Page 1 of 17 Pages
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 1996
Commission File Number 1-11482
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Transition Period from to
FIRST COLONY CORPORATION
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1200334
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
RIVERFRONT PLAZA, WEST TOWER SUITE 1350
901 EAST BYRD STREET
RICHMOND, VIRGINIA 23219
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code - (804) 775- 0300
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports); and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Number of shares of common stock, no par value, outstanding as of
April 30, 1996: 49,303,144
FIRST COLONY CORPORATION
I N D E X
Page
Number
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
March 31, 1996 and December 31, 1995 3 - 4
Consolidated Statements of Income
Three Months Ended March 31, 1996 and 1995 5
Consolidated Statements of Shareholders' Equity
Three Months Ended March 31, 1996 and 1995 6
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 1996 and 1995 7
Notes to Consolidated Financial Statements 8 - 9
ITEM 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 10 - 15
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
FIRST COLONY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(1996 Unaudited)
March 31 December 31
1996 1995
Investments:
Fixed maturities held to maturity, at
amortized cost:
Bonds (Fair value: 1996, $4,345,009;
1995, $4,660,947) $4,069,067 $4,070,476
Fixed maturities available for sale,
at fair value:
Bonds (Amortized cost: 1996, $4,468,066;
1995, $4,242,361) 4,564,479 4,602,319
Preferred stock, redeemable (Amortized
cost: 1996, $74,540; 1995, $77,465) 85,717 96,479
Equity securities, at market value
Preferred stock, nonredeemable (Cost: 1996,
$253,130; 1995, $274,328) 284,893 321,118
Common stock (Cost: 1996, $28,766;
1995, $28,476) 35,568 32,935
Policy loans 212,600 207,854
Other long-term investments 41,719 40,637
Short-term investments 10,868 14,160
Total investments 9,304,911 9,385,978
Cash and cash equivalents 22,447 46,125
Accrued investment income 171,207 161,689
Deferred policy acquisition costs 938,381 874,586
Reinsurance recoverable 125,375 115,344
Property and equipment, less
accumulated depreciation 44,673 44,697
Goodwill, less accumulated amortization 31,087 31,385
Other assets 79,902 60,805
Total assets $10,717,983 $10,720,609
See accompanying notes to consolidated financial statements.
FIRST COLONY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(1996 Unaudited)
March 31 December 31
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
Liabilities:
Policy liabilities:
Future policy benefits $6,069,988 $5,932,338
Claims 65,741 52,569
Total policy liabilities and accruals 6,135,729 5,984,907
Deposits on investment contracts 2,542,586 2,521,657
Other policyholder funds 116,988 132,678
Other liabilities 122,568 93,881
Short-term borrowing 32,369
Long-term debt 174,847 174,843
Deferred income taxes 238,438 328,238
Total liabilities 9,363,525 9,236,204
Shareholders' equity:
Preferred stock - No par value; authorized
15,000 shares; issued and outstanding,
3,200 shares 80,000 80,000
Common stock - No par value; authorized
150,000 shares; issued and outstanding
49,303 shares 312,913 312,888
Net unrealized appreciation of fixed maturities 54,195 208,288
Net unrealized appreciation of equity securities 26,400 34,644
Retained earnings 880,950 848,585
Total shareholders' equity 1,354,458 1,484,405
Total liabilities and shareholders' equity $10,717,983 $10,720,609
See accompanying notes to consolidated financial statements.
FIRST COLONY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands)
(Unaudited)
Three months ended
March 31
1996 1995
Revenues:
Life insurance premiums $ 92,106 $ 79,010
Life contingent annuity premiums 85,360 80,722
Total premiums 177,466 159,732
Net investment income 196,231 179,467
Mortality, surrender &
administrative charges 27,725 25,865
Realized gains on investments 10,301 11,468
Total revenues 411,723 376,532
Benefits:
Life and annuity benefits paid 133,488 117,353
Increase in reserves 174,658 170,164
Total benefits 308,146 287,517
Expenses:
Commissions 7,977 8,749
General and administrative and
other expenses 17,440 15,789
Amortization of intangible assets 14,892 10,695
Debt service cost 3,069 3,025
Total expenses 43,378 38,258
Total benefits and expenses 351,524 325,775
Income before income taxes 60,199 50,757
Income taxes 21,276 17,822
Net income 38,923 32,935
Dividends on preferred stock 888 749
Earnings available for common shareholders $ 38,035 $ 32,186
Net income per share of common stock $ 0.77 $ 0.65
Cash dividends paid per share of
common stock $ 0.115 $ 0.100
Shares used to compute net income
per share of common stock 49,372 49,354
See accompanying notes to consolidated financial statements.
FIRST COLONY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In Thousands)
(Unaudited)
Three Months Ended
March 31
1996 1995
Shares Amounts Shares Amounts
Preferred Stock, no par value
(authorized 15,000 shares;
issued and outstanding 3,200)
Beginning and ending balance 3,200 $ 80,000 3,200 $ 80,000
Common Stock, no par value
(authorized 150,000 shares;
issued and outstanding 49,303
in 1996 and 49,301 in 1995)
Beginning balance 49,302 312,888 49,301 312,879
Exercise of stock options 1 25
Ending balance 49,303 312,913 49,301 312,879
Net unrealized appreciation
(depreciation) of fixed maturities:
Beginning balance 208,288 (114,937)
Net change in unrealized gains or
losses net of (i) deferred
taxes (benefit) of ($82,973)
in 1996 and $42,631 in 1995;
(ii) deferred policy acquisition
costs of ($32,800) in 1996 and
$24,200 in 1995. (154,093) 79,173
Ending balance, net of (i)
deferred taxes (benefit) of
$29,182 in 1996 and ($19,258) in
1995; (ii) deferred policy
acquisition costs of $16,000 in
1996 and ($2,800) in 1995. 54,195 (35,764)
Net unrealized appreciation of
equity securities:
Beginning balance 34,644 16,293
Net change in unrealized gains or
losses net of deferred taxes
(benefit) of ($4,439) in 1996 and
$10,025 in 1995. (8,244) 18,618
Ending balance, net of deferred
taxes of $12,166 in 1996 and
$16,749 in 1995. 26,400 34,911
Retained earnings:
Beginning balance 848,585 720,307
Net income 38,923 32,935
Cash dividends to shareholders:
Preferred stock (888) (749)
Common stock (5,670) (4,930)
Ending balance 880,950 747,563
Total shareholders' equity $1,354,458 $1,139,589
See accompanying notes to consolidated financial statements.
FIRST COLONY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Three Months Ended
March 31
1996 1995
Cash and cash equivalents at beginning of period $ 46,125 $ 54,817
Cash flows from operating activities:
Net income 38,923 32,935
Adjustments to reconcile net income to cash
provided from operating activities:
Increase in policy liabilities
and accruals 120,850 106,335
Depreciation, depletion and amortization 16,304 12,029
Accrued federal income taxes 14,452 20,385
Deferred federal income taxes (2,387) 6,641
Change in other policyholders' funds (17,835) 8,289
Accrual of discounts on fixed maturities (23,861) (23,377)
Deferred policy acquisition costs (45,370) (47,389)
Change in reinsurance recoverable (10,032) (12,799)
Realized gains on investments (10,301) (11,468)
Other (12,051) (6,261)
Net cash provided from
operating activities 68,692 85,320
Cash flows used in investing activities
Fixed maturities available-for-sale:
Purchases (321,903) (277,850)
Sales 23,294 157,614
Maturities, calls and redemptions 77,506 25,460
Fixed maturities held-to-maturity:
Purchases (28,879) (172,452)
Maturities, calls and redemptions 53,472 22,644
Purchase of other investments (1,753) (18,301)
Sale or maturity of other investments 28,648 24,188
Other (2,605) (15,544)
Net cash used by
investing activities (172,220) (254,241)
Cash flows from financing activities:
Investment contracts 23,303 111,800
Universal life contracts 25,099 32,098
Short term borrowing 32,369
Dividend to shareholders (946) (5,720)
Other 25
Net cash provided from
financing activities 79,850 138,178
Decrease in cash and cash equivalents (23,678) (30,743)
Cash and cash equivalents at end of period $ 22,447 $ 24,074
See accompanying notes to consolidated financial statements.
FIRST COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
(Unaudited)
1. The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and in
conformity with generally accepted accounting principles and reflect all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the interim periods. All such adjustments are of a normal
recurring nature. The results for the three-month period ended March 31,
1996 are not necessarily indicative of the results to be expected for the
full year ending December 31, 1996. For further information, refer to the
consolidated financial statements and footnotes included in the Company's
annual report on Form 10-K for the year ended December 31, 1995.
The accompanying consolidated financial statements of First Colony
Corporation (First Colony or the Company) include the accounts of the
Company and its wholly-owned subsidiary, First Colony Life Insurance
Company (First Colony Life), and its wholly-owned subsidiaries,
American Mayflower Life Insurance Company of New York (American Mayflower)
and Jamestown Life Insurance Company (Jamestown). First Colony Life,
American Mayflower, and Jamestown are life insurance companies and are
referred to collectively as the "Insurance Companies."
2. For the three months ended March 31, 1996 and 1995, the effective tax rate
was 35.3% and 35.1%, respectively.
Income tax payments totalled $9,211 for the three month period ended March
31, 1996, compared to refunds of $9,204 for the three-month period ended
March 31, 1995.
3. Interest paid on indebtedness amounted to $5,797 for the quarters ended
March 31, 1996 and 1995.
FIRST COLONY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
(Unaudited)
4. The effect of reinsurance on premiums and expenses is as follows:
Three Months Ended
March 31
1996 1995
Direct premiums $173,118 $163,486
Reinsurance assumed 26,863 13,819
Reinsurance ceded (22,515) (17,573)
Total net premiums $177,466 $159,732
Ceded reinsurance netted
against benefits and expenses $ 32,181 $ 34,479
Net reinsurance (costs) for
universal life contracts $ (4,643) $ (4,005)
Components of the reinsurance recoverable asset are as follows:
March 31, December 31
1996 1995
Ceded reserves $100,419 $ 94,102
Ceded claims liability 16,682 12,468
Ceded - Other 8,274 8,774
Total $125,375 $115,344
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following is management's discussion and analysis of certain
significant factors which have affected the Company's results of operations
during the periods included in the accompanying consolidated statements of
income and changes in the Company's financial condition since year-end
1995.
RESULTS OF OPERATIONS
First Colony operates principally in a single business segment selling
individual life and annuity products. For the purpose of analyzing
operating results it splits the segment into three lines; annual life
insurance, single premium immediate annuities(SPIAs) and accumulation
products.
Following is an analysis of income before income taxes for the quarters
ended March 31 (in thousands):
1996 1995
Pretax operating income $50,159 $39,566
Realized gains on investments 10,301 11,468
Amortization effects related to
realized gains on investments (261) (277)
Income before income taxes $60,199 $50,757
Pretax operating income is defined as income before income taxes excluding
net realized gains or losses on investments and the effect of related
amortization. Pretax operating income was $50.2 million for the first
quarter of 1996, up 27% over the first quarter of 1995. Pretax operating
income benefited from the earnings on the growing life and immediate
annuity in force business and relatively better life insurance and annuity
mortality costs.
Realized gains are not included as part of the Company's operating income
for analytical purposes. Realized gains on fixed maturities are an accelerated
source of profit and the "amortization effects" related to these gains refer
to the amortization of deferred policy acquisition costs. In accordance with
generally accepted accounting principles, the amortization of deferred
policy acquisition costs for certain products is based on estimated gross
profits, including profits from investment gains, prepayment speeds of
principal underlying investments in CMOs and mortality. Changes in market
interest rates affect bond calls and CMO prepayment speeds, which affect the
amount and timing of the receipt of the investment income from these
investments. Periodically, the gross profit and the cumulative amortization for
the books of business are re-estimated and adjusted by a cumulative charge or
credit to the statement of income.
The following table sets forth revenues, income before income taxes and
assets for the periods indicated for each of the lines of business.
Operating revenues include premiums, net investment income, mortality,
surrender and administrative charges and excludes realized gains on
investments. Assets, investment income, net realized gains and certain
expense elements are allocated to a line of business on bases that
management considers reasonable.
Dollars in millions Three months ended
March 31
1996 1995
Revenues:
Annual Life Insurance
- Operating $ 143.0 $ 126.5
- Net realized gains 0.2 5.7
- Total 143.2 132.2
SPIA
- Operating 201.5 185.2
- Net realized gains 12.5 4.4
- Total 214.0 189.6
Accumulation products
- Operating 56.9 53.4
- Net realized gains (2.4) 1.4
- Total 54.5 54.8
Total
- Operating 401.4 365.1
- Net realized gains 10.3 11.5
- Total $ 411.7 $ 376.6
Income before income taxes:
Annual Life Insurance
- Operating $ 23.9 $ 19.1
- Net realized gains 0.2 5.7
- Amortization effects 0.0 0.0
- Total 24.1 24.8
SPIA
- Operating 14.1 11.0
- Net realized gains 12.5 4.4
- Amortization effects 0.0 0.0
- Total 26.6 15.4
Accumulation products
- Operating 12.2 9.5
- Net realized gains (2.4) 1.4
- Amortization effects (0.3) (0.3)
- Total 9.5 10.6
Total
- Operating 50.2 39.6
- Net realized gains 10.3 11.5
- Amortization effects (0.3) (0.3)
- Total $ 60.2 $ 50.8
Assets:
Annual Life Insurance $ 2,224.9 $1,887.6
SPIA 5,806.3 5,071.7
Accumulation products 2,686.8 2,569.3
Total $10,718.0 $9,528.6
QUARTERS ENDED MARCH 31, 1996 AND 1995
Total revenues for the first quarter ended March 31, 1996 increased 9%
compared to the first quarter of 1995 for the reasons discussed below.
Premiums. Premiums for the quarter ended March 31, 1996, were $177.5
million, an increase of 11% from the first quarter of 1995. Life insurance
premiums increased to $92.1 million for the quarter ended March 31, 1996,
up 17% from the prior year reflecting new sales and good persistency of the
in-force business. Life contingent SPIA premiums of $85.4 million for the
quarter increased 6% compared to the first quarter of 1995.
Net Investment Income. Net investment income increased to $196.2
million for the quarter ended March 31, 1996, up 9% over the comparable
1995 period. The increase reflects primarily a 12% growth of invested
assets from March 31, 1995, due primarily to new deposits on investment
contracts and premium income. Higher CMO prepayment speeds generated higher
investment income in the current quarter of $0.5 million net of related
deferred acquisition cost amortization while lower CMO prepayment speeds in
1995 generated lower investment income of $0.3 million net of related
amortization. The effective yield on invested assets (excluding FASB 115) was
8.76% for the three months ended March 31, 1996, compared to 8.79% for the
three months ended March 31, 1995.
Mortality, Surrender and Administrative Charges. Mortality,
surrender and administrative charges increased to $27.7 million for the
quarter ended March 31, 1996, up 7% over the comparable 1995 period. The
quarter benefited from higher mortality and administrative charges for
universal life products due to new sales and favorable persistency of the
in-force business.
Total Benefits. Total benefits for the quarter ended March 31,
1996, increased to $308.1 million, up 7% from the first quarter of 1995.
Life insurance benefits increased to $89.6 million, up 12% over the
comparable 1995 period. The increase was primarily derived from life
mortality benefits, which increased 14%, to $51.8 million in 1996, and to
life policy reserves and other life benefits which increased 11%, to $37.8
million in 1995. The increase to benefits is attributable to a 21% growth
of the in-force business. First quarter life insurance mortality
experience was better than assumed in pricing and better relative to 1995.
For the quarter, SPIA benefits and reserves increased to $179.4 million, up
7% from 1995. The increase is due to interest accumulation on in-force
business and $9.6 million higher annuity benefit payments. Accumulation
product benefits decreased to $39.1 million, down 3% over the first quarter
of 1995, reflecting $0.4 million lower mortality and $1.0 million lower
reserves and other benefit costs.
Total Expenses. Total expenses for the quarter ended March 31,
1996, increased to $43.4 million, up 13% from last year. Commissions net
of deferral decreased to $8.0 million for the quarter, down 8%. The
decrease to commissions is due to lower renewal commissions on products
currently being sold. Amortization of intangible assets increased to $14.9
million for the quarter ended March 31, 1996, up 39% from the comparable
1995 period. The increase is due primarily to $4.2 million higher
amortization of deferred policy acquisition costs. General and
administrative and other expenses increased 10% to $17.4 million. The
increase is due principally to higher payroll costs and professional fees
in the first quarter of 1996.
Income Before Income Taxes. Income before income taxes, which
includes realized investment gains and the effect of related amortization
was $60.2 million for the quarter ended March 31, 1996, up 19% from the
comparable 1995 period.
Pretax operating income, which excludes realized investment gains and
the effect of related amortization, was $50.2 million for the quarter, up
27% from the first quarter of 1995. Pretax operating income for the
quarter benefited from the earnings on the growing life and immediate
annuity in force business and relatively better life insurance and
immediate annuity mortality costs.
Income Taxes. Income taxes increased to $21.3 million for the
quarter ended March 31, 1996, up 19% compared to 1995. The increase is due
to higher operating earnings and a slightly higher operating tax rate.
Realized Gains on Investments. After-tax realized investment gains
including the effects of related amortization were $6.5 million for the
quarter ended March 31, 1996, compared to $7.2 million for the comparable
1995 period.
Net income. Net income increased to $38.9 million for the quarter
ended March 31, 1996, up 18% from the comparable 1995 period. The increase
is principally due to higher net operating earnings offset by slightly
lower net realized investment gains.
FINANCIAL CONDITION
Liquidity and Capital Resources. First Colony Life's businesses
produce positive cash flows which are invested primarily in investment
grade bonds with maturities closely matched with future cash flow needs.
Principal sources of funds at First Colony Life are premiums and other
considerations received, net investment income received and proceeds from
investments called, matured, redeemed or sold. The principal uses of these
funds by First Colony Life are the payment of benefits on life insurance
and annuity policies, operating expenses and the purchase of investments.
Net cash provided by operating activities was $68.7 million and $85.3
million in the three months ended March 31, 1996 and 1995, respectively.
Cash provided by operating activities benefited from higher net investment
income cash flows offset by higher tax payments in 1996. Net cash used by
investing activities was $172.2 and $254.2 million in the three months
ended March 31, 1996 and 1995, respectively.
First Colony Life's financing activities relate primarily to its
universal life insurance and annuity products with benefits payable for a
stated period. First Colony Life's cash management strategy occasionally
results in the need for short-term borrowing to meet current commitments.
The net cash provided by financing activities amounted to $79.9 million and
$138.2 million for the three months ended March 31, 1996 and 1995,
respectively.
First Colony is an insurance holding company and its principal sources
of cash are dividends from and an investment management and services
agreement with First Colony Life. The Company's primary uses of cash have
been for common and preferred shareholder dividends, debt service,
operating expenses and a common stock investment portfolio. Future cash
requirements will be primarily for debt service cost on the Company's
Senior Notes, short-term borrowing, dividends on the Variable Term
Preferred Stock, common shareholder dividends and operating expenses.
Given First Colony's cash flow and current financial results,
management of the Company believes that the cash flow from the operating
and financing activities of First Colony Life over the next year will
provide sufficient liquidity for the operations of the Company, as well as
provide sufficient funds so that the Company will be able to make dividend
payments, satisfy debt service obligations and pay other operating
expenses.
First Colony Life's investment portfolio consists of high quality
assets which produce a reasonable rate of return with maturities closely
matched to future cash flow needs. At March 31, 1996, the bond portfolio
had an average Moody's rating of A-1. At March 31, 1996, bonds below
investment grade represented 2.2% of the bond portfolio based on par value.
The mark-to-market requirements of FASB 115 for the available-for-sale
portfolio resulted in unrealized gains of $54.2 million (net of the related
effect of deferred policy acquisition costs and deferred income taxes) or
$1.10 per share for the quarter ended March 31, 1996, compared to
unrealized gains of $208.3 million, or $4.22 per share at December 31,
1995. Market values decreased during the first quarter as a result of
rising yields in the bond market. Fixed maturity investments in the held-
to-maturity category represented approximately 47% of the fixed maturity
portfolio. The Company does not have a trading portfolio, nor did it invest
in derivative financial instruments for the period ended March 31, 1996.
At March 31, 1996, approximately 16% of First Colony's investment
portfolio was invested in mortgage-backed obligations, 98% of which are
collateralized mortgage obligations (CMOs) secured by residential
mortgages. Certain of these CMOs are subject to prepayment risk in a
falling interest rate environment which impacts total yield but does not
affect the recoverability of principal. During the first three months of
1996, cash payments of principal received on CMOs were $49.9 million versus
$9.7 million last year due to a falling interest rate environment that existed
during late 1995 and early 1996. Future levels of CMO prepayments are dependent
principally upon the direction of future interest rates.
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits
None
b. Reports on Form 8-K
Registrant filed a Form 8-K on May 8, 1996 which contained a
supplemental financial report concurrent with the press release of
the current quarter's operating results for the period ended
March 31, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
FIRST COLONY CORPORATION
(Registrant)
Date: May 14, 1996 By: s/Ronald V. Dolan
President
Date: May 14, 1996 By: s/Peter W. Karras
Secretary and Treasurer