<PAGE>
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 March 31, 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 March 31, 1996, 2,763,782 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 - March 31, 1996
and December 31, 1995 3
Item 1: Consolidated Statements of Operations - three months
ended March 31, 1996 and 1995 5
Item 1: Consolidated Statements of Cash Flow - three months
ended March 31, 1996 and 1995 6
Item 1: Notes to Consolidated Financial Statements 8
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
MARCH 31, 1996 AND DECEMBER 31, 1995
(Dollars in thousands)
ASSETS 1996 1995
-------- --------
(unaudited)
Investments:
Fixed maturities held to maturity, at
amortized cost (market $9,926 in 1996
and $10,556 in 1995) $ 9,503 $ 9,504
Securities available for sale:
Fixed maturities, at market (amortized
cost $65,145 in 1996 and $141,474 in 1995) 65,394 149,231
Equity securities, at market (cost $361 in
1996 and $339 in 1995) 401 366
Short-term investments 320 356
Mortgage loans on real estate 545 564
Policy loans 593 598
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Total 76,756 160,619
Cash and cash equivalents 8,615 11,372
Investment in common stock of affiliate 768 803
Accrued investment income 602 1,090
Deferred acquisition costs 45,296 42,468
Investment contract benefits recoverable 446,438 351,489
Reinsurance benefits recoverable 2,864 2,438
Cost in excess of net assets of businesses
acquired (less accumulated amortization
of $1,083 in 1996 and $1,014 in 1995) 3,596 3,666
Other assets 525 541
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Total Assets $ 585,460 $ 574,486
======= =======
See accompanying notes to consolidated financial statements
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INVESTORS INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
MARCH 31, 1996 AND DECEMBER 31, 1995
(Dollars in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
-------- --------
(unaudited)
Liabilities:
Future policy benefits and claims:
Investment contracts $ 521,098 $ 511,315
Life insurance reserves 7,730 7,189
Accident & health claim reserves 4 5
Unearned ceding commission (including
deferred gross profits of $8,801 in
1996 and $7,031 in 1995) 47,313 38,062
Note payable 8,000 8,000
Amounts due to coinsurer 3,090 5,998
Accrued expenses 419 250
Other liabilities 2,455 2,239
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Total Liabilities 590,109 573,058
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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 2,767,782 in
1996 and 2,766,982 in 1995; outstanding
2,763,782 in 1996 and 2,762,982 in 1995 1,384 1,384
Additional paid-in capital 3,652 3,651
Net unrealized investment gains (losses) 91 7,083
Accumulated deficit (9,768) (10,682)
Treasury stock, at cost (4,000 shares in
1996 and 1995) (8) (8)
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(4,649) 1,428
------- -------
Total Liabilities and Shareholders' Equity $ 585,460 $ 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 THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(Dollars in thousands, except per share data)
1996 1995
-------- --------
Revenue:
Net investment income $ 2,221 $ 2,900
Realized investment gains (losses) 3,879 147
Premium and policy fees 345 330
Commission and other income 264 253
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Total revenue 6,709 3,630
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Benefits and Expenses:
Current and future insurance benefits 248 232
Interest on investment contracts 1,800 2,389
Underwriting, acquisition and insurance expenses 3,512 1,079
Other expenses 231 231
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Total benefits and expenses 5,791 3,931
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Income (loss) before income taxes 918 (299)
Income taxes 5 25
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Net income (loss) $ 913 $ (324)
======= =======
Net Income (loss) per share of common stock $ 0.32 $ (0.12)
======= =======
Weighted average number of shares outstanding 2,818,935 2,765,982
========= =========
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 MARCH 31, 1996 AND 1995
(Dollars in thousands)
1996 1995
-------- --------
Cash flows from operating activities:
Net income (loss) $ 913 $ (324)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Net accretion of fixed maturities (91) (188)
Realized investment loss (gains) (3,879) (147)
Amortization of costs in excess of net assets
of businesses acquired 83 77
Amortization of deferred acquisition costs 2,505 367
Amortization of unearned ceding commissions (105) (108)
Deferral of unearned ceding commission 6,289 4,471
Deferral of acquisition costs (1,749) (4,070)
Change in assets and liabilities:
Increase in investment contract
benefits recoverable (88,626) (3,874)
Increase in insurance reserves and
interest on investment contracts 7,835 6,561
Increase in other assets, net 63 (403)
Increase (decrease) in other liabilities, net (2,520) (865)
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Net cash provided by (used in)
operating activities (79,282) 1,499
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Cash flows from investing activities:
Investment repayments:
Mortgage loans 19 22
Policy loans, net 5 2
Investments sold:
Fixed maturities, available for sale 86,544 48,130
Investments in:
Fixed maturities, available for sale (6,243) (14,475)
Short-term investments, net 36 (19)
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Net cash provided by investing activities 80,361 33,660
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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 MARCH 31, 1996 AND 1995
(Dollars in thousands)
1996 1995
-------- --------
Cash flows from financing activities:
Investment contract deposits $ 17,735 $ 40,190
Investment contract withdrawals (15,247) (10,097)
Reinsurance contract deposits (17,463) (35,682)
Withdrawals recovered from reinsurance 11,139 6,069
Treasury stock purchased - (8)
Common stock issued - 1
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Net cash provided by (used in)
financing activities (3,836) 473
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Net increase (decrease) in cash
and cash equivalents (2,757) 35,631
Cash and cash equivalents, beginning of year 11,372 3,530
------- -------
Cash and cash equivalents, end of year $ 8,615 $ 39,161
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest - 160
Income taxes - -
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 March 31, 1996, and the results of operations
for the three month periods ended March 31, 1996 and 1995, and the cash flow
for the three months ended March 31, 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
Because of the amount of business Investors writes in California (approximately
33% of its total in 1995), that State considers Investors to be "commercially
domiciled" in California and regulates it accordingly. Investors agreed to
arrange a capital infusion that would raise its statutory capital and surplus
to $11 million by July 31, 1996 (as extended) in order to continue to write new
business in California. 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 statutory capital and surplus.
In 1995, Investors wrote approximately 24% of its new business in Arizona.
Prior to the scheduled July 30, 1996 closing of the Preferred Stock arrangement
discussed below (see Note 5), Investors will take any interim steps necessary
to allay the concerns expressed by these states.
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 deferred until its realization is assured.
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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 satisfy both California and Arizona, the Company signed a definitive
agreement on April 29, 1996 with AAM Capital Partners, L. P. ("AAM") for the
sale of up to $7,000,000 of convertible voting preferred stock (70,000 shares).
This infusion of capital will be used to recapitalize Investors which will then
be able to retain a larger portion of its profitable annuity business that is
currently being ceded to a reinsurer. AAM has in-depth expertise of insurance
operations and plans to help IIG utilize its marketing expertise in a number of
new and expanding markets. AAM is an equity investment fund which participates
in investments in the insurance industry.
Under the terms of the agreement, which (as extended) is scheduled to close on
July 30, 1996, IIG's Board of Directors will expand to seven members. As
separate groups, the owners of the preferred and common shares will each
separately elect three directors. The remaining director will be elected by
all the shareholders. Each preferred share will be convertible at any time
into 100 shares of common stock or, after December 31, 2001, redeemable for
$100 per share, plus accrued dividends at the option of the holder. In
conjunction with this agreement, IIG will exchange 250,000 restricted shares of
its common stock for all of IIG's currently outstanding warrants to purchase
1,000,000 shares of common stock. These warrants are currently held by Chester
County Fund, Inc., IIG's largest shareholder.
In addition to the normal and customary contingencies, final closing of the
agreement is subject to regulatory approval and the full subscription of AAM's
co-investor group.
If this agreement closes as currently scheduled, the additional capital should
satisfy the conditions set by both California and Arizona and reduce the level
of regulatory scrutiny from Delaware.
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6. Stock Options
During the quarter ended March 31, 1996, the Company issued 15,600 share
options under its Agent Plan at market ($0.94 to $1.00 per share). If
unexercised, the 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 March 31,
1996 financial statements reflected 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 for only one month.
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 $86,000 at March 31, 1996. This change caused an
increase of $4,301,000 in Deferred acquisitions costs and $3,783,000 in
Unearned ceding commissions and a decrease of $6,991,000 in the Net unrealized
investment gains and (losses) component of shareholders equity.
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
to arrange its financing.
<PAGE> 12
The California Department of Insurance continues to express concern over
Investors' level of statutory capital but has agreed to extend its agreement
with Investors regarding additional capital until July 31, 1996. The Arizona
Department of Insurance continues to closely monitor Investors progress and
may require some interim steps such as additional deposits or special
reinsurance arrangements prior to the scheduled closing of the Preferred Stock
sale.
The Company believes the funds resulting form the sale of the Preferred Stock
should be adequate to assure that both the Company and Investors can continue
operating in the normal course of business. If the agreement fails to close as
scheduled, management will develop alternative plans to obtain the needed
funds. However, there can be no assurance that this could be done in a timely
or economical manner.
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 of any 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.
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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 its 1995 Form 10-K on June 11, 1996. The Company filed the
following Forms 8-K during the first and second quarter of 1996:
February 8, 1996 Cancellation of agreement to sell all the
outstanding shares of Investors Marketing
Group, Inc. and Investors Insurance
Corporation.
February 13, 1996 Selection of BDO Seidman LLP as the Company's
primary accountant.
March 5, 1996 Reinsurance agreement with New Era Life
Insurance Company.
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
authorize.
Investors Insurance Group, Inc.
(Registrant)
Date: July 1, 1996 /s/ Melvin C. Parker
______________________________
Melvin C. Parker
President, Chief Executive Officer
and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 65,394
<DEBT-CARRYING-VALUE> 9,503
<DEBT-MARKET-VALUE> 9,926
<EQUITIES> 401
<MORTGAGE> 545
<REAL-ESTATE> 0
<TOTAL-INVEST> 76,756
<CASH> 8,615
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 45,296
<TOTAL-ASSETS> 585,460
<POLICY-LOSSES> 528,828
<UNEARNED-PREMIUMS> 4
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<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 8,000
0
0
<COMMON> 1,384
<OTHER-SE> (6,033)
<TOTAL-LIABILITY-AND-EQUITY> 585,460
345
<INVESTMENT-INCOME> 2,221
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<OTHER-INCOME> 264
<BENEFITS> 248
<UNDERWRITING-AMORTIZATION> 2,490
<UNDERWRITING-OTHER> 1,022
<INCOME-PRETAX> 918
<INCOME-TAX> 5
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