<PAGE> 1
U. S. Securities and Exchange Commission
Washington, D. C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from..........to........
Commission File Number 1-8069
Investors Insurance Group, Inc.
(Exact name of small business issuer
as specified in its charter)
Florida 13-2574130
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No)
7200 W. Camino Real
Boca Raton, Florida 33433
(Address of principal executive office) (Zip Code)
(407) 391-5043
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ] No [X]
As of June 30, 1996, 2,836,258 shares of the issuer's common stock were
outstanding.
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Investors Insurance Group, Inc
FORM 10-QSB
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION Page
Item 1: Consolidated Balance Sheets - June 30, 1996
and December 31, 1995 3
Item 1: Consolidated Statements of Operations - six months
ended June 30, 1996 and 1995 5
Item 1: Consolidated Statements of Operations - three months
ended June 30, 1996 and 1995 6
Item 1: Consolidated Statements of Cash Flow - three months
ended June 30, 1996 and 1995 7
Item 1: Notes to Consolidated Financial Statements 9
Item 2: Management's Discussion and Analysis 11
Part II. OTHER INFORMATION
Item 1: Legal Proceedings 13
Item 2: Changes in Securities 13
Item 3: Default Upon Senior Securities 13
Item 4: Submission of Matters to a Vote of Security Holders 13
Item 5: Other Information 13
Item 6: Exhibits and Reports on Form 8-K 13
SIGNATURES 14
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PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
INVESTORS INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995
(Dollars in thousands)
ASSETS 1996 1995
-------- --------
(unaudited)
Investments:
Fixed maturities held to maturity, at
amortized cost (market $9,790 in 1996
and $10,556 in 1995) $ 9,502 $ 9,504
Securities available for sale:
Fixed maturities, at market (amortized
cost $63,891 in 1996 and $141,474 in 1995) 62,954 149,231
Equity securities, at market (cost $11 in
1996 and $339 in 1995) 15 366
Short-term investments 324 356
Mortgage loans on real estate 387 564
Policy loans 583 598
------- -------
Total 73,765 160,619
Cash and cash equivalents 5,713 11,372
Investment in common stock of affiliate,
at market (cost $992 in 1996 and 1995) 909 803
Accrued investment income 507 1,090
Deferred acquisition costs 46,912 42,468
Investment contract benefits recoverable 459,146 351,489
Reinsurance benefits recoverable 3,531 2,438
Cost in excess of net assets of businesses
acquired (less accumulated amortization
of $1,153 in 1996 and $1,014 in 1995) 3,527 3,666
Income tax recoverable 1,493 -
Other assets 372 541
------- -------
Total Assets $ 595,875 $ 574,486
======= =======
See accompanying notes to consolidated financial statements
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INVESTORS INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
JUNE 30, 1996 AND DECEMBER 31, 1995
(Dollars in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
-------- --------
(unaudited)
Liabilities:
Future policy benefits and claims:
Investment contracts $ 532,790 $ 511,315
Life insurance reserves 8,404 7,189
Accident & health claim reserves 7 5
Unearned ceding commission (including
deferred gross profits of $8,979 in
1996 and $7,031 in 1995) 49,178 38,062
Note payable 8,000 8,000
Amounts due to coinsurer 166 5,998
Accrued expenses 633 250
Other liabilities 2,365 2,239
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Total Liabilities 601,543 573,058
------- -------
Commitments & Contingencies
Shareholders' Equity:
Preferred Stock, no par,
authorized 20,000,000 shares, none issued - -
Common Stock, $.50 par value; authorized
30,000,000 shares; issued 2,840,258 in
1996 and 2,766,982 in 1995; outstanding
2,836,258 in 1996 and 2,762,982 in 1995 1,420 1,384
Additional paid-in capital 3,652 3,651
Net unrealized investment gains (losses) (1,039) 7,083
Accumulated deficit (9,693) (10,682)
Treasury stock, at cost (4,000 shares in
1996 and 1995) (8) (8)
------- -------
(5,668) 1,428
------- -------
Total Liabilities and Shareholders' Equity $ 595,875 $ 574,486
======= =======
See accompanying notes to consolidated financial statements
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INVESTORS INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(Dollars in thousands, except per share data)
1996 1995
-------- --------
Revenue:
Net investment income $ 3,651 $ 5,713
Realized investment gains (losses) 4,029 555
Premium and policy fees 669 934
Commission and other income 614 663
------- -------
Total revenue 8,963 7,865
------- -------
Benefits and Expenses:
Current and future insurance benefits 308 590
Interest on investment contracts 2,731 4,787
Underwriting, acquisition and insurance expenses 4,733 2,328
Other expenses 460 461
------- -------
Total benefits and expenses 8,232 8,166
------- -------
Income (loss) before income taxes 731 (301)
Income taxes (259) (1)
------- -------
Net income (loss) $ 990 $ (300)
======= =======
Net Income (loss) per share of common stock $ 0.35 $ (0.11)
======= =======
Weighted average number of shares outstanding 2,848,258 2,765,839
========= =========
See accompanying notes to consolidated financial statements
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INVESTORS INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995
(Dollars in thousands, except per share data)
1996 1995
-------- --------
Revenue:
Net investment income $ 1,430 $ 2,812
Realized investment gains (losses) 150 408
Premium and policy fees 324 604
Commission and other income 350 410
------- -------
Total revenue 2,254 4,234
------- -------
Benefits and Expenses:
Current and future insurance benefits 60 358
Interest on investment contracts 931 2,398
Underwriting, acquisition and insurance expenses 1,221 1,249
Other expenses 230 231
------- -------
Total benefits and expenses 2,442 4,236
------- -------
Income (loss) before income taxes (188) (2)
Income taxes (264) (26)
------- -------
Net income (loss) $ 76 $ 24
======= =======
Net Income (loss) per share of common stock $ 0.03 $ 0.01
======= =======
Weighted average number of shares outstanding 2,867,022 3,004,327
========= =========
See accompanying notes to consolidated financial statements
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INVESTORS INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995
(Dollars in thousands)
1996 1995
-------- --------
Cash flows from operating activities:
Net income (loss) $ 990 $ (300)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Net accretion of fixed maturities (167) (322)
Realized investment loss (gains) (4,007) (555)
Amortization of costs in excess of net assets
of businesses acquired 154 147
Amortization of deferred acquisition costs 2,645 763
Amortization of unearned ceding commissions (271) (368)
Deferral of unearned ceding commission 8,339 7,734
Deferral of acquisition costs (3,552) (6,782)
Change in assets and liabilities:
Increase in investment contract
benefits recoverable (95,470) (8,521)
Increase in insurance reserves and
interest on investment contracts 16,087 14,412
Increase in other assets, net (1,850) (1,116)
Increase (decrease) in other liabilities, net (5,323) (748)
------- -------
Net cash provided by (used in)
operating activities (82,425) 4,344
------- -------
Cash flows from investing activities:
Investment repayments:
Mortgage loans 177 43
Policy loans, net 15 (13)
Investments sold:
Fixed maturities, available for sale 88,588 49,537
Equity securities, available for sale 328 375
Investments in:
Fixed maturities, available for sale (6,828) (46,493)
Equity securities, available for sale - (328)
Short-term investments, net 32 (51)
------- -------
Net cash provided by investing activities 82,312 3,070
------- -------
See accompanying notes to consolidated financial statements
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INVESTORS INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (continued)
FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995
(Dollars in thousands)
1996 1995
-------- --------
Cash flows from financing activities:
Investment contract deposits $ 35,705 $ 67,889
Investment contract withdrawals (29,101) (22,926)
Reinsurance contract deposits (35,166) (61,588)
Withdrawals recovered from reinsurance 22,979 14,144
Treasury stock purchased - (8)
Common stock issued 37 1
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Net cash provided by (used in)
financing activities (5,546) (2,488)
------- -------
Net increase (decrease) in cash
and cash equivalents (5,659) 4,925
Cash and cash equivalents, beginning of year 11,372 3,530
------- -------
Cash and cash equivalents, end of year $ 5,713 $ 8,455
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest - 320
Income taxes 1,000 95
see accompanying notes to consolidated financial statements
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INVESTORS INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Management Representation
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments (consisting only of normal recurring items) necessary
to present fairly the consolidated financial position of Investors Insurance
Group, Inc. ("Company") and its subsidiaries, primarily Investors Insurance
Corporation ("Investors"), as of June 30, 1996, and the results of operations
for the six month and three month periods ended June 30, 1996 and 1995, and the
cash flow for the six month periods ended June 30, 1996 and 1995.
2. Reporting Standards
Prior to 1996, the Company filed its financial statements in compliance with
Regulation S-X of the Securities and Exchange Commission ("SEC"). Recognizing
that the requirements of Regulation S-X are unnecessarily burdensome for small
businesses, the SEC has provided alternative, and less expensive, financial
reporting standards under its Regulation S-B. Beginning in 1996 with this Form
10-QSB, the Company has elected to report under the SEC's Regulation S-B.
3. Regulatory Issues
Based on the amount of business Investors writes in California (approximately
28% of its total in 1996), that State considers Investors to be "commercially
domiciled" in California and regulates it accordingly. In order to continue to
write new business in California, Investors has agreed to arrange a capital
infusion that would raise its statutory capital and surplus to $11 million by
September 30, 1996 (as extended; this extension is contingent upon an extension
of the agreement with AAM Capital Partners, L. P. ("AAM") and AAM filing a list
of its coinvestors by August 30, 1995, see Note 5 below). The Arizona
Department of Insurance ("Arizona") has raised questions about Investors'
continuing ability to write new business at, or above, its 1995 level based on
its current ratio of policy liabilities to statutory capital and surplus. In
1996, Investors wrote approximately 27% of its new business in Arizona.
Investors expected to address the concerns expressed by California and Arizona
by obtaining additional capital from AAM (see Note 5 below). Currently, the
Company is negotiating an extension of the AAM agreement, as well as seeking
capital from other sources. As a backup plan, Investors is in the process of
negotiating an amendment to its coinsurance agreement to reinsure all its
unreinsured annuities (account value of approximately $64.5 million). While
the Investors is confident this approach would allay the concerns expressed by
Arizona, any plan would have to be approved by both California and Delaware.
4. Reinsurance
As a result of the continued concern of the Delaware Department of Insurance
("Delaware") about Investors' ratio of statutory policy liabilities to capital
and surplus, in early 1996, Investors entered into an agreement to cede a block
of annuity policies with statutory policy reserves of $76,306,929 to New Era
Life Insurance Company ("New Era"). This reinsurance agreement provides for an
initial coinsurance period (up to five years) followed by full assumption of
the specified policies. Investors will continue to service these policies
through December 31, 2000. Investors will pay New Era coinsurance allowances
of 1% of the average statutory policy liability for the first 5 years.
Thereafter, New Era will pay Investors 2% of the average statutory policy for
the following five years. The profit related to these allowances will be
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deferred until its realization is assured.
Since under its terms, this agreement became effective on December 31, 1995
and, based on Delaware's approval, this transaction was reflected in Investors'
1995 statutory statement and, as a result, Investors' ratio of statutory policy
liabilities to capital and surplus was reduced below Delaware's target. The
Company expects this to help allay Delaware's concerns. This transaction was
closed on March 1, 1996 and, therefore, it is reflected as of that date in the
accompanying financial statements. The amounts of the policy liabilities and
the related settlement values have been adjusted to reflect the balances as
they existed as of the closing.
Under the terms of the New Era reinsurance agreement, Investors elected to
transfer cash rather than securities to New Era. Therefore, in January and
February of 1996 Investors sold the securities supporting this block of
business and realized an investment gain of approximately $3,697,000 million.
Under generally accepted accounting principles, this gain accelerates
the amortization of the deferred acquisition costs related to this block of
business by approximately $2,254,000 million, leaving approximately $1,443,000
million as a contribution to profits for the first quarter of 1996.
In addition to Delaware's approval, Investors had to obtain approval for the
New Era reinsurance agreement from the California Department of Insurance
("California"). California approved the coinsurance portion on the New Era
agreement, but wanted additional time to review the assumption portion of the
agreement.
5. Preferred Stock
To address the concerns expressed by California and Arizona (see Note 3),
the Company signed a definitive agreement on April 29, 1996 with AAM for the
sale of up to $7,000,000 of convertible voting preferred stock. While this
agreement was scheduled to close on July 30, 1996, AAM was unable to fulfill
certain obligations under the agreement and the agreement was terminated. Both
AAM and the Company have expressed interest in extending the agreement,
however, there can be no assurance that this extension will become effective.
6. Stock Options
During the six month period ended June 30, 1996, the Company issued 33,100
share options under its Agent Plan at market ($0.94 to $1.00 per share). Since
the Company's agents are not employees, under SFAS #123 which became effective
on January 1, 1996, the Company has recorded the fair value of these share
options ($9,061) as an expense. If SFAS #123 had been effective in 1995, the
fair value of the 56,900 share options issued through June 30, 1995 ($26,856)
would have been recorded as an expense.
If unexercised, these options expire after two years.
<PAGE> 11
Item 2: Management Discussion and Analysis
General
The following discussion and analysis for Investors Insurance Group, Inc.
("Company") and its wholly-owned subsidiaries, primarily Investors Insurance
Corporation ("Investors"), updates the discussion and analysis contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995 and
should be read in conjunction with that report and the Notes to the June 30,
1996 financial statements presented under Item 1.
Results of Operations
As described in Note 4 to the accompanying financial statements, on March 1,
1996, Investors closed a large reinsurance agreement with New Era Life
Insurance Company ("New Era"). This transaction substantially accounts for the
significant changes in the Company's balance sheet. Specifically, Investors
transferred approximately $78,688,000 in cash (which has previously been
invested in Fixed maturities, available for sale) and added $82,974,000 to
Investment contracts recoverable and $4,286,000 to Unearned ceding commission.
This transactions also significantly effected the Company's statement of
operations. The increase in Realized investment gains is substantially due to
the disposal of the investments supporting the policies ceded to New Era Life
Insurance Company ("New Era"). The realization of investment gains and losses
changes the pattern of expected future profits which forms the basis for the
amortization of deferred acquisition costs. As a result of this gain, the
amortization of deferred acquisition costs increased by approximately
$2,254,000 and this increase substantially accounts for the change in
Underwriting, acquisition and insurance expenses between 1995 and 1996.
The assets related to the reinsurance agreement were transferred to New Era and
both the related income (Net investment income) and expense (Interest on
investment contracts) have declined from the levels reflected in 1995. Since
this transaction did not occur until March 1, 1996 this decline reflects the
effect of this transfer since that point.
As more fully described in the Company's 1995 From 10K, the calculation of
income tax expense results in a deferred tax asset which is fully reserved. As
a result, the income tax expense reflected in the Company's financial
statements is its estimate of the amount it expects to pay in the current
period. The income tax benefit reflected in the second quarter of 1996 is
substantially all the result of the difference between the prior estimate of
the refund resulting from the carryback of the loss from 1995 and the actual
amount calculated in the preparation of the Company's 1995 tax return.
In addition to the reinsurance transaction, the value of the Company's
investments changed significantly to due to changes in the market interest
rates. Specifically, the excess of the carrying value of investments carried
at market over the related cost of these investments declined from $7,595,000
at December 31, 1995 to ($1,016,000) at June 30, 1996. This change caused an
increase of $4,919,000 in Deferred acquisitions costs and $4,430,000 in
Unearned ceding commissions and a decrease of $8,122,000 in the Net unrealized
investment gains and (losses) component of shareholders equity.
<PAGE> 12
Liquidity and Capital Resources
At the request of AAM Capital Partners, L. P. ("AAM"), the closing on its
purchase of the Company's Preferred Stock (see Note 5 to the accompanying
financial statements) was extended to July 30, 1996 to allow it additional time
arrange its financing. However, AAM was unable to fulfill certain obligations
under the agreement and the agreement was terminated. Both AAM and the
Company have expressed interest in extending the agreement, however, there can
be no assurance that this extension will become effective.
Together, California and Arizona account for 55% of Investors new business in
1996. Based on Investors statutory capital, both states have expressed concern
about Investors ability to continue writing in those states. The Company
expects to address those concern by obtaining additional capital from AAM or
other sources, however there can be no assurance that this can be arranged in a
timely or economical manner. As a backup plan, Investors is in the process of
negotiating an amendment to its coinsurance agreement to reinsure all its
unreinsured annuities (account value of approximately $64.5 million). While
the Investors is confident this approach would allay the concerns expressed by
Arizona, any plan would have to be approved by both California and Delaware.
Caution on Forward-Looking Statements
The 1995 Private Securities Litigation Reform Act provides issuers the
opportunity to make cautionary statements regarding forward-looking statements.
Accordingly, any forward-looking statement contained herein or in any other
oral or written statement by the Company or any of its officers, director or
employees is qualified by the fact that actual results of the Company may
differ materially from such statement due to the following important factors,
among other risks and uncertainties inherent in the Company's business:
1. Prevailing interest rate levels, including any continuation of the
current relatively flat yield curve for short-term investments, which
may affect the ability of the Company to sell its products, the market
value of the Company's investments or the lapse rate of the Company's
policies, notwithstanding product design features intentioned to
enhance persistency of the Company's products.
2. Changes in the federal income tax laws and regulations which may affect
the relative tax advantage of the Company's products.
3. Changes in the regulation of financial services, including bank sales
of insurance products, which may affect the competitive environment for
the Company's products.
4. Regulatory requirements from any of the states in which Investors is
authorized to sell insurance.
5. The parent company's access to sufficient funds to pay its obligations
as they become due.
<PAGE> 13
PART II: OTHER INFORMATION
Item 1: Legal Proceedings
No changes to report
Item 2: Changes in Securities
No changes to report
Item 3: Defaults on Senior Securities
None
Item 4: Submissions of Matters to a Vote of Security Holders
None
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8-K
The Company filed the following Form 8-K during the second
quarter of 1996:
April 29, 1996 Agreement to sell preferred stock to AAM Capital
Partners, L. P.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Investors Insurance Group, Inc.
(Registrant)
Date: August 8, 1996 /s/ Melvin C. Parker
______________________________
Melvin C. Parker
President, Chief Executive
Officer and Chief Financial
Officer
<TABLE> <S> <C>
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<DEBT-HELD-FOR-SALE> 62,954
<DEBT-CARRYING-VALUE> 9,502
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