SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 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)
The Austin Centre,701 Brazos, 12th Floor
Austin, Texas 78701
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (512) 404-5000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
Number of common shares outstanding ($.22 Par Value) at end of period:
8,278,995.
- 1 -
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
INDEX
Page No.
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 2000 and December 31, 1999.................................... 3
Consolidated Statements of Income
For the three month periods ended
March 31, 2000 and March 31, 1999........................................5
Consolidated Statements of Cash Flows
For the three month periods ended
March 31, 2000 and March 31, 1999........................................6
Notes to Consolidated Financial Statements....................................8
Item 2. Management's Discussion and Analysis of
Financial Conditions and Results of Operations...........................9
Item 3. Quantitative and Qualitative Disclosures
About Market Risk.......................................................15
Part II
Other Information............................................................16
Signature Page...............................................................17
- 2 -
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
(Unaudited)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, at
amortized cost (market value approximates
$1,682 and $2,056 at March 31, 2000 and
December 31, 1999) $ 1,710 $ 2,088
Fixed maturities available for sale, at market value
(amortized cost of $426,208 and $411,532 at
March 31, 2000 and December 31, 1999) 419,466 404,217
Equity securities, at market value (cost approximates
$338 at March 31, 2000 and December 31, 1999) 1,849 1,943
Policy loans 49,781 50,882
Mortgage loans 6,789 6,844
Invested real estate and other invested
assets 28,189 21,145
Short-term investments 164,428 191,695
Total investments 672,212 678,814
Cash and cash equivalents 6,530 3,358
Notes receivable from affiliates 39,960 41,497
Accrued investment income 8,332 7,529
Agent advances and other receivables 20,840 24,230
Reinsurance receivables 19,281 18,769
Property and equipment, net 4,429 4,416
Deferred policy acquisition costs 36,417 35,598
Present value of future profits of
acquired businesses 38,865 39,831
Other assets 10,104 9,304
Separate account assets 472,634 457,853
Total Assets $ 1,329,604 $ 1,321,199
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
- 3 -
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
(in thousands of dollars)
<TABLE>
<CAPTION>
March 31, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999
(Unaudited)
<S> <C> <C>
Liabilities:
Policy liabilities and contractholder
deposit funds:
Future policy benefits $ 132,029 $ 130,092
Contractholder deposit funds 523,639 533,869
Unearned premiums 1,959 1,977
Other policy claims and benefits payable 10,528 9,893
668,155 675,831
Other policyholders' funds 3,025 3,012
Deferred federal income taxes 22,809 21,741
Other liabilities 17,314 14,635
Separate account liabilities 468,226 454,289
Total Liabilities 1,179,529 1,169,508
Commitments and Contingencies
Redeemable preferred stock:
Class A Preferred, $1 par value, 5,000 5,000
5,000,000 shares authorized, issued
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, 8,278,995
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 loss (3,400) (3,712)
Retained earnings 155,163 151,932
158,677 155,134
Common treasury stock, at cost, 2,576,483 and
2,027,537 in 2000 and 1999, respectively (8,602) (3,443)
Total Shareholders' Equity 150,075 151,691
Total Liabilities and Shareholders' Equity $ 1,329,604 $ 1,321,199
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
- 4 -
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars, except for per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
<S> <C> <C>
Revenues:
Premium $ 2,278 $ 2,548
Net investment income 12,204 12,915
Earned insurance charges 10,149 10,062
Other 768 745
25,399 26,270
Benefits and expenses:
Policyholder benefits and expenses 7,353 8,022
Interest expense on contract holders
deposit funds 7,159 7,880
Amortization of present value of future
profits of acquired businesses 966 920
Amortization of deferred policy
acquisition costs 694 584
Operating expenses 4,129 4,189
20,301 21,595
Income from operations 5,098 4,675
Provision for federal income taxes 1,867 1,714
Net income $ 3,231 $ 2,961
Net income per share
Basic:
Weighted average common stock
outstanding 8,817 8,791
Basic earnings per share $ 0.37 $ 0.34
Diluted:
Common stock and common stock equivalents 8,824 8,786
Diluted earnings per share $ 0.37 $ 0.34
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
- 5 -
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
CASH FLOWS FROM OPERATING 2000 1999
ACTIVITIES
<S> <C> <C>
Net Income $ 3,231 $ 2,961
Adjustments to reconcile net income to
net cash used in operating activities:
Amortization of present value of future
profits of acquired businesses 966 920
Amortization of deferred policy
acquisition costs 694 584
Depreciation 59 109
Changes in assets and liabilities:
Increase in accrued investment income (803) (326)
Decrease (increase) in agent advances and
other receivables 2,878 (2,120)
Policy acquisition costs deferred (1,513) (1,360)
Decrease in policy liabilities and
contractholder deposit funds (7,676) (5,240)
Increase in other policyholders' funds 13 47
Increase in other liabilities 2,679 2,293
Increase (decrease) in deferred
federal income taxes 1,068 (879)
Increase in other assets (800) (2,196)
Other, net (808) (1,079)
Net cash used in
operating activities $ (12) $ (6,286)
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
- 6 -
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
CASH FLOWS FROM INVESTING 2000 1999
ACTIVITIES
<S> <C> <C>
Investments purchased $ (32,773) $ (11,250)
Proceeds from sales and maturities
of investments 12,384 33,055
Net change in short-term investments 27,267 (20,433)
Purchases and sales of equipment (72) (159)
Decrease in notes receivable from affiliates 1,537 1,537
Net cash provided by investing activities 8,343 2,750
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of treasury stock (5,159) -0-
Issuance of common stock -0- 60
Net cash (used in) provided by
financing activities (5,159) 60
Net increase (decrease) in cash and
cash equivalents 3,172 (3,476)
Cash and cash equivalents, beginning
of period 3,358 12,206
Cash and cash equivalents, end of period $ 6,530 $ 8,730
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
- 7 -
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The financial statements included herein have been presented to conform to the
requirements of Form 10-Q. This presentation includes year end balance sheet
data which was derived from audited financial statements. The notes to the
financial statements 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. Management believes the financial statements reflect all adjustments
necessary to present a fair statement of interim results. Certain prior year
amounts have been reclassified to conform with current year presentation.
Other Comprehensive Income
The following is a reconciliation of total accumulated other comprehensive
income (loss) from December 31, 1999 to March 31, 2000 (in thousands):
<TABLE>
<CAPTION>
Net unrealized Net Total
gain (loss) on appreciation accumulated
investments (depreciation) other
in fixed of equity comprehensive
maturities securities income (loss)
available for
sale
<S> <C> <C> <C>
Balance at December 31, 1999 $ (4,755) $ 1,043 $ (3,712)
Current period change 373 (61) 312
Balance at March 31, 2000 $ (4,382) $ 982 $ (3,400)
</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 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.
- 8 -
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Conditions and Results
of Operations
For the three-month period ended March 31, 2000, InterContinental Life
Corporation's ("ILCO") net income was $3,231,000 (basic earnings of $ 0.37 per
common share and diluted earnings of $0.37 per common share) as compared to
$2,961,000 (basic earnings of $ 0.34 per common share and diluted earnings of $
0.34 per common share) in the first three 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 three-month period ended March 31, 2000, the Company's income before
federal income taxes was $5,098,000 on revenues of $25,399,000 as compared to
income of $4,675,000 on revenues of $26,270,000 for the first three 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 the
provision of quality customer service.
Premium income, net of reinsurance, for the first three months of 2000 was $2.28
million, as compared to $2.55 million for the first three months of 1999.
Reinsurance premiums ceded were $0.3 million for the first three months of 2000,
as compared to $0.7 million in the first three months of 1999.
Earned insurance charges for the three-month period ended March 31, 2000 were
$10.15 million, as compared to $10.06 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 March 31, 2000, the market value of the fixed maturities available for
sale segment was $419.5 million as compared to an amortized cost of $426.2
million, or an unrealized loss of $6.7 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 ($4.38
million at March 31, 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.
For the three-month period ended March 31, 2000, the lapse rate with respect to
universal life insurance policies increased from the lapse rate experienced in
the similar period in 1999. The rate for the 2000 period was 6.96%, as compared
to 5.77% in the 1999 period. The lapse rate with respect to traditional
(non-universal) life insurance policies decreased from the levels
- 9 -
<PAGE>
experienced in the second quarter of 1999. The rate for the three-month period
ended March 31, 2000 was 7.88%, as compared to 8.38% 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")(formerly known as InterContinental Life Insurance Company).
ILCO's primary source of funds consists of payments under two Surplus Debentures
from Investors-NA.
On March 17, 1999, the Company paid a stock dividend (one share of common stock
for each outstanding share of common stock). As a result, Financial Industries
Corporation ("FIC") currently owns, directly and indirectly through its
subsidiary Family Life Insurance Company, 3,932,692 shares (approximately
47.50%) of ILCO's common stock..
ILCO's principal source of liquidity consists of the periodic payment of
principal and interest by Investors-NA, pursuant to the terms of the Surplus
Debentures. The Surplus Debentures were originally issued by Standard Life
Insurance Company and their terms were previously approved by the Mississippi
Insurance Commissioner. In connection with the 1993 merger of Standard Life into
Investors-NA, the obligations of the Surplus Debentures were assumed by
Investors- NA. As of March 31, 2000, the outstanding principal balance of the
Surplus Debentures was $0.456 million and $2.9 million, respectively. The terms
of the latter required final payment of the remaining principal balance on March
31, 2000. Effective September 28, 1999, the Company and Investors-NA amended the
payment schedule to provide payment of the remaining balance in four
installments, with the final installment being due July 1, 2000. Since
Investors-NA is domiciled in the State of Washington, the provisions of
Washington insurance law apply to the Surplus Debentures. Under the provisions
of the Surplus Debentures and current law, no prior approval of the Washington
Insurance Commissioner is required for Investors-NA to pay interest or principal
on the Surplus Debentures; provided that, after giving effect to such payments,
the statutory surplus of Investors-NA is in excess of $10 million (the "surplus
floor"). However, Investors-NA has voluntarily agreed with the Washington
Insurance Commissioner that it will provide at least five days advance notice of
payments which it will make under the surplus debenture. As of March 31, 2000,
the statutory surplus of Investors-NA was $73.6 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 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. Under the "greater of" standard, an insurer may pay a dividend
in an amount equal to the greater of (i) 10% of the policyholder surplus or (ii)
the insurer's net gain from operations for the previous year. As of March 31,
2000, Investors-NA had earned surplus of $ 52.037 million.
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
- 10 -
<PAGE>
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 $ 18.6 million at March
31, 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.
ILCO's net cash flow used in operating activities was $0.012 million for the
three-month period ended March 31, 2000, as compared to $6.286 million for the
first three 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 March 31, 2000, the Company's investment assets totaled $672.2 million, as
compared to $678.8 million as of December 31, 1999. Total assets as of March 31,
2000 ($1.329 billion) increased slightly from the level as of December 31, 1999
($1.321 billion).
The level of short-term investments at March 31, 2000 was $164.4 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 $28.2 million as of March 31, 2000. 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. Construction on Phase One commenced during the first quarter of
1999. Upon completion of Phase One, the Company plans to move its corporate
headquarters to space in one of the buildings. The move is currently scheduled
for the third quarter of 2000. In connection with the move, Investors-NA (the
tenant under the lease of its current Austin Centre space) intends to sub-lease
said space. In February, 2000, Investors-NA completed plans to develop a third
office building on the site. The third building will contain approximately
116,000 square feet. Construction is scheduled to commence during the second
quarter of 2000.
The fixed maturities available for sale portion of invested assets at March 31,
2000 was $419.5 million. The amortized cost of the fixed maturities available
for sale segment as of March 31, 2000 was $426.2 million, representing a net
unrealized loss of $6.7 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,
- 11 -
<PAGE>
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 $ 181.3 million and
mortgage-backed pass-through securities of $ 39.4 million at March 31, 2000.
Mortgage-backed pass-through securities, sequential CMOs and support bonds,
which comprised approximately 53.8% of the book value of the Company's
mortgage-backed securities at March 31, 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 46.2% and sequential and support
classes represented approximately 35.8 % of the book value of the Company's
mortgage-backed securities at March 31, 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 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 March 31, 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 March 31, 2000 include
$39.96 million of "Notes receivable from affiliates", represented by (i) a loan
of $22.5 million from Investors-NA to Family Life Corporation ("FLC") and a $2.5
million loan from Investors-CA to Financial Industries Corporation ("FIC") -
which loan is now owned by Investors-NA as a result of the merger of
Investors-CA into Investors-NA) - and $2.0 million of additions to the $2.5
million note made in accordance with the terms of such note; these loans were
granted in connection with the 1991 acquisition of Family Life Insurance Company
by a wholly-owned subsidiary of FIC (ii) a loan of $30 million by Investors-NA
to Family Life Corporation made in July, 1993, in connection with the prepayment
by the FIC subsidiaries of indebtedness which had been previously issued to
Merrill Lynch as part of the 1991 acquisition and (iii) a loan of $4.5 million
by Investors-NA to Family Life Insurance Investment Company ("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
- 12 -
<PAGE>
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
($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.
-13-
<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 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.
-14-
<PAGE>
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 $23.3 million at March
31, 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 $625.5 million at
March 31, 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 $218.4 million at March 31,
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 $12.3
million at March 31, 2000 and $12.0 million at December 31, 1999.
- 15 -
<PAGE>
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
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 involves the
same type of policy and includes allegations which are substantially identical
to the allegations in the first action. The named plaintiff also seeks class
certification. The Company believes that the court would consider class
certification with respect to only one of these actions. The Company also
believes that this action is without merit and intends to vigorously defend this
matter.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
- 16 -
<PAGE>
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
The Registrant filed a report on Form 8-K on February 1, 2000, reporting on
the status of the stock repurchases under its stock repurchase plan. A
subsequent Form 8-K was filed on May 2, 2000, reporting on the updated
status of the purchases made by the Registrant under the stock repurchase
plan. Each such Form 8-K is hereby incorporated by reference.
- 17 -
<PAGE>
INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
INTERCONTINENTAL LIFE CORPORATION
/s/ James M. Grace
James M. Grace, Treasurer
Date: May 15, 2000
- 18 -
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THE SECHUDLE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR
THE THREE MONTHS ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-2000
<PERIOD-END> Mar-31-2000
<DEBT-HELD-FOR-SALE> 419,466
<DEBT-CARRYING-VALUE> 1,710
<DEBT-MARKET-VALUE> 1,682
<EQUITIES> 1,849
<MORTGAGE> 6,789
<REAL-ESTATE> 28,189
<TOTAL-INVEST> 672,212
<CASH> 6,530
<RECOVER-REINSURE> 19,281
<DEFERRED-ACQUISITION> 36,417
<TOTAL-ASSETS> 1,329,604
<POLICY-LOSSES> 132,029
<UNEARNED-PREMIUMS> 1,959
<POLICY-OTHER> 523,639
<POLICY-HOLDER-FUNDS> 10,528
<NOTES-PAYABLE> 0
0
0
<COMMON> 2,388
<OTHER-SE> 147,687
<TOTAL-LIABILITY-AND-EQUITY> 1,329,604
2,278
<INVESTMENT-INCOME> 12,204
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 768
<BENEFITS> 7,353
<UNDERWRITING-AMORTIZATION> 694
<UNDERWRITING-OTHER> 4,129
<INCOME-PRETAX> 5,098
<INCOME-TAX> 1,867
<INCOME-CONTINUING> 3,231
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,231
<EPS-BASIC> 0.37
<EPS-DILUTED> 0.37
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
