does not select new investments
which are commonly referred to as "high yield" or "non-investment grade."
The portfolio includes investments in mortgage-backed securities which includes
collateralized mortgage obligations ("CMOs") of $176.2 million and
mortgage-backed pass-through securities of $44.4 million at September 30, 2000.
Mortgage-backed pass-through securities, sequential CMOs and support bonds,
which comprised approximately 55.5% of the book value of the Company's
mortgage-backed securities at September 30, 2000, are sensitive to prepayment
and extension risks. The Company has reduced the risk of prepayment associated
with this portion of the investment portfolio by investing in planned
amortization class ("PAC"), target amortization class ("TAC") instruments, 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 scheduled bonds represented approximately 44.5 % and sequential
and support classes represented approximately 35.3 % of the book value of the
Company's mortgage-backed securities at September 30, 2000. 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
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<PAGE>
investments in CMOs during 1999. For the year 2000, the Company's investment
objectives include the making of selected investments in CMOs.
The Company's fixed maturities portfolio (including short-term investments), as
of September 30, 2000 and December 31, 1999, included a non-material amount (0.1
% 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. Of these
non-investment grade investments, all received an NAIC rating of "5" (lowest
quality).
The consolidated balance sheets of the Company as of September 30, 2000 include
$ 36.89 million of "Notes receivable from affiliates", represented by (i) a loan
of $22.5 million from Investors- NA to Family Life Corporation ("FLC") and a
$2.5 million loan from Investors Life Insurance Company of California
("Investors-CA") to Financial Industries Corporation ("FIC") - which loan is now
owned by Investors-NA as a result of the merger of Investors-CA into
Investors-NA) - and $2.0 million of additions to the $2.5 million note made in
accordance with the terms of such note; these loans were granted in connection
with the 1991 acquisition of Family Life Insurance Company by a wholly- owned
subsidiary of FIC (ii) a loan of $30 million by Investors-NA to Family Life
Corporation made in July, 1993, in connection with the prepayment by the FIC
subsidiaries of indebtedness which had been previously issued to Merrill Lynch
as part of the 1991 acquisition and (iii) a loan of $4.5 million by Investors-NA
to Family Life Insurance Investment Company ("FLIIC") made in July, 1993, in
connection with the same transaction described above.
As of June 12, 1996, the provisions of the notes from Investors-NA to FIC, FLC
and Family Life Insurance Investment Company ("FLIIC") were modified as follows:
(a) the $22.5 million note was amended to provide for twenty quarterly principal
payments, in the amount of $1,125,000 each, to commence on December 12, 1996;
the final quarterly principal payment is due on September 12, 2001; the interest
rate on the note remains at 11%, (b) the $30 million note was amended to provide
for forty quarterly principal payments, in the amount of $163,540 each for the
period December 12, 1996 to September 12, 2001; beginning with the principal
payment due on December 12, 2001, the amount of the principal payment increases
to $1,336,458; the final quarterly principal payment is due on September 12,
2006; the interest rate on the note remains at 9%, (c) the $4.5 million note was
amended to provide for forty quarterly principal payments, in the amount of
$24,531 each for the period December 12, 1996 to September 12, 2001; beginning
with the principal payment due on December 12, 2001, the amount of the principal
payment increases to $200,469; the final quarterly principal payment is due on
September 12, 2006; the interest rate on the note remains at 9%, (d) the $2.5
million note was amended to provide that the principal balance of the note is to
be repaid in twenty quarterly installments of $125,000 each, commencing December
12, 1996 with the final payment due on September 12, 2001; the rate of interest
remains at 12% and (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
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($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.
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.
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 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 and (3)
adverse regulatory changes affecting the business of insurance.
Accounting Developments
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, 2000, as amended by FAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FAS No. 133". As the Company does not have
significant investments in derivative financial instruments, the adoption of FAS
No. 133 is not anticipated to have a material impact on the Company's results of
operations, liquidity or financial position.
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Item 3. 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 information set forth in
Item 2, "Management's Discussion and Analysis of Financial Conditions and
Results of Operations - Investments" of this report.
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 $22.5 million at
September 30, 2000 and $23.3 million at December 31, 1999. 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 approximate market value of such assets was
$610.8 million at September 30, 2000 and $639.5 million at December 31, 1999.
The fixed income investments of the Company include certain mortgage-backed
securities. The market value of such securities was $220.5 million at September
30, 2000 and $ 208.0 million at December 31, 1999. 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
$11.2 million at September 30, 2000 and $12.0 million at December 31, 1999.
Fixed income investments held in separate accounts 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
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changes on a range of factors, including duration and potential prepayment.
Part II. Other Information
Item 1. Legal Proceedings
The Company and Investors-NA are defendants in a lawsuit which was filed in
October, 1996, in Travis County, Texas. CIGNA Corporation, an unrelated Company,
is also a named defendant in the lawsuit. The named plaintiffs in the suit (a
husband and wife), allege that the universal life insurance policies sold to
them by INA Life Insurance Company (a company which was merged into Investors-
NA in 1992) utilized unfair sales practices. The named plaintiffs seek
reformation of the life insurance contracts and an unspecified amount of
damages. The named plaintiffs also seek a class action as to similarly situated
individuals. No certification of a class has been granted as of the date hereof.
The Company believes that the suit is without merit and intends to vigorously
defend this matter.
In August, 1997, another individual filed a similar action in Travis County,
Texas against the corporate entities identified above. The lawsuit involved the
same type of policy and includes allegations which are substantially identical
to the allegations in the first action. In July, 2000, the court, on its own
motion, moved to dismiss the action for failure on the part of the plaintiff to
prosecute the matter. The plaintiff did not file a motion to retain the case and
the matter has been removed from the court's docket.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
a. As previously reported in a press release dated October 13, 2000,
the Board of Directors of the Company has established a Special
Committee of outside directors of the Board to explore a merger with
Financial Industries Corporation ("FIC"). FIC owns approximately 48%
of the common stock of ILCO. The Board and the Special Committee have
received a report on an actuarial evaluation of the Company and FIC,
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which was performed by an independent actuarial consulting firm. The
special committee will review the actuarial evaluation and other
pertinent information, and furnish a recommendation on the merger
proposal to the Board. As of the date of this report on Form 10-Q, no
date has been set for the next meeting of the Board of Directors of
the Company.
b. On October 13, 2000, Charles K. Chacosky submitted his resignation
as a director and officer of the Company and its life insurance
company subsidiaries. Mr. Chacosky advised the Board that his
resignation was for personal reasons.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Form 10-K Annual Report of Registrant for the year ended
December 31, 1999 heretofore filed by Registrant with the
Securities and Exchange Commission, which is hereby
incorporated by reference.
(b) Reports on Form 8-K
None
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INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
INTERCONTINENTAL LIFE CORPORATION
/s/ James M. Grace
James M. Grace, Treasurer
Date: November 14, 2000
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