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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 June 30, 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
July 31, 1996: 49,303,281
FIRST COLONY CORPORATION
I N D E X
Page
Number
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
June 30, 1996 and December 31, 1995 3 - 4
Consolidated Statements of Income
Three Months and Six Months Ended
June 30, 1996 and 1995 5
Consolidated Statements of Shareholders' Equity
Six Months Ended June 30, 1996 and 1995 6
Consolidated Statements of Cash Flows
Six Months Ended June 30, 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 10-16
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
FIRST COLONY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
(1996 Unaudited)
June 30 December 31
1996 1995
Investments:
Fixed maturities held to maturity, at
amortized cost:
Bonds (Fair value: 1996 $4,223,121;
1995, $4,660,947) $ 4,032,551 $ 4,070,476
Fixed maturities available for sale,
at fair value:
Bonds (Amortized cost: 1996, $4,678,704;
1995, $4,242,361) 4,709,322 4,602,319
Preferred stock, redeemable (Amortized
cost: 1996, $73,698; 1995, $77,465) 81,748 96,479
Equity securities, at market value
Preferred stock, nonredeemable (cost: 1996,
$230,933; 1995, $274,328) 256,721 321,118
Common stock (cost: 1996, $29,594;
1995, $28,476) 37,125 32,935
Policy loans 216,935 207,854
Other long-term investments 38,277 40,637
Short-term investments 11,790 14,160
Total investments 9,384,469 9,385,978
Cash and cash equivalents 42,456 46,125
Accrued investment income 165,478 161,689
Deferred policy acquisition costs 977,361 874,586
Reinsurance receivable 126,106 115,344
Property and equipment, less
accumulated depreciation 45,181 44,697
Goodwill, less accumulated amortization 30,789 31,385
Other assets 69,243 60,805
Total assets $10,841,083 $10,720,609
See accompanying notes to consolidated financial statements.
FIRST COLONY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
(1996 Unaudited)
June 30 December 31
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
Liabilities:
Policy liabilities:
Future policy benefits $ 6,198,404 $ 5,932,338
Claims 52,084 52,569
Total policy liabilities
and accruals 6,250,488 5,984,907
Deposits on investment contracts 2,621,971 2,521,657
Other policyholder funds 116,636 132,678
Other liabilities 117,233 93,881
Long-term debt 174,852 174,843
Deferred income taxes 214,010 328,238
Total liabilities 9,495,190 9,236,204
Shareholders' equity:
Preferred stock - No par value; authorized
15,000 shares; issued and outstanding,
3,200 80,000 80,000
Common stock - No par value; authorized
150,000 shares; issued and outstanding
49,303 shares 312,917 312,888
Net unrealized appreciation of
fixed maturities 13,937 208,288
Net unrealized appreciation of equity
securities 22,989 34,644
Retained earnings 916,050 848,585
Total shareholders' equity 1,345,893 1,484,405
Total liabilities and shareholders'
equity $10,841,083 $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 Six months ended
June 30 June 30
1996 1995 1996 1995
Revenues:
Life insurance premiums $ 96,862 $ 84,978 $ 188,968 $163,988
Life contingent
annuity premiums 78,879 106,069 164,239 186,791
Total premiums 175,741 191,047 353,207 350,779
Net investment income 198,925 184,055 395,156 363,522
Mortality, surrender &
administrative charges 29,172 25,619 56,897 51,484
Realized gains on
investments 11,008 20,909 21,309 32,377
Total revenues 414,846 421,630 826,569 798,162
Benefits:
Life and annuity
benefits paid 131,353 123,003 264,841 240,356
Increase in reserves 175,098 196,269 349,756 366,433
Total benefits 306,451 319,272 614,597 606,789
Expenses:
Commissions 8,648 9,103 16,625 17,852
General and administrative
and other expenses 17,942 16,492 35,382 32,281
Amortization of intangible
assets 14,248 9,128 29,140 19,823
Debt service cost 3,052 3,024 6,121 6,049
Total expenses 43,890 37,747 87,268 76,005
Total benefits
and expenses 350,341 357,019 701,865 682,794
Income before income taxes 64,505 64,611 124,704 115,368
Income taxes 22,800 22,850 44,076 40,672
Net income 41,705 41,761 80,628 74,696
Dividends on preferred stock 935 997 1,823 1,746
Earnings available for common
shareholders $ 40,770 $ 40,764 78,805 72,950
Net income per share of common
stock $ 0.82 $ 0.83 $ 1.59 $ 1.48
Cash dividends paid per share of
common stock $ 0.115 $ 0.100 $ 0.230 $ 0.200
Shares used to compute net income
per share of common stock 49,429 49,361 49,429 49,361
See accompanying notes to consolidated financial statements.
FIRST COLONY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In Thousands)
(Unaudited)
Six Months Ended
June 30
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 49,302 in 1995)
Beginning balance 49,302 $ 312,888 49,301 $ 312,879
Exercise of stock options 1 29 1 9
Ending balance 49,303 312,917 49,302 312,888
Net unrealized appreciation
of fixed maturities:
Beginning balance 208,288 (114,937)
Net change in unrealized gains or
losses net of (i) deferred
taxes (benefit) of ($104,650) in 1996
and $106,924 in 1995; (ii) deferred
policy acquisition costs of($38,800)
in 1996 and $52,500 in 1995 (194,351) 198,575
Ending balance, net of (i)
deferred taxes of $7,505 in
1996 and $45,035 in 1995; (ii)
deferred policy acquisition
costs of $10,000 in 1996 and
$25,500 in 1995. 13,937 83,638
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 ($6,275) in 1996 and
$12,085 in 1995. (11,655) 22,443
Ending balance, net of deferred
taxes of $10,330 in 1996 and
$18,809 in 1995. 22,989 38,736
Retained earnings:
Beginning balance 848,585 720,307
Net income 80,628 74,696
Cash dividends to shareholders:
Preferred stock (1,823) (1,746)
Common stock (11,340) (9,860)
Ending balance 916,050 783,397
Total shareholders' equity $1,345,893 $1,298,659
See accompanying notes to consolidated financial statements.
FIRST COLONY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Six Months Ended
June 30
1996 1995
Cash and cash equivalents at beginning
of period $ 46,125 $ 54,817
Cash flows from operating activities:
Net income 80,628 74,696
Adjustments to reconcile net income to cash
provided from operating activities:
Increase in policy liabilities
and accruals 213,127 233,440
Depreciation, depletion and amortizaton 31,997 22,546
Federal income taxes (6,224) 23,316
Change in other policyholders' funds (19,274) 30,077
Accrual of discounts on fixed maturities (52,833) (49,389)
Deferred policy acquisition costs (92,121) (101,418)
Change in reinsurance recoverable (10,762) (16,889)
Realized gains on investments (21,309) (32,377)
Other 7,574 1,087
Net cash provided from
operating activities 130,803 185,089
Cash flows used in investing activities
Fixed maturities available-for-sale:
Purchases (674,849) (606,635)
Sales 105,909 224,507
Maturities, calls and redemptions 155,462 60,244
Fixed maturities held-to-maturity:
Purchases (72,034) (297,815)
Maturities, calls and redemptions 152,958 56,704
Purchase of other investments (3,325) (31,558)
Sale or maturity of other investments 54,783 72,971
Other (9,640) (24,443)
Net cash used by
investing activities (290,736) (546,025)
Cash flows from financing activities:
Investment contracts 104,147 245,597
Universal life contracts 42,505 83,003
Short term borrowing 17,071
Dividend to shareholders (7,488) (11,653)
Other 29 9
Net cash provided from
financing activities 156,264 316,956
Decrease in cash and cash equivalents (3,669) (43,980)
Cash and cash equivalents at end of period $ 42,456 $ 10,837
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 six-month
period ended June 30, 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 quarters ended June 30, 1996 and 1995, the effective
tax rate was 35.3%. For the six months ended June 30, 1996
and 1995, the effective tax rate increased to 35.3%, up from
35.2%.
Income tax payments totalled $41,089 and $50,300 for the
three and six- month periods ended June 30, 1996, compared to
$26,559 and $17,355 for the three and six-month periods
ended June 30, 1995.
3. Interest paid on indebtedness was $5,797 for the six months
ended June 30, 1996 and 1995. No interest payments were due
or paid during the second quarter of 1996 or 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 Six Months Ended
June 30 June 30
1996 1995 1996 1995
Direct Premiums $179,546 $190,034 $352,664 $353,520
Reinsurance assumed 18,516 20,866 45,379 34,685
Reinsurance ceded (22,321) (19,853) (44,836) (37,426)
Total net premiums $175,741 $191,047 $353,207 $350,779
Ceded reinsurance netted
against benefits and
expenses $ 29,578 $ 38,977 $ 61,759 $ 73,456
Net reinsurance (costs)
for universal life
contracts $ (4,705) $ (4,112) $ (9,348)$(8,117)
Components of the reinsurance recoverable asset are as
follows:
June 30 December 31
1996 1995
Ceded reserves $106,518 $ 94,102
Ceded claims liability 11,347 12,468
Ceded - Other 8,241 8,774
Total $126,106 $ 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 (in
thousands):
Three Months Ended Six Months Ended
June 30 June 30
1996 1995 1996 1995
Pretax operating income $52,721 $43,557 $102,880 $83,123
Realized gains on
investments 11,008 20,909 21,309 32,377
Amortization effects related to
realized gains on investments 776 145 515 (132)
Income before income taxes $64,505 $64,611 $124,704 $115,368
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
$52.7 million for the quarter ended June 30, 1996, up 21% over
the same period last year. Pretax operating income was $102.9
million for the six months ended June 30, 1996, up 24% from the
same period a year ago. Pretax operating income for the quarter
and the six months 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
exclude 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 Six months ended
June 30 June 30
1996 1995 1996 1995
Revenues:
Annual Life Insurance
- Operating $ 150.4 $ 129.9 $ 293.4 $ 256.4
- Net realized gains 2.6 9.4 2.8 15.1
- Total 153.0 139.3 296.2 271.5
SPIA
- Operating 196.7 214.7 398.2 399.9
- Net realized gains 9.3 9.9 21.8 14.3
- Total 206.0 224.6 420.0 414.2
Accumulation Products
- Operating 56.8 56.1 113.7 109.5
- Net realized gains (0.9) 1.6 (3.3) 3.0
- Total 55.9 57.7 110.4 112.5
Total
- Operating 403.9 400.7 805.3 765.8
- Net realized gains 11.0 20.9 21.3 32.4
- Total $ 414.9 $ 421.6 $ 826.6 $ 798.2
Income before income taxes:
Annual Life Insurance
- Operating $ 28.6 $ 22.7 $ 52.5 $ 41.8
- Net realized gains 2.6 9.4 2.8 15.1
- Amortization effects 0.2 0.3 0.2 0.3
- Total 31.4 32.4 55.5 57.2
SPIA
- Operating 10.2 10.3 24.3 21.3
- Net realized gains 9.3 9.9 21.8 14.3
- Amortization effects 0.0 0.0 0.0 0.0
- Total 19.5 20.2 46.1 35.6
Accumulation Products
- Operating 13.9 10.5 26.1 20.0
- Net realized gains (0.9) 1.6 (3.3) 3.0
- Amortization effects 0.6 (0.1) 0.3 (0.4)
- Total 13.6 12.0 23.1 22.6
Total
- Operating 52.7 43.5 102.9 83.1
- Net realized gains 11.0 20.9 21.3 32.4
- Amortization effects 0.8 0.2 0.5 (0.1)
- Total $ 64.5 $ 64.6 $ 124.7 $ 115.4
Assets:
Annual Life Insurance $2,301.3 $1,963.6 $2,301.3 $1,963.6
SPIA 5,856.8 5,368.2 5,856.8 5,368.2
Accumulation Products 2,683.0 2,753.2 2,683.0 2,753.2
Total $10,841.1$10,085.0 $10,841.1 $10,085.0
PERIODS ENDED JUNE 30, 1996 AND 1995
Total revenues for the quarter ended June 30, 1996 decreased
2% compared to the second quarter of 1995. The decrease for the
quarter is due principally to lower premium revenues from life-
contingent SPIA's, offset by higher premium revenues from life
insurance and higher net investment income. For the six months
ended June 30, 1996, revenues increased 4% over last year. The
increase for the six months is due principally to higher premium
revenues from life insurance and higher net investment income,
offset by lower premium revenues from life contingent SPIA's.
Premiums. Premiums for the quarter ended June 30, 1996, were
$175.7 million, a decrease of 8% from the second quarter of 1995.
Life insurance premiums increased to $96.9 million, up 14% from
the prior year. Life contingent SPIA premiums of $78.8 million
for the quarter decreased 26% compared to the second quarter of
1995.
For the six months ended June 30, 1996, premiums of $353.2
million were 1% higher than last year. Life insurance premiums
increased to $189.0 million, up 15% from 1995. Life insurance
premiums for both the quarter and six months reflect new sales
and renewal premiums on the in-force business. Annuity premiums
of $164.2 million were 12% lower than 1995. The decrease for
both the quarter and six months is due to lower sales of life
contingent single premium immediate annuities.
Net Investment Income. Net investment income increased to
$199.0 million for the quarter ended June 30, 1996, up 8% over
the comparable 1995 period. The increase reflects primarily a 8%
growth of invested assets, excluding FASB 115, from June 30,
1995 due primarily to new deposits on investment contracts and
premium income. For the quarter, higher CMO prepayment speeds
generated higher investment income of $2.7 million net of related
deferred acquisition cost amortization, compared to $0.1MM higher
investment income related to CMO prepayments in 1995.
For the six months ended June 30, 1996, net investment income of
$395.2 million was 9% higher than last year, reflecting primarily
growth of invested assets, up $0.5 billion from June 30, 1995.
New deposits on investment contracts and premium income account
for the increase in invested assets. Higher CMO prepayment
speeds generated higher investment income for the six months of
$3.2 million net of related deferred acquisition cost
amortization while lower CMO prepayment speeds in 1995 generated
lower investment income of $0.2 million net of related
amortization. The effective yield on invested assets was 8.84%
for the six months ended June 30, 1996, compared to 8.91% for the
six months ended June 30, 1995.
Mortality, Surrender and Administrative Charges. Mortality,
surrender and administrative charges increased to $29.2 million
for the quarter ended June 30, 1996, up 14% over the comparable
1995 period. For the six months ended June 30, 1996, mortality,
surrender and administrative charges increased to $56.9 million,
up 10% over 1995. Both the quarter and year-to-date periods
benefited from higher mortality and administrative charges for
universal life products due to new sales and retention of the in-
force business.
Total Benefits. Total benefits for the quarter ended June
30, 1996, decreased to $306.5 million, down 4% from the second
quarter of 1995. Life insurance benefits for the quarter
increased to $88.7 million, up 9% over the comparable 1995
period. The increase was primarily the result of higher life
mortality benefits, which increased 5%, to $48.5 million in 1996,
and higher life policy reserves and other life benefits which
increased 15%, to $40.2 million in 1996 on new sales. For the
quarter, SPIA benefits and reserves decreased to $178.8 million,
down 9% from 1995. The decrease is due principally to lower
sales of life contingent SPIAs. Accumulation product benefits
decreased to $39.0 million, down 8% from 1995, reflecting $3.6
million lower reserves and other benefit costs.
Total benefits for the six months ended June 30, 1996 increased
to $614.6 million, up 1% from 1995. Life insurance benefits
increased to $178.3 million, up 11% over 1995, reflecting $8.8
million higher life mortality benefits and $8.7 million higher
life policy reserves and other life benefits. The increase in
policy benefits is attributable to a 20% growth of the in-force
business. Life insurance mortality for the quarter and six
months was lower than assumed in pricing and lower relative to
1995's mortality for the comparable periods. Year-to-date, SPIA
benefits and reserves decreased to $358.2 million, down 1% from
1995, reflecting lower sales of life contingent SPIA's.
Accumulation product benefits for the six months decreased to
$78.1 million, down 5% over 1995, reflecting primarily $4.6
million lower reserves and other benefit costs.
Total Expenses. Total expenses for the quarter ended June
30, 1996 increased to $43.9 million, up 16% from last year.
Commissions net of deferral decreased to $8.6 million for the
quarter, down 5%. Amortization of intangible assets increased to
$14.2 million for the quarter ended June 30, 1996, up 56% from
the comparable 1995 period. The increase is due to $5.2 million
higher amortization of deferred policy acquisition costs related
to the growing life insurance in force.
Total expenses for the six months ended June 30, 1996 increased
to $87.3 million, up 15% from 1995. Commissions net of deferral
decreased to $16.6 million, down 7% from last year. The decrease
to commissions for the quarter and year is attributable to lower
sales of life contingent SPIAs. Amortization of intangible assets
increased to $29.1 million, up 47% from last year. The increase
is due to an $9.4 million increase in amortization of deferred
policy acquisition costs related to the growing life insurance in
force.
Income Before Income Taxes. Income before income taxes,
which includes realized investment gains and the effect of
related amortization was $64.5 million for the quarter ended June
30, 1996, down slightly from the comparable 1995 period. Income
before income taxes for the six months ended June 30, 1996 was
$124.7 million, up 8% from last year.
Pretax operating income, which excludes realized investment gains
and the effect of related amortization, was $52.7 million for the
quarter, up 21% from 1995. For the six months ended June 30,
1996, pretax operating income of $102.9 million was up 24% from
the comparable 1995 period. Pretax operating income for the
quarter and year-to-date benefited from the earnings on the
growing life and immediate annuity in force business and
relatively better life insurance and immediate annuity mortality.
Income Taxes. Income taxes were $22.8 million for the
quarter ended June 30, 1996, level with 1995. For the six months
ended June 30, 1996, income taxes increased to $44.1 million, up
8% compared to 1995. Both the quarter and year to date were
affected by higher operating earnings offset by lower realized
investment gains. The effective tax rate for the six month period
was 35.3%, up slightly from 35.2% for the same period in 1995.
Realized Gains on Investments. After-tax realized
investment gains including the effect of related amortization
were $7.6 million for the quarter ended June 30, 1996, compared
to $13.6 million for the comparable 1995 period. After tax
realized investment gains including the effect of related
amortization were $14.1 million for the six months ended June 30,
1996, compared to $20.8 million in 1995. The decrease is due
primarily to the Company's election to take capital gains in the
common stock portfolio during 1995, which was not repeated in
1996.
Net income. Net income was $41.7 million for the quarter
ended June 30, 1996, down slightly from $41.8 million in 1995.
For the six months ended June 30, 1996, net income increased to
$80.6 million, up 8% from the comparable 1995 period. The
increase for the year is principally due to higher net operating
earnings offset by lower 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 $130.8 million
and $185.1 million in the six months ended June 30, 1996 and
1995, respectively. Cash provided by operating activities was
lower in the current period due primarily to higher tax payments
in 1996.
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 $156.3 million and $316.9
million for the six months ended June 30, 1996 and 1995,
respectively. The 1996 period reflects lower sales of single
premium universal life and investment contracts.
Net cash used by investing activities was $290.7 million and
$546.0 million in the six months ended June 30, 1996 and 1995,
respectively. The cash used by investing activities in the
current period was lower than last year as explained above.
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,
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 June 30,
1996, the bond portfolio had an average Moody's rating of A-1. At
June 30, 1996, bonds below investment grade represented 2.1% 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
$13.9 million (net of the related effect of deferred policy
acquisition costs and deferred income taxes) or $0.28 per share
at June 30, 1996, compared to unrealized gains of $208.3 million,
or $4.22 per share at December 31, 1995. Market values decreased
during the six month period as a result of rising yields in the
bond market. Fixed maturity investments in the held-to-maturity
category represented approximately 46% of the fixed maturity
portfolio. The Company does not have a trading portfolio, nor
does it invest in derivative financial instruments.
At June 30, 1996, approximately 16% of First Colony's
investment portfolio was invested in mortgage-backed obligations,
99% 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 six months of 1996, cash payments
of principal received on CMOs were $117.5 million versus $32.2
million last year. Future levels of CMO prepayments are
dependent principally upon the direction of future interest
rates.
During the second quarter, First Colony Life's AA+
(excellent) rating was downgraded to AA- (excellent) by Standard
& Poor's. Also, in light of the announcement that the Company
was considering various strategic options, Standard & Poor's
placed First Colony Life on CreditWatch with developing
implications. This reflects the possibility that the rating
could be raised or lowered based on the outcome of this review.
Subsequent Event
On August 5, 1996, the Company and General Electric Capital
Corporation announced the signing of a definitive agreement for
the sale of the Company to GE Capital. The Company's principal
subsidiaries, First Colony Life Insurance Company and American
Mayflower Life Insurance Company of New York, will become
subsidiaries of GE Capital Assurance, a GE Capital company.
The cash purchase price will be $36.15 per share of the Company's
common stock for a total value to First Colony shareholders of
approximately $1.8 billion. Following regulatory and shareholder
approval, the transaction is expected to close by year-end.
Ratings
Concurrent with the acquisition announcement the following rating
agencies have adjusted their ratings for First Colony Life and
American Mayflower Life of New York.
A.M. Best Company has placed the A++ (Superior) Best's rating of
First Colony Life and its subsidiary, American Mayflower Life of
New York, under review with developing implications.
Standard & Poor's has revised its CreditWatch implications on the
double-A'-minus claims-paying ability ratings of First Colony
Life Insurance Company and its primary subsidiary, American
Mayflower Life of New York, to positive from "developing."
Duff & Phelps Credit Rating Company has placed the AA+ (Double-A-
Plus) claims paying ability ratings of First Colony Life and its
wholly owned subsidiary American Mayflower Life of New York, and
the 'AA (Double-A) senior debt rating and 'AA-" (Double-A-Minus)
preferred stock rating of First Colony Corporation on Rating
Watch--Developing.
Moody's Investors Service placed the senior debt and preferred
stock ratings of A2 of First Colony Corporation and the financial
strength rating of Aa3 of First Colony Life and American
Mayflower Life of New York under review for possible upgrade.
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits
10.12.1 Form of Change in Control and Termination
Agreement, dated March 23, 1995, as amended April 2, 1996, and
May 15, 1996, with Messrs. Gottwald, Dolan and Karras.
10.12.2 Form of Change in Control and Termination
Agreement, dated March 23, 1995, as amended April 2, 1996, and
May 15, 1996, with Messrs. Britton, Whaley, and Larsen.
10.12.3 Form of Change in Control and Termination
Agreement, dated March 23, 1995, as amended April 2, 1996, and
May 15, 1996, with Messrs. Weishan, Guengerich, Smith and certain
officers of subsidiaries of First Colony Corporation.
10.13.1 Form of Option Agreement, dated December 22,
1993, as amended effective November 28, 1995 and April 2,
1996, with Messrs. Gottwald, Dolan, Karras, Britton,
Whaley, Weishan, Guengerich, Larsen, Smith and one
officer of a subsidiary of First Colony Corporation.
10.13.2 Form of Option Agreement, dated December 12,
1994, as amended effective November 28, 1995 and April 2,
1996, with Messrs. Gottwald, Dolan, Karras, Britton,
Whaley, Weishan, Guengerich, Larsen, Smith and one
officer of a subsidiary of First Colony Corporation.
10.13.3 Form of Option Agreement, dated November 28,
1995, as amended effective April 2, 1996, with Messrs.
Gottwald, Dolan, Karras, Britton, Whaley, Weishan,
Guengerich, Larsen, Smith and one officer of a subsidiary
of First Colony Corporation.
b. Reports on Form 8-K
Registrant filed a Form 8-K on August 8, 1996, which
contained the Agreement and Plan of Merger with General
Electric Capital Corporation ("General
Electric") and a wholly-owned subsidiary of General
Electric ("Merger Subsidiary") and a press release with
respect to the merger of the Registrant with a Merger
Subsidiary.
In addition, Registrant submitted a supplemental
financial report concurrent with the press release of
the current quarter's operating results for the
period ended June 30, 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: August 14, 1996 By: s/Ronald V. Dolan
President
Date: August 14, 1996 By: s/Peter W. Karras, CPA
Secretary and Treasurer
EXHIBIT INDEX
Page
10.12.1 Form of Change in Control and Termination Agreement,
executed March 23, 1995, as amended April 2, 1996,
and May 15, 1996, with Messrs. Gottwald, Dolan and
Karras.
10.12.2 Form of Change in Control and Termination Agreement,
executed March 23, 1995, as amended April 12, 1996,
and May 15, 1996, with Messrs. Britton, Whaley,
and Larsen.
10.12.3 Form of Change in Control and Termination
Agreement, dated March 23, 1995, as amended April 2, 1996, and
May 15, 1996, with Messrs. Weishan, Guengerich, Smith and certain
officers of subsidiaries of First Colony Corporation.
10.13.1 Form of Option Agreement, dated December 22, 1993,
as amended effective November 28, 1995 and April 2,
1996, with Messrs. Gottwald, Dolan, Karras, Britton,
Whaley, Weishan, Guengerich, Larsen, Smith and one
officer of a subsidiary of First Colony Corporation.
10.13.2 Form of Option Agreement, dated December 12, 1994,
as amended effective November 28, 1995 and April 2,
1996, with Messrs. Gottwald, Dolan, Karras, Britton,
Whaley, Weishan, Guengerich, Larsen, Smith and one
officer of a subsidiary of First Colony Corporation.
10.13.3 Form of Option Agreement, dated November 28, 1995,
as amended effective April 2, 1996, with Messrs.
Gottwald, Dolan, Karras, Britton, Whaley, Weishan,
Guengerich, Larsen, Smith and one
officer of a subsidiary of First Colony Corporation.