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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission File
Number 0-4690
FINANCIAL INDUSTRIES CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 74-2126975
State of Incorporation (I.R.S. Employer
Identification number)
701 Brazos, Suite 1400, Austin, Texas 78701
(Address of Principal Executive Offices) (Zip Code)
(512) 404-5050
(Registrant's Telephone Number)
Securities Registered pursuant to Section 12(b) of the Act: None
Securities Registered pursuant to Section 12(g) of the Act:
Common Stock, $.20 par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
and (2) has been subject to such filing requirements for the past
90 days. YES X NO
The aggregate market value of the voting stock held by non-
affiliates of the Registrant on March 25, 1997, based on the
closing sales price in The Nasdaq Small-Cap Market ($12.25
per share), was $41,001,608.
The number of shares outstanding of Registrant's common stock on
March 25, 1997 was 5,427,965.
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
DOCUMENTS INCORPORATED BY REFERENCE:
A. Reports on Form 10-K of InterContinental Life
Corporation for the fiscal years ended December 31,
1996, 1995 and 1994 are hereby incorporated by
reference.
PART I
Item 1. Business
General
Financial Industries Corporation ("FIC", the "Company" or the
"Registrant") is a holding company primarily engaged in the life
insurance business through its ownership of 100% of Family Life
Insurance Company ("Family Life") and its approximately 46%
interest in InterContinental Life Corporation ("ILCO"). FIC also
holds options to acquire additional shares, which, if exercised,
would result in FIC owning approximately 61.5% of ILCO's
outstanding shares.
The Registrant was organized as an Ohio corporation in 1968 and
was reincorporated in Texas in 1980. Its executive offices are
located at 701 Brazos, Suite 1400, Austin, Texas 78701. Through
1984, FIC's principal business was the sale and underwriting of
life and health insurance, mainly in the midwestern and
southwestern United States. In 1985, FIC acquired control of
ILCO.
FIC, ILCO and their insurance subsidiaries have substantially
identical managements, and a majority of the directors of FIC are
also directors of ILCO and FIC's and ILCO's insurance
subsidiaries. Officers allocate their time between FIC and
ILCO in accordance with the comparative requirements of both
companies and their subsidiaries. Roy F. Mitte, Chairman,
President and Chief Executive Officer of FIC, ILCO and their
insurance subsidiaries, owns 34% of the outstanding shares of
FIC's common stock.
Acquisitions
Strategy. The Company's strategy has been and continues to be to
grow internally and through acquisitions, while maintaining an
emphasis on cost controls. Management believes that, under
appropriate circumstances, it is more advantageous to acquire
companies with large books of in-force life insurance than to
produce new business, because initial underwriting costs have
already been incurred and mature business is generally less
likely to terminate, making possible more predictable profit
analysis. However, Family Life does continue to market those
products that are profitable, as well as develop new products and
streamline distribution channels. See "Agency Operations". It is
also management's belief that the continuing consolidation in the
life insurance industry presents attractive opportunities for the
Company to acquire life insurance companies that complement or
fit within the Company's existing marketing structure and product
lines. The Company's objective is to improve the profitability
of acquired businesses by consolidating and streamlining the
administrative functions of these businesses, eliminating
unprofitable products and distribution channels, applying its
marketing expertise to the acquired company's markets and agents,
and benefitting from economies of scale. FIC's ability to make
future acquisitions will be dependent on its being able to obtain
the necessary financing. In addition, since ILCO has the same
acquisition strategy as FIC, a conflict of interest could arise
in the future between FIC and ILCO with respect to acquisition
opportunities.
Acquisition of ILCO. In January 1985, FIC acquired 26.53% of
ILCO's Common Stock. FIC and Family Life subsequently acquired
additional shares of ILCO's Common Stock and as of March 17,
1997, FIC owned, directly and indirectly through Family Life,
approximately 46% of the outstanding shares of ILCO's Common
Stock. FIC holds options to acquire up to 1,702,155 additional
shares of ILCO's Common Stock. Giving effect to the exercise of
those options, FIC would own, directly and indirectly through
Family Life, approximately 61.54% of the outstanding shares of
ILCO's Common Stock. The exercise price of the options is equal
to the average quoted market price of ILCO's common stock over
the six-month period immediately prior to exercise. In addition,
in the event that any other party should seek to acquire, without
the prior approval of ILCO's Board of Directors, securities
aggregating five percent or more of the outstanding shares of
ILCO, FIC would then have the right to acquire, under the same
price formula, that number of shares of common stock which
together with the shares then owned by FIC, would amount to 51%
of the outstanding shares of ILCO. The consideration for the
options was FIC's granting to ILCO a loan in the principal amount
of $1.2 million, FIC's agreement to guarantee additional ILCO
obligations totaling $4.0 million and FIC's agreement to
guarantee ILCO's lease obligation on its headquarters building
upon demand. In addition, FIC guaranteed a $15.0 million term
loan of ILCO.
Acquisition of Family Life. FIC acquired Family Life from
Merrill Lynch Insurance Group, Inc. on June 12, 1991. The
consideration for the purchase was $114 million consisting of a
cash payment of $70 million and $44 million of subordinated
promissory notes issued by subsidiaries of FIC to the seller and
its affiliates. Family Life underwrites and sells mortgage
protection life insurance to customers who are mortgage borrowers
from financial institutions where Family Life has marketing
relationships. Family Life distributes its insurance products
primarily through a national career agency sales force. See
"Acquisition of Family Life".
ILCO's Acquisitions
In November 1986, ILCO acquired Standard Life Insurance Company
("Standard Life"), headquartered in Jackson, Mississippi, for a
gross purchase price of $54.5 million. A portion of the funds
used by the new life insurance company formed by ILCO to make the
acquisition ("New Standard") was the proceeds of a loan extended
to the Company by a national bank in the principal amount of
$15.0 million (the "Standard Term Loan"). This sum was, in turn,
loaned by ILCO to New Standard, and the loan was evidenced by a
surplus debenture. New Standard was merged into Standard Life in
June 1988.
In December 1988, ILCO, through Standard Life, purchased
Investors Life Insurance Company of California ("Investors-CA")
and Investors Life Insurance Company of North America
("Investors-NA") from CIGNA Corporation for a purchase price of
$140 million. ILCO obtained the funds used for the acquisition
from: (a) a senior loan in the amount of $125.0 million provided
by six financial institutions, (b) a $10.0 million subordinated
loan provided by two insurance and financial service
organizations and (c) the sale of $5.0 million of Class A
Preferred Stock to CIGNA and $15.0 million of Class B Preferred
Stock to the subordinated lenders. Approximately $15.0 million
of these funds were used to discharge the Standard Term Loan.
The balance of these funds were loaned by ILCO to Standard Life.
To evidence this indebtedness, Standard Life issued a $140.0
million surplus debenture to ILCO. In connection with the
subordinated debt and preferred stock financing, ILCO issued
detachable warrants entitling the holders to purchase 1,107,480
shares of ILCO's Common Stock at $3.33 per share.
In May 1990, ILCO effected an exchange agreement with the holders
of its Class A Preferred Stock and its Class B Preferred Stock.
Under the provisions of the exchange agreement, the holders of
the Class A Preferred Stock received $5 million principal amount
of a 13.25% 1998 Series Subordinate Notes, due November 1, 1998,
together with a make whole amount equal to 13.25% of the then
outstanding balance of the Note. The holders of the Class B
Preferred Stock received $15 million principal amount of a 13.25%
1999 Series Subordinated Notes, due November 1, 1999.
ILCO prepaid the subordinated debt and purchased the warrants in
early 1993. See "The ILCO Senior Loan".
In February, 1995, ILCO, through Investors-NA, purchased from
Meridian Mutual Insurance Company the stock of Meridian Life
Insurance Company, an Indianapolis-based life insurer, for a cash
purchase price of $17.1 million. After the acquisition, Meridian
Life changed its name to Investors Life Insurance Company of
Indiana ("Investors-IN"). Investors-IN is licensed in ten states
and markets a variety of individual life and annuity products
through independent agents.
On March 25, 1997, ILCO and Investors-IN entered into an
agreement to acquire State Auto Life Insurance Company, an Ohio
domiciled life insurer, from State Automobile Mutual Insurance
Company, for a cash purchase price of $11.8 million, subject to
certain post-closing adjustments. In connection with this
transaction, the bank group participating in the Senior Loan have
agreed to defer payment of $4.5 million otherwise payable on
April 1, 1997 under the terms of the Senior Loan, and to reduce
the amount of the payment otherwise due on July 1, 1997 by $2.5
million. This deferral would result in extending the maturity
date of the Senior Loan to October 1, 1998. Under the terms of
the transaction, State Auto Life would be merged into Investors-
IN. The closing of the transaction, which is expected to occur
during the second quarter of 1997, is subject to regulatory
approvals.
Business of Family Life Insurance Company
Family Life, which was organized in the State of Washington in
1949, specializes in providing mortgage protection life,
disability and accidental death insurance and annuity products to
mortgage borrowers of financial institutions. Family Life has
policies in force with customers of approximately 335 financial
institutions, of which approximately 35 actively provide Family
Life with regular updating of their lists of borrowers.
Family Life's mortgage protection business consists of term and
universal life insurance and disability insurance sold to
borrowers of mortgage debt, designed to repay the mortgages of
policyholders in the event of their death or disability. This
business is sold to customers of client financial institutions,
usually through a list of borrowers provided by the financial
institution. These policies often list the lending financial
institution as the primary beneficiary of the life insurance
policy. An important feature of the Family Life product is the
ability to bill and collect premiums through the policyholder's
monthly mortgage payments.
Family Life has annuity products and a variety of life insurance
products, including decreasing term life insurance, universal
life insurance, ten-year level term products, and a whole life
insurance product.
During 1996, 1995 and 1994, Family Life received premium income
from sales of its annuity products and various lines of insurance
as follows: $0.2 million, $3.8 million and $1.5, respectively,
from annuity products; $48.3 million, $51.5 million and $52.4
million, respectively, from individual life; $1.0 million, $1.2
million and $1.4 million, respectively, from individual accident
and health; $469,327, $483,373 and $609,132, respectively, from
direct mail (group) life and $238,128, $289,749 and $424,429,
respectively, from direct mail (group) accident and health.
Family Life is licensed to sell mortgage life insurance products
in 49 states and the District of Columbia. In 1996, premium
income from these products was derived from all states in which
Family Life is licensed, with significant amounts derived from
Texas (24%), California (23%), and Illinois (5%).
Family Life's primary distribution channel is its agency force of
approximately 514 career agents (at December 31, 1996), who are
organized into ten regions. Most of the career agents sell
mortgage life insurance products exclusively for Family Life.
Family Life's other distribution channel had been direct mail
marketing. However, in 1992, Family Life discontinued
solicitations of new direct mail business in order to concentrate
more cost effectively on proven agent sold operations.
The mortgage life insurance business is very fragmented. Family
Life believes that it is among the larger writers of agent sold
mortgage life insurance in the United States and the only nation-
wide agent-sold life insurance company operating through leads
from financial institutions. Many of Family Life's competitors
are life insurance companies with more resources than Family Life
and whose mortgage life insurance business represents only a
small portion of their total business.
Consolidation and Administration
Following the 1991 acquisition of Family Life by FIC, management
integrated the sales, marketing, underwriting, accounting,
contract and licensing, investments, personnel, data processing,
home office support and other departments of Family Life and the
life insurance subsidiaries of ILCO. Management believes this
integration has resulted in cost savings for Family Life and
ILCO's insurance subsidiaries. During 1992, ILCO's and FIC's
insurance operations were centralized at their headquarters in
Austin, Texas, with the exception of certain services performed
in Seattle, Washington. Management believes that relocating
administrative functions to Austin has reduced costs and improved
the efficiency of the insurance companies' operations.
At December 31, 1996, the number of employees within FIC and its
subsidiaries, together with the employees of ILCO's insurance
subsidiaries, was approximately 332.
Business of InterContinental Life Corporation
ILCO was incorporated in 1969 under the laws of New Jersey. Its
executive office is located at 701 Brazos, Suite 1400, Austin,
Texas 78701.
Operations. ILCO has developed management techniques to reduce
operating expenses by centralizing, standardizing and more
efficiently performing many functions common to most life
insurance companies, such as underwriting and policy
administration, accounting and financial reporting, marketing,
regulatory compliance, actuarial services and asset management.
ILCO has selectively recruited personnel in sales, marketing and
various administrative departments.
ILCO's centralized management techniques resulted in significant
employee reductions and expense savings in the three life
insurance companies acquired by ILCO in 1986 and 1988. During
1996, the general insurance expenses of ILCO's insurance
subsidiaries were $12,008,160, as compared to $13,737,883 in 1995
and $12,865,000 in 1994. The attainment of this level of cost
reduction has contributed significantly to the achievement of the
current level of profitability. Management is committed to
maintaining the general insurance expenses of ILCO's insurance
subsidiaries at a level which will generate an acceptable level
of profitability while maintaining the competitive pricing of
their insurance products.
Principal Products. ILCO's insurance subsidiaries are engaged
primarily in administering existing portfolios of individual and
group life insurance and accident and health insurance policies
and annuity products. Approximately 74.5% of the total collected
premiums for 1996 were derived primarily from renewal premiums on
insurance policies and annuity products sold by ILCO's insurance
subsidiaries prior to their acquisition by ILCO.
ILCO's insurance subsidiaries are also engaged in marketing and
underwriting individual life insurance and annuity products in 49
states and the District of Columbia. These products are marketed
through independent, non-exclusive general agents.
The products currently being distributed include several versions
of universal life insurance and interest-sensitive whole life
insurance. Under a whole life insurance policy, the policyholder
pays a level premium over his or her expected lifetime. The
policy combines life insurance protection with a savings plan
that gradually increases in amount over a period of several
years. The universal and interest-sensitive whole life insurance
policies of ILCO's insurance subsidiaries provide permanent life
insurance which credit company-declared current interest rates.
The universal life insurance portfolio of ILCO's insurance
subsidiaries consists primarily of flexible premium universal
life insurance policies. Under the flexible premium policies,
policyholders may vary the amounts of their coverage (subject to
minimum and maximum limits) as well as the date of payment and
frequency of payments.
Direct premiums received from all types of universal life
products were $40.6 million in 1996, as compared to $42.3 million
in 1995 and $42.1 million in 1994. Investors-NA received
reinsurance premiums from Family Life of $1.6 million in 1996,
pursuant to the reinsurance agreement for universal life products
written by Family Life. In 1996, premium income from all life
insurance products was derived from all states in which ILCO's
insurance subsidiaries are licensed, with significant amounts
derived from Pennsylvania (14%), California (9.0%) New Jersey
(9.0%).
Until they discontinued sales of credit life and disability
insurance in the fourth quarter of 1994, two of ILCO's insurance
subsidiaries generally sold that insurance to consumers through
lending and credit organizations. Such insurance was generally
written on an individual or group basis to (i) persons financing
the purchase of new automobiles in the State of New Jersey and
(ii) persons obtaining loans from banks and finance companies in
southeastern states. Most policies of this type were issued for
a term of 48 months or less. Direct premiums received from
credit life and accident insurance, prior to reinsurance, were
$4.2 million in 1994 and $6.5 million in 1993.
Two of ILCO's insurance subsidiaries receive premium income from
health insurance policies. In 1996, premium income from all
health insurance policies was $0.9 million, as compared to $1.1
million in 1995 and $1.4 million in 1994. Premium income from
health insurance in 1996 was derived from all of the states in
which those two insurance subsidiaries are licensed, with
significant amounts derived from Pennsylvania (23%), New Jersey
(23%), and California (10%).
Investors-NA sponsors a variable annuity separate account, which
offers single premium and flexible premium policies. The
policies provide for the contract owner to allocate premium
payments among four different portfolios of Putnam Capital
Manager Trust ("PCM Fund"), a series fund which is managed by
Putnam Investment Management, Inc. As of January 1, 1997, the
PCM Fund changed its name to Putnam Variable Trust. Prior to
April, 1995, the underlying investment vehicle for the variable
annuity contracts was the CIGNA Annuity Funds Group. A
substitution of the PCM Fund for the CIGNA Funds was completed in
April, 1995. The plan of substitution was approved by the
Securities and Exchange Commission. Following such approval, the
plan was submitted to policyholders for approval, which approval
was obtained. During 1996, the premium income realized in
connection with these variable annuity policies was $256,294,
which was received from existing contract owners.
Direct deposits from the sale of fixed annuity products by ILCO's
subsidiaries were $948,000 in 1996, as compared to $1,359,000 in
1995 and $1,296,000 in 1994. Investors-NA received reinsurance
premiums from Family Life of $3.8 million in 1996, pursuant to
the reinsurance agreement for annuity products written by Family
Life.
The following table sets forth, for the three years ended
December 31, 1996, the combined premium income and other
considerations received by ILCO's insurance subsidiaries from
sales of their various lines of insurance.
Year Ended December 31,
Type of Insurance 1996 1995 1994
(in thousands)
Individual:
Life $15,031 $16,426 $15,721
Accident & Health 1,035 1,218 1,435
Total Individual Lines 16,066 17,644 17,156
Group:
Life 2,018 2,594 2,226
Accident & Health 6 105
Total Group Lines 2,018 2,600 2,331
Credit:
Life (85) (222) 3,282
Accident & Health (57) 240 2,296
Total Credit Lines (142) 18 5,578
Total Premiums 17,942 20,262 25,065
Reinsurance premiums ceded (7,962) (8,568) (10,748)
Total Net Premium 9,980 11,694 14,317
Amount Received on
Investment
Type Contracts 47,135 44,130 43,372
Total Premiums and
Deposits Received $57,115 $55,824 $57,689
Merger of Insurance Subsidiaries. Investors-NA redomesticated
from Pennsylvania to Washington in December of 1992. Investors-
CA merged into Investors-NA on December 31, 1992. Standard Life
merged into Investors-NA on June 29, 1993. The mergers have
achieved cost savings, such as reduced auditing expenses involved
in auditing one combined company; the savings of expenses and
time resulting from the combined company being examined by one
state insurance department (Washington), rather than three
(California, Pennsylvania and Mississippi); the reduction in the
number of tax returns and other annual filings with 45 states;
and smaller annual fees to do business and reduced retaliatory
premium taxes in most states. Management believes that these
reductions in expenses have further strengthened the financial
condition of the combined company.
Investment of Assets
The assets held by Family Life and ILCO's life insurance
subsidiaries must comply with applicable state insurance laws and
regulations pertaining to life insurance companies. The
investment portfolios of Family Life and ILCO's life insurance
subsidiaries are tailored by their managements to reflect the
nature of the insurance obligations, business needs, regulatory
requirements and tax considerations relating to the underlying
insurance business with respect to such assets. This is
particularly the case with respect to interest-sensitive life
insurance products, where the investment emphasis is to obtain a
targeted margin of profit over the rate of interest credited to
policyholders, while endeavoring to minimize the portfolio's
exposure to changing interest rates. To reduce the exposure to
such rate changes, portfolio investments are selected so that
diversity, maturity and liquidity factors approximate the
duration of associated policyholder liabilities.
The investment objective of Family Life and ILCO's insurance
subsidiaries emphasizes the selection of short to medium term,
high quality fixed income securities, rated Baa-3 (investment
grade) or better by Moody's Investors Service, Inc. At December
31, 1996, only 3.9% of ILCO's total assets were invested in
mortgage loans or real estate. Non-affiliated corporate debt
securities that were non-investment grade represented 1.1% of
ILCO's total assets at December 31, 1996. ILCO had investments
in debt securities of affiliated companies aggregating
approximately $59.9 million as of December 31, 1996. Family Life
does not have investments in mortgage loans, real estate, non-
investment grade debt securities or affiliates' debt securities.
The investments of Family Life and ILCO's insurance subsidiaries
in mortgage-backed securities included collateralized mortgage
obligations ("CMOs") of $40.4 million and $260.1 million,
respectively, and mortgage-backed pass-through securities of $7.3
million and $53.7 million, respectively, at December 31, 1996.
Mortgage-backed pass-through securities, sequential CMO's,
support bonds and z-accrual bonds, which comprised approximately
39.8% of the book value of FIC's mortgage-backed securities and
52.3% of the book value of ILCO's mortgage-backed securities at
December 31, 1996, are sensitive to prepayment and extension
risks. ILCO and FIC have reduced the risk of prepayment
associated with mortgage-backed securities by investing in
planned amortization class ("PAC"), target amortization class
("TAC") instruments, accretion directed bonds and scheduled
bonds. These investments are designed to amortize in a
predictable manner by shifting the risk of prepayment of the
underlying collateral to other investors in other tranches
("support classes") of the CMO. At December 31, 1996, PAC and
TAC instruments and accretion directed and scheduled bonds
represented approximately 60.8% of the book value of FIC's
mortgage-backed securities and approximately 47.7% of the book
value of ILCO's mortgage-backed securities. Sequential and
support classes represented approximately 21.1% of the book value
of FIC's mortgage-backed securities and approximately 35.2% of
the book value of ILCO's mortgage-backed securities at December
31, 1996. In addition, FIC and ILCO limit the risk of prepayment
of CMOs by not paying a premium for any CMOs. ILCO and FIC do
not invest in mortgage-backed securities with increased
prepayment risk, such as interest-only stripped pass-through
securities and inverse floater bonds. FIC does not have any z-
accrual bonds, and those bonds constituted only 3.4% of the book
value of ILCO's mortgage-backed securities at December 31, 1996.
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. Neither FIC nor ILCO made
additional investments in CMOs during 1996, and the current
investment objectives of both FIC and ILCO do not contemplate
additions to the portfolio of CMO investments during 1997.
FIC and ILCO do not invest in non-agency mortgage-backed
securities, which have a greater credit risk than that of agency
mortgage-backed securities.
ILCO and FIC do not make new mortgage loans on commercial
properties. Substantially all of ILCO's mortgage loans were made
by its subsidiaries prior to their acquisition by ILCO. At
December 31, 1996, 0.6% of the total book value of mortgage loans
held by ILCO had defaulted as to principal or interest for more
than 90 days, and none of ILCO's mortgage loans were in
foreclosure. During 1996, none of ILCO's mortgage loans were
converted to foreclosed real estate or were restructured while
ILCO owned them. Family Life does not have any mortgage loans.
Another key element of FIC's and ILCO's investment strategy is to
avoid large exposure in other investment categories which
management believes carry higher credit or liquidity risks,
including private placements, partnerships and bank
participations. These categories accounted for approximately
1.2% of ILCO's invested assets and none of FIC's invested assets
at December 31, 1996.
A subsidiary of ILCO, Investors-NA, is the owner and developer of
an office complex known as Bridgepoint Square Offices. Once
completed, the project will consist of four office buildings,
with a total rentable space of 364,000 square feet, and two
parking garages. Investors-NA purchased the 20 acre tract of land
for this complex in January, 1995. At that time, the tract
included one completed and fully leased office building, an
adjacent parking garage, and sites for three more office
buildings and a second parking garage. Since the purchase,
Investors-NA has completed construction on the second parking
garage and two of the remaining building sites. Construction is
in progress on the fourth building, with a projected completion
date in July, 1997. Three of the four buildings are fully
occupied by tenants and the fourth is partially leased.
Negotiations are in progress with two potential tenants to lease
the remaining space in the fourth building. See Item 2.
Properties.
In May 1996, Family Life Insurance Company, an indirect, 100%
owned subsidiary of FIC, purchased a 7.1 acre tract adjacent to
the original Bridgepoint Square tract. This second tract
contained one building site and one garage site. In January,
1997, Family Life began construction on a four-story office
building, with rentable space of approximately 71,500 square
feet, and the parking garage, with 350 parking spaces. The
projected completion date is September, 1997. Once construction
on the building is completed, FIC, ILCO and their related
companies will move their headquarters from the current location
in the Austin Centre to the new office building. The companies
will occupy approximately 50,000 square feet of the building,
with the balance to be leased to a third party.
FIC and ILCO have established and staffed an investment
department, which manages portfolio investments and investment
accounting functions for their life insurance subsidiaries.
Agency Operations
The products of FIC's and ILCO's insurance subsidiaries are
marketed and sold through two divisions:
A. Investors Life Distribution System
Investors Life Distribution System sells a wide range of life
insurance and annuity products through an independent, non-
exclusive general agent sales distribution system. The products
sold are issued by subsidiary companies of ILCO.
All marketing and sales for the Company are directed by the
Executive Vice President of Marketing and Sales. The Vice
President for Investors Sales directs Regional Vice Presidents
who are responsible for the recruitment of general agents and
managing general agents for individual insurance sales in the
Investors Life Distribution System.
B. Family Life Distribution System
This nationwide system sells Family Life's products through an
exclusive agent force. This agent force sells mortgage
protection insurance and annuity products. The products are sold
primarily to middle-income customers of client financial
institutions, usually through a list of borrowers provided by the
financial institution. Family Life works closely with the
financial institutions to maintain and insure that Family Life
lead systems, which had been built from the loan portfolios of
each active financial institution, operate at a level that favors
both parties. Family Life agents make courtesy calls to
borrowers of the financial institutions which are active on the
Family Life lead system to offer the borrower the opportunity to
purchase mortgage protection insurance (term, universal or whole
life insurance products).
Sales and Marketing for Family Life is directed by the Executive
Vice President of Marketing and Sales. Reporting to the Executive
Vice President, the Senior Vice President of Marketing heads the
Family Life marketing organization which is focused on the
development and maintenance of contractual agreements with the
financial institutions which provide referrals to, and collect
monthly premiums from, their borrowers for Family Life insurance
plans. The Senior Vice President for Family Life Sales directs
nine Regional Vice Presidents. The Family Life distribution
system consists of 72 District Sales Managers, and 514 active
career agents.
Data Processing
Pursuant to a data processing agreement with a major service
company, the data processing needs of ILCO's and FIC's insurance
subsidiaries were provided at a central location until November
30, 1994. Effective December 1, 1994, all of those data
processing needs have been provided to ILCO's and FIC's Austin,
Texas and Seattle, Washington facilities by FIC Computer
Services, Inc., a new subsidiary of FIC. See Item 13. Certain
Relationships and Related Transactions with Management.
Competition
There are many life and health insurance companies in the United
States. Agents placing insurance business with Family Life and
ILCO's insurance subsidiaries are compensated on a commission
basis. However, some companies pay higher commissions and charge
lower premium rates and many companies have more substantial
resources than Family Life and ILCO's insurance subsidiaries.
The principal cost and competitive factors that affect the
ability of Family Life and ILCO's insurance subsidiaries to sell
their insurance products on a profitable basis are: (1) the
general level of premium rates for comparable products; (2) the
extent of individual policyholders services required to service
each product category; (3) general interest rate levels; (4)
competitive commission rates and related marketing costs; (5)
legislative and regulatory requirements and restrictions; (6) the
impact of competing insurance and other financial products; and
(7) the condition of the regional and national economies.
Reinsurance and Reserves
In accordance with general practices in the insurance industry,
Family Life and ILCO's insurance subsidiaries limit the maximum
net losses that may arise from large risks by reinsuring with
other carriers. Such reinsurance provides for a portion of the
mortality risk to be retained by Family Life and the ILCO
subsidiaries with the excess being ceded to a reinsurer at a
premium set forth in a schedule based upon the age and risk
classification of the insured. The reinsurance treaties provide
for allowances that help Family Life and ILCO's insurance
subsidiaries offset the expense of writing new business. Family
Life generally retains the first $200,000 of risk on the life of
any one individual. ILIC generally retains the first $70,000 of
risk on the life of any individual. On group life insurance, the
retention level is $50,000 per individual life. Investors-NA
generally retains the first $100,000 of risk on the life of any
individual. Investors-IN generally retains the first $50,000 of
risk on the life of any individual.
In 1988, Investors-NA entered into a bulk reinsurance treaty
under which it reinsured all of its risks under accidental death
benefit policies. ILIC had previously obtained similar bulk
reinsurance for accidental death benefit policies. The treaty
was renegotiated with another reinsurer, with a new effective
date of January 1, 1996. Effective as of January 1, 1997, the
treaty was renegotiated with a different reinsurer.
In 1993 ILCO's life insurance subsidiaries entered into a quota
share reinsurance treaty under which all credit life and health
business issued March 1, 1993 and later is 50% reinsured.
In 1995, Family Life (as the ceding company) entered into a
reinsurance agreement with Investors-NA (as the reinsuring
company) pertaining to universal life insurance written by Family
Life. The reinsurance agreement is on a co-insurance basis and
applies to all covered business with effective dates on and after
January 1, 1995. The agreement applies to only that portion of
the face amount of the policy which is less than $200,000; face
amounts of $200,000 or more are reinsured by Family Life with a
third party reinsurer. In 1996, Family Life (as the ceding
company) entered into a reinsurance agreement with Investors-NA
(as the reinsuring company), pertaining to annuity contracts
written by Family Life. The agreement applies to contracts
written on or after January 1, 1996. These reinsurance
arrangements reflect management's plan to develop universal life
and annuity business at Investors-NA, with Family Life
concentrating on the writing of term life insurance products.
Although reinsurance does not eliminate the exposure of FIC's and
ILCO's insurance subsidiaries to losses from risks insured, the
net liability of such subsidiaries will be limited to the portion
of the risk retained, provided that the reinsures meet their
contractual obligations.
ILCO's insurance subsidiaries and Family Life carry reserves on
their books to meet future obligations under their outstanding
insurance policies. Such reserves are believed to be sufficient
to meet policy obligations as they mature and are calculated
using assumptions for interest, mortality, expenses and
withdrawals in effect at the time the policies were issued.
Acquisition of Family Life
On June 12, 1991 FIC consummated the purchase of all of the
outstanding shares of common stock of Family Life, a State of
Washington based life insurance corporation, from Merrill Lynch
Insurance Group, Inc. ("Merrill Lynch") pursuant to the terms of
a definitive Stock Purchase Agreement entered into in March of
1991. The business of Family Life, as reconstituted for sale,
consists principally of the underwriting and sale of life
insurance to mortgage borrowers through lending institutions.
The consideration for the purchase was $114 million consisting of
a cash payment of $70 million and $44 million of subordinated
promissory notes issued by subsidiaries of FIC to the seller and
its affiliates.
To effectuate the transaction, FIC organized two downstream
holding companies: Family Life Corporation ("FLC"), and Family
Life Insurance Investment Corporation ("FLIIC"). FLIIC was
organized as a wholly-owned subsidiary of FIC and, in turn, was
issued all of the outstanding shares of FLC. FLC purchased
250,000 shares of common stock, being all of the outstanding
shares, of Family Life from Merrill Lynch for an $84 million cash
payment (including $14 million that had been borrowed by FLIIC
from an affiliate of Merrill Lynch) and a $30 million senior
subordinated note. Following the purchase of the Family Life
shares by FLC, Family Life issued 250,000 previously unissued
shares of its common stock to FLC for a $2.5 million cash payment
and immediately thereafter redeemed from FLC 250,000 shares of
its common stock that had been purchased by FLC from Merrill
Lynch. The consideration paid to FLC by Family Life for said
redeemed shares consisted of $2.5 million cash, a newly issued
surplus debenture (an instrument having certain restrictions on
payment for the protection of policyholders) in the principal
amount of $97.5 million and $14 million principal value of newly
issued preferred shares.
As part of the financing arrangement, FLC entered into a senior
loan agreement under which $50 million was provided by a group of
banks (the "Family Life Senior Loan"). The balance of the
financing consisted of a $30 million subordinated note issued by
FLC to Merrill Lynch and $14 million borrowed by FLIIC from an
affiliate of Merrill Lynch and evidenced by a subordinated note
in the principal amount of $12 million and a subordinated note in
the principal amount of $2 million (collectively, the "Merrill
Lynch Subordinated Loans") and $25 million lent by two insurance
company subsidiaries of ILCO (the "Investors Life Subordinated
Loans"). The latter amount was represented by a $22.5 million
loan from Investors-NA to FLC and a $2.5 million loan provided
directly to FIC by Investors-CA. In addition to the interest
provided under the Investors Life Subordinated Loans, Investors-
NA and Investors-CA were granted by FIC non-transferable options
to purchase, in amounts proportionate to their respective loans,
up to a total of 9.9 percent of shares of FIC common stock at a
price of $10.50 per share, equivalent to the then current market
price, subject to adjustment to prevent dilution. The initial
terms of the option provided for their expiration on June 12,
1998, if not previously exercised. In connection with the 1996
amendments to the $34.5 million subordinated loans obtained from
Investors-NA, the expiration date of the options was extended to
September 12, 2006. For a discussion of the 1996 amendments,
please refer to Item 13, Certain Relationships and Related
Transactions with Management, above.
Of the total of $119 million of cash borrowed and notes issued by
FIC and its subsidiaries for purposes of the transaction, $114
million constituted the purchase price for Family Life and $5
million was used to pay transaction costs, for working capital
and for other related purposes. In connection with the several
loans effected for purposes of the transaction, various creditors
priorities and normal borrower requirements and restrictions were
established and FIC issued its direct guaranty of the respective
loans, subject to certain priorities, to the various lending
banks, Merrill Lynch and its affiliates, and Investors-NA and
Investors-CA. The outstanding shares of common stock of Family
Life were also pledged as collateral to the bank lenders and,
upon repayment of the bank loan, to Merrill Lynch. The
transaction was structured to conform to the requirements of
Section 338(h)(10) of the Internal Revenue Code.
On July 30, 1993, the Merrill Lynch Subordinated Loans were
prepaid. $38 million plus accrued interest was paid to retire
the indebtedness, which had a principal balance of approximately
$50 million on July 30, 1993. The primary source of the funds
used to prepay the Merrill Lynch Subordinated Loans was new
subordinated loans totalling $34.5 million that were obtained
from Investors-NA. See "The Family Life Refinancing."
Family Life Senior and Subordinated Loans
Senior Loan. The Senior Loan obligations of FLC were completely
paid off on April 17, 1996. During the period that the Senior
Loan was in effect, it was a secured and guaranteed five year
term loan in the initial principal amount of $50 million. The
Senior Loan consisted of separate notes (one for each member of
the lending syndicate), with interest payable quarterly and a
final maturity date of June 12, 1996. The interest rate of the
Senior Loan was subject to periodic change based upon stipulated
percentages above a quoted bank base lending rate or Eurodollar
rate as such are in effect from time to time.
Upon the retirement of the Senior Loan, certain of the its
provisions were automatically incorporated into the Investors
Life Subordinated Loans which are described in the following
section. Those provisions include specified events of default,
including, but not limited to, failure to pay principal,
interest, commitment fees or other amounts payable when due,
failure to maintain certain financial covenants, violation of
covenants (including covenants with respect to the maintenance
of a minimum net worth), material misrepresentations, defaults
under other indebtedness, the loss of any license of an insurance
subsidiary of FLC which would have a material adverse effect on
FLC, defaults under the FIC guaranty agreement, a fine in an
amount in excess of $100,000 imposed upon any insurance
subsidiary of FLC by any state insurance regulatory agency,
changes in ownership or control of FIC by its controlling person,
Roy F. Mitte, or in ILCO by FIC and the occurrence of certain
events of bankruptcy. In addition, the security interests
furnished to the lenders under the Senior Loan were transferred
to Investors-NA. The security interests include all of the
issued and outstanding shares of common stock of FLIIC, all of
the issued and outstanding shares of preferred stock and common
stock of FLC and Family Life and the $97.5 million surplus
debenture of Family Life.
Investors Life Subordinated Loans. The $22.5 million
subordinated senior note issued by FLC to Investors-NA was
originally scheduled to mature on June 12, 1998, with principal
payments in four equal semi-annual principal installments of
$5,625,000 each on December 12, 1996, June 12, 1997, December 12,
1997 and June 12, 1998. Interest is payable semi-annually, at
the rate of 11% per annum. Effective as of June 12, 1996, the
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%.
The $2.5 million subordinated note issued by FIC to Investors-CA
initially provided for interest, payable semi-annually, at the
rate of 12% per annum, and its principal is due and payable in
full at maturity on June 12, 1998 (the "FIC Note"). As a result
of the merger of Investors-CA into Investors-NA, the FIC Note is
now owned by Investors-NA. Prior to June 12, 1996, accrued
interest on the FIC Note was paid by delivery of additional notes
of FIC having terms identical to such original note, including
the payment of interest (the "PIK Notes"). Interest payable on
and after June 12, 1996 on all of the FIC Note is to be paid in
cash. Effective as of June 12, 1996, the FIC 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. With respect to the PIK Notes, the amendment provided that
the principal balance of the notes ($1,977,119) is to be paid in
twenty quarterly principal payments, in the amount of $98,855.95
each, commencing December 12, 1996 with the final payment due on
September 12, 2001. The interest rate on both the FIC Note and
the PIK Notes remained at 12%.
The obligors are allowed to prepay the Investors Life
Subordinated Loans, in whole or in part, without premium or
penalty. During the time that the Senior Loan was outstanding,
the Investors Life Subordinated Loans were subordinated to the
Senior Loan and constitute a second lien on the pledged
collateral subject to the first lien of the Senior Loan.
Repayment of FLC's $22.5 million note is also guaranteed by FIC.
The Investors Life Subordinated Loan documents specify events of
default, including, but not limited to, failure to pay principal,
interest or other amounts payable with respect to the Investors
Life Subordinated Loan documents when due, violation of covenants
in the Investors Life Subordinated Loan documents (including
covenants with respect to the maintenance of a minimum net
worth), material misrepresentations, defaults under other
indebtedness, and the occurrence of certain events of bankruptcy.
The Investors Life Subordinated Loan documents also contain
various specified negative, affirmative and financial covenants
to be performed or observed by FLC, FIC and their subsidiaries.
During the period the Senior Loan was outstanding, the covenants
in effect under the Investors Life Subordinated Loan documents
were less restrictive than the covenants under the Senior Loan
documents but become generally equivalent to the Senior Loan
restrictions upon the termination of the Senior Loan.
On July 30, 1993, Investors-NA loaned $34.5 million to FLC and
FLIIC in the form of subordinated notes in connection with the
prepayment of the Merrill Lynch Subordinated Loans. See "The
Family Life Refinancing."
As of December 31, 1996 the outstanding principal balance of the
Investors Life Subordinated Loans, including the loans made by
Investors-NA in 1993 was $59,940,193.
Options. In addition to the interest provided under the
Investors Life Subordinated Loans, Investors-NA and Investors-CA
were granted by FIC non-transferable options to purchase, in
amounts proportionate to their respective loans, up to a total of
9.9 percent of shares of FIC common stock at a price of $2.10 per
share (as adjusted to reflect the five-for-one stock split in
November, 1996), equivalent to the then current market price,
subject to adjustment to prevent dilution. The initial terms of
the option provided for their expiration on June 12, 1998, if not
previously exercised. In connection with the 1996 amendments to
the $34.5 million subordinated loans obtained from Investors-NA,
the expiration date of the options was extended to September 12,
2006.
The Family Life Refinancing. On July 30, 1993, the Merrill Lynch
Subordinated Loans were prepaid. $38 million plus accrued
interest was paid to retire the indebtedness, which had a
principal balance of approximately $50 million on July 30, 1993.
The primary source of the funds used to prepay the Merrill Lynch
Subordinated Loans was new subordinated loans totalling $34.5
million that were obtained from Investors-NA. Prior to the 1996
amendments described below, the principal amount of the new
subordinated debt was payable in four equal annual installments
in 2000, 2001, 2002 and 2003. The interest rate is 9%. The
other terms of the 1993 notes are substantially the same as those
of the $22.5 million subordinated loan that Investors-NA had
previously made to FLC and that continue to be outstanding.
The $34.5 million of new subordinated loans consist of a $30
million loan to FLC and a $4.5 million loan to FLIIC. The debt
restructuring reduced the total indebtedness of FLC and FLIIC by
approximately $15 million. The transaction resulted in a pre-tax
gain of approximately $12 million for the Company in the third
quarter of 1993, and the Company estimates that the restructuring
of this subordinated debt will result in aggregate interest
savings to FLC and FLIIC of approximately $40 million over the
next ten years. In recognition of this reduced interest
requirement, the interest rate on the surplus debenture of Family
Life held by FLC was reduced from 12.5% to 9%.
As of June 12, 1996, the provisions of the notes from Investors-
NA to FIC, FLC and FLIIC were modified as follows: (a) the $22.5
million note was amended to provide for twenty quarterly
principal payments, in the amount of $1,125,000 each, to commence
on December 12, 1996; the final quarterly principal payment is
due on September 12, 2001; the interest rate on the note remains
at 11%, (b) the $30 million note was amended to provide for forty
quarterly principal payments, in the amount of $163,540 each for
the period December 12, 1996 to September 12, 2001; beginning
with the principal payment due on December 12, 2001, the amount
of the principal payment increases to $1,336,458; the final
quarterly principal payment is due on September 12, 2006; the
interest rate on the note remains at 9%, (c) the $4.5 million
note was amended to provide for forty quarterly principal
payments, in the amount of $24,531 each for the period December
12, 1996 to September 12, 2001; beginning with the principal
payment due on December 12, 2001, the amount of the principal
payment increases to $200,469; the final quarterly principal
payment is due on September 12, 2006; the interest rate on the
note remains at 9%, (d) the $2.5 million note was amended to
provide that the principal balance of the note is to be repaid in
twenty quarterly installments of $125,000 each, commencing
December 12, 1996 with the final payment due on September 12,
2001; the rate of interest remains at 12%, (e) the Master PIK
note, which was issued to provide for the payment in kind of
interest due under the terms of the $2.5 million note prior to
June 12, 1996, was amended to provide that the principal balance
of the note ($1,977,119) is to be paid in twenty quarterly
principal payments, in the amount of $98,855.95 each, to commence
December 12, 1996 with the final payment due on September 12,
2001; the interest rate on the note remains at 12%.
ILCO's Senior and Subordination Loans and Warrants
FIC guaranteed ILCO's senior and subordinated loans that were the
source of funds used for the acquisition of Investors-NA and
Investors-CA. Those loans were as follows: (1) a credit
facility in the amount of $135,000,000 composed of the following:
(a) a senior loan in the amount of $125,000,000 (the "ILCO Senior
Loan") provided by a nationally chartered banking institution
(the "Senior Lender") as the lead bank in a lending syndicate
consisting of six banks and/or other financial institutions; and
(b) a $10,000,000 subordinated loan (the "Subordinated Loan")
provided by two insurance and financial service organizations
(the "Subordinated Lenders"); and (2) the sale of preferred stock
as follows: (a) $5,000,000 of Class A Preferred Stock issued at
par to Insurance Company of North America, a CIGNA subsidiary;
and (b) $15,000,000 of Class B Preferred Stock issued at par to
the Subordinated Lenders. Approximately $15,000,000 of these
funds were used to discharge an existing term loan. The balance
of these funds were loaned by ILCO to Standard to consummate the
purchase under the Acquisition Agreement. To evidence this
indebtedness, Standard issued a $140,000,000 surplus debenture to
ILCO. In January 1993, ILCO prepaid the Subordinated Loans and
amended the ILCO Senior Loan. See "The ILCO Refinancing."
In May 1, 1990, ILCO effected an exchange agreement with the
holders of its Class A Preferred Stock (principal amount of $5
million; dividend rate of 13.25%) and its Class B Preferred Stock
(principal amount of $15 million; dividend rate of 13.25%). Under
the provisions of the exchange agreement, the holders of the
Class A Preferred Stock received $5 million principal amount of a
13.25% 1998 Series Subordinated Notes, due November 1, 1998,
together with a make whole amount equal to 13.25% of the then
outstanding balance of the Note. The holders of the Class B
Preferred Stock received $15 million principal amount of a 13.25%
1999 Series Subordinated Notes, due November 1, 1999.
The ILCO Refinancing. In January, 1993, ILCO prepaid all of its
subordinated indebtedness and purchased and cancelled all of the
warrants held by certain of its subordinated noteholders. In
addition to paying the $30 million aggregate principal amount of
the subordinated notes due in 1997, 1998 and 1999 plus accrued
interest, ILCO paid approximately $7 million of prepayment
penalty, the after-tax effect of which will be a charge against
earnings in 1993, and approximately $8 million for the warrants,
which will be a charge directly against retained earnings. The
warrants had entitled the holders to purchase 1,107,480 shares of
ILCO's Common Stock (approximately 24% of the outstanding shares)
at an exercise price of $3.33 per share. The currently estimated
price that the warrant holders could have required ILCO to pay
for the warrants upon exercise of their put option was
approximately $29.9 million. The earliest that the put option
could have been exercised was December 1993, if such exercise
would not have resulted in a default under ILCO's Senior Loan at
that time. The purchase and cancellation of the warrants will
reduce the number of ILCO's outstanding shares of common stock
and common stock equivalents used in the computation of its
earnings per share from approximately 7,147,000 shares to
approximately 6,040,000 shares. This adjustment in common stock
equivalents will affect ILCO's earnings per share for periods
after January 29, 1993. However, it will not affect FIC's equity
in ILCO's net income.
The primary source of the funds used to prepay the subordinated
debt and to purchase the warrants was an increase in the
outstanding balance of ILCO's Senior Loan from $60 million to
$110 million pursuant to an amended and restated credit agreement
that the Company entered into on January 29, 1993 with certain
banks, including the same agent bank as in the Company's original
bank group in 1988. ILCO's prepayment of subordinated debt,
purchase of warrants and increase in senior bank indebtedness are
referred to herein as the "ILCO Refinancing". The terms of the
amended and restated credit facility are substantially the same
as the 1988 facility. The interest rate on the $30 million
subordinated debt that was replaced by the new ILCO Senior Loan
was 13.25%. The average interest rate paid by ILCO on ILCO's New
Senior Loan was approximately 7.04% during 1994, 8.63% during
1995 and 7.76% during 1996. The maturity date, which had been
December 31, 1996, was extended to July 1, 1998 for the new ILCO
Senior Loan. On February 14, 1995, ILCO borrowed an additional
$15 million under the ILCO Senior Loan to help finance the
acquisition of Investors-IN, and the maturity date of the ILCO
Senior Loan was further extended to July 1, 1999.
As of December 31, 1995, the outstanding principal balance of the
ILCO's senior loan obligations was $59.4 million. In January,
1996, the Company made a scheduled payment of $4.5 million under
its Senior Loan. In March, 1996, the Company made the scheduled
payments for April 1st and July 1st, totaling $9 million. At
that same time, the Company made a payment of $941,000, an
additional payment under the terms of the loan applied to the
principal balance. On April 1, 1996, an optional principal
payment in the amount of $15 million was made, which resulted in
advancing the scheduled payoff date of the Senior Loan to April
1, 1998. In July, 1996, the Company made the principal payment
for October 1st ($4.5 million), plus an optional principal
payment of $0.5 million.
The ILCO Senior Loan is a secured and guaranteed six and one-half
year term loan. A required $26 million principal payment was
made on April 1, 1993. Thereafter, the principal is payable in
twenty-two quarterly installments of $4.5 million each,
commencing on April 1, 1994 and ending on July 1, 1999. ILCO is
required to make mandatory payments on the Senior Loan equal to
(a) 100% of the net proceeds from the issuance of ILCO's capital
stock or debt securities and (b) the applicable percentage of
ILCO's annual Excess Cash Flow: 100%, if the outstanding
principal balance of the ILCO Senior Loan exceeds $75 million;
75%, if the outstanding balance exceeds $50 million but is equal
to or less than $75 million; or 50%, if the outstanding balance
is equal to or less than $50 million. Excess Cash Flow is the
excess of (i) the sum of ILCO's cash and cash equivalents,
principal and interest received by ILCO from surplus debentures,
cash dividends received by ILCO and interest income on ILCO's
cash equivalents over (ii) the sum of principal and interest paid
on ILCO's indebtedness, operating expenses, taxes actually paid
and $5 million.
The ILCO Senior Loan bears interest, at the option of ILCO, at a
rate per annum equal to (i) the Alternate Base Rate (as defined
below) plus the Applicable Margin (as defined below), or (ii)
LIBOR (adjusted for reserves) for interest periods of 1, 2, 3 or
6 months plus the Applicable Margin. LIBOR is London Inter-Bank
Offered Rates. The Alternate Base Rate for any day is the higher
of (a) the agent bank's corporate base rate as announced from
time to time and (b) the federal funds rate as published by the
Federal Reserve Bank of New York plus 0.5%. The Applicable
Margin, depending on the outstanding principal balance of the
ILCO Senior Loan, ranges from 0.5% to 1.25% for loans that bear
interest based upon the Alternate Base Rate and from 1.75% to
2.5% for loans that bear interest based upon LIBOR. The initial
Applicable Margin for Alternate Base Rate loans is 1.25% and the
initial Applicable Margin for LIBOR loans is 2.5%.
The obligations of ILCO under the ILCO Senior Loan are secured
by: (1) all of the outstanding shares of stock of Investors-NA,
(2) a $15,000,000 surplus debenture of Investors-NA payable to
ILCO, which had an outstanding principal balance of $5,706,000
as of December 31, 1996 and (3) a $140,000,000 surplus debenture
of Investors-NA payable to ILCO, which had an outstanding
principal balance of $32,840,000 as of December 31, 1996. The
obligations of ILCO under the ILCO Senior Loan are guaranteed by
FIC.
The ILCO Senior Loan prohibits the payment by ILCO of cash
dividends on ILCO's Common Stock and contains covenants,
including restrictive covenants that impose limitations on ILCO's
and its subsidiaries' ability to, among other things: (i) make
investments; (ii) create or incur additional debt; (iii) engage
in businesses other than their present and related businesses;
(iv) create or incur additional liens; (v) incur contingent
obligations; (vi) dispose of assets; (vii) enter into
transactions with affiliated companies; and (viii) make capital
expenditures; and various financial covenants, including
covenants requiring the maintenance of a minimum cash flow
coverage ratio, minimum consolidated net worth and minimum
statutory surplus of subsidiaries, and a minimum ratio (360%) of
(i) the sum of the statutory capital and surplus, the asset
valuation reserve and one-half of the dividend liability
pertaining to participating policies of each insurance company
subsidiary to (ii) its respective Authorized Control Level RBC
(see "Regulation").
The ILCO Senior Loan specifies events of default, including, but
not limited to, failure to pay amounts under the ILCO Senior Loan
documents when due; defaults or violation of covenants under
other indebtedness; certain defaults or violation of certain
covenants under the Family Life Senior Loan (which provisions are
no longer applicable since the repayment of the Family Life
Senior Loan in April, 1996); default under the subordinated loans
made by Investors-NA to FLC and FLIIC; the loss of any license of
an insurance subsidiary of ILCO which would have a material
adverse effect on ILCO; defaults under the FIC guaranty
agreement; changes in ownership or control of FIC or ILCO by its
controlling person, Roy F. Mitte, or in ILCO by FIC; and the
occurrence of certain events of bankruptcy. If Mr. Mitte ceases
to control the management of ILCO solely by reason of (i) his
death or (ii) his permanent inability to perform his usual and
customary duties on a full-time basis on behalf of ILCO and FIC
as the result of physical or mental infirmity, a default will
occur, and the banks holding in the aggregate at least 66 2/3% of
the outstanding balance of the ILCO Senior Loan may, on or after
180 days after the date on which such default occurs, declare the
ILCO Senior Loan immediately due and payable. Mr. Mitte's
ability to communicate and his mobility are impaired as a result
of a stroke he suffered in May 1991. However, Mr. Mitte
continues to control the management of the Company, and Mr.
Mitte's impairments do not constitute a default under the ILCO
Senior Loan. See Item 10(b) "Executive Officers of the
Registrant".
The principal balance of the ILCO Senior Loan was $24.94 million
as of December 31, 1996.
Regulation
General. ILCO's insurance subsidiaries and Family Life are
subject to regulation and supervision by the states in which they
are licensed to do business. Such regulation is designed
primarily to protect policy owners. Although the extent of
regulation varies by state, the respective state insurance
departments have broad administrative powers relating to the
granting and revocation of licenses to transact business,
licensing of agents, the regulation of trade practices and
premium rates, the approval of form and content of financial
statements and the type and character of investments.
These laws and regulations require Family Life and ILCO's
insurance subsidiaries to maintain certain minimum surplus levels
and to file detailed periodic reports with the supervisory
agencies in each of the states in which they do business, and
their business and accounts are subject to examination by such
agencies at any time. The insurance laws and regulations of the
domiciliary states of FIC's and ILCO's insurance subsidiaries
require that such subsidiaries be examined at specified
intervals. Family Life is domiciled in the State of Washington.
Investors-NA and ILIC are domiciled in the states of Washington
and New Jersey, respectively. In December 1992, Investors-NA
redomesticated from Pennsylvania to Washington, and Investors-CA
merged into Investors-NA. In June 1993 Standard Life merged into
Investors-NA. Investors-IN is domiciled in the State of Indiana.
A number of states regulate the manner and extent to which
insurance companies may test for Acquired Immune Deficiency
Syndrome (AIDS) antibodies in connection with the underwriting of
life insurance policies. To the extent permitted by law, Family
Life and ILCO's insurance subsidiaries consider AIDS information
in underwriting coverages and establishing premium rates. An
evaluation of the financial impact of future AIDS claims is
extremely difficult, due in part to insufficient and conflicting
data regarding the incidence of the disease in the general
population and the prognosis for the probable future course of
the disease.
Risk-Based Capital Requirements. Effective for the 1993 calendar
year, the National Association of Insurance Commissioners
("NAIC") has adopted Risk-Based Capital ("RBC") requirements to
evaluate the adequacy of statutory capital and surplus in
relation to investment and insurance risks associated with: (i)
asset quality; (ii) mortality and morbidity; (iii) asset and
liability matching; and (iv) other business factors. The states
will use the RBC formula as an early warning tool to discover
potential weakly capitalized companies for the purpose of
initiating regulatory action. The RBC requirements are not
intended to be a basis for ranking the relative financial
strength of insurance companies. In addition, the formula
defines a new minimum capital standard which will supplement the
prevailing system of low fixed minimum capital and surplus
requirements on a state-by-state basis.
The RBC requirements provide for four different levels of
regulatory attention in those states that adopt the NAIC
regulations, depending on the ratio of the company's Total
Adjusted Capital (which generally consists of its statutory
capital, surplus and asset valuation reserve) to its Authorized
Control Level RBC. A "Company Action Level Event" is triggered if
a company's Total Adjusted Capital is less than 200% but greater
than or equal to 150% of its Authorized Control Level RBC, or if
a negative trend has occurred (as defined by the regulations) and
Total Adjusted Capital is less than 250% but more than 200% of
its Authorized Control Level RBC. When a Company Action Level
Event occurs, the company must submit a comprehensive plan to the
regulatory authority which discusses proposed corrective actions
to improve its capital position. A "Regulatory Action Level
Event" is triggered if a company's Total Adjusted Capital is less
than 150% but greater than or equal to 100% of its Authorized
Control Level RBC. When a Regulatory Action Level Event occurs,
the regulatory authority will perform a special examination of
the company and issue an order specifying corrective actions that
must be followed. An "Authorized Control Level Event" is
triggered if a company's Total Adjusted Capital is less than 100%
but greater than or equal to 70% of its Authorized Control Level
RBC, and the regulatory authority may take any action it deems
necessary, including placing the company under regulatory
control. A "Mandatory Control Level Event" is triggered if a
company's Total Adjusted Capital is less than 70% of its
Authorized Control Level RBC, and the regulatory authority is
mandated to place the company under its control.
Calculations using the NAIC formula and the statutory financial
statements of Family Life and ILCO's insurance subsidiaries as of
December 31, 1996 indicate that the Total Adjusted Capital of
each of FIC's and ILCO's insurance subsidiaries is above 480% of
its respective Authorized Control Level RBC.
Solvency Laws Assessments. The solvency or guaranty laws of most
states in which an insurance company does business may require
that company to pay assessments (up to certain prescribed limits)
to fund policyholder losses or liabilities of insurance companies
that become insolvent. Recent insolvencies of insurance
companies increase the possibility that such assessments may be
required. These assessments may be deferred or forgiven under
most guaranty laws if they would threaten an insurer's financial
strength and, in certain instances, may be offset against future
premium taxes. The insurance companies record the expense for
guaranty fund assessments in the period assessed. The occurrence
and amount of such assessments have increased in recent years.
The net amounts of such assessments for Family Life and ILCO's
insurance subsidiaries were approximately $6,796 and $100,165,
respectively, in the year ended December 31, 1996. Those amounts
are net of the amounts that can be offset against future premium
taxes and, in the case of Family Life, the amount is also net of
the amount that can be recovered from Merrill Lynch pursuant to
the Stock Purchase Agreement between FIC and Merrill Lynch. See
"Acquisition of Family Life." The likelihood and amount of any
other future assessments cannot be estimated and are beyond the
control of FIC and ILCO.
Surplus Debentures and Dividends. The principal sources of cash
for FLC to make payments of principal and interest on the Family
Life Senior Loan are payments under the surplus debenture of
Family Life Insurance Company (a Washington-domiciled insurer)
and dividends paid by Family Life . Under current Washington
law, any proposed payment of a dividend or distribution which,
together with dividends or distributions paid during the
preceding twelve months, exceeds the greater of (i) 10% of
statutory surplus as of the preceding December 31 or (ii)
statutory net gain from operations for the preceding calendar
year is an "extraordinary dividend" and may not be paid until
either it has been approved, or a 60-day waiting period shall
have passed during which it has not been disapproved, by the
Washington Insurance Commissioner. Effective July 25, 1993,
Washington amended its insurance code to retain the "greater of"
standard for dividends but enacted requirements that prior
notification of a proposed dividend be given to the Washington
Insurance Commissioner and that cash dividends may be paid only
from earned surplus. Family Life does not presently have earned
surplus as defined by the regulations adopted by the Washington
Insurance Commissioner and, therefore, is not presently permitted
to pay cash dividends. However, since the new law applies only
to dividend payments, the ability of Family Life to make
principal and interest payments under the surplus debenture is
not affected.
Principal and interest payments on the surplus debenture have
provided sufficient funds to meet debt service obligations of
FLC. Under the provisions of the surplus debenture and current
law, Family Life can pay interest and principal on the surplus
debenture without having to obtain the prior approval of the
Washington Insurance Commissioner; provided that, after giving
effect to the payment of interest or principal on the surplus
debenture, the statutory capital and surplus of Family Life
exceeds 6% of its assets. Pursuant to the surplus debenture,
Family Life paid principal and interest in 1994, 1995 and 1996
totalling
$19,311,960, $16,052,400 and $13,526,338, respectively. Family
Life does give five-days prior notification to the Washington
Insurance Department of each proposed payment on the surplus
debenture in accordance with an agreement between Family Life and
the Department. The Company does not anticipate that Family Life
will have any difficulty in making principal and interest
payments on the surplus debenture in the amounts necessary to
enable FLC to service its indebtedness for the foreseeable
future.
Valuation Reserves. Commencing in 1992, the Mandatory Securities
Valuation Reserve ("MSVR") required by the NAIC for life
insurance companies was replaced by a mandatory Asset Valuation
Reserve ("AVR") which is expanded to cover mortgage loans, real
estate and other investments. A new mandatory Interest
Maintenance Reserve ("IMR"), designed to defer realized capital
gains and losses due to interest rate changes on fixed income
investments and to amortize those gains and losses into future
income, is also effective for 1992. Previously, realized capital
gains attributable to interest rate changes were credited to the
MSVR and had the effect of reducing Family Life's required MSVR
contributions. Effective in 1992, such realized capital gains
are credited to the IMR. As a result of these changes, Family
Life is required to accrue greater aggregate asset valuation
reserves. The combination of the AVR and IMR will affect
statutory capital and surplus and may reduce the ability of
Family Life to pay dividends and make payments on the surplus
debenture.
Insurance Holding Company Regulation. Family Life is subject to
regulation under the insurance and insurance holding company
statutes of Washington. The insurance holding company laws and
regulations vary from jurisdiction to jurisdiction, but generally
require insurance and reinsurance subsidiaries of insurance
holding companies to register with the applicable state
regulatory authorities and to file with those authorities certain
reports describing, among other information, their capital
structure, ownership, financial condition, certain intercompany
transactions and general business operations. The insurance
holding company statutes also require prior regulatory agency
approval or, in certain circumstances, prior notice of certain
material intercompany transfers of assets as well as certain
transactions between insurance companies, their parent companies
and affiliates.
Under the Washington Insurance Code, unless (i) certain filings
are made with the Washington Department of Insurance, (ii)
certain requirements are met, including a public hearing and
(iii) approval or exemption is granted by the insurance
commissioner, no person may acquire any voting security or
security convertible into a voting security of an insurance
holding company, such as the Company, which controls a Washington
insurance company, or merge with such a holding company, if as a
result of such transaction such person would "control" the
insurance holding company. "Control" is presumed to exist if a
person directly or indirectly owns or controls 10% or more or the
voting securities of another person.
Potential Federal Regulation. Although the federal government
generally does not directly regulate the insurance industry,
federal initiatives often have an impact on the business.
Congress and certain federal agencies are investigating the
current condition of the insurance industry (encompassing both
life and health and property and casualty insurance) in the
United States in order to decide whether some form of federal
role in the regulation of insurance companies would be
appropriate. Congress is currently conducting a variety of
hearings relating in general to the solvency of insurers. It is
not possible to predict the outcome of any such congressional
activity nor the potential effects thereof on Family Life.
Congressional initiatives directed at repeal of the McCarran-
Ferguson Act (which exempts the "business of insurance" from most
federal laws, including the antitrust laws, to the extent it is
subject to state regulation) and judicial decisions narrowing the
definition of "business of insurance" for McCarran-Ferguson Act
purposes may limit the ability of insurance companies in general
to share information with respect to rate-setting, underwriting
and claims management practices. Current and proposed federal
measures which may also significantly affect the insurance
industry include minimum solvency requirements and removal of
barriers preventing banks from engaging in the insurance
business.
Federal Income Taxation
The Revenue Reconciliation Act of 1990 amended the Internal
Revenue Code of 1986 to require a portion of the expenses
incurred in selling insurance products to be deducted over a
period of years, as opposed to an immediate deduction in the year
incurred. Since this change only affects the timing of the
deductions, it does not affect tax expense as shown on the
Company's financial statements prepared in accordance with GAAP.
However, the change will increase the tax for statutory
accounting purposes in the first few years, which will reduce
statutory surplus and, accordingly, may decrease the amount of
cash dividends that Family Life can pay. For the years ended
December 31, 1994, 1995 and 1996, the increases in Family Life's
current income tax provisions, utilizing the effective tax rates,
due to this change were $209,555, $77,498 and $183,358,
respectively. The change has a negative tax effect for statutory
accounting purposes when Family Life's premium income
increases, but has a positive tax effect when its premium
income decreases.
Item 2. Properties
The Registrant's headquarters are currently located at Austin
Centre, 701 Brazos, Suite 1400, Austin, Texas. Investors-NA
purchased Austin Centre, an office-hotel property in downtown
Austin in August 1991 for a purchase price of $31,275,000 from an
unrelated seller that had previously acquired the property
through foreclosure. Austin Centre covers a full city block and
is a sixteen story mixed use development consisting of 343,664
square feet of office/retail space (predominately office space),
a 314 room hotel and 61 luxury apartments, all united by a 200
foot high glass atrium. The project was completed in October
1986.
In September 1995, Investors-NA (a subsidiary of ILCO) entered
into a contract to sell Austin Centre to an Austin-based real
estate investment firm for a purchase price of $62.675 million,
less $1 million to be paid to a capital reserve account for the
purchaser. The sale was consummated on March 29, 1996. A
portion of the sale proceeds equal to the amount that Investors-
NA presently had invested in Austin Centre were retained and
reinvested by Investors-NA. The balance of the net proceeds of
the sale were used to reduce ILCO's bank indebtedness by
approximately $15 million.
On January 31, 1995, ILCO, through Investors-NA, purchased, as an
investment property, an office building project known as
Bridgepoint Office Square in Austin, Texas for a cash purchase
price of $9.75 million. The property consists of 20 acres of land
with four office building sites and two parking structure sites.
The first phase of development of the property was completed in
1986 and consists of a five-story office building with 83,474
square feet of rentable space and a 550-car parking garage. The
office space is fully rented.
In the fourth quarter of 1995, construction began on the second
office building, containing approximately 109,000 rentable square
feet, and the other parking garage containing approximately 871
spaces. That phase of the project was completed in September
1996, and is 100% leased to a major tenant in the technology
business.
In March 1996, construction commenced on the third office
building, with approximately 81,000 rentable square feet of
office space and was completed in December, 1996. Investors-NA
leased approximately 43,000 square feet of the third office
building to the same tenant which leased all of the space in the
second building. The remaining space was leased in October, 1996
to a major tenant, also in the technology business.
Construction began on the fourth building in July 1996, with a
projected completion date of July, 1997. The fourth building
contains approximately 92,459 rentable square feet. In September
of 1996, approximately 23,619 rentable square feet were leased to
an oil and gas company. Another 10,000 square feet was leased in
March, 1997, to a company involved in the technology field.
Investors-NA is currently negotiating with two other potential
tenants to lease the remainder of the rentable square feet in the
fourth building.
On May 3, 1996, Family Life, purchased a tract of land adjoining
the Bridgepoint Office Square tract for a cash purchase price of
$1.3 million. The property consists of 7.1 acres of land with one
office building site and one parking structure site. Family Life
began construction of the fifth building (known as "Bridgepoint
Five") on the new site in January 1997. The building, which will
have approximately 71,500 square feet of rentable space, is
currently projected to be completed in September, 1997. Following
completion of the building, ILCO and its related companies will
vacate their current headquarters in the Austin Centre and move
them to Bridgepoint Five. ILCO and its related companies will
occupy approximately 50,000 rentable square feet. Family Life is
currently seeking tenants to occupy the remainder of the rentable
square feet in the fifth building.
Family Life leases its home offices at the Fourth and Blanchard
Building, 2121 Fourth Avenue, in Seattle, Washington. The lease
currently covers approximately 7,776 rentable square feet of
office space for a term expiring in October 1998 with an option
to renew for an additional three-year period. The initial base
rental is approximately $11,200 per month, which includes Family
Life's proportionate share of the building's operating expenses,
including utilities, property taxes, insurance, maintenance and
management. Actual increases from those initial operating
expenses during the lease term are passed on to Family Life on a
proportionate basis.
ILCO leases a building located at 40 Parker Road, Elizabeth, New
Jersey. This building, which was formerly ILCO's headquarters
building, contains approximately 41,000 square feet of office
space. The remaining term of the lease is 11 years, and the
lease calls for a minimum base rental of $450,000 per annum. The
lease provides that all costs including, but not limited to,
those for maintenance, repairs, insurance and taxes be borne by
ILCO. ILCO and ILIC currently occupy a nominal portion of the
space in the 40 Parker Road property and have sub-leased the
remaining portion.
ILIC owns three buildings which are adjacent to the 40 Parker
Road building. One building, which is leased to third parties,
contains approximately 3,500 square feet of space. The second
building contains approximately 2,500 square feet of space and is
leased to persons who perform maintenance services for ILIC's and
ILCO's properties in Elizabeth, New Jersey. The third building,
purchased during 1985, contains approximately 3,500 square feet
of space, and is partially leased to third parties and the
remainder is used to provide accommodations for employees working
at the New Jersey office.
Investors-NA owns an office building located at 206 West Pearl
Street, Jackson, Mississippi. This building is 66 years old and
contains approximately 85,000 square feet of office space.
Investors-NA currently occupies a nominal portion of the space in
this property and leases space to various commercial tenants.
The Company believes that its properties and leased space are
adequate to meet its foreseeable requirements.
Item 3. Legal Proceedings
The Company and its subsidiaries are defendants in certain legal
actions related to the normal business operations of the Company.
Management believes that the resolution of such legal actions
will not have a material impact on the financial statements.
ILCO 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.
ILCO believes that the suit is without merit and intends to
vigorously defend this matter.
Item 4. Submission of Matters to a Vote of Security Holders
A Special Meeting of the Shareholders of FIC was held on November
12, 1996, for the purpose of obtaining the vote of the
shareholders on a proposal to amend the Articles of Incorporation
to: (i) increase the number of authorized shares of common stock
from 3,304,200 shares to 10,000,000 shares and (ii) to reduce the
par value of the common stock from $1.00 to $.20. These
amendments to the Articles of Incorporation were related to the
implementation of the five-for-one stock split authorized by the
Board of Directors on September 27, 1996.
PART II
Item 5. Market for the Registrant's Common Stock and Related
Security Holder Matters
A. Market Information
The following table sets forth the quarterly high and low sales
prices for FIC Common Stock in The Nasdaq Small-Cap Market for
1996 and 1995. The quotations set forth in the table have been
adjusted to give retroactive effect to the five-for-one stock
split which was effective November 12, 1996. FIC's NASDAQ
trading symbol is FNIN.
Common Stock
Prices
High Low
1996
First Quarter $11.00 $ 6.95
Second Quarter 11.90 7.80
Third Quarter 11.90 8.70
Fourth Quarter 15.00 11.00
1995
First Quarter $ 6.80 $ 5.60
Second Quarter 8.10 5.60
Third Quarter 8.50 7.30
Fourth Quarter 7.90 6.60
B. Stockholders
As of March 17, 1997 there were approximately 16,126 record
holders of FIC Common Stock.
C. Dividends
FIC has not paid a dividend since 1976 and does not expect to pay
a dividend during 1997.
The ability of an insurance holding company, such as FIC, to pay
dividends to its shareholders may be limited by the company's
ability to obtain revenue, in the form of dividends and other
payments, from its operating insurance subsidiary or
subsidiaries. The right of Family Life to pay dividends is
restricted by the insurance laws of its domiciliary state. See
Item 1. Business - Regulation - Surplus Debenture and Dividends.
However, FIC does not directly own Family Life's stock but,
instead, indirectly owns that stock through two downstream
holding companies, FLIIC and FLC. FLC, which holds all of the
stock of Family Life, is prohibited from paying dividends on its
common stock by the provisions of the note from Investors-NA ,
and FLIIC, the immediate parent of FLC and the directly-owned
subsidiary of FIC, is prohibited from paying dividends on its
stock by the $4.5 million subordinated note of FLIIC held by
Investors-NA, except FLIIC may pay dividends on its common stock
to enable FIC to make scheduled principal and interest payments
on its $2.5 million subordinated note to Investors-NA. The
ability of ILCO to pay dividends to FIC and the other
shareholders of ILCO is affected by the receipt of dividends and
other payments from its insurance subsidiaries. In addition, the
ILCO Senior Loan restricts ILCO from paying any dividends on its
stock during the term of that loan.
Item 6. Selected Financial Data
(Registrant and its Consolidated Subsidiaries)
(In thousands, except per share data)
1996 1995 1994 1993 1992
Operating
Revenues $59,928 $ 61,541 $ 68,524 $ 74,023 $ 83,531
Income (loss)
before federal
income tax,
equity in net
earnings of
affiliates,
extraordinary
items and
cumulative
effect of
change in
accounting
principle of
affiliate 9,791 10,394 10,610 11,560 12,179
Income before
equity in net
earnings of
affiliates,
extraordinary
items and
cumulative
effect of
change in
accounting
principle of
affiliate 7,145 7,966 8,264 8,587 8,831
Equity in net
earnings of
affiliate, net
of tax 9,012 2,051 1,690 3,038 4,761
Income before
extraordinary
items and
cumulative
effect of
change in
accounting
principle of
affiliate 16,157 10,017 9,954 11,625 13,592
Extraordinary
items -0- -0- -0- 5,555 -0-
Income before
cumulative
effect of
change in
accounting
principle of
affiliate 16,157 10,017 9,954 17,180 13,592
Cumulative
effect of
change in
accounting
principle of
affiliate, net -0- -0- -0- (1,159) -0-
of tax benefit
Net Income $16,157 $ 10,017 $ 9,954 $ 16,021 $ 13,592
Common Stock
and Common
Stock
Equivalents 5,568 5,540 5,530 5,555 5,565
Net income per
share before
extraordinary
items and
cumulative
effect of
change in
accounting
principle of
affiliate $ 2.90 $ 1.81 $ 1.80 $ 2.09 $ 2.44
Extraordinary
items -0- -0- -0- 1.00 -0-
Net income per
share before
cumulative
effect of
change in
accounting
principle of
affiliate 2.90 1.81 1.80 3.09 2.44
Cumulative
effect of
change in
accounting
principle of
affiliate -0- -0- -0- ( 0.21) 0.00
Net Income per
share $ 2.90 $ 1.81 $ 1.80 $ 2.88 $ 2.44
Total Assets $287,730 $287,678 $253,100 $277,790 $311,497
Long Term
Obligations $59,940 $ 67,989 $ 77,819 $ 89,178 $113,015
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
For the year ended December 31, 1996, FIC's net income was
$16,157,000 (or $2.90 per common share), as compared to
$10,017,000 (or $1.81 per common share for the year ended
December 31, 1995 and $9,954,000 (or $1.80 per common share), for
the year ended December 31, 1994. The net income per share for
the years 1995 and 1994 has been restated to reflect the effect
of the five-for-one stock split which was effective November 12,
1996.
FIC's net income is affected by its equity interest in
InterContinental Life Corporation ("ILCO") and ILCO's insurance
subsidiaries. Net income for the year ended December 31, 1996
includes $7.1 million resulting from ILCO's sale of the Austin
Centre, a hotel/office complex, located in Austin, Texas. The
sale was completed by Investors Life Insurance Company of North
America ("Investors-NA"), a wholly-owned subsidiary of ILCO. The
selling price was $62.675 million, less $1 million paid to a
capital reserve account for the purchaser. The property was
purchased in 1991 for $31.275 million. A portion of the sale
proceeds, equal to the book value of the property, net of
improvements and amortization ($36.8 million), was retained and
reinvested by Investors-NA. The balance of the proceeds of the
sale, net of federal income tax, was used to reduce the ILCO's
senior loan obligations by $15 million. The sale closed on March
29, 1996. The Company and its affiliates will continue to occupy
space on three floors of the office tower as its headquarters,
under a lease which runs through September 30, 1997. In
September, 1997, the Company and its affiliates will move its
headquarters to a new, 71,500 square foot office building know
as Bridgepoint Five. That project, which is currently under
construction on a 7.1 acre site owned by Family Life Insurance
Company, is located in Austin, Texas, adjacent to the 20-acre
office building site which is being developed by Investors-NA.
The Bridgepoint Five site was purchased by Family Life in May,
1996, for a cash purchase price of $1.3 million.
The statutory earnings of Family Life as required to be reported
to insurance regulatory authorities before interest expense,
capital gains and losses, and federal income taxes were
$12,734,000 at December 31, 1996, as compared to $14,354,000 at
December 31, 1995 and $18,944,000 at December 31, 1994. These
statutory earnings are the source to provide for the repayment of
the indebtedness incurred in connection with the acquisition of
Family Life.
The decline in long-term interest rates during 1996, which was
related to general economic conditions, had a positive effect
upon the market value of the fixed maturities available for sale
segment of the Company's portfolio. As of December 31, 1996, the
market value of the fixed maturities available for sale segment
was $83.8 million as compared to an amortized value of $83.0
million, or an unrealized gain $.8 million. The net of tax
effect of this increase has been recorded as an increase in
shareholders' equity. There is no assurance that this unrealized
gain may be realized in the future.
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.
The consolidated balance sheets at December 31, 1996 include
Separate Account assets of Family Life in the amount of $0.45
million. The Separate Account is maintained by Family Life,
which was acquired by FIC on June 12, 1991. Under the provisions
of the purchase agreement between FIC and Merrill Lynch Insurance
Group, Inc., certain life insurance companies affiliated with
Merrill Lynch agreed to assume (on an assumption reinsurance
basis) the variable annuity contracts related to such Separate
Account assets. The transfer of these assets, in accordance with
the provisions of the reinsurance agreement, is subject to
certain regulatory approvals. During the year 1996, Merrill Lynch
received regulatory approvals in several additional
jurisdictions. As a result, Separate Account assets in the
amount of $8.1 million were transferred out of Family Life, in
accordance with the provisions of the 1991 agreements. The
Company has not obtained a definitive date from Merrill Lynch as
to when the remaining regulatory approvals will be obtained, so
as to enable Family Life to complete the transfer of Separate
Account assets.
Equity in Net Income of InterContinental Life Corporation
General:
Prior to the acquisition of Family Life in June of 1991, FIC's
primary involvement in the life insurance business was through
its equity interest in ILCO. The Company's equity in the net
earnings of ILCO, net of federal income tax, was $9,012,000, as
compared to $2,051,000 for the year 1995 and $1,690,000 for the
year 1994. The increase in 1996 is primarily attributable to
ILCO's net income resulting from the sale of the Austin Centre
property.
FIC currently owns 1,795,146 shares of ILCO's common stock, and
holds options to acquire an additional 1,702,155 shares. The
options were granted under an Option Agreement between FIC and
ILCO which was entered into in March, 1986. In addition, Family
Life currently owns 171,200 shares of ILCO common stock. As a
result, FIC currently owns, directly and indirectly through
Family Life, 1,966,346 shares (approximately 46%) of ILCO's
common stock and holds options to acquire 1,702,155 shares. If
all of FIC's rights under the Option Agreement were to be
presently exercised, FIC's ownership would amount to
approximately 61.5% of the issued and outstanding shares of
ILCO's common stock.
The decline in long-term interest rates during 1996, which was
related to general economic conditions, had a positive effect
upon the market value of the fixed maturities available for sale
segment of ILCO's investment portfolio. As of December 31, 1996,
the market value of the fixed maturities available for sale
segment was $453.9 milli