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 June 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:
8,214,444.
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INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
INDEX
Page No.
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2000 and December 31, 1999...................................... 3
Consolidated Statements of Income
For the three and six month periods ended
June 30, 2000 and June 30, 1999...........................................5
Consolidated Statements of Cash Flows
For the three and six month periods ended
June 30, 2000 and June 30, 1999...........................................7
Notes to Consolidated Financial Statements................................... 11
Item 2. Management's Discussion and Analysis of
Financial Conditions and Results of Operations...........................13
Item 3. Quantitative and Qualitative Disclosures
About Market Risk........................................................18
Part II
Other Information.............................................................20
Signature Page................................................................22
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INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
(in thousands of dollars)
2000 1999
<S> <C> <C>
ASSETS (Unaudited)
Investments:
Fixed maturities, at
amortized cost (market value
approximates $1,619 and $2,056) 1,645 $ 2,088
Fixed maturities available for sale,
at market value (amortized cost
$451,676 and $411,532) 443,441 404,217
Equity securities, at market value
(cost approximates $338) 1,578 1,943
Policy loans 49,265 50,882
Mortgage loans 6,735 6,844
Invested real estate and other
invested assets 36,114 21,145
Short-term investments 127,314 191,695
Total investments 666,092 678,814
Cash and cash equivalents 10,297 3,358
Notes receivable from affiliates 38,423 41,497
Accrued investment income 8,133 7,529
Agent advances and other receivables 18,735 24,230
Reinsurance receivables 21,404 18,769
Property and equipment, net 4,442 4,416
Deferred policy acquisition costs 37,532 35,598
Present value of future profits of
acquired businesses 37,826 39,831
Other assets 10,792 9,304
Separate account assets 456,169 457,853
Total Assets $ 1,309,845 $ 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
June 30, December 31,
(in thousands of dollars)
<TABLE>
<CAPTION>
2000 1999
LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)
<S> <C> <C>
Liabilities:
Policy liabilities and contractholder
deposit funds:
Future policy benefits $ 131,668 $ 130,092
Contractholder deposit funds 516,774 533,869
Unearned premiums 1,959 1,977
Other policy claims and benefits payable 10,420 9,893
660,821 675,831
Other policyholders' funds 2,988 3,012
Deferred federal income taxes 21,462 21,741
Other liabilities 21,245 14,635
Separate account liabilities 451,996 454,289
Total Liabilities 1,158,512 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,
8,214,444 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 (4,546) (3,712)
Retained earnings 158,286 151,932
160,654 155,134
Common treasury stock, at cost,
2,641,034 and 2,027,537 in 2000
and 1999, respectively (9,321) (3,443)
Total Shareholders' Equity 151,333 151,691
Total Liabilities and
Shareholders' Equity $ 1,309,845 $ 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 June 30,
<TABLE>
<CAPTION>
2000 1999
Revenues:
<S> <C> <C>
Premium $ 2,306 $ 2,610
Net investment income 12,310 12,960
Earned insurance charges 9,536 10,085
Other 1,118 1,038
25,270 26,693
Benefits and expenses:
Policyholder benefits and expenses 7,084 8,572
Interest expense on contract holders
deposit funds 7,435 8,195
Amortization of present value of future
profits of acquired businesses 1,038 968
Amortization of deferred policy
acquisition costs 509 631
Operating expenses 4,269 4,165
20,335 22,531
Income from operations 4,935 4,162
Provision for federal income taxes 1,812 1,535
Net income $ 3,123 $ 2,627
Net income per share:
Basic:
Weighted average common stock
outstanding 8,233 8,785
Basic earnings per share $ 0.38 $ 0.30
Diluted:
Common stock and common
stock equivalents 8,251 8,802
Diluted earnings per share $ 0.38 $ 0.30
</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>
Six Months Ended June 30,
June 30,
2000 1999
Revenues:
<S> <C> <C>
Premium $ 4,584 $ 5,158
Net investment income 24,514 25,875
Earned insurance charges 19,685 20,147
Other 1,887 1,783
50,670 52,963
Benefits and expenses:
Policyholder benefits and expenses 14,437 16,594
Interest expense on contract holders
deposit funds 14,594 16,075
Amortization of present value of future
profits of acquired businesses 2,004 1,888
Amortization of deferred policy
acquisition costs 1,203 1,215
Operating expenses 8,399 8,354
40,637 44,126
Income from operations 10,033 8,837
Provision for federal income taxes 3,679 3,249
Net income $ 6,354 $ 5,588
Net income per share:
Basic: Weighted average common stock
outstanding 8,526 8,785
Basic earnings per share 0.75 $ 0.64
Diluted:
Common stock and common
stock equivalents 8,533 8,803
Diluted earnings per share $ 0.74 $ 0.64
.
</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 June 30,
2000 1999
CASH FLOWS FROM OPERATING
ACTIVITIES
<S> <C> <C>
Net Income $ 3,123 $ 2,627
Adjustments to reconcile net income to
net cash (used in)
operating activities:
Amortization of present value of future
profits of acquired businesses 1,038 968
Amortization of deferred policy
acquisition costs 509 631
Net gain on sale of investments 0 (222)
Depreciation 77 118
Changes in assets and liabilities:
Decrease in accrued investment income 199 408
Increase in agent advances and
other receivables (18) (4,928)
Policy acquisition costs deferred (1,624) (1,485)
Decrease in policy liabilities and
contractholder deposit funds (7,477) (5,871)
Decrease in other policyholders' funds (37) (22)
Increase in other liabilities 3,931 2,070
Decrease in deferred federal income taxes (1,347) (3,180)
(Increase) decrease in other assets (688) 246
Other, net 393 4,788
Net cash used in operating activities $ (1,921) $ (3,852)
</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 June 30,
2000 1999
CASH FLOWS FROM INVESTING
ACTIVITIES
<S> <C> <C>
Investments purchased $ (43,190) $ (16,232)
Proceeds from sales and
maturities of investments 11,036 20,603
Net change in short-term investments 37,114 (963)
Purchases and retirements of equipment (90) (168)
Decrease in notes receivable from affiliates 1,537 1,537
Net cash provided by investing activities 6,407 4,777
CASH FLOWS FROM FINANCING ACTIVITIES
(Purchase) issuance of treasury stock (719) 33
Net cash (used in) provided by
financing activities (719) 33
Net increase in cash and cash equivalents 3,767 958
Cash and cash equivalents, beginning
of period 6,530 8,730
Cash and cash equivalents,
end of period $ 10,297 $ 9,688
</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>
Six Months Ended June 30,
2000 1999
CASH FLOWS FROM OPERATING
ACTIVITIES
<S> <C> <C>
Net Income $ 6,354 $ 5,588
Adjustments to reconcile net income to
net cash used in
operating activities:
Amortization of present value of future
profits of acquired businesses 2,004 1,888
Amortization of deferred policy
acquisition costs 1,203 1,215
Net gain on sale of investments 0 (222)
Depreciation 136 227
Changes in assets and liabilities:
(Increase) decrease in accrued
investment income (604) 82
Decrease (increase) in agent
advances and other receivables 2,860 (7,048)
Policy acquisition costs deferred (3,137) (2,845)
Decrease in policy liabilities and
contractholder deposit funds (15,153) (11,111)
(Decrease) increase in other policyholders'
funds (24) 25
Increase in other liabilities 6,610 4,363
Decrease in deferred federal income taxes (279) (4,059)
Increase in other assets (1,488) (1,950)
Other, net (415) 3,709
Net cash used in operating activities $ (1,933) $ (10,138)
</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>
Six Months Ended June 30,
2000 1999
CASH FLOWS FROM INVESTING
ACTIVITIES
<S> <C> <C>
Investments purchased $ (75,963) $ (27,482)
Proceeds from sales and maturities
of investments 23,420 53,658
Net change in short-term investments 64,381 (21,396)
Purchases and retirements of equipment (162) (327)
Decrease in notes receivable
from affiliates 3,074 3,074
Net cash provided by investing activities 14,750 7,527
CASH FLOWS FROM FINANCING ACTIVITIES
(Purchase) Issuance of treasury stock (5,878) 33
Issuance of common stock 0 60
Net cash (used in) provided by
financing activities (5,878) 93
Net increase (decrease) in cash
and cash equivalents 6,939 (2,518)
Cash and cash equivalents,
beginning of year 3,358 12,206
Cash and cash equivalents,
end of period $ 10,297 $ 9,688
</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
(unaudited)
The financial statements included herein reflect all adjustments which are,
in the opinion of management, necessary to present a fair statement of the
interim results. The statements have been prepared to conform to the
requirements of Form 10-Q and do not necessarily include all disclosures
required by generally accepted accounting principles (GAAP). The reader should
refer to Form 10-K for the year ended December 31, 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 (loss) from December 31, 1999 to June 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 (loss)
available for
sale
<S> <C> <C> <C>
Balance at December 31, 1999 $ (4,755) $ 1,043 $ (3,712)
Current period change (598) (237) (835)
Balance at June 30, 2000 $ (5,353) $ 806 $ (4,547)
</TABLE>
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INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 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 six-month period ended June 30, 2000, InterContinental Life
Corporation's ("ILCO") net income was $6,354,000 (basic earnings of $ 0.75 per
common share and diluted earnings of $0.74 per common share) as compared to
$5,588,000 (basic earnings and diluted earnings of $0.64 per common share) in
the first six 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 six-month period ended June 30, 2000, the Company's income before
federal income taxes was $10,033,000 on revenues of $50,670,000 as compared to
income of $8,837,000 on revenues of $52,963,000 for the first six 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 six months of 2000 was
$4.6 million, as compared to $5.2 million for the first six months of 1999.
Reinsurance premiums ceded were $ 1.0 million for the first six months of 2000,
as compared to $1.5 million in the first six months of 1999.
Earned insurance charges for the six-month period ended June 30, 2000 were
$19.7 million, as compared to $20.1 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 June 30, 2000, the market value of the fixed maturities available for
sale segment was $443.4 million as compared to an amortized cost of $451.7
million, or an unrealized loss of $8.3 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 ($5.4
million at June 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.
For the three-month period ended June 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 6.55%, as compared
to 7.03% in the 1999 period. The lapse rate with respect to traditional
(non-universal) life insurance policies decreased significantly from the levels
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<PAGE>
experienced in the second quarter of 1999. The rate for the three-month
period ended June 30, 2000 was 5.95%, as compared to 9.88% 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").
Prior to June 30, 2000, ILCO's primary source of funds consisted of payments
under two Surplus Debentures from Investors-NA.
Financial Industries Corporation ("FIC") currently owns, directly and
indirectly through its subsidiary Family Life Insurance Company, 3,932,692
shares (approximately 47.9%) of ILCO's common stock..
Prior to June 30, 2000, 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 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 June 30, 2000, Investors-NA had earned surplus of $ 55.3
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 $19.0 million at June 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
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<PAGE>
with the provisions of the Indiana Insurance Code.
ILCO's net cash flow used in operating activities was $ (1.9) million for
the six-month period ended June 30, 2000, as compared to $(10.1) million for the
first six 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 June 30, 2000, the Company's investment assets totaled $666.1
million, as compared to $678.8 million as of December 31, 1999. Total assets as
of June 30, 2000 ($1.309 billion) decreased slightly from the level as of
December 31, 1999 ($1.321 billion).
The level of short-term investments at June 30, 2000 was $127.3 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 $36.1 million as of June 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 was nearing completion as of June 30, 2000. ILCO began
moving its corporate headquarters to Building I of the Project in June, 2000 and
completed the move in July, 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 June 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 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 June
30, 2000 was $443.4 million. The amortized cost of the fixed maturities
available for sale segment as of June 30, 2000 was $451.7 million, representing
a net unrealized loss of $8.3 million. This unrealized loss principally reflects
changes in interest rates from the date the respective investments were
purchased.
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<PAGE>
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 $179.1 million and
mortgage-backed pass-through securities of $46.7 million at June 30, 2000.
Mortgage-backed pass-through securities, sequential CMOs and support bonds,
which comprised approximately 55.9% of the book value of the Company's
mortgage-backed securities at June 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 44.1% and sequential and support
classes represented approximately 35.2% of the book value of the Company's
mortgage-backed securities at June 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 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 June 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 June 30, 2000 include
$38.4 million of "Notes receivable from affiliates", represented by (i) a loan
of $22.5 million from Investors-NA to Family
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<PAGE>
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 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.
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<PAGE>
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.
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.
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<PAGE>
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 $24.0 million at June
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
June 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 $222.7 million at June 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 $12.3
million at June 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 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.
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<PAGE>
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders was held on May 23, 2000. The sole
matter voted on at the meeting was the election of directors. All of the
nominees were elected as directors by the shareholders.
The voting tabulation as to each nominee was as follows:
<TABLE>
<S> <C> <C>
<CAPTION>
Name In Favor Withheld
Bender, Robert 7,520,527 91.973
Chacosky, Charles K. 7,518,960 93,540
Demgen, Jeffrey H. 7,519,320 93,180
Fleron, Theodore A. 7,520,527 91,973
Gilcrease, W. Lewis 7,519,987 92,513
Grace, James M. 7,519,320 93,180
Kosson, Richard 7,520,527 91,973
Mitte, Roy F. 7,509,347 103,153
Nash, Elizabeth 7,520,527 91,973
Payne, Eugene E. 7,519,320 93,180
Schmitt, Steven P. 7,520,527 91,973
</TABLE>
Item 5. Other Information
None
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<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
On May 2, 2000, the Company filed a Current Report on Form
8-K, updating the
status of its purchases under the Stock Repurchase Plan.
The plan, which was approved by the Company's Board of
Directors on June 29, 1999, and amended on March 29, 2000,
authorizes the repurchase of up to 10% of the issued and
outstanding shares of the Company's common stock.
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<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: August 14, 2000
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<PAGE>
