In November, 1997, Investors-NA and Family Life entered into a sale agreement with an independent third party for the sale of their respective interests in Bridgepoint Square Offices. The transaction, which closed on December 5,1997, was for an aggregate price of $78 million. The sale resulted in a net pre-tax profit to Investors-NA of approximately $14.3 million, and a net pre-tax profit to Family Life of approximately $4.5 million. See Item 2. Properties.
FIC and ILCO have established and staffed an investment department, which manages portfolio investments and investment accounting functions for their life insurance subsidiaries.
The 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.
This nationwide system sells Family Life's products through an exclusive agent force. This agent force sells mortgage protection life 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).
Pursuant to a data processing agreement with a major service company, the data processing needs of FIC's and ILCO's insurance subsidiaries were provided at a central location until November 30, 1994. Since December, 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.
The Company's analysis also indicated that, in addition to potential policy administration errors in the life insurance subsidiaries, any machine which contains a microchip is subject to error due to the Y2K problem. Such an occurrence could not only create errors in the Company's internal systems, but those of the Company's suppliers and service providers. In order to prepare for this contingency, the Plan called for the acquisition of new mainframe hardware and software, and the modification and conversion of our telephones, voice mail and desk-top personal computers.
Under the Plan, FIC Computer Services, Inc. will utilize its own personnel, acquire Y2K compliant operating software, and engage the assistance of outside consultants to facilitate the systems conversions and modifications. FIC has budgeted approximately $330,000 for implementation of the Plan. In the event that the Plan does not achieve full compliance by the target dates, or if unforeseen matters involving Y2K appear at later dates, the Company will utilize the staff of FIC Computer Services, Inc. to identify and resolve such issues as and if they arise.
A non-material number of Family Life policies are administered by systems which also administer policies for ILCO and its subsidiaries. With regard to ILCO and its subsidiaries, the ALIS system (administering approximately 49,280 policies for Investors- NA) was converted to CK/4 in January of 1998. The conversion of the Life 70 system (administering approximately 17,285 policies for Investors-IN) is scheduled for completion in April, 1999. The modification of the Lifecomm-B system which is responsible for the 33,375 policies assumed after the acquisition of State Auto Life is also scheduled for completion in April, 1999. The conversion of the Lifecomm-A system (administering approximately 65,266 policies for Investors-NA) is now scheduled for completion in September of 1999.
The various software applications described above are licensed to the Company or its affiliates under agreements which permit the Company's and ILCO's subsidiaries to process business on its computer systems utilizing such software.
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.
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.
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%.
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."
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 $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%.
ILCO's 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 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 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 $5,206,224 as of December 31, 1997 and (3) a $140,000,000 surplus debenture of Investors-NA payable to ILCO, which had an outstanding principal balance of $22,590,000 as of December 31, 1997. The obligations of ILCO under the Senior Loan are guaranteed by FIC.
The principal balance of the ILCO Senior Loan was $10.96 million as of December 31, 1997.
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.
Calculations using the NAIC formula and the statutory financial statements of Family Life and ILCO's insurance subsidiaries as of December 31, 1997 indicate that the Total Adjusted Capital of each of FIC's and ILCO's insurance subsidiaries is above 680% 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 net amounts of such assessments for Family Life and ILCO's insurance subsidiaries were approximately $16,441 and $70,253 , respectively, in the year ended December 31, 1997. 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 above-described "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 1995, 1996 and 1997 totaling $16,052,400, $13,526,338 and $11,903,287, 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. During 1997, a change in the NAIC's AVR procedures resulted in a one-time reduction in the amount of the reserves held by Family Life, with a corresponding one-time increase in the amount of surplus, in the amount of $320,000. A new mandatory Interest Maintenance Reserve ("IMR"), designed to defer realized capital gains and losses due to interest rate changes on fixed income investments and to amortize those gains and losses into future income, is also effective for 1992. Previously, realized capital gains attributable to interest rate changes were credited to the MSVR and had the effect of reducing Family Life's required MSVR contributions. Effective in 1992, such realized capital gains are credited to the IMR. 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.
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.
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, 1995, 1996 and 1997, the increases (decreases) in Family Life's current income tax provisions, utilizing the effective tax rates, due to this change were $77,498, $183,358 and ($136,000), 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.
In January, 1995, ILCO, through Investors-NA, purchased, as an investment property, an office building project known as Bridgepoint Office Square in Austin, Texas for a cash purchase price of $9.75 million. The property consists of 20 acres of land with four office building sites and two parking structure sites. The first phase of development of the property was completed in 1986 and consists of a five-story office building with 83,474 square feet of rentable space and a 550-car parking garage. The office space was fully rented.
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.
Pursuant to the terms of the Bridgepoint Sale Agreement, Family Life is obligated to complete the construction of and tenant improvements in Bridgepoint Five. At the date on which the transaction closed, the building shell and adjacent parking garage had been completed, except for the client briefing center. As of March, 1998, all tenant improvements had been completed subject to final inspection.
Equity in net earnings of affiliate, net of tax 6,458 9,012 2,051 1,690 3,038
Cumulative effect of change in accounting principle of affiliate, net of tax benefit -0- -0- -0- -0- (1,159)
Net income per share before extraordinary items and cumulative effect of change in accounting principle of affiliate Basic $ 3.01 $ 2.98 $ 1.85 $ 1.83 $ 2.14 Diluted $ 2.92 $ 2.90 $ 1.81 $ 1.80 $ 2.09
Net income per share before cumulative effect of change in accounting principle of affiliate Basic $ 3.01 $ 2.98 $ 1.85 $ 1.83 $ 3.16 Diluted $ 2.92 $ 2.90 $ 1.81 $ 1.80 $ 3.09
Cumulative effect of change in accounting principle of affiliate Basic -0- -0- -0- -0- ($0.21) Diluted -0- -0- -0- -0- ( 0.21)
Basic $ 3.01 $ 2.98 $ 1.85 $ 1.83 $ 2.95 Diluted $ 2.92 $ 2.90 $ 1.81 $ 1.80 $ 2.88
Long Term Obligations $ 53,792 $ 59,940 $ 67,989 $ 77,819 $ 89,178
Net income from continuing operations (excluding the gain resulting from Family Life s sale of its interest in Bridgepoint Square Offices in 1997 , ILCO s sale of its interest in Bridgepoint Square Offices in 1997, and ILCO s sale of the Austin Centre in 1996, as described below) was $9,300,000 ($1.66 per common share on a diluted basis) for the year ended December 31, 1997, $9,487,000 ($1.70 per common share on a diluted basis) for the year ended December 31, 1996 and $10,017,000 ($1.81 per common share on a diluted basis) for the year ended December 31, 1995
Net income for the year ended December 31, 1997 includes $3.2 million ($0.57 per common share) resulting from Family Life s sale of its interest in Bridgepoint Square Offices. Family Life purchased undeveloped land at the Bridgepoint site in May, 1996, 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 building (known as "Bridgepoint Five") in January 1997. In May, 1997, the entire rentable space (approximately 76,793 rentable square feet) contained in the building was leased to a major tenant in the technology business. Construction of the parking garage and the building shell was completed in October, 1997. In November, 1997, Family Life entered into a contract to sell its interest in the Bridgepoint Square Office complex. The sale also included the adjacent properties developed by ILCO s subsidiary, Investors-NA. The aggregate purchase price for the project was $78 million. The transaction closed on December 5, 1997. The purchase price was allocated approximately 78.5% to Investors-NA and 21.5% to Family Life. The sale resulted in a net profit to Family Life of approximately $4.5 million ($3.2 million after tax)that is included in FIC's earnings for the year 1997.
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, 1997 includes $3.8 million ($0.68 per common share on a diluted basis) resulting from ILCO s sale of its interest in Bridgepoint Square Offices. 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 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 $13,625,000 at December 31, 1997, as compared to $12,734,000 at December 31, 1996 and $14,354,000 at December 31, 1995. 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 1997, 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, 1997, the market value of the fixed maturities available for sale segment was $81.85 million as compared to an amortized value of $79.06 million, or an unrealized gain $2.79 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.
Premiums for the year 1997, net of reinsurance ceded, were $40.2 million, as compared to $43.3 million in 1996 and $43.9 million in 1995. Policyholder benefits and expenses were $17.7 million in 1997, as compared to $22.1 million in 1996 and $21.0 million in 1995.
The decline in long-term interest rates during 1997, 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, 1997, the market value of the fixed maturities available for sale segment was $454.5 million as compared to an amortized cost of $436.8 million, or an unrealized gain $17.7 million. There is no assurance that this unrealized gain will be realized by ILCO in the future. Since FIC owns approximately 45.40% of the common stock of ILCO, such unrealized gains, net of tax, are reflected in FIC's equity interest in ILCO, and had the effect of increasing the reported value of such equity interest by approximately $4.9 million.
In December, 1997, ILIC, an indirect subsidiary of ILCO, transferred its domicile from New Jersey to Indiana. Following completion of the redomestication, ILIC merged with Pre-Merger Investors-IN, with ILIC as the surviving entity in the merger process. Immediately after the merger, ILIC changed its name to Investors Life Insurance Company of Indiana. As used hereinafter, the phrase "Investors-IN" shall be used to refer to the merged entities. As a result of the merger, Investors-IN is licensed in 44 states. As of December 31, 1997, it had assets of $153.8 million and capital and surplus of $23.1 million.
Investors-IN, formerly known as ILIC, is domiciled in the State of Indiana. The transfer of domicile from New Jersey to Indiana was effective December 15, 1997. Under the Indiana insurance code, a domestic insurer may make dividend distributions upon proper notice to the Department of Insurance, as long as the distribution is reasonable in relation to adequate levels of policyholder surplus and quality of earnings. Under Indiana law the dividend must be paid from earned surplus. Extraordinary dividend approval would be required where a dividend exceeds the greater of 10% of surplus or the net gain from operations for the prior fiscal year. Investors-IN had earned surplus of $18.1 million at December 31, 1997.
The cash requirements of FIC and its subsidiaries consist primarily of its service of the indebtedness created in connection with its ownership of Family Life. As of September 30, 1996 the outstanding balance of such indebtedness was $61.5 million on the Subordinated Notes granted by Investors-NA. On April 17, 1996, the Senior Loan granted by a group of banks was completely paid off.
Washington's insurance code includes the "greater of" standard for dividends but has requirements that prior notification of a proposed dividend be given to the Washington Insurance Commissioner and that cash dividends may be paid only from earned surplus. Family Life does not presently have earned surplus as defined by the regulations adopted by the Washington Insurance Commissioner and, therefore, is not 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. 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 Family Life Corporation to service its indebtedness for the foreseeable future.
FIC's net cash flow provided by operating activities was $5.2 million in 1997, as compared to $9.7 million in 1996 and $9.1 million in 1995. Net cash flow used in financing activities was $6.1 million in 1997, as compared to $8.05 million in 1996 and $9.8 million in 1995.
In connection with the purchase of the Investors Life Companies by ILCO and the purchase of Family Life by a wholly- owned subsidiary of FIC, FIC guaranteed the payment of the indebtedness created in connection with such acquisitions. The guaranty commitments of FIC with respect to the debt obligations of ILCO relate to the ILCO Senior Loan, with an outstanding balance at December 31, 1997 of $10.96 million.
As of December 31, 1997, the Company's investment assets totaled $119.1 million, as compared to $111.7 million as of December 31, 1996.
The fixed maturities portfolio of Family Life, as of December 31, 1997, consisted solely of fixed maturities investments which, in the annual statements of the companies, as filed with state insurance departments, were designated under the National Association of Insurance Commissioners ("NAIC") rating system as a "1" (highest quality).
Management believes that the absence of "high-yield" or "non- investment grade" investments (as defined above) in the portfolios of its life insurance subsidiary enhances the ability of the Company to service its debt, provide security to its policyholders and to credit relatively consistent rates of return to its policyholders. Y2K Compliance
Under the Plan, The Company will utilize the services of personnel of its affiliate, FIC Computer Services, Inc., to acquire Y2K compliant operating software, and engage the assistance of outside consultants to facilitate the systems conversions and modifications. The Company has budgeted approximately $330,000 for implementation of the Plan. In the event that the Plan does not achieve full compliance by the target dates, or if unforeseen matters involving Y2K appear at later dates, the Company will utilize the staff of FIC Computer Services to identify and resolve such issues as and if they arise.
With respect to non-centralized systems (i.e. desktop computers), the Company anticipates that updated software releases will be commercially available well in advance of the year 2000. Accordingly, to the extent that such systems rely on date sensitive information, the Company expects that the effort needed to correct for Y2K problems will be less time intensive than the effort needed to achieve compliance for its centralized systems.
In June, 1997, the FASB issued FAS No. 130, "Reporting Comprehensive Income", which establishes standards for reporting and display of comprehensive income and its components in a financial statement with the same prominence as other financial statements. Comprehensive income is defined as net income adjusted for changes in stockholders' equity resulting from events other than net income or transactions related to an entity's capital instruments. The Company is required to adopt FAS 130 effective January 1, 1998, with reclassification of financial statements for earlier years required.
In February, 1998, the FASB issued FAS 132, "Employers' Disclosures About Pensions and Other Postretirement Benefits", which revises current disclosure requirements for employers' pension and other retiree benefits. FAS 132 does not change the measurement or recognition of pension or other postretirement benefit plans. The Company is required to adopt FAS 132 effective January 1, 1998, with restatement of disclosures for earlier years required.
3. Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995.