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 47.995 acres of land in Austin, Texas. The aggregate purchase price for these tracts was $8.1 million. 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 section of the project, which consists of four office buildings, an associated parking garage and related infrastructure was completed during 2000 and 2001. The second section of construction, which includes three more office buildings, an associated parking garage and related infrastructure, is in progress and Investors Life expects completion of this phase by the end of 2002. FIC and its insurance subsidiaries occupy almost the entire Building One of River Place Pointe, consisting of approximately 74,021 square feet of space.
ILCO leases a building located at 40 Parker Road, Elizabeth, New Jersey. This building, which was formerly ILCO's headquarters building, contains approximately 41,000 square feet of office space. The lease, which was signed in December 1985 and expires in December 2005, calls for a minimum base rental of $737,940 per annum. The lease provides that all costs including, but not limited to, those for maintenance, repairs, insurance and taxes be borne by ILCO. ILCO subleases this space to third parties.
On May 18, 2001, pursuant to an Agreement and Plan of Merger, as amended (the "Merger Agreement"), dated as of January 17, 2001, among FIC, InterContinental Life Corporation ("ILCO"), and ILCO Acquisition Company, a Texas corporation and wholly-owned subsidiary of FIC ("Merger Sub"), Merger Sub was merged with and into ILCO (the "Merger"). ILCO was the surviving corporation of the Merger and became a wholly-owned subsidiary of FIC. In accordance with the Merger Agreement, FIC issued 1.1 shares of common stock, par value $0.20 per share ("FIC Common Stock"), for each share of common stock, par value $0.22 per share, of ILCO outstanding at the time of the Merger ("ILCO Common Stock"). In addition, each share of ILCO Common Stock issuable pursuant to outstanding options was assumed by FIC and became an option to acquire FIC Common Stock with the number of shares and exercise price adjusted for the exchange ratio in the Merger. Prior to the merger, FIC owned approximately 48.1% of ILCO's common stock. Since ILCO was a wholly-owned subsidiary of FIC for the period from May 18, 2001 to December 31, 2001, the operations of ILCO are reported on a consolidated basis with FIC in the year end 2001 financial statements. For the period from January 1, 2001 to May 17, 2001, and for the years ended December 31, 2000 and December 31, 1999, FIC's net income includes its equity interest in the net income of ILCO, with such equity interest being based on FIC's percentage ownership of ILCO.
Earnings per share for the year ended December 31, 2001, were affected by the increase in the number of FIC's common shares outstanding and the inclusion of 100% of the operating results of ILCO from the date of the Merger through December 31, 2001. The increase in outstanding shares is attributable to the shares issued to ILCO shareholders in connection with the Merger. As of December 31, 2001, the number of FIC's common shares outstanding was 9,498,847, as compared to 5,054,661 as of December 31, 2000.
The increase in net income for the year 2001 was primarily attributable to the Merger, which consolidated 100% of ILCO's net income subsequent to the May 18, 2001 Merger, with FIC's net income. Net income for the year 1999 was affected by the inclusion of $409,000 of net gain from the sale of real estate located in Jackson, Mississippi.
Premium revenues reported for traditional life insurance products are recognized when due. Premium income, net of reinsurance ceded, for the year 2001, was $35.9 million, as compared to $33.1 million for the year 2000 and $34.0 million for the year 1999. The consolidation of ILCO's operations following the Merger contributed approximately $5 million and Family Life contributed approximately $31 million to premium income for the year ended December 31, 2001. At Family Life (which has been a subsidiary of FIC for all of the year-end periods covered by this report), first year net collected premiums for traditional life insurance products in 2001 were $3.4 million as compared to $2.2 million in 2000. The level of renewal premiums for traditional life insurance products at Family Life for the year 2001 was $27.2 million, as compared to $31.4 million for the year 2000 and $32.0 million for the year 1999. The decrease in renewal premium is attributable to the decrease in the traditional life insurance book of business.
Net investment income for the year ended December 31, 2001 was $30.7 million as compared to $6.9 million for the year ended December 31, 2000 and $6.9 million for the year ended December 31, 1999. Approximately $24 million of the increase in net investment income for the year ended December 31, 2001 was attributable to the consolidation of ILCO's operations for the period from May 18, 2001 to December 31, 2001. At Investors Life and Investors-IN net investment income decreased from $50.9 million in 2000 to $47.9 million in 2001. The decrease was primarily attributable to lower interest rates on short-term investments as well as the sale of investments to pay for the continued construction at River Place Pointe. See "Investments - Real Estate" for a description of the River Place Pointe investment. The level of net investment income contributed by the investment portfolio of Family Life for the year ended December 31, 2001 was $6.3 million. Net investment income at Family Life was adversely affected by the decline in the level of interest income received from fixed income and short-term investments. This decline is attributable to lower interest rates during the period. The net investment income was approximately level from the year ended 1999 and 2000 mainly due to the long term portfolio remaining level while short term investments were decreasing and the short term rates were increasing.
Interest expense on contract holders deposit funds was $19.9 million for the year 2001, as compared to $2.2 million in each of the years 2000 and 1999. This increase is primarily attributable to $17.5 million of interest expense on contract holders deposit funds resulting from the consolidation of ILCO's operations following the Merger. This expense is related to payment of interest to policyholders for cash values accumulated in their accounts.
The provision for federal income taxes was $5.3 million in 2001, as compared to $1.3 million in 2000 and $1.2 million in 1999. The inclusion of ILCO's results for the period from May 18, 2001 to December 31, 2001 contributed approximately $2.6 million to the level of federal income taxes. Because of the Merger and subsequent consolidation of FIC and ILCO's provision for federal income taxes, FIC was not able to utilize the small company tax deduction, which provided lower tax rates. The increase in federal income taxes due to the loss of this deduction was $343,227. Further, for the year ended December 31, 2000 and 1999, FIC and ILCO each paid, and were each able to deduct $1 million of excess compensation each. Due to the Merger, the Company will incur approximately $100,000 in additional federal income taxes in 2001 related to excess compensation since ILCO will only be able to deduct approximately $750,000 of Mr. Mitte's compensation for 2001.
Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of business operations. FIC is an insurance holding company whose principal assets consist of the outstanding capital stock of its insurance subsidiaries - Family Life Insurance Company ("Family Life"), Investors Life Insurance Company of North America ("Investors Life"), and prior to February 19, 2002, Investors Life Insurance Company of Indiana ("Investors-IN"). Prior to the merger of FIC and ILCO on May 18, 2001, the principal assets of FIC consisted of the common stock of its insurance subsidiary, Family Life - and its equity ownership in ILCO. As a holding company, FIC's ability to meet its cash requirements, pay interest on any debt, pay expenses related to its affairs and pay dividends on its common stock substantially depends upon dividends from its subsidiaries.
Prior to June 2001, the principal source of liquidity for FIC and its wholly-owned subsidiary, Family Life Corporation, consisted of the periodic payment of principal and interest by Family Life pursuant to the terms of the surplus debenture issued in connection with the Family Life acquisition from Merrill Lynch. During 2001, Family Life made principal payments of $5.9 million and interest payments of $0.2 million to Family Life Corporation pursuant to the terms of the surplus debenture. The surplus debenture was completely paid off as of June 30, 2001. For periods subsequent to June 30, 2001, FIC's available source of liquidity will be dividends paid to it from its subsidiaries. Applicable state insurance laws generally restrict the ability of insurance companies to pay cash dividends in excess of prescribed limitations without prior approval.
Prior to the merger of Investors Life and Investors-IN in February 2002, Investors-IN was domiciled in the State of Indiana. 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. Investors-IN had earned surplus of $26.5 million at December 31, 2001 and earned surplus of $21.3 million at December 31, 2000. Investors-IN did not make any dividend payments during 2001.
Net cash flow provided by investing activities was $12.0 million in 2001, as compared to $9.1 million in 2000 and $1.7 million in 1999. The increase in cash provided by investing activities from 2000 to 2001 was due to the purchase of ILCO, which provided $9.1 million, and a $14.8 million increase in proceeds from short-term investments. These amounts were offset by a ($18.1) million capitalization of real estate. The increase in cash provided by investing from 1999 to 2000 was primarily attributable to proceeds from a net decrease in short term investments.
Net cash flow used in financing activities was ($1.1) million in 2001, as compared to ($4.8) million in 2000 and ($3.1) million in 1999. Payment of cash dividends to stockholders attributed to $6.0 million of cash used in financing for 2001, as compared to only $0.9 million in 2000 and $0 in 1999; however, repayment of subordinated notes payable decreased from ($6.1) million in 2000 to ($1.5) million in 2001 due to the Merger. Contractholder deposits provided $35.9 million to cash from financing activities in 2001 and contractholder withdrawals used ($27.7) million which was an increase from 2000 and 1999 due to the inclusion of ILCO's cash flows for the period following the Merger.
The cash requirements of FIC, and its holding company subsidiary, Family Life Corporation, consist primarily of its service of the indebtedness created in connection with FIC's ownership of Family Life. As of December 31, 2001, the investment portfolio of Investors Life included $29.2 million of notes receivable from affiliates, represented by (i) a loan of $30 million by Investors Life to Family Life Corporation made in July 1993, in connection with the prepayment of indebtedness which had been previously issued to Merrill Lynch as part of the 1991 acquisition of Family Life Insurance Company by a wholly-owned subsidiary of FIC, and (ii) a loan of $4.5 million by Investors Life to Family Life Insurance Investment Company made in July 1993, in connection with the same transaction described above. Prior to September 12, 2001, the investment portfolio of Investors Life also included a $22.5 million loan from Investors Life to Family Life Corporation and a $2.5 million loan from Investors-CA (which was subsequently merged into Investors Life) to FIC and $2.0 million of additions to the $2.5 million note made in accordance with the terms of such note, which loans were fully paid on September 12, 2001.
Given the historical cash flow of our subsidiaries and the current financial results, management believes that the cash, cash equivalents and short term investments of FIC and its subsidiaries are sufficient to meet the needs of its business and to satisfy debt service. There are no trends, commitments or capital asset requirements that are expected to have an adverse effect on the liquidity of FIC.
Invested assets, excluding separate accounts, totaled $756.3 million and $99.1 million as of December 31, 2001 and December 31, 2000, respectively. The increase is primarily attributable to the inclusion of ILCO's invested assets on FIC's Consolidated Balance Sheets after the May 18th Merger. 66% of FIC's invested assets are in fixed maturity securities, available for sale. All of FIC's invested assets are invested in the United States. The most significant differences between the portfolio composition as of December 31, 2001 as compared to December 31, 2000 are investments in real estate, mortgage loans, and fixed maturities held to maturity, as well as an increase in investments in policy loans. Prior to the May 18, 2001 Merger, FIC did not have any invested real estate, mortgage loans, or fixed maturities held to maturity.
The securities valuation office (SVO) of the National Association of Insurance Commissioners evaluates all public and private bonds purchased as investments by insurance companies. The SVO assigns one of six investment categories to each security it reviews. Category 1 is the highest quality rating, and Category 6 is the lowest. As of December 31, 2001, the majority of our bonds, 99.8%, are investment grade (Category 1 and 2). The Company's fixed maturities portfolio (including short-term investments), included only a non-material amount (0.2% 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 by the SVO as "3" (medium quality) or below. This number is attributable to mortgage bonds which Investors Life owns in a California utility, which has been downgraded to a "6" (lowest quality) rating by the NAIC. As of December 31, 2001, Investors Life owned bonds in Southern California Edison which were purchased for $0.98 million and had a market value as of December 31, 2001 of $0.94 million. Prior to December 31, 2001, Investors Life also owned mortgage bonds in Pacific Gas & Electric which were sold during 2001 at a loss of $170,263 and Southern California Edison which were sold during 2001 at a loss of $187,305, and Investors-IN also owned bonds in Southern California Edison which were sold at a loss of $26,906 during 2001.
The financial statements contain a summary of FIC's critical accounting policies, including a discussion of recently-issued accounting pronouncements. Certain of these policies are considered to be important to the portrayal of FIC's financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. These policies include valuation of : investments, deferred acquisition costs and present value of future profits, and future policy benefits. For the year 2001, the Company's critical accounting policies also included the purchase accounting for ILCO.
The Company's investments primarily consist of fixed maturity securities, which include bonds, notes and redeemable preferred stocks. Fair values of investments in fixed securities are based on quoted market prices or dealer quotes. Fixed maturities are classified as "available for sale" and are reported at fair value, with unrealized investment gains and losses, net of income taxes, credited or charged directly to shareholder's equity. When an impairment of the value of an investment is considered other than temporary, the decrease in value is reported in net income as a realized investment loss and a new cost basis is established.
For the period from January 1, 2001 to May 17, 2001, and for the years 2000 and 1999, FIC's net income includes its equity interest in the net income of ILCO, with such equity interest being based on FIC's percentage ownership of ILCO.
1. Report of PricewaterhouseCoopers LLP, Independent Accountants, dated March 29, 2002.
4. Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2001, 2000 and 1999.
5. Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999.