ILCO's home office is located at River Place Pointe, 6500 River Place Blvd., Building One, Austin, Texas. River Place Pointe was purchased by Investors-NA on October 29, 1998. It consists of two adjoining tracts of land located in Austin, Texas totaling 47.995 acres. The aggregate purchase price for these tracts was $8.1 million. Prior to the closing of the transaction, Investors-NA obtained a Site Development Permit for the tracts from the City of Austin. The Site Development Permit allows for the construction of seven office buildings totaling 600,000 square feet, with associated parking, drives and related improvements. Construction on the first phase of the Project, which consists of two office buildings, an associated parking garage, and related infrastructure was completed during 2000. The second phase of construction, which includes two more office buildings, is in progress and Investors-NA expects completion of this phase by the end of the second quarter of 2001. ILCO, FIC and their insurance subsidiaries occupy almost the entire Building One of River Place Pointe, consisting of approximately 74,021 square feet of space.
Following is a discussion and analysis of the financial statements and other statistical data that management believes will enhance the understanding of FIC's financial condition and results of operations.
Premiums for the year 2000, net of reinsurance ceded, were $33.1 million, as compared to $33.96 million for the year 1999 and $38.4 million for the year 1998. This source of revenue is related to Family Life's traditional life insurance book of business, especially Family Life's decreasing term products. The first year premiums for 2000 were relatively level with 1999. The decrease in first year premiums from 1998 to 1999 of $0.7 million was related to higher level of new sales in 1998. The level of, renewal premiums for the year 2000 was $0.6 million lower than for the year 1999, and the level for the year 1999 was $3.7 million lower that for the year 1998. The decrease in renewal premium is attributable to the decrease in the traditional life insurance book of business.
The net investment income was approximately level from 1999 to 2000 mainly due to the long term portfolio remaining level while short term investments were decreasing and the short term rates were increasing. The net investment income for 1999 was $6.9 million as compared to $7.8 million in 1998. There was a decrease of approximately $0.9 million from 1998 to 1999.
Earned insurance charges for 2000 were $4.3 million, as compared to $4.8 million in 1999 and $6.0 million in 1998. This source of revenue is related to the universal life insurance and annuity book of business of Family Life. The amount is consistently decreasing because Family Life Insurance Company reinsures all of its universal life and annuity business with Investors-NA. As a result, earned insurance charges are affected by a decreasing block of business.
In 2000, the amortization of present value of future profits of acquired business was $3.7 million as compared to $5.2 million in 1999 and $6.1 million in 1998. The amortization of present value of future profits decreased by $1.5 million in 1999 to 2000 and $958,000 from 1998 to 1999. These decreases in amortization were expected and should continue to decrease as the underlying asset, present value of future profits decreases.
The amortization of deferred policy acquisition costs was $5.3 million in 2000, as compared to $5.2 million in 1999 and $5.2 million in 1998. The increase in amortization of $171,000 from 1999 to 2000 can be attributed to the capitalization of expenses incurred in connection with the writing of new business.
The provision for federal income taxes was $1.28 million in 2000 as compared to $1.17million in 1999 and $2.37 million in 1998. The provision for federal income taxes for the years 2000 and 1999 is substantially lower that for 1998, due to the utilization in 1999 and 2000 of the small company deduction by Family Life Insurance Company. That deduction was not available to Family Life in the year 1998 under the applicable federal income tax rules. The availability of the deduction reduced federal income taxes by $600,000 in 1999 and $400,000 in 2000.
Results of Operations - Three Months Ended December 31, 2000 as compared to the Three Months Ended December 31, 1999
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. For the year 2000, the Company's equity in the net earnings of ILCO, net of federal income tax, was $3,581,000 ,which was an increase as compared to $3,310,000 for the year 1999 and $2,613,000 for the year 1998. The increase in equity income from ILCO of $271,000 from 1999 to 2000 is due to an increase in the percentage ownership FIC has in ILCO and is partially offset by a decrease in ILCO's net income. The equity income from ILCO of $697,000 from 1998 to 1999 can be attributed to an increase in ILCO's net income of $1.6 million from 1998 to 1999.
FIC carries its investment in ILCO on the equity method of accounting. At December 31, 2000, FIC's investment in affiliate was valued at $79.1 million. The book value of ILCO's common stock at December 31, 2000 was $19.70 per share, which is substantially above the market value ($9.50) of ILCO's common stock on that same date. The applicable accounting standards permit FIC to carry its investment in ILCO on the equity method of accounting, without any adjustment to reflect the difference between book value and market value. Under certain circumstances, Accounting Principles Board Opinion 18 ("APB 18") and Staff Accounting Bulletin Topic 5.M ("SAB 5.M") require an adjustment to earnings where the value of an investment is deemed to have decreased on an other than a temporary basis. Application of the "other than temporary" provisions of APB 18 and SAB 5.M to FIC's investment in ILCO would potentially result in a charge to earnings in some future period. The amount of such charge would be based primarily upon the market price of ILCO's common stock, which ranged from $9.313 per share to $14.56 per share during the first quarter of 2001. Based on that range of market prices, the range of possible impairment charges which might result would be from $20.22 million to $39.36 million, net of tax.
However, management believes that an adjustment to earnings is neither required nor appropriate under the provisions of APB 18 and SAB 5.M. In addition, management notes that FIC and ILCO are currently parties to an Agreement and Plan of Merger whereby ILCO would become a wholly- owned subsidiary of FIC. FIC believes that it is probable that the merger will be consummated. After the merger, FIC will include ILCO in its consolidated financial statements. FIC expects to recover the cost of its investment in ILCO from the realization of ILCO's net assets through consolidation.
Further, in the event that the merger transaction were not completed, ILCO has the ability to resume its stock repurchase plan. If ILCO were to make additional purchases under that plan, the additional purchases would reduce the number of ILCO's outstanding shares, thereby increasing the percentage of FIC's ownership interest in ILCO. Alternatively, FIC could purchase shares of FIC in the open market or in negotiated transactions to increase the percentage of its ownership in ILCO. In the event that the ownership percentage were to be increased to more than 50%, FIC would include ILCO in its consolidated financial statements, which would produce the results described in the preceding paragraph.
In the event that none of the above-described events were to occur and FIC was required to recognize an earnings charge for an "other than temporary" impairment, the ability of FIC to record on an equity basis its interest in the net earnings of ILCO may be limited by the future market value of ILCO's common stock. Since the amount of any such adjustments would be dependent upon the future market value of ILCO's common stock, FIC's management is not able to estimate the potential range of charges which might occur in future periods.
The Form 10-Ks of ILCO for the years ended December 31, 2000, 1999 and 1998, set forth the business operations and financial results of ILCO and its life insurance subsidiaries. Such 10-K reports of ILCO, including the discussion by ILCO's management under the caption "Management's Discussion and Analysis of Financial Conditions and Results of Operations" are incorporated herein by reference.
The principal source of liquidity for FIC's subsidiaries consists of the periodic payment of principal and interest by Family Life pursuant to the terms of a Surplus Debenture. The terms of the Surplus Debenture were previously approved by the Washington Insurance Commissioner. Under the provisions of the Surplus Debenture and current law, no prior approval of the Washington Insurance Department is required for Family Life to pay interest or principal on the Surplus Debenture; provided that, after giving effect to such payments, the statutory surplus of Family Life is in excess of 6% of assets (the "surplus floor"). However, Family Life has voluntarily agreed with the Washington Insurance Commissioner that it will provide at least five days advance notice of payments which it will make under the surplus debenture. As of December 31, 2000, the statutory capital and surplus of Family Life was $23.8 million, an amount substantially in excess of the surplus floor. During 2000, Family Life made principal payments of $8.0 million and interest payments of $1.0 million to Family Life Corporation under the Surplus Debenture. As of December 31, 2000, the principal balance of the Surplus Debenture was $5.9 million. The funds required by Family Life to meet its obligations under the terms of the Surplus Debenture are generated primarily from premium payments from policyholders, investment income and the proceeds from the sale and redemption of portfolio investments.
FIC's net cash flow provided by operating activities was $7,000 for the year 2000, as compared to $2.6 million for the year 1999 and $6.0 million in 1998. The decrease from 1999 to 2000 can be attributed to an increase in receivables of $3.3 million in 2000 as compared to a $1.5 million increase in 1999. This change is attributable to the reinsurance receivable from the universal life and annuity business reinsured by Family Life with Investors-NA. In addition, the change in cash flow provided by operating activities for the year 2000 was adversely affected by a decrease in the amortization of the present value of future profits and the amortization of deferred policy acquisition costs.
As of December 31, 2000, the Company's investment assets totaled $99.1 million, as compared to $105.95 million in 1999.
The decrease in long-term interest rates during the last part of the year 2000, 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, 2000, the market value of the fixed maturities available for sale segment was $79.8 million as compared to an amortized value of $78.2 million, or a realized gain of $1.6 million.
On January 24, 2001, FIC submitted an application to have its common stock traded on the NASDAQ National Market under the symbol FNIN. FIC has provided Nasdaq Listing Qualifications with appropriate documentation to support its application and management expects the application process to be completed at the beginning of April, 2001.
On March 8, 2001, FIC announced that it has received unsolicited verbal indications of interest from a few companies that may be interested in acquiring FIC after completion of the merger with ILCO. The press release did not state any price ranges or other material terms. In conjunction with such indications of interest, FIC has retained Philo Smith Capital Corporation as its financial advisor to explore the possibility of a post-merger sale of FIC with these companies and to further solicit indications of interest from other companies that may have similar interests. No formal indications of interest have been received by FIC to date and FIC has not determined to sell the post-merger company.
In March, 2001, FIC announced that its board of directors approved the payment of an annual cash dividend in the amount of $0.41 per share. The dividend is payable on April 12, 2001, to record holders as of the close of business on March 19, 2001.
3. Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998.