FIC’s home office is located at River Place Pointe, 6500 River Place Blvd., Building One, Austin, Texas. River Place Pointe was purchased by Investors Life in October 1998. It consists of approximately 48 acres of land in Austin, Texas. The aggregate purchase price for the undeveloped land was $8.1 million. The site development permit allowed for the construction of seven office buildings totaling 600,000 square feet, with associated parking, drives and related improvements. The Company completed construction of the first section of the project, which consists of four office buildings, an associated parking garage and related infrastructure, during 2000 and 2001. It completed the second phase of construction, which included three more office buildings, an associated parking garage and related infrastructure, in 2002. FIC and its insurance subsidiaries occupy Building One of River Place Pointe, consisting of approximately 76,143 square feet of space, and approximately 5,000 square feet of Building Four for records storage. On June 1, 2005, the Company sold River Place Pointe to a non-affiliated party, in an all-cash transaction for a gross purchase price of $103 million. Under the terms of the sale agreement, Investors Life entered into a lease with the purchaser with respect to all of the space in Building One, for a five-year term at a rate of $28.00 per square foot, which is above the market rate in effect in June 2005, but was the prevailing rental rate at the time that FIC and its subsidiaries occupied the building in July 2000. The lease provides Investors Life with a right of cancellation of the lease at March 31, 2008.
A subsidiary of FIC leases a building located at 40 Parker Road, Elizabeth, New Jersey. This building contains approximately 41, 400 square feet of office space. The lease, which was entered into in December 1985 and expires in December 2005, calls for an annual rental of $798,456 effective January 1, 2004; the actual rental charge in 2003 was $737,940. The lease provides that all costs including, but not limited to, those for maintenance, repairs, insurance and taxes be borne by FIC; these costs amounted to $316,392, $306,505, and $317,571in 2003, 2002 and 2001, respectively. FIC subleases this space to third parties, for which it received $212,012, $204,700, and $197,457 in 2003, 2002 and 2001, respectively.
The following selected consolidated financial data includes the accounts of Financial Industries Corporation and its subsidiaries. This financial data has been restated, as more fully described in
The financial data in this Annual Report on Form 10-K for the years 2002, 2001, 2000, and 1999, and for the first three quarters of 2003, have been restated from amounts previously reported because of the correction of accounting errors. A discussion of the restatement for the years 2002, 2001 and on the opening shareholders’ equity balance at January 1, 2001, is provided in Note 2 of the accompanying Consolidated Financial Statements. The effect of the restatement on the unaudited quarterly financial information for 2003 and 2002 is described in Note 20 of the accompanying Consolidated Financial Statements. All information presented in Item 6. Selected Financial Data and in this Management’s Discussion and Analysis of Financial Condition and Results of Operations reflects this restatement.
FIC suffered a net loss of $22.5 million in 2003. In addition to the impact of lower interest rates on its investment income, this loss reflected realized losses on investments, negative results from discontinued operations, large payments to former employees, unusual expenses associated with the proxy matters and related litigation that occurred during the year, and reduced federal income tax benefits. Management believes that in evaluating FIC’s condition and prospects, it is important to look beyond these special events to the important conditions and trends in the underlying business. In that regard, management believes that the most significant trends in the business pertain to sales of new business and operating expenses.
The Company initially announced the discovery of accounting errors affecting 2003 and prior periods on April 21, 2004, following the March 26, 2004, notification regarding its continuing work on the 2003 consolidated financial statements and its inability to file a timely 10-K. The filing of this Annual Report on Form 10-K was delayed due to the time required to complete the restatement and the audits of the affected financial statements.
Internal Review. In connection with the preparation of its consolidated financial statements included in this Annual Report on Form 10-K, FIC’s current management initiated an internal review of FIC’s books and records. This review commenced in March 2004 following the discovery that intercompany accounts had not been adequately reconciled for several years, and was expanded in scope to identify all material accounting transactions and financial reporting issues. The internal review was directed by senior management with oversight by the Audit Committee of the Board of Directors. The work included a review of large volumes of accounting data and entries, as well as extensive analysis of complex financial transactions and the records of those transactions from 1999 to the present. In certain cases, items in periods prior to 1999 were examined due to the nature of the transactions under review. As part of its internal review, FIC also evaluated the financial reporting consolidation process and the resulting financial statements as well as the appropriateness of its prior accounting and reporting decisions. In this work, the Company has been assisted by the accounting firm of KPMG LLP and other outside accountants and actuaries. The Company’s registered public accounting firm, PricewaterhouseCoopers LLP, has worked closely with the Company in auditing the Company’s revised financial statements. Management believes that the scope and process of its internal review was sufficient to identify issues of a material nature that could affect FIC’s financial statements.
Restatement. The aggregate effect of the restatement for accounting errors decreased previously reported net income for the years ended December 31, 2002 and 2001, and the opening balance of shareholders equity at January 1, 2001 (for the effect on shareholder’s equity of the correction of accounting errors occurring in years prior to 2001) by $7.7 million, $6.2 million and $23.1 million, respectively, as follows:
Deferred Policy Acquisition Costs (DAC )and Present Value of Future Profits of Acquired Businesses (PVFP) - The Company determined that its accounting for DAC and PVFP was not in compliance with SFAS 97, “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments”, which provides accounting principles for interest sensitive products such as annuities and universal life insurance and SFAS 60, “Accounting and Reporting by Insurance Enterprises”, which provides accounting principles for traditional life insurance products. Pursuant to SFAS 97, capitalized acquisition costs are to be amortized over the life of a book of contracts at a constant rate based on the present value of the estimated gross profit amounts expected to be realized over the life of the book of contracts. Estimates of expected gross profit used as a basis for amortization are to be evaluated regularly, and the total amortization recorded to date adjusted by a charge or credit to the statement of earnings if actual experience or other evidence suggests that earlier estimates should be revised. Pursuant to SFAS 60, acquisition costs are capitalized and charged to expense in proportion to premium revenue recognized. Capitalized acquisition costs are to be charged to expense using methods that include the same assumptions used in estimating the liability for future policy benefits.
Amortization of Fixed Maturities - The Company determined that it had not appropriately accounted for the purchase accounting adjustments associated with fixed maturities available for sale acquired in connection with the purchase of ILCO by FIC and ILCO’s acquisitions prior to its acquisition by FIC. The original purchase accounting adjusted the historical cost basis of acquired fixed maturities to market value. These purchase accounting adjustments produced revised premiums and discounts for the acquired securities which require amortization in accordance with GAAP. The Company had not amortized these premiums and discounts nor taken these unamortized balances into account upon sales, prepayments, or maturities of the securities.
Agent Advances and Other Receivables -The Company determined that the subledger detail for its agent balances did not reconcile to its general ledger and that the allowance for unrecoverable agent receivables was not adequate and included errors in the calculations. In addition, certain other receivable accounts were not supportable or were not collectable.
Real Estate and Property and Equipment - The Company determined that the accounting for rental income escalations on its operating leases for invested real estate was not recognized on a straight-line basis in accordance with SFAS No. 13 “Accounting for Leases”. The Company also discovered errors in accounting for depreciation expense associated with its owned real estate, tenant improvements, and property and equipment. Certain tenant improvements, which were reimbursable to the Company, had inadvertently been capitalized resulting in additional errors in the calculation of depreciation and an overstatement of invested real estate and understatement of other receivables. In addition, carrying values for certain property and equipment general ledger balances were not supported by detailed records.
Excess of Net Assets Acquired Over Cost - In connection with the 2001 acquisition of ILCO, the Company allocated the purchase price to the fair value of the assets acquired and liabilities assumed in accordance with the purchase method of accounting resulting in the recognition of an excess of net assets acquired over cost, also referred to as negative goodwill. Many of the accounting errors described herein affected the fair value of the net assets acquired from ILCO, resulting in a decrease in the amortization of negative goodwill in 2001 and in the remaining unamortized negative goodwill, which was recognized as a cumulative effect of a change in accounting principle in 2002 in accordance with SFAS No. 141 “Business Combinations”.
Equity in Earnings of Affiliate - ILCO became a wholly owned subsidiary of the Company on May 18, 2001. Prior to that date, the Company owned approximately 48% of ILCO’s common shares and accounted for its ownership interest in ILCO using the equity method of accounting. Many of the accounting errors described herein affected ILCO’s pre-acquisition financial statements. The changes in “equity in net earnings of affiliate,” which represents the Company’s interest in ILCO’s net earnings, is therefore equal to approximately 48% of the related accounting errors, net of taxes.
In addition to the restatement adjustments to net income and opening shareholders’ equity at January 1, 2001, as described above, restatement adjustments also increased (decreased) other components of equity for the years 2002 and 2001 as follows:
Additional paid-in capital increased by the tax benefit from the exercise of employee stock options which had previously been reported as a component of tax expense. Comprehensive income increased primarily due to the change in unrealized gains and losses on fixed maturities available for sale resulting from the amortization of purchase accounting adjustments in connection with the acquisition of ILCO. Retained earnings increased (decreased) for the correction of dividend payments and liabilities. Treasury stock declined, increasing equity, as a result of the reconciliation of the Company’s intercompany accounts.
Net loss for the year of $22.5 million, discussed in more detail below
$0.2 million reduction for increases in the Company’s minimum pension liability
During 2003, the Company increased its investment in mortgage-backed securities (including asset-backed securities) significantly, from 42% to 54% of its total investment in fixed maturities. Such securities are sensitive to changes in prevailing interest rates, since interest rate levels affect the rate at which the underlying mortgage obligations are repaid. Mortgage-backed pass-through securities, sequential CMOs and support bonds, which comprised approximately 50.1% of the book value of FIC’s mortgage-backed securities at December 31, 2003, are sensitive to prepayment and extension risks. FIC’s insurance subsidiaries have reduced the risk of prepayment associated with mortgage-backed securities by investing in planned amortization class (“PAC”), target amortization class (“TAC”) instruments and scheduled bonds. These investments are designed to amortize in a predictable manner by shifting the risk of prepayment of the underlying collateral to other investors in other tranches (“support classes”) of the CMO. At December 31, 2003, PAC and TAC instruments and scheduled bonds represented approximately 27.2% of the book value of FIC’s mortgage-backed securities. Sequential and support classes represented approximately 21.5% of the book value of FIC’s mortgage-backed securities at December 31, 2003. At December 31, 2004 the Company had reduced its investments in mortgage-backed securities to approximately 39% of its total investment in fixed maturities.
An allocation by security type of the Company’s investments in fixed maturities as of December 31, 2003 and 2002, is detailed below.
The costs related to acquiring new business, including certain costs of issuing policies and certain other variable selling expenses (principally commissions), are capitalized and treated as deferred policy acquisition costs (“DAC”) to be amortized over the life of the related policies. The increase in the Company’s DAC from December 31, 2002, to December 31, 2003, reflects the capitalization of acquisition costs associated with sales of new insurance policies, more than offsetting the amortization of such amounts capitalized in prior years. The present value of future profits of acquired business is the capitalized acquisition cost of blocks of insurance business that the Company has acquired from others in the past. This asset is amortized to expense as the profits are realized from the various blocks of acquired business and the policies in force gradually decrease. The overall decline in these two assets reflects the gradual net run-off in business that the Company experienced in 2003, as shown in the following table.
The entire principal amount of the 2003 Notes and any accrued but unpaid interest may become immediately due and payable upon an event of default, which includes: (1) failure to pay interest within 30 days of any due date; (2) failure to pay principal when due; (3) the bankruptcy or insolvency of FIC; or (4) the merger of FIC or sale of all or substantially all of its assets unless the successor entity to a merger is a United States corporation (or a foreign corporation that agrees to be bound by certain tax provisions). The terms of the 2003 Notes also place certain limitations on the offer or sale of securities of FIC if it would render invalid the exemption of the notes issued in connection with the loan from the registration requirements of the Securities Act of 1933. Other terms and conditions of the $15 million borrowing are described in Note 8 in the accompanying financial statements.
Financial intermediaries such as FIC depend on their equity capital to absorb short-term fluctuations in asset and liability values in their financial structures. They also count on equity capital to support the growth of the business. One typical measure of the strength of a financial holding company such as FIC is the simple ratio of its shareholders’ equity to its total assets. For FIC, excluding its separate account assets (which are not relevant for this purpose), at the end of 2003, this ratio was 11.8%, compared to 14.6% at the end of 2002. Management believes that its current equity capital is sufficient to meet the Company’s current liabilities and to fund growth at currently planned levels.
FIC’s two insurance company subsidiaries are subject to regulation under state law. Among other requirements, these state laws and regulations impose capital adequacy requirements on insurance companies. Using a calculation that takes into account the quality, liquidity, maturities, and amounts of its assets and liabilities, each insurance company is required to calculate its “risk-based capital” (or “RBC”). The company’s total adjusted capital must exceed 200% of the authorized control level RBC to avoid supervisory activity by the insurance regulators. As of December 31, 2004, the total adjusted capital of FIC’s insurance subsidiaries, Family Life and Investors Life, was approximately 869% and 254% of its authorized control level risk-based capital, respectively. The RBC ratio of Investors Life was also significantly improved as a result of the June 2005 sale of the River Place Pointe real estate investment. See Item 2 - Properties.
FIC incurred a net loss of $22.5 million in 2003. Comparing this result to the results in 2001 and 2002 is complicated by several factors:
In 2003, FIC’s net loss was affected by the following significant and unusual items:
$0.4 million paid to William P. Tedrow in connection with the New Era acquisition in June 2003 (see Registrant's Quarterly Report on Form 10-Q for the three-month period ended June 30, 2003 for a further description of this payment).
a $5.7 million increase in the valuation allowance related to the realization of deferred tax assets.
In 2002, net income and earnings per share were affected by the cumulative effect of a change in accounting principle of $6.8 million. This amount represents the excess of fair value of net assets acquired over cost as of the beginning of 2002 related to the merger of Intercontinental Life Corporation (“ILCO”) with and into a subsidiary of FIC on May 18, 2001. The Company recorded this cumulative effect in conjunction with adopting SFAS No. 141, “Business Combinations,” in the first quarter of 2002, as required by SFAS No. 141. In seeking to compare 2002 results to those of other periods, it is important to take into account the one-time impact of this change in accounting principle.
Setting aside the effects of the unusual events mentioned above, the Company believes that the more important factors affecting its operating results during this period include the run-off in the Company’s existing book of business, coupled with relatively low sales of new business, the decline in the prevailing interest rates, and the increase in operating expenses.
The decline in UL premiums from 2002 to 2003, shown in the prior table, reflects the factors noted earlier in this discussion: the net run-off of business from the Company’s existing book of business, and declining sales of new UL policies. Although the Company is focusing on reversing these trends on an overall basis, management has de-emphasized the sale of annuity and UL products in periods subsequent to 2003 due to the current interest-rate environment and certain design features of FIC’s current annuity products.
Earned insurance charges totaled $40.3 million, $41.9 million, and $27.8 million for the years ended December 31, 2003, 2002, and 2001, respectively. These revenues primarily consist of UL cost of insurance charges, policy surrender charges, and policy administration charges. The significant increase from 2001 to 2002 is primarily due to the ILCO acquisition in May 2001 as previously described. The increase related to the ILCO merger totaled approximately $14.6 million. The approximate 3.7% decline in earned insurance charges from 2002 to 2003 is primarily due to reduced UL cost of insurance charges resulting from the net run-off of business also as previously described.
Real estate income is primarily earned from the leases on the buildings at the Company’s River Place Pointe office complex in Austin, Texas. Net real estate income (revenues from leases less associated operating expenses and depreciation) totaled $2.4 million, $2.9 million, and $2.1 million for the years ended December 31, 2003, 2002, and 2001, respectively. The increase in income from 2001 to 2002 is partially due to the completion of the initial construction phase of the River Place Pointe office complex during 2001 and the subsequent increase in leasing activity. Also, the May 2001 merger of ILCO into FIC increased the consolidated net real estate income as the River Place Pointe property was owned by Investors Life, a subsidiary of ILCO. The decrease in income from 2002 to 2003 was primarily attributable to higher depreciation expenses in 2003 as the final phase of construction was completed during mid-year 2002, with minimal additional leasing activity. As disclosed in more detail in Note 19 of the accompanying financial statements, the Company sold the River Place Pointe property in June 2005. Accordingly, the Company will no longer have significant real estate-related income subsequent to June 2005 as the sales proceeds are being reinvested primarily in fixed maturity securities.
For the year ended December 31, 2003, FIC had a $0.4 million net realized loss on investments, compared to a $2.8 million net realized loss in 2002, and a $54,000 net realized gain in 2001. During the third quarter of 2003, eight bonds purchased earlier in 2003 were classified as other than temporarily impaired, resulting in writedowns totaling approximately $5.2 million. These bonds were subsequently sold in the fourth quarter of 2003, resulting in a small additional loss subsequent to the writedowns. The Company also sold various bonds throughout 2003 for gains that largely offset the previously described writedowns, resulting in the $0.4 million net realized loss for the year. The Company identified one bond at December 31, 2002, that was considered to be other than temporarily impaired and reduced its carrying value by $463,000. This writedown adjustment, along with an impairment-related reduction of $2.5 million in the carrying value of its equity securities, contributed $3.0 million to the net realized loss in 2002.
Interest expense on contractholder deposit funds represents interest paid or credited to contractholders on cash values accumulated in their universal life insurance and annuity accounts. Interest expense totaled $26.4 million in 2003, $29.7 million in 2002, and $19.9 million in 2001. The decrease from 2002 to 2003 was primarily attributable to reductions in interest rates credited to policyholders, as the Company managed its interest spread in response to the low and declining interest rates that characterized 2003. The increase from 2001 to 2002 relates to the ILCO merger due to the inclusion of the expenses of Investors Life for the full year in 2002 as compared to the period from May 18 to December 31 in 2001. The increase related to the ILCO merger totaled approximately $9.3 million.
Present value of future profits on acquired businesses (PVFP) is amortized in a similar manner as DAC, as previously described, for traditional and interest sensitive business. Amortization of PVFP totaled $4.6 million, $4.2 million, and $4.6 million for the years ended December 31, 2003, 2002, and 2001, respectively. The amortization is consistent with the run-off of the acquired blocks of business.
$1.6 million paid in investment banking fees for strategic business plan reviews and in legal fees and other expenses for proxy matters and litigation related to the 2003 annual meeting of shareholders.
Similarly, operating expenses in 2002 included approximately $2.9 million in unusual expenses, including an employment contract buy-out with James M. Grace, a former officer of the Company, a charitable contribution in January 2002 to the Mitte Foundation in the amount of $1 million, the costs of a special investigation, and a charge for uncollectible agent balances. The operating expenses for the year 2001 included certain unusual expenses related to the favorable resolution of the vanishing premium litigation.
The provision for federal income taxes on income or loss from continuing operations, before equity in net earnings of affiliate and cumulative effect of change in accounting principle, reflects tax benefits totaling $2.9 million and $3.0 million for the years 2003 and 2002, respectively, while 2001 reflects a tax expense of $1.7 million. These tax amounts equate to effective tax expense (benefit) rates of (15%), (24.5%), and 32.1% for the years ended December 31, 2003, 2002, and 2001, respectively. The primary reason for the significant deviation from the expected statutory tax rate of 34% for the Company is due to the establishment of a valuation allowance and increases to this allowance for deferred tax assets. Under SFAS No. 109, the Company has established a valuation allowance when, based on the weight of the available evidence, it is more likely than not that some portion of its deferred tax assets will not be realized. Realization of deferred tax assets is dependent upon the Company’s generation of sufficient taxable income in the future to recover tax benefits that cannot be recovered from taxes paid in prior periods. The Company’s deferred tax assets are primarily comprised of net operating losses of FIC and its non-life insurance wholly owned subsidiaries. These net operating loss carry forwards totaled approximately $30.1 million at year-end 2003 and begin to expire in 2008 through 2023. The valuation allowance totaled $7.6 million at December 31, 2003, with the initial establishment of the allowance in 2002 totaling $1.2 million. Additions to the allowance totaled $6.4 million in 2003. These additions include $3.6 million related to continuing operations, $2.1 million related to discontinued operations, and $0.7 million related to other comprehensive income.
principal payments each quarter of $1,536,927, commencing March 12, 			2006, and ending with a final payment on June 12, 2008; and
In addition to these debt service requirements, the holding company must pay its expenses in connection with Board of Directors fees, insurance costs, corporate overhead, certain audit and accounting fees, and legal and consulting expenses as incurred. The holding company has not paid any dividends to its shareholders since early in 2003, and management does not anticipate the payment of such dividends in the near future.
FIC’s overall liquidity experience in recent periods is reflected in its consolidated cash flow statement, the highlights of which are summarized in the following table.
The increase of $65.4 million in cash and cash equivalents during 2002 was primarily due to maturities of short-term investments and maturities and early redemptions of fixed income investments that occurred during December 2002, resulting in an increased cash position pending reinvestment.
Net cash used in investing activities in 2003 was primarily attributable to increased investment purchases. At December 31, 2002, the Company had holdings of short-term investments of $101,000 and cash and cash equivalents of $162.8 million for a combined total of $162.9 million. During 2003 the Company utilized $80.7 million of these funds primarily to purchase longer term fixed maturity securities. The remaining $82.2 million was held as cash and cash equivalents at December 31, 2003, and the Company had no short-term investments at year-end 2003.
Payment of cash dividends to shareholders accounted for $0.5 million of cash used in financing for 2003, as compared to $2.1 million in 2002 and $6.4 million in 2001. The increase in net cash flow provided by financing activities in 2003 was primarily attributable to the funds provided by the $15.0 million notes issued in May 2003. In 2003, contractholder fund withdrawals (annuities and UL insurance policies) exceeded deposits by $4.7 million, while in 2002 withdrawals exceeded deposits by $8.7 million.
In light of the information and considerations outlined above, management believes at this time that the liquidity of FIC and its subsidiaries is sufficient to meet the needs of its business, including its debt service requirements.
In accordance with generally accepted accounting principles (“GAAP”), universal life insurance premiums and annuity deposits received are reflected in FIC’s consolidated financial statements as increases in liabilities for contractholder deposit funds and not as revenues. Similarly, surrender benefits paid relating to universal life insurance policies and annuities are reflected as decreases in liabilities for contractholder deposit funds and not as expenses. These exclusions from the income statement must be kept clearly in mind for an accurate understanding of FIC’s financial statements.
The Company’s investments primarily consist of fixed maturity securities, which include bonds and notes. Fair values of investments in fixed maturity securities are based on quoted market prices or dealer quotes. Fixed maturities classified as “available for sale” are reported at fair value, with unrealized investment gains and losses, net of income taxes, credited or charged directly to shareholders’ equity. Securities classified as “trading securities” are also reported at fair value, with changes in fair value credited or charged directly to income. GAAP requires that the book value of investments be written down to fair value when declines in value are considered other than temporary. Such securities are described as “other than temporarily impaired” or “OTTI.” When such impairments occur, the decrease in value is reported in net income as a realized investment loss and a new cost basis is established.
Projections used to determine the rate of amortization of DAC and PVFP also require extensive assumptions about, among other things, interest margins, product loads, mortality rates, persistency rates, and maintenance expense levels. In setting the levels of DAC and PVFP amortization, important assumptions must also be made about the appropriate level at which blocks of policies will be aggregated for testing the acceptability of amortization schedules, and views vary widely on this topic. The importance and complexity of these issues is reflected in the extensive restatements of prior years’ financial results because of the incorrect methodology used to compute DAC and PVFP in prior periods.
FIC’s liability for future policy benefits accounted for 14.5% of its total liabilities at December 31, 2003, or 21.0% after excluding liabilities associated with separate accounts. These liabilities for future policy benefits, referred to as reserves, are estimated using actuarial methods based on assumptions about future receipts of premiums, interest yields, investment returns, expenses, mortality, morbidity, and persistency. These assumptions consider Company experience and industry standards. The assumptions vary by plan, age at issue, year of issue, and duration. They include estimates, shaped by judgment and experience, and have a substantial impact on the reported financial condition of the Company.
The Company computes deferred income taxes utilizing the asset and liability method. Under this method, balance sheet amounts for deferred income taxes are computed based on the tax effect of the differences between the financial reporting and federal income tax bases of assets and liabilities using the tax rates which are expected to be in effect when these differences are anticipated to reverse. Under SFAS No. 109, the Company establishes a valuation allowance, when based on the weight of the available evidence, it is more likely than not that some portion of the deferred tax assets will not be realized. Realization of deferred tax assets is dependent upon the Company's generation of sufficient taxable income in the future to recover tax benefits that cannot be recovered from taxes paid in prior periods.
FIC is an insurance holding company whose principal assets consist of the outstanding capital stock of its insurance subsidiaries, Family Life Insurance Company and Investors Life Insurance Company of North America. As a holding company, FIC’s ability to meet its cash requirements, pay principal and interest on any debt, pay expenses related to its affairs and pay dividends on its common stock substantially depends upon dividends from its subsidiaries.
The requirements are used by states as an early warning tool to discover potential weakly-capitalized companies for the purposes of initiating regulatory action. Generally, if an insurer’s risk-based capital falls below specified levels, the insurer would be subject to different degrees of regulatory action depending upon the magnitude of the deficiency. Possible regulatory actions range from requiring the insurer to propose actions to correct the risk-based capital deficiency to placing the insurer under regulatory control.
As of December 31, 2004, the total adjusted capital of FIC’s insurance subsidiaries, Family Life and Investors Life, was approximately 869% and 254% of its authorized control level risk-based capital, respectively. If these percentages were to decrease, regulatory action could have a material adverse effect on our results of operations. (The RBC ratio of Investors Life was also significantly improved as a result of the June 2005 sale of the River Place Pointe real estate investment. See Item 2 - Properties.)
Our insurance subsidiaries are subject to regulation by state insurance departments.
In the past, legislation has been proposed that would have curtailed the tax-favorable treatment of some of our life insurance and annuity products. For example, Congress has previously considered legislation that would have eliminated the tax-deferred treatment of annuity products purchased by consumers other than in connection with a tax qualified retirement plan. While no such proposals are currently under active consideration by Congress, if legislative proposals directed at limiting the tax-favorable treatment of life insurance policies or annuity contracts were enacted, market demand for such products would likely be adversely affected. In addition, proposals have been considered by Congress which would either eliminate or significantly reduce Federal estate taxes. Many insurance products are designed and sold to help policyholders reduce the effect of Federal estate taxation on their estates. Thus, the enactment of any legislation that eliminates or significantly reduces Federal estate taxation would likely result in a significant reduction in sales of our currently tax-favorable products.
Conversely, during periods of declining interest rates, life insurance and annuity products may be relatively more attractive to consumers, resulting in increased premium payments on products with flexible premium features, repayment of policy loans and increases in persistency, or a higher percentage of insurance policies remaining in force from year to year. During such a period, our investment earnings will be lower because the interest earnings on our fixed income investments will be more likely to be prepaid or redeemed as borrowers seek to borrow at lower interest rates, and we may be required to reinvest the proceeds in securities bearing lower interest rates. Accordingly, during periods of declining interest rates, our profitability may suffer as a result of a decrease in the spread between interest rates credited to policyholders and returns on our investment portfolio.
operating results that vary from the expectations of management, securities analysts and investors;
In addition, the stock market in general has experienced extreme volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations may adversely affect the market price of our common stock.
Sales of substantial amounts of shares of our common stock in the public market, or the perception that those sales may occur, could cause the market price of our common stock to decline or make it more difficult for us to sell equity and equity-linked securities in the future at a time and a price that we consider appropriate.
We are subject to state statutes governing insurance holding companies, which generally require that any person or entity desiring to acquire direct or indirect control of any of our insurance company subsidiaries obtain prior regulatory approval. Control would be presumed to exist under most state insurance laws with the acquisition of 10% or more of our outstanding voting securities. Applicable state insurance company laws and regulations could delay or impede a change of control of our Company, which could prevent our shareholders from receiving a control premium.
Our earnings depend significantly upon the extent to which our actual claims experience is consistent with the assumptions used in setting prices for our products and establishing liabilities for future insurance and annuity policy benefits and claims. The liability that we have established for future policy benefits is based upon assumptions concerning a number of factors, including the amount of premiums that we will receive in the future, rate of return on assets we purchase with premiums received, expected claims, expenses and persistency, which is the measurement of the percentage of insurance policies remaining in force from year to year. However, due to the nature of the underlying risks and the degree of uncertainty associated with the determination of the liabilities for unpaid policy benefits and claims, we cannot determine precisely the amounts that we will ultimately pay to settle these liabilities. As a result, we may experience volatility in the level of our reserves from period to period. To the extent that actual claims experience is less favorable than our underlying assumptions, we could be required to increase our liabilities. As a result, we may experience volatility in the level of future earnings to the extent that experience differs from our assumptions.
result in the termination of our relationships with agents and other distributors of our products and services; and
FIC’s future capital requirements depend on many factors, including its ability to write new business successfully and to establish premium rates and reserves at levels sufficient to cover losses. To the extent that FIC needs to raise additional funds, any equity or debt financing for this purpose, if available at all, may be on terms that are not favorable to it. If FIC cannot obtain adequate capital, its business, results of operations and financial condition could be adversely affected.
Consolidated Statement of Operations for the year ended December 31, 2003, and Restated Consolidated Statements of Operations for the years ended December 31, 2002 and 2001.
Consolidated Statement of Changes in Shareholders' Equity for the year ended December 31, 2003, and Restated Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2002 and 2001.
Consolidated Statement of Cash Flows for the year ended December 31, 2003, and Restated Consolidated Statements of Cash Flows for the years ended December 31, 2002 and 2001.