In September 1995, Investors-NA 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 contract provides that the sale will be consummated by March 29, 1996. ILCO anticipates that the sale proceeds equal to the amount that Investors-NA presently has invested in Austin Centre will be retained and reinvested by Investors-NA and that most of the balance of the net proceeds of the sale will be 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. 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. This second phase of the project is projected to be completed in the summer of 1996.
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.
Net income per share before cumulative effect of change in accounting principle 2.11 1.93 1.13 2.06 1.89
For the year ended December 31, 1995, ILCO's net income from operations was $10,714,000 ($2.11 per common share), as compared to $9,917,000 ($1.93 per common share) in 1994 and $12,200,000 ($2.20 per common share), before extraordinary item and change in accounting principle, in 1993.
Net income for the years 1995 and 1994 was not affected by extraordinary items. For the year ended December 31, 1993, after giving effect to the cost of early extinguishment of debt (net of tax) and the effect of a change in accounting principle, net income for the period was $3,347,000, or $.69 per common share. The net income of ILCO for the year 1993 was affected by (i) the costs associated with the prepayment in January of 1993 of its Subordinated Loans; the prepayment premium resulted in a one time charge to earnings in the amount of $6,253,000, net of tax, and (ii) the one time charge to earnings, in the amount of $2,600,000, which was incurred in connection with the initial adoption of Financial Accounting Standard No. 109 ("Accounting for Income Taxes"). The effect of each of these items was within the range previously disclosed by management in the Company's Form 10-K for the year ended December 31, 1992.
Premium income, net of reinsurance, for the year 1995 was $11.7 million, as compared to $14.3 million in 1994 and $16.1 million in 1993. The decline is primarily attributable to the decision to discontinue the writing of credit life and credit accident and health insurance, as well as the reduction in premiums received for traditional (non-universal) life insurance and accident and health insurance policies. This decline was partially offset by the premium income resulting from the inclusion of Investors-IN. For the year 1995, reinsurance premiums ceded were $8.9 million, as compared to $10.9 million in 1994 and $11.9 million in 1993.
Earned insurance charges for the year ended December 31, 1995 were $42.3 million, as compared to $39.4 million for 1994 and $38.6 million in 1993. This source of revenues is related to the universal life insurance and annuity book of business of Investors-NA. The increase in the level of earned insurance charges for the 1995 year is primarily attributable to the addition of Investors-IN.
Interest expense was $5.7 million for the year ended December 31, 1995, as compared to $5.2 million for the year 1994 and $5.7 million in 1993. The increase in 1995, as compared to 1994, is attributable to an increase in the average rate of interest paid on the senior loan - 8.63% in 1995 as compared to 7.04% for 1994, the effect of which was partially offset by a decrease in the average amount of the senior loan ($64.3 million in 1995 as compared to $69.4 million in 1994). The decrease in interest expense in 1994, as compared to 1993, was attributable to the lower average amount of the senior loan ($69.4 million for 1994 and compared to $88.9 million in 1993), offset partially by a slight increase in the average rate of interest paid on the senior loan (7.04% in 1994, as compared to 6.37% in 1993).
The decline in long-term interest rates during 1995, 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 portfolio. As of December 31, 1995, the market value of the fixed maturities available for sale segment was $483.6 million as compared to a carrying value of $463.7 million, or an unrealized gain $19.9 million. There is no assurance that this unrealized gain willbe realized in the future.
On January 31, 1995, ILCO, through Investors-NA, purchased, as an investment property, an office building project known as One 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 sites for parking garages. At the time of the purchase, the first stage of the development had already been completed, consisting of a five- story office building with 83,474 square feet of rentable space and a 550-car parking garage. That stage of the development was completed in 1986. In the fourth quarter of 1995, construction commenced on a second building on the site, with 110,000 square feet of rentable space, and the second parking garage. The second phase of the project is expected to be completed in the summer of 1996.
In January 1996, the Company announced that Investors-NA had entered into an agreement to sell the Austin Centre, an office- hotel complex in Austin, Texas. The selling price is $62.675 million, less $1 million to be paid to a capital reserve account for the purchaser. The property, which consists of 343,664 square feet of office/retail space, a 314 room hotel and 61 rental apartments, was purchased in 1991 for $31.275 million. Since 1992, the Company has rented space on three floors of the office tower as its headquarters. The Company anticipates that a portion of the sale proceeds, approximately the amount that Investors-NA has invested in the property, will be retained and reinvested. The balance of the net proceeds of the sale will be used to reduce the Company's senior loan obligations by approximately $15 million. The sale contract provides that the sale will be consummated by March 29, 1996.
For the year ended December 31, 1995, annualized first-year premiums and deposits on deposit type contracts of Investors-NA declined by approximately 19% as compared to 1994. The corresponding decline from 1993 to 1994 was 7%.
As of December 31, 1994, the outstanding principal balance of the ILCO's senior loan obligations was $66.6 million. On January 2, 1995, the Company made a scheduled payment of $4.5 million under its Senior Loan. In connection with the acquisition of Investors-IN in February, 1995, ILCO borrowed an additional $15 million under its Senior Loan to help finance the purchase. On April 3, 1995, a principal payment in the amount of $13.2 million was made, which prepaid the Senior Loan until October 1, 1995. The Senior Loan had a principal balance at December 31, 1995 of $59.4 million. In January, 1996, the Company made a scheduled principal payment, in the amount of $4.5 million. As of March 15, 1996, the principal balance of the Senior Loan was $54.9 million.
ILCO's net cash flow provided by (used in) operating activities was $10.3 million for the year ended December 31, 1995, as compared to ($15.3) million for the same period in 1994. This change is primarily due to fluctuations in the amount of deferred federal income taxes, related to the market value of the portion of investments assets that are fixed maturities available for sale.
As of December 31, 1995, the book value of the Company's investment assets totaled $669.5 million, as compared to $547.7 million as of December 31, 1994. Total assets as of December 31, 1995 ($1.32 billion) increased from the level as of December 31, 1994 ($1.15 billion). The increase in total assets is primarily attributable to the inclusion of Investors-IN and an increase in the amount of separate account assets and the unrealized gain in the market value of fixed maturities available for sale.
The level of short-term investments at the end of 1995 was $86.0 million, as compared to $94.9 million at the end of 1994. The decline in the level of short-term investments reflects the actions of management to diversify the investment portfolio of the Company and the investment in the development of Bridgepoint.
The fixed maturities available for sale portion of invested assets at December 31, 1995 was $483.6 million. The amortized cost of the fixed maturities available for sale segment as of December 31, 1995 was $463.7 million, representing a net unrealized gain of $19.9 million. This unrealized gain principally reflects changes in interest rates from the date the respective investments were purchased. To reduce the exposure to interest rate changes, portfolio investments are selected so that diversity, maturity and liquidity factors approximate the duration of associated policyholder liabilities.
The assets held by ILCO's life insurance subsidiaries must comply with applicable state insurance laws and regulations. In selecting investments for the portfolios of its life insurance subsidiaries, the Company's emphasis is to obtain targeted profit margins, while minimizing the exposure to changing interest rates. Thisobjective is implemented byselecting primarily short- to medium-term, investment grade fixed income securities. In making such portfolio selections, the Company generally does not select new investments which are commonly referred to as "high yield" or "non-investment grade."
The Company's fixed maturities portfolio (including short-term investments), as of December 31, 1995, included a non-material amount (1.1% of total fixed maturities and short-term investments) of debt securities which, in the annual statements of the companies as filed with state insurance departments, were designated under the National Association of Insurance Commissioners ("NAIC") rating system as "3" (medium quality) or below. For the year ended December 31, 1994, the comparable percentage was 1.1%. The majority of these non-investment grade investments are concentrated in the medium quality (or "3") category, with only 0.2% receiving an NAIC rating of "4" (low quality) or below as of December 31, 1995, as compared to 0.5% as of December 31, 1994.
The consolidated balance sheets of the Company as of December 31, 1995 include $61.2 million of "Notes receivable from affiliates", represented by (i) a loan of $22.5 million from Investors-NA to Family Life Corporation and a $2.5 million loan from Investors-CA to Financial Industries Corporation (which is now owned by Investors-NA as a result of the merger of Investors-CA into Investors-NA) and $1.7 million of additions to the $2.5 million note made in accordance with the terms of such note; these loans were granted in connection with the 1991 acquisition of Family Life Insurance Company by a wholly-owned subsidiary of FIC (ii) a loan of $30 million by Investors-NA to Family Life Corporation made in July, 1993, in connection with the prepayment by the FIC subsidiaries of indebtedness which had been previously issued to Merrill Lynch as part of the 1991 acquisition and (iv) a loan of $4.5 million by Investors-NA to Family Life Insurance Investment Company made in July, 1993, in connection with the same transaction described above. The NAIC has assigned a rating of "3" to the notes described above. These loans have not been included in the preceding description of NAIC rating percentages.
Management believes that the absence of any material amounts of "high-yield" or "non-investment grade" investments (as defined above) in the portfolios of its life insurance subsidiaries enhances the ability of the Company to service its debt, provide security to its policyholders and to credit relatively consistent rates of return to its policyholders.
1. Report of Price Waterhouse LLP, Independent Accountants, dated March 27, 1996.