<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 September 30, 1997
[ ] 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)
(561) 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 November 1, 1997, 2,836,582 shares of the issuer's common stock were
outstanding.
<PAGE> 2
Investors Insurance Group, Inc.
FORM 10-QSB
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION Page
Item 1: Consolidated Balance Sheets - September 30, 1997
and December 31, 1996 3
Item 1: Consolidated Statements of Operations - Nine months
ended September 30, 1997 and 1996 5
Item 1: Consolidated Statements of Operations - three months
ended September 30, 1997 and 1996 6
Item 1: Consolidated Statements of Cash Flows - year to date
periods ended September 30, 1997 and 1996 7
Item 1: Notes to Consolidated Financial Statements 9
Item 2: Management's Discussion and Analysis 14
Part II. OTHER INFORMATION
Item 1: Legal Proceedings 19
Item 2: Changes in Securities 20
Item 3: Default Upon Senior Securities 20
Item 4: Submission of Matters to a Vote of Security Holders 20
Item 5: Other Information 20
Item 6: Exhibits and Reports on Form 8-K 20
SIGNATURES 21
<PAGE> 3
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
INVESTORS INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and December 31, 1996
(Dollars in thousands)
ASSETS 1997 1996
-------- --------
(unaudited)
Investments:
Fixed maturities held to maturity, at
amortized cost (market $8,889 in 1997
and $8,731 in 1996) $ 8,198 $ 8,200
Securities available for sale:
Fixed maturities, at market (amortized
cost $48,222 in 1997 and $57,309 in 1996) 48,350 57,075
Equity securities, at market (cost $11 in 1996) - 22
Short-term investments 265 305
Mortgage loans on real estate 298 365
Policy loans 558 522
------- -------
Total 57,669 66,489
Cash and cash equivalents 5,926 6,801
Investment in common stock of affiliate,
at market (cost $992 in 1997 and 1996) 1,321 638
Accrued investment income 477 451
Deferred acquisition costs 39,333 46,760
Reinsurance benefits receivable 2,199 -
Investment contract benefits recoverable 400,634 483,378
Reinsurance benefits recoverable 5,489 4,740
Cost in excess of net assets of business
acquired (less accumulated amortization
of $1,504 in 1997 and $1,291 in 1996) 3,181 3,389
Income tax recoverable 165 765
Other assets 275 303
------- -------
Total Assets $ 516,669 $ 613,714
======= =======
See accompanying notes to consolidated financial statements.
<PAGE> 4
INVESTORS INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
September 30, 1997 and December 31, 1996
(Dollars in thousands)
LIABILITIES AND CAPITAL DEFICIT 1997 1996
-------- --------
(unaudited)
Liabilities:
Future policy benefits and claims:
Investment contracts $ 456,288 $ 547,184
Life insurance reserves 10,405 9,666
Accident & health claim reserves 30 29
Unearned ceding commission (including
deferred gross profits of $7,814 in
1997 and $9,154 in 1996) 42,404 50,210
Note payable 8,000 8,000
Amounts due to coinsurer 47 1,173
Accrued expenses 1,044 875
Other liabilities 2,091 2,411
------- -------
Total Liabilities 520,309 619,548
------- -------
Commitments & Contingencies
Capital Deficit:
Preferred Stock, no par,
authorized 20,000,000 shares, none issued - -
Common Stock, $.50 par value; authorized
30,000,000 shares; issued 2,840,582 in
1997 and 2,840,082 in 1996; outstanding
2,836,582 in 1997 and 2,836,082 in 1996 1,420 1,420
Additional paid-in capital 3,656 3,656
Net unrealized investment gains (losses) 465 (586)
Accumulated deficit (9,173) (10,316)
Treasury stock, at cost (4,000 shares in
1997 and 1996) (8) (8)
------- -------
(3,640) (5,834)
------- -------
Total Liabilities and Capital Deficit $ 516,669 $ 613,714
======= =======
See accompanying notes to consolidated financial statements.
<PAGE> 5
INVESTORS INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
For the Nine Months Ended September 30, 1997 AND 1996
(Dollars in thousands, except per share data)
1997 1996
-------- --------
Revenue:
Net investment income $ 3,683 $ 5,073
Realized investment gains 524 4,017
Premium and policy fees 853 906
Commission and other income 2,424 1,466
------- -------
Total revenue 7,484 11,462
------- -------
Benefits and Expenses:
Current and future insurance benefits 289 360
Interest on investment contracts 2,319 4,090
Underwriting, acquisition and insurance expenses 3,519 5,897
Other expenses 373 693
------- -------
Total benefits and expenses 6,500 11,040
------- -------
Income before income tax benefit 984 422
Income tax benefit (159) (270)
------- -------
Net income $ 1,143 $ 692
======= =======
Net Income per share of common stock $ 0.40 $ 0.24
======= =======
Weighted average number of shares outstanding 2,836,412 2,836,548
========= =========
See accompanying notes to consolidated financial statements.
<PAGE> 6
INVESTORS INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
For the Three Months Ended September 30, 1997 AND 1996
(Dollars in thousands, except per share data)
1997 1996
-------- --------
Revenue:
Net investment income $ 1,230 $ 1,422
Realized investment gains (losses) 513 (12)
Premium and policy fees 226 237
Commission and other income 734 852
------- -------
Total revenue 2,703 2,499
------- -------
Benefits and Expenses:
Current and future insurance benefits (15) 52
Interest on investment contracts 722 1,359
Underwriting, acquisition and insurance expenses 1,310 1,164
Other expenses 71 232
------- -------
Total benefits and expenses 2,088 2,807
------- -------
Income (loss) before income tax benefit 615 (308)
Income tax benefit (110) (11)
------- -------
Net income $ 725 $ (297)
======= =======
Net Income per share of common stock $ 0.26 $ (0.10)
======= =======
Weighted average number of shares outstanding 2,836,482 2,836,082
========= =========
See accompanying notes to consolidated financial statements.
<PAGE> 7
INVESTORS INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
For the Year to Date Periods Ended September 30, 1997 AND 1996
(Dollars in thousands)
1997 1996
-------- --------
Cash flows from operating activities:
Net income $ 1,143 $ 692
Adjustments to reconcile net income
to net cash used in operating activities:
Net accretion of fixed maturities (178) (240)
Realized investment gains (524) (3,995)
Amortization of costs in excess of net assets
of business acquired 212 224
Amortization of deferred acquisition costs 1,352 2,819
Amortization of unearned ceding commissions (1,449) (933)
Ceding commission recognized upon assumption (595) -
Deferral of unearned ceding commission 2,260 9,887
Deferral of acquisition costs (1,932) (4,906)
Change in assets and liabilities:
Decrease (increase) in investment contract
benefits recoverable 8,940 (102,151)
Increase (decrease) in insurance reserves and
interest on investment contracts (7,573) 24,105
Increase in other assets, net (152) (2,117)
Decrease in other liabilities, net (3,470) (4,353)
------- -------
Net cash used in
operating activities (1,966) (80,968)
------- -------
Cash flows from investing activities:
Investment repayments:
Mortgage loans 67 189
Policy loans, net (36) 29
Investments sold:
Fixed maturities, available for sale 11,111 88,656
Equity securities, available for sale 22 328
Short-term investments, net 40 31
Investments in:
Fixed maturities, available for sale (1,333) (6,828)
------- -------
Net cash provided by investing activities 9,871 82,405
------- -------
See accompanying notes to consolidated financial statements.
<PAGE> 8
INVESTORS INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (continued)
For the Year to Date Periods Ended September 30, 1997 AND 1996
(Dollars in thousands)
1997 1996
-------- --------
Cash flows from financing activities:
Investment contract deposits $ 21,737 $ 49,771
Investment contract withdrawals (55,337) (43,545)
Reinsurance contract deposits (23,145) (48,900)
Withdrawals recovered from reinsurance 47,966 35,265
Common stock issued - 41
------- -------
Net cash used in financing activities (8,779) (7,368)
------- -------
Net decrease in cash and cash equivalents (874) (5,931)
Cash and cash equivalents, beginning of year 6,801 11,372
------- -------
Cash and cash equivalents, end
of year to date period $ 5,927 $ 5,441
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest - -
Income taxes $ (750) $ 1,000
See accompanying notes to consolidated financial statements.
<PAGE> 9
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, IIC, Inc., Investors Insurance
Corporation ("Investors") and Investors Marketing Group, Inc. ("IMG"), as of
September 30, 1997, and the results of operations for the nine and three month
periods ended September 30, 1997 and 1996, and the cash flows for the year to
date periods ended September 30, 1997 and 1996.
2. Reporting Standards
The Company files its financial statements in compliance with Regulation
S-B of the Securities and Exchange Commission.
3. Regulatory Issues
As a result of its on-going discussion with the Arizona Insurance Department
("Arizona"), Investors amended its quota share reinsurance contract with
Republic Vanguard Life Insurance Company ("RVL") to cede all its current and
future Arizona business to RVL on a 100% quota share basis. Under the terms
of this amendment, which was effective August 1, 1997, Investors transferred
statutory reserves of approximately $8.5 million. The impact of this
transaction was to increase Investors' statutory capital and surplus by
approximately $254,000 and to increase the Company's GAAP basis income by
approximately $214,000 ("Realized investment gains", approximately $513,000,
result from the disposal of the investments supporting the ceded policies.
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 $299,000 and this increase is
reflected in "Underwriting, acquisition and insurance expenses"). This
transaction also increased "Investment contract benefits recoverable"
approximately $9,700,000 and "Unearned ceding commissions" approximately
$701,000.
As part of its agreement with Arizona, Investors further agreed to reinsure
either (a) all its current and prospective business on a 100% quota share
basis or (b) all its current and prospective Arizona business on a full
assumption basis upon the earliest of the following events:
1. Investors' statutory capital and surplus falls below $4.5 million, or
2. Investors' Risk Based Capital falls to less than 225% of its Authorized
Control Level, or
3. Investors' ratio of policyholder liabilities to statutory capital and
surplus exceeds 16:1, or
4. Investors' statutory capital and surplus is less than $10 million on
December 15, 1997.
<PAGE> 10
Through September 30, 1997, 40% of Investors' new business was written in
Arizona. To meet the conditions imposed by this agreement, the Company is
currently seeking a buyer for Investors. However, the actions of the creditor
of the IIG Note (see Note 6) have made it very difficult for the Company to
dispose of Investors.
4. Reinsurance
Under the provisions of the reinsurance agreement with New Era Life Insurance
Company ("NEL"), NEL began to assume sole liability for the policies that were
ceded to it in 1996. As sole liability is assumed by NEL, the Company removes
its liability for Investment contracts, its related assets ("Investment
contract benefits recoverable" and "Deferred acquisition costs") and its
"Unearned ceding commissions" from its balance sheet and recognizes the related
profit portion of the "Unearned ceding commission" as "Commission and other
income". During the three months ended March 31, 1997 and September 30, 1997,
NEL assumed sole liability for investment contract liabilities of
approximately $48,983,000 and $29,797,000, respectively. This assumption
reduced both the Company's liability for Investment contracts and its
receivable for "Reinsurance benefits recoverable" by $48,983,000 on March 31,
1997 and an additional $29,861,000 on September 30, 1997. Further, it reduced
the Company's "Deferred acquisition costs" and "Unearned ceding commissions" by
$1,766,767 and $2,167,060, respectively, and increased its "Commission and
other income" by $400,293 as of March 31, 1997 and an additional $885,000,
$1,080,000 and $195,000, respectively, as of September 30, 1997.
The 1996 NEL reinsurance agreement significantly reduced Investors' ratio of
statutory liabilities to statutory capital and surplus. In recognition of its
improved statutory financial position, effective January 1, 1997, Investors
reduced its ceding rate under its quota share agreement from 100% to 60%
(however, see discussion in Note 3 on Arizona reinsurance).
5. Stock Options
The Agent's Stock Option Plan was not renewed by the Board in 1997 and no new
options have been granted. If unexercised, the outstanding options expire two
years after issue. During the nine month period ended September 30, 1997,
74,400 share options expired. There are currently 78,600 share options
outstanding under the Agent's Stock Option Plan.
In 1989, IIG issued warrants to purchase 1,000,000 shares of its common stock
at $2.00 per share. These warrants were not exercised and expired under their
terms on March 31, 1997.
6. Note Payable
In connection with its acquisition of IIC Inc., which owns all the outstanding
shares of Investors, IIG issued an $8,000,000 secured subordinated note
payable which was due March 31, 1997, with interest at 8% payable quarterly
(IIG Note).
<PAGE> 11
As a result of material misrepresentations by the seller, IIG has several
significant claims which, if sustained, should reduce the principal amount of
the IIG Note and result in a refund of previously paid interest. However,
these issues have not been settled. Until the spring of 1997, ownership of
the IIG Note had been in dispute. The ownership issues have been resolved and
negotiations are on-going while the creditor requests offers for its interest
in the IIG Note and "collateral". The ultimate settlement of the claims
against the IIG Note will not result in any additional liability for IIG and,
based on the terms of the IIG Note, IIG has recognized interest expense
through March 31, 1997. However, in recognition of its claims against the IIG
Note, IIG has withheld payment of interest since 1995.
Payment of the IIG Note principal was due on March 31, 1997 and is currently
in default. The creditor has filed a lawsuit seeking a judgment on the IIG
Note (The Honorable Donna Lee Williams, Insurance Commissioner of the State of
Delaware as Receiver of National Heritage Life Insurance Company v. Investors
Insurance Group, Inc.; U.S.D.C., M.D. Fla 97-773-CV-ORI-19) and the Company is
vigorously defending this action and is asserting counterclaims against the
creditor. Delaware has filed motions to dismiss many of the Company's
defenses and counterclaims for various jurisdictional reasons. Management
believes the defenses are properly before the court and the motions will be
denied. However, the ultimate outcome of this case cannot be determined at
this time.
7. Condensed Financial Information of the Parent Company
As presented in the Parent company's financial statements below, the Parent
has depleted its liquid assets. Further, as discussed in the 1996 Form 10KSB,
it is unable to obtain additional funds from its subsidiaries. While the
Company is continuing to try to arrange financing for its on-going expenses,
there can be no assurance it will be able to do so.
<PAGE> 12
CONDENSED BALANCE SHEETS PARENT COMPANY
As of September 30, 1997
(in thousands)
ASSETS
Cash and cash equivalents $ -
Investments in affiliates and wholly-owned subsidiary 5,553
Other assets 66
------
Total assets $5,619
======
LIABILITIES AND CAPITAL DEFICIT
Liabilities:
Note payable $ 8,000
Accrued interest on note payable 960
Due to affiliates 180
Other liabilities 119
------
Total liabilities 9,259
------
Capital Deficit:
Common stock 1,420
Additional paid-in capital 3,656
Net unrealized investment losses 465
Accumulated deficit (9,173)
Treasury stock (8)
------
Total Capital Deficit (3,640)
------
Total Liabilities and Capital Deficit $ 5,619
======
<PAGE> 13
CONDENSED STATEMENTS OF OPERATIONS
PARENT COMPANY
For the Year to Date Period Ending September 30, 1997
(in thousands)
Revenue $ 235
------
Expenses:
General and administrative expenses 408
Interest expense 160
------
Total expenses 568
------
Loss before equity in net income
of subsidiaries and income taxes (333)
Equity in net income of subsidiaries 1,411
------
Loss before income taxes 1,078
Income tax benefit (65)
------
Net Income $1,143
======
CONDENSED STATEMENTS OF CASH FLOWS
PARENT COMPANY
For the Year to Date Period Ending September 30, 1997
(in thousands)
Cash flows from operating activities:
Net income $1,143
Adjustments to reconcile net income to net
cash used in operating activities:
Equity in net income of subsidiaries (1,411)
Realized investment gains (11)
Change in other assets and
other liabilities, net 185
-------
Net cash used in operating activities (94)
Cash from the sales of equity securities 22
-------
Net decrease in cash and cash equivalents (72)
Cash and cash equivalents, beginning of year 72
-------
Cash and cash equivalents as of September 30, 1997 $ -
=======
<PAGE> 14
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-KSB for the year ended December 31,
1996 and should be read in conjunction with that report and the Notes to the
September 30, 1997 financial statements presented under Item 1.
Results of Operations
The table below presents the annuity premium written in 1997 and 1996 (in
thousands):
Calendar 1997 1996
Quarter
1st $ 10,958 $ 18,325
2nd 7,778 19,138
3rd 3,220 14,169
-------- --------
Total $ 21,965 51,632
4th ======== 15,087
--------
Total $ 66,719
========
Management believes the decline in written premium is a reflection of the
current low interest rate environment and the marketing difficulties resulting
from the issues surrounding its agreement with the Arizona Insurance
Department ("Arizona") (see Note 3 to the financial statements and discussion
below) and the IIG Note (see Note 6 to the financial statements and discussion
below under "Liquidity and Capital Resources"). Despite these marketing
problems, the Company's operating results continue to be positive both for the
quarter and the year-to-date period. These positive results were primarily
due to an increase in reinsurance ceding commission income and realized
investment gains. The major transactions effecting the financial statements
impact several different line items. These transactions will be discussed
below together with their impacts; thereafter, the remaining significant
changes in the financial statements are discussed by line item.
As a result of its on-going discussion with Arizona, Investors amended its
quota share reinsurance contract with Republic Vanguard Life Insurance Company
("RVL") to cede all its current and future Arizona business to RVL on a quota
share basis. Under the terms of this amendment, which was effective August 1,
1997, Investors transferred statutory reserves of approximately $8.5 million.
The impact of this transaction was to increase Investors' statutory capital
and surplus by approximately $254,000 and to increase the Company's GAAP
basis income by approximately $214,000 (the "Realized investment gains",
approximately $513,000, result from the disposal of the investments supporting
the ceded policies. Realization of investment gains and losses changes the
pattern of expected future profits which forms the basis for the amortization
<PAGE> 15
of deferred acquisition costs. As a result of this gain, the amortization of
deferred acquisition costs increased by approximately $299,000 and this
increase is reflected in "Underwriting, acquisition and insurance expenses").
This transaction also increased "Investment contract benefits recoverable"
approximately $9,700,000 and "Unearned ceding commissions" approximately
$701,000.
As part of its agreement with Arizona, Investors further agreed to reinsure
either (a) all its current and prospective business on a quota share basis or
(b) all its current and prospective Arizona business on a full assumption
basis upon the earliest of the following events:
1. Investors' statutory capital and surplus falls below $4.5 million, or
2. Investors' Risk Based Capital falls to less than 225% of its
Authorized Control Level, or
3. Investors' ratio of policyholder liabilities to statutory capital and
surplus exceeds 16:1, or
4. Investors' statutory capital and surplus is less than $10 million on
December 15, 1997.
Through September 30, 1997, 40% of Investors' new business was written in
Arizona. To meet the conditions imposed by this agreement, the Company is
currently seeking a buyer for Investors. However, the actions of the creditor
of the IIG Note (see Note 6) have made it very difficult for the Company to
dispose of Investors.
As described in the Company's prior year financial statements, Investors
closed a large reinsurance agreement with New Era Life Insurance Company
("NEL") in 1996. This transaction substantially accounts for many of the
changes in the Company's Consolidated Statements of Operations. Specifically,
the 1996 "Realized investment gains" is substantially due to the disposal of
the investments supporting the ceded policies. 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 year to date
change in "Underwriting, acquisition and insurance expenses" between 1997 and
1996. Since the assets related to the reinsurance agreement were transferred
to NEL on March 1, 1996, both the related income ("Net investment income") and
expense ("Interest on investment contracts") have declined from the levels
reflected in 1996.
In 1997, NEL began to assume sole liability for the policies that were ceded
to it in 1996. As sole liability is assumed by NEL, the Company removes its
liability for Investment contracts, its related assets ("Investment contract
benefits recoverable" and "Deferred acquisition costs") and "Unearned ceding
commissions" from its balance sheet and recognizes the related profit portion
of the "Unearned ceding commission" as "Commission and other income". During
the three months ended March 31, 1997 and September 30, 1997, NEL assumed
sole liability for investment contract liabilities of approximately
$48,983,000 and $29,797,000, respectively. This assumption reduced both the
Company's liability for Investment contracts and its receivable for
"Reinsurance benefits recoverable" by $48,983,000 on March 31, 1997 and an
additional $29,861,000 on September 30, 1997. Further, it reduced the
Company's "Deferred acquisition costs" and "Unearned ceding commissions" by
$1,766,767 and $2,167,060 and increased its "Commission and other income" by
$400,293 as of March 31, 1997 and an additional $885,000, $1,080,000 and
$195,000, respectively, as of September 30, 1997.
<PAGE> 16
In addition to the effects of the major transactions discussed above, the 1997
year-to-date balance of "Commission and other income" increased approximately
$150,000 as a result of the new third-party administration revenues from the
Company's new venture in California. These revenues are spread fairly evenly
among the quarters. "Commission and other income" further increased
approximately $135,000 as a result of an acceleration in the amortization of
deferred ceding commissions. This acceleration reflects the combined impact
of higher levels of current and expected surrender rates.
The year-to-date reduction in "Underwriting, acquisition and insurance
expenses" is primarily the result of the high level of 1996 expenses related
to the NEL reinsurance transaction (see discussion above). Management has
attempted to reduce its current operating expenses and defer certain
promotional expenses until the issues surrounding the IIG Note are resolved.
As a result, the current operating expenses have generally been lower, except
for three items:
1. A third quarter expense of approximately $90,000 related to the
Arizona reinsurance agreement discussed above,
2. An acceleration in the amortization of deferred acquisitions costs
reflecting the combined impact of higher levels of current and
expected surrender rates, and
3. The change in the valuation allowance related to the recoverability
of the pre-paid NEL reinsurance allowances (decrease of
approximately $100,000 in the first quarter of 1997; increase of
$25,000 in the third quarter of 1997). This change reflects
changes in the Company's assumptions about prospective interest
rates.
The IIG Note was due on March 31, 1997. Since the IIG Note does not provide
for interest after maturity, no further interest has been recognized. The
reduction in "Other expenses" reflects this change.
The 1996 NEL reinsurance agreement significantly reduced Investors' ratio of
statutory liabilities to statutory capital and surplus. In recognition of its
improved statutory financial position, effective January 1, 1997, Investors
reduced its ceding rate under its quota share agreement from 100% to 60%
(however, see discussion above on Arizona reinsurance). As a result of the
lower ceding rate and the lower volume of new business, Investors now receives
more from its reinsurer for reimbursement of benefits than it pays on new
premium. The new asset line "Reinsurance benefits receivable" accompanies the
reduction in the liability "Amounts due to reinsurer".
As more fully described in the Company's 1996 Form 10KSB, the calculation of
income tax expense results in a deferred tax asset that 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 or recover for the
current period. The Company included Investors in its consolidated tax return
for the first time in 1996 and, as a result, it received partial tax benefits
related to the 1996 tax losses of the non-life companies. This benefit
(approximately $63,000) is reflected in the third quarter of 1997.
<PAGE> 17
Liquidity and Capital Resources
In connection with its acquisition of IIC Inc., which owns all the outstanding
shares of Investors, IIG issued an $8,000,000 secured subordinated note
payable which was due March 31, 1997, with interest at 8% payable quarterly
(IIG Note).
As a result of material misrepresentations by the seller, IIG has several
significant claims which, if sustained, should reduce the principal amount of
the IIG Note and result in a refund of previously paid interest. However,
these issues have not been settled. Until recently, ownership of the IIG Note
has been in dispute. Since the ownership issues were resolved, negotiations
have been deferred while creditor solicits valuation advice from outside
sources. The ultimate settlement of the claims against the IIG Note will not
result in any additional liability for IIG and, based on the terms of the IIG
Note, IIG has recognized interest expense through March 31, 1997. However, in
recognition of its claims against the IIG Note, IIG has withheld payment of
interest since 1995.
Payment of the IIG Note principal was due on March 31, 1997 and is currently
in default. The creditor has filed a lawsuit seeking foreclosure (The
Honorable Donna Lee Williams, Insurance Commissioner of the State of Delaware
as Receiver of National Heritage Life Insurance Company v. Investors Insurance
Group, Inc.; U.S.D.C., M.D. Fla 97-773-CV-ORI-19) and the Company has filed a
Motion to Dismiss this action. Delaware has filed motions to dismiss many of
the Company's defenses and counterclaims for various jurisdictional reasons.
Management believes the defenses are properly before the court and the motions
will be denied. However, the ultimate outcome of this case cannot be
determined at this time.
The Parent has depleted its liquid assets and, as discussed in the 1996 Form
10KSB, it is unable to obtain additional funds from its subsidiaries. While
it is attempting to arrange financing for its on-going expenses, there can be
no assurance it will be able to do so.
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,
directors 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.
<PAGE> 18
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> 19
PART II: OTHER INFORMATION
Item 1: Legal Proceedings
There existed a dispute between the Pennsylvania Department of Insurance, as
statutory liquidator of Corporate Life Insurance Company ("Pennsylvania"), and
the Delaware Department of Insurance, as rehabilitator and liquidator of
National Heritage Life Insurance Company ("Delaware") as to the ownership of
the Secured Subordinated Debenture ("IIG Note") issued in 1989 by Gemco
National, Inc. to Corporate Life Insurance Company in connection with the
purchase by Gemco of all of the outstanding shares of stock of IIC, Inc.,
Investors Insurance Corporation and Westchester Reinsurance, Ltd. To avoid
being subject to double liability, the Company filed a Complaint in Equity for
Interpleader with the Pennsylvania Commonwealth Court captioned Investors
Insurance Group, Inc. v. Insurance Commissioner of Pennsylvania Department of
Insurance and Insurance Commissioner of Delaware Department of Insurance, (518
MD 1995, PA Cmwlth Ct. 1995). On or about November 1, 1996, the Company filed
for an in junction restraining Delaware from foreclosing on the stock of
Investors Insurance Corporation. In April 1997, Pennsylvania ceded its
interest in the IIG Note to Delaware for an undisclosed amount of
consideration. The Pennsylvania Commonwealth Court then dismissed the action
without prejudice.
In connection with the above action, on March 14, 1996 Delaware filed a
Petition for Declaratory Judgment, Specific Performance and Injunctive Relief
against the Company in the case entitled, In The Matter of the Liquidation of
National Heritage Life Insurance Company, (CA. No. 13530. DE Ct, Chancery
1996). Delaware requested the Court to enter a Declaratory Judgment that it
(Delaware) is the owner of the IIG Note and, as such, is entitled to receipt
of interest payments being held in escrow, and is entitled to have the IIG
Note registered in its (Delaware's) name. The action also requested the Court
to declare that the Company does not have any claims to offset the principal
amount of the IIG Note and further seeks indemnification from the Company.
In June of 1997, the Court dismissed the petition for lack of jurisdiction.
In June 1997, Delaware filed a Civil Action against the Company seeking a
judgment on the IIG Note (The Honorable Donna Lee Williams, Insurance
Commissioner of the State of Delaware as Receiver of National Heritage Life
Insurance Company v. Investors Insurance Group, Inc.; U.S.D.C., M.D. Fla 97-
773-CV-ORI-19). The Company has asserted defenses and counterclaims against
Delaware. Delaware has filed motions to dismiss many of the Company's
defenses and counterclaims for various jurisdictional reasons. Management
believes the defenses are properly before the court and the motions will be
denied.
The Company's management believes it has valid defenses and counter claims,
however, the ultimate outcome of this case cannot be determined at this time.
<PAGE> 20
Item 2: Changes in Securities
No changes to report
Item 3: Defaults on Senior Securities
See discussion under Item 1 above
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
a). Exhibits
Addendum No 12 to Reinsurance Agreement INVE001 between
Investors Insurance Corporation and Republic Vanguard
Life Insurance Company
b). Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter
ended September 30, 1997.
<PAGE> 21
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: December 3, 1997 /s/ Melvin C. Parker
______________________________
Melvin C. Parker
President, Chief Executive
Officer and Chief Financial
Officer
<PAGE>
<PAGE> 1
ADDENDUM NO. 12
to
REINSURANCE AGREEMENT INVE0001
between
INVESTORS INSURANCE CORPORATION OF DELAWARE
with Administrative Offices in Jacksonville, Florida
and
REPUBLIC-VANGUARD LIFE INSURANCE COMPANY
of Dallas, Texas
Effective August 1, 1997, Schedule II of the Agreement shall be replaced by
the attached Schedule II, which is amended to cover the reinsurance of the
net retained Arizona business and the change of Republic-Vanguard Life's
coinsurance quota share for new business issued in Arizona.
IN WITNESS WHEREOF, the parties have executed this Addendum in duplicate on
the dates and places set forth below:
INVESTORS INSURANCE CORPORATION REPUBLIC-VANGUARD LIFE INSURANCE
August 1, 1997 August 1, 1997
__________________________ _________________________
Date Date
Susan F. Powell John Brill
__________________________ _________________________
By By
EVP SVP
__________________________ _________________________
Title Title
Debra Sanders Gorden Jardin
__________________________ _________________________
Witness Witness
<PAGE> 2
SCHEDULE II
A. COINSURANCE PERCENTAGES
Quota Share
Calendar Period of Issue Jurisdiction Reinsured
- ------------------------ ------------------- -----------
January 1, 1991-
September 30, 1994 Missouri 80%
October 1, 1991-
September 30, 1994 All Licensed States 80%
October 1, 1994-
April 30, 1995 All Licensed States 90%
May 1, 1995-
December 31, 1996 All Licensed States 100%
January 1, 1997-
July 31, 1997 All Licensed States,
except California 60%
August 1, 1997 and later All Licensed States,
except California, 60%
Arizona 100%, plus 100% of
Investor's Net
Retained Business
issued October 1,
1991-July 31, 1997
B. ASSUMPTION OF DIRECT POLICIES - Effective March 27, 1995
Assumption by
Calendar Period of Issue Jurisdiction Republic-Vanguard Life
- ------------------------ -------------- --------------------------
1990 - 1994: 13 Policies Kansas 100%
<PAGE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 7
<PAGE>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 48,350
<DEBT-CARRYING-VALUE> 8,198
<DEBT-MARKET-VALUE> 8,889
<EQUITIES> 0
<MORTGAGE> 298
<REAL-ESTATE> 0
<TOTAL-INVEST> 57,669
<CASH> 5,926
<RECOVER-REINSURE> 2,199
<DEFERRED-ACQUISITION> 39,333
<TOTAL-ASSETS> 516,668
<POLICY-LOSSES> 456,288
<UNEARNED-PREMIUMS> 30
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 8000
0
0
<COMMON> 1,420
<OTHER-SE> (5,060)
<TOTAL-LIABILITY-AND-EQUITY> 516,669
853
<INVESTMENT-INCOME> 3,683
<INVESTMENT-GAINS> 524
<OTHER-INCOME> 2,424
<BENEFITS> 289
<UNDERWRITING-AMORTIZATION> 927
<UNDERWRITING-OTHER> 2,592
<INCOME-PRETAX> 984
<INCOME-TAX> (159)
<INCOME-CONTINUING> 1,143
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,143
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 0.40
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<PAGE>
</TABLE>
