The Registrant's headquarters are located at Austin Centre, 701 Brazos, Suite 1400, Austin, Texas. Investors-NA purchased Austin Centre, an office-hotel property in downtown Austin in August 1991 for a purchase price of $31,275,000 from an unrelated seller that had previously acquired the property through foreclosure. Austin Centre covers a full city block and is a sixteen story mixed use development consisting of 343,664 square feet of office/retail space (predominately office space), a 314 room hotel and 61 luxury apartments, all united by a 200 foot high glass atrium. The project was completed in October 1986. At December 31, 1995, the office tower was approximately 85% occupied, and during 1995 the hotel averaged about 80% occupancy.
Family Life leases its home offices at the Fourth and Blanchard Building, 2121 Fourth Avenue, in Seattle, Washington. The lease currently covers approximately 2,700 rentable square feet of office space for a term expiring in October 1998 with an option to renew for an additional three-year period. The initial base rental is approximately $11,200 per month, which includes Family Life's proportionate share of the building's operating expenses, including utilities, property taxes, insurance, maintenance and management. Actual increases from those initial operating expenses during the lease term are passed on to Family Life on a proportionate basis.
Income before equity in net earnings of affiliates, extraordinary items and cumulative effect of change in accounting principle of affiliate 7,803 8,264 8,587 8,831 5,852
Income before extraordinary items and cumulative effect of change in accounting principle of affiliate 10,016 9,954 11,625 13,592 10,306
Net Income $10,016 $ 9,954 $ 16,021 $ 13,592 $ 10,306
Net income per share before extraordinary items and cumulative effect of change in accounting principle of affiliate $ 9.04 $ 9.00 $ 10.46 $ 12.21 $ 9.54
Cumulative effect of change in accounting principle of affiliate -0- -0- ( 1.04) 0.00 0.00
Net income for the years 1995 and 1994 was not affected by any extraordinary items. After giving effect to: (i) the extraordinary items and change in accounting method related to FIC's equity in the net income of its affiliate, InterContinental Life Corporation ("ILCO") and (ii) the one-time gain, in the amount of $8,344,000, net of tax, resulting from early extinguishment of the indebtedness to Merrill Lynch incurred in connection with the 1991 acquisition of Family Life Insurance Company ("Family Life"), net income for the year ended December 31, 1993 was $16,021,000, or $14.42 per common share. The net income of FIC for the 1993 period was affected by extraordinary items and change in accounting principle of its affiliate, ILCO, related to (i) the costs associated with the prepayment in January of 1993 by ILCO of its Subordinated Loans; the prepayment premium resulted in a one time charge to FIC's earnings, net of tax benefit, in the amount of $2,789,000 and (ii) the one time charge to FIC's earnings, net of tax benefit, in the amount of $1,159,000, which was incurred in connection with the initial adoption by ILCO 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.
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 $14,354,000 at December 31, 1995, as compared to $18,944,000 at December 31, 1994 and $21,757,000 at December 31, 1993 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 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 Company's portfolio. As of December 31, 1995, the market value of the fixed maturities available for sale segment was $83.6 million as compared to a carrying value of $80 million, or an unrealized gain $3.6 million. There is no assurance that this unrealized gain may be realized in the future.
For the year ended December 31, 1995, the combined general insurance expenses of Family Life were $13,126,000, as compared to $11,944,000 for the year 1994 and $11,510,000 for the year 1993.
In July, 1993, Washington amended its insurance code to retain the "greater of" standard for dividends but enacted requirements that prior notification of a proposed dividend be given to the Washington Insurance Commissioner and that cash dividends may be paid only from earned surplus. Investors-NA 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 Investors-NA to make principal and interest payments under the surplus debentures is not affected. ILCO does not anticipate that Investors-NA will have any difficulty in making principal and interest payments on the surplus debentures in the amounts necessary to enable ILCO to service its Senior Loan for the foreseeable future.
Premiums for the year 1995, net of reinsurance ceded, were $43.9 million, as compared to $48.9 million in 1994 and $54.2 million in 1993. The decline is primarily attributable to the combined effect of the lapse of group business (a product line which Family Life had previously discontinued), a shift in consumer purchases from traditional, whole life insurance policies to other forms of life insurance products and the lapse rates experienced with respect to term life insurance products. Policyholder benefits and expenses were $21.0 million in 1995, as compared to $21.8 million in 1994 and $20.9 million in 1993.
In 1995, Family Life entered into a reinsurance agreement with Investors-NA 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. The arrangement reflects management's plan to concentrate on the writing of term life insurance, with Investors-NA to develop universal life business.
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 December 31, 1995, the outstanding balance of such indebtedness was: (i) $6.8 million on the Senior Loan granted by a group of banks and (ii) $61.2 million on the Subordinated Notes granted by Investors-NA.
The sources of funds for Family Life consist of premium payments from policy holders, investment income and the proceeds from the sale and redemption of portfolio investments. These funds are applied primarily to provide for the payment of claims under insurance and annuity policies, operating expenses, taxes, investments in portfolio securities, shareholder dividends and payments under the provisions of the Surplus Debenture.
Effective July 25, 1993, Washington amended its insurance code to retain the "greater of" standard for dividends but enacted requirements that prior notification of a proposed dividend be given to the Washington Insurance Commissioner and that cash dividends may be paid only from earned surplus. Family Life does not presently have earned surplus as defined by the regulations adopted by the Washington Insurance Commissioner and, therefore, is not 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 $9.1 million in 1995, as compared to $5.3 million in 1994 and $16.9 million in 1993. Net cash flow used in financing activities was $9.8 million in 1995, as compared to $11.4 million in 1994 and $18.3 million in 1993.
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. After giving effect to the refinancing of the ILCO Senior Loan and the repayment of the ILCO Subordinated Loans, 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, 1995 of $59.4 million.
The guaranty commitments of FIC under the loans incurred in connection with the acquisition of Family Life (after taking into account the repayments and new loans which occurred in July, 1993) relate to: (i) the Senior Loan of Family Life Corporation to a bank group, with a balance of $6.8 million at December 31, 1995, (ii) the $22.5 million note issued by Family Life Corporation to Investors Life Insurance Company of North America, and (iii) the $34.5 million loaned by Investors-NA to two subsidiaries of FIC.
There are no trends, commitments or capital asset requirements that are expected to have an adverse effect on the liquidity of FIC.
The level of short-term investments at the end of 1995 was $27.2 million, as compared to $28.4 million as of December 31, 1994. The fixed maturities available for sale portion represents $83.6 million of investment assets as of December 31, 1995, as compared to $77.5 million at the end of 1994. The amortized cost of fixed maturities available for sale as of December 31, 1995 was $80 million representing a net unrealized gain of $3.6 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.
During 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123 "Accounting for Stock-Based Compensation," which encourages companies to adopt the fair value based method of accounting for stock-based compensation. This method requires the recognition of compensation expense equal to the fair value of such equity securities at the date of the grant. This statement also allows companies to continue to account for stock-based compensation under the intrinsic value based method, as prescribed by Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees," with footnote disclosure of the pro forma effects of the fair value based method. SFAS No. 123 is effective for transactions entered into in years that begin after December 15, 1995.
5. Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993.