<PAGE> 1
UNITED STATES
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 period ended JUNE 30, 1995
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
--------------------- -----------------------
Commission File Number: 0-1984
--------------------------------------------------------
INSURANCE INVESTORS & HOLDING CO.
--------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Illinois 37-0858627
--------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2512 N. Knoxville Ave., Peoria, Illinois 61604-3622
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(309) 685-7661
--------------------------------------------------------------------------------
(Registrant s telephone number, including area code)
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.
[X] Yes [ ] No
As of June 30, 1995, Registrant had 807,649 shares of Class A common
stock and 472,423 shares of Class B common stock outstanding.
<PAGE> 2
INSURANCE INVESTORS & HOLDING CO. AND SUBSIDIARIES
INDEX
Page
Number
------
Part I. Financial Information
Item 1. Financial Statements
Balance sheets, June 30, 1995 (Unaudited)
and December 31, 1994 3
Statements of Operations, Six-Months
Ended June 30, 1995
and 1994 (Unaudited) 5
Statements of Operations, Three-Months
Ended June 30, 1995
and 1994 (Unaudited) 6
Statements of Cash Flows, Six-Months
Ended June 30, 1995
and 1994 (Uanudited) 7
Statements of Cash Flows, Three-Months
Ended June 30, 1995
and 1994 (Uanudited) 8
Notes to Financial Statements 9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 17
Part II. Other Information 21
2
<PAGE> 3
INSURANCE INVESTORS & HOLDING CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1995 AND DECEMBER 31, 1994
<TABLE>
<CAPTION>
(UNAUDITED)
JUNE 30, DECEMBER 31,
1995 1994
---------------- ----------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities held for investment, at
amortized cost (market $1,964,961
in 1995 and $1,902,194 in 1994) $ 1,967,747 $ 1,955,882
Equity securities, at market (cost $81,473 in 1995 and
1994) 65,376 57,957
Policy loans 105,177 101,749
---------------- ----------------
Total investments 2,138,300 2,115,588
Cash 210,777 207,506
Accrued investment income 30,698 26,581
Deferred policy acquisition costs 48,671 51,262
Property, plant and equipment (at cost, less accumulated
depreciation of $108,880 in 1995 and $108,713 in
1994) 1,281 1,448
---------------- ----------------
Total assets $ 2,429,727 $ 2,402,385
================ ================
</TABLE>
(Continued)
3
<PAGE> 4
INSURANCE INVESTORS & HOLDING CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1995 AND DECEMBER 31, 1994
<TABLE>
<CAPTION>
(UNAUDITED)
JUNE 30, DECEMBER 31,
1995 1994
--------------- ----------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Future policy benefit reserves $ 708,801 $ 717,441
Deferred premium reserve 68,345 67,443
Other policyholders' funds 290,216 292,719
--------------- ----------------
Total policy liabilities 1,067,362 1,077,603
Accounts payable and accrued expenses 39,707 26,424
Minority interest 95,670 93,268
Notes payable 319,400 267,900
Other liabilities 5,740 3,549
--------------- ----------------
Total liabilities 1,527,879 1,468,744
STOCKHOLDERS' EQUITY:
Common stock:
Class A, $1 par value, 1,500,000 shares authorized,
819,249 shares issued in 1995 and 1994,
including shares in treasury of 11,600 in 1995
and 1994 819,249 819,249
Class B, $.10 stated value, 500,000 shares
authorized, 472,423 shares issued and
outstanding in 1995 and 1994 47,242 47,242
Paid-in capital 576,347 576,347
Unrealized loss on investments (14,969) (21,869)
Retained deficit (516,596) (477,903)
--------------- ----------------
911,273 943,066
Treasury stock, at cost (9,425) (9,425)
--------------- ----------------
Total stockholders equity 901,848 933,641
--------------- ----------------
COMMITMENTS AND CONTINGENCIES
Total liabilities and stockholders equity $ 2,429,727 $ 2,402,385
=============== ================
</TABLE>
4
<PAGE> 5
INSURANCE INVESTORS & HOLDING CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX-MONTHS ENDED JUNE 30, 1995 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
SIX-MONTHS ENDED JUNE 30,
----------------------------------------
1995 1994
-------------- --------------
<S> <C> <C>
REVENUES:
Premiums $ 33,575 $ 29,172
Net investment income 62,618 51,543
Realized investment gains 4,805 1,081
-------------- --------------
100,998 81,796
BENEFITS AND EXPENSES:
Policy benefits:
Death and other policy benefits 52,766 37,664
Endowments 2,869 6,103
Policyholder dividends 7,728 7,880
-------------- --------------
63,363 51,647
Increase (decrease) in future policy benefit reserves (8,640) 308
Amortization of deferred policy acquisition costs 2,591 2,401
Provision for deferred premium 902 91
General insurance expenses 62,597 87,076
Taxes licenses and fees 4,301 6,686
Interest expense 12,694 8,209
-------------- --------------
137,808 156,418
Income (loss) before federal income tax and minority
interest $ (36,810) $ (74,622)
Federal income tax expense 0 0
-------------- --------------
Income (loss) before minority interest $ (36,810) $ (74,622)
Minority interest in gain (loss) of subsidiary (1,883) (1,376)
-------------- --------------
NET INCOME (LOSS) $ (38,693) $ (75,998)
============== ==============
PER SHARE AMOUNTS:
NET INCOME (LOSS) PER SHARE OF COMMON STOCK $(0.03) $(0.06)
============== ==============
</TABLE>
5
<PAGE> 6
INSURANCE INVESTORS & HOLDING CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE-MONTHS ENDED JUNE 30, 1995 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
THREE-MONTHS ENDED JUNE 30,
---------------------------------------
1995 1994
-------------- -------------
<S> <C> <C>
REVENUES:
Premiums $ 19,196 $ 13,950
Net investment income 33,117 26,341
Realized investment gains 4,805 155
-------------- -------------
57,118 40,446
BENEFITS AND EXPENSES:
Policy benefits:
Death and other policy benefits 26,953 6,066
Endowments 105 3,143
Policyholder dividends 3,915 4,066
-------------- -------------
30,973 13,275
Increase (decrease) in future policy benefit reserves (8,206) 5,124
Amortization of deferred policy acquisition costs (73) 210
Provision for deferred premium 106 531
General insurance expenses 32,406 44,540
Taxes licenses and fees 1,055 4,237
Interest expense 6,666 4,342
-------------- -------------
62,927 72,259
Income (loss) before federal income tax and minority
interest $ (5,809) $ (31,813)
Federal income tax expense 0 0
-------------- -------------
Income (loss) before minority interest $ (5,809) $ (31,813)
Minority interest in gain (loss) of subsidiary (1,883) (17)
-------------- -------------
NET INCOME (LOSS) $ (7,692) $ (31,830)
============== =============
PER SHARE AMOUNTS:
NET INCOME(LOSS) PER SHARE OF COMMON STOCK $(0.01) $(0.03)
============== =============
</TABLE>
6
<PAGE> 7
INSURANCE INVESTORS & HOLDING CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX-MONTHS ENDED JUNE 30, 1995 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
SIX-MONTHS ENDED JUNE 30,
---------------------------------------
1995 1994
-------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net gain (loss) $ (38,693) $ (73,246)
Adjustments to reconcile net gain to net cash provided
by operating activities:
Accrued investment income (4,117) (6,604)
Deferred policy acquisition costs 2,591 4,480
Property, plant and equipment 167 460
Future policy benefit reserves (8,640) 308
Deferred premium reserve 902 91
Other policy liabilities (2,503) (14,637)
Accounts payable and accrued expenses 13,283 15,439
Minority interest 2,402 (1,376)
Other, net (1,187) 0
-------------- -------------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES (35,795) (75,085)
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturity of fixed maturities 290,648 277,851
Sale of fixed maturities available for sale 0 0
Purchase of fixed maturities available for sale (299,654) (223,636)
Increase in policy loans (net) (3,428) 0
-------------- -------------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES
(12,434) 54,215
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowed funds 51,500 35,500
-------------- -------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES
51,500 35,500
-------------- -------------
NET INCREASE (DECREASE) IN CASH AND
SHORT-TERM INVESTMENTS 3,271 14,630
Cash and short term investments at
beginning of period 207,506 203,106
-------------- -------------
Cash and short term investments at end
of period $ 210,777 $ 217,736
============== =============
</TABLE>
7
<PAGE> 8
INSURANCE INVESTORS & HOLDING CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE-MONTHS ENDED JUNE 30, 1995 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
THREE-MONTHS ENDED JUNE 30,
---------------------------------------
1995 1994
-------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net gain (loss) $ (7,692) $ (31,795)
Adjustments to reconcile net gain to net cash provided
by operating activities:
Accrued investment income 2,711 2,166
Deferred policy acquisition costs 721 1,307
Property, plant and equipment 6 231
Future policy benefit reserves (8,206) (10,303)
Deferred premium reserve 106 531
Other policy liabilities (4,394) 3,160
Accounts payable and accrued expenses 9,767 11,507
Minority interest 2,522 (18)
Other, net (1,653) 0
-------------- -------------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES (6,112) (23,214)
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturity of fixed maturities 61,842 169,305
Sale of fixed maturities available for sale 0 0
Purchase of fixed maturities available for sale 0 (148,855)
Increase in policy loans (net) (144) 0
-------------- -------------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES
61,698 20,450
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowed funds 23,000 20,500
-------------- -------------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES 23,000 20,500
-------------- -------------
NET INCREASE (DECREASE) IN CASH AND SHORT-
TERM INVESTMENTS 78,586 17,736
Cash and short term investments at
beginning of period 132,191 200,000
-------------- -------------
Cash and short term investments at end
of period $ 210,777 $ 217,736
============== =============
</TABLE>
8
<PAGE> 9
INSURANCE INVESTORS & HOLDING CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
(UNAUDITED)
(1) FINANCIAL STATEMENTS
The balance sheet for June 30, 1995, the statements of operations for
the three- and six-month periods ended June 30, 1995 and 1994, and the
statements of cash flows for the three- and six-month periods then
ended have been prepared by the Company without audit. In the opinion
of Management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position,
results of operations and changes in cash flows at June 30, 1995, and
for comparative periods presented have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted. It is suggested that these
financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's December 31,
1994 annual 10-K report filed with the Securities and Exchange
Commission. The results of operations for the period ended June 30,
1995 are not necessarily indicative of the operating results for the
full year.
Earnings per common share are computed on the basis of the weighted
average numbers of common "A" and "B" shares outstanding during each
period. For the three- and six-month periods ended June 30, 1995 and
1994, the weighted average number of such shares outstanding was
1,280,072.
(2) PENDING ACQUISITION AND MERGER
On December 9, 1994, the Company announced that it had signed a
definitive written agreement to be acquired by Citizens, Inc., an
Austin, Texas based life insurance holding company.
The agreement provides that following the acquisition by Citizens,
Investors' shareholders will receive one share of Citizens Class A
Common Stock for each eight shares of Investors Common Stock owned.
Additionally, Citizens will acquire all shares of Central Investors
Life Insurance Company, a subsidiary of the Company, not wholly-owned
by Insurance Investors, based upon an exchange ratio of one share of
Citizens Class A common stock for each four shares of Central
Investors owned. The transaction will involve issuance of
approximately 170,000 of Citizens Class A shares and will also be
accounted for as a purchase. The agreement is subject to approval by
the Company s shareholders. The Illinois Department of Insurance
approved the transaction on March 10, 1995.
9
<PAGE> 10
The following unaudited pro forma condensed balance sheet as of June
30, 1995 reflects the purchase of the Company by Citizens (including a
similar acquisition of American Liberty Financial Corporation ("ALFC"))
by Citizens pending as of the date of this 10-Q) as if it occurred on
June 30, 1995. The unaudited pro forma condensed consolidated income
statement for the six months ended June 30, 1995 reflects the purchases
of the Company and ALFC as if they had occurred on January 1, 1995.
Management's estimate of the impact of applying purchase accounting,
as if the two acquisitions had occurred as described above, is
presented below. The unaudited pro forma financial information is not
necessarily indicative either of the results of operations that would
have occurred had the acquisition been consummated at the beginning of
1995 or of future results of operations of the consolidated entities.
10
<PAGE> 11
PRO-FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
(AMOUNTS IN THOUSANDS)
PRO-FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
CITIZENS INC HISTORICAL HISTORICAL PURCHASE
AND ALFC AND INSURANCE ADJUSTMENTS AND PRO-FORMA
ASSETS SUBSIDIARIES SUBSIDIARIES INVESTORS ELIMINATIONS CONSOLIDATED
------ ------------ ------------ --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Long term Investments $91,111 $15,018 $2,138 $64 (a) $108,331
Short term Investments 9,495 942 0 0 10,437
-------- ------- ------ ------- --------
Total Investments 100,606 15,960 2,138 64 118,768
Cash 3,274 709 211 4,194
Other receivables 3,107 438 0 3,545
Accrued investment
income 1,268 316 31 1,615
Deferred policy
acquisition costs 36,165 6,831 49 (6,880) (b) 36,165
Cost of insurance
acquired 2,188 0 0 5,828 (e) 8,016
Excess of cost over net
assets acquired 3,252 0 0 8,078 (c) 11,330
Other intangible assets 0 0 0 1,816 (d) 1,816
Deferred taxes 393 1,839 0 (980) (g) 1,252
Other assets 7,096 786 1 0 7,883
-------- ------- ------ ------- --------
Total Assets $157,349 $26,879 $2,430 $7,926 $194,584
======== ======= ====== ======= ========
</TABLE>
11
<PAGE> 12
PRO-FORMA CONSOLIDATED BALANCE SHEET (CONTINUED)
JUNE 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
CITIZENS INC HISTORICAL HISTORICAL PURCHASE
LIABILITIES AND AND ALFC AND INSURANCE ADJUSTMENTS AND PRO-FORMA
STOCKHOLDERS EQUITY SUBSIDIARIES SUBSIDIARIES INVESTORS ELIMINATIONS CONSOLIDATED
-------------------- ------------ ------------ --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Future policy benefit
reserves $106,715 $14,621 $709 $559 (f) $122,604
Other policyholder
liabilities 8,483 1,772 359 10,614
Other liabilities 2,785 359 45 3,189
Notes payable 794 0 319 1,113
Deferred tax liability 0 1,825 0 (1,825) (h) 0
Minority interest 0 16 96 (112) (h) 0
-------- ------- ---- ------- --------
Total liabilities 118,777 18,593 1,528 (1,378) 137,520
Class A common stock 21,457 250 819 17,423 (h) 39,949
Class B common stock 283 0 47 (47) (h) 283
Preferred stock 0 263 0 (263) (h) 0
Additional paid-in
capital 0 6,030 576 (6,606) (h) 0
Unrealized loss on
investments (744) 0 (15) 15 (h) (744)
Retained earnings 19,757 1,743 (516) (1,227) (h) 19,757
-------- ------- ---- ------- --------
40,753 8,286 911 9,295 59,245
Treasury stock (2,181) 0 (9) 9 (2,181)
-------- ------- ---- ------- --------
Total stockholders
equity 38,572 8,286 902 9,304 57,064
-------- ------- ---- ------- --------
Total liabilities and
stockholders equity $157,349 $26,879 $2,430 $7,926 $194,584
======== ======= ====== ======= ========
</TABLE>
12
<PAGE> 13
EXPLANATION OF PRO-FORMA ADJUSTMENTS AS OF JUNE 30, 1995:
(a) Adjustment necessary to record acquired fixed maturities at
market value.
(b) Deferred policy acquisition costs are reflected in the
accompanying pro-forma financial statements as follows:
<TABLE>
<S> <C>
Historical Citizens $36,165
Historical ALFC and II 6,880
-------
Historical DAC 43,045
Reverse historical ALFC and II (6,880)
-------
Net DAC $36,165
=======
</TABLE>
(c) Establish cost of insurance acquired. Cost of insurance
acquired represents the estimated present value of future
profits in the acquired business. This amount was calculated as
the difference between ALFC's and II's historical future
policy benefit reserves and the estimated gross premium
reserve at June 30, 1995. The gross premium reserve was
estimated assuming a level interest yield of 7%. Life
mortality was based on appropriate multiples of the 1965-70
Select and Ultimate and the Ultimate Intercompany Table and
withdrawals based on Linton B and BB tables as deemed
appropriate based on individual life plan experience.
Accident and health morbidity was based on multiples of 1974
Cancer tables, Stroke/Heart Attack Indemnity Table, 1985 NAIC
Cancer Tables and published claim costs and withdrawals based
on Linton C and CC Tables as deemed appropriate based on
individual health plan experience. Cost of insurance acquired
is being amortized in proportion to the profit over the lives
of the respective policies.
Cost of insurance acquired is presented in the accompanying
pro-forma financial statements as follows:
<TABLE>
<S> <C>
Historical Citizens $2,188
ALFC and II cost of insurance capitalized 5,828
-----
Pro-forma cost of insurance acquired $8,016
======
</TABLE>
(d) Allocation of purchase price to identifiable intangible
assets. Identifiable intangible assets include state licenses
and agency force and are being amortized over 10 years.
(e) Excess of cost over net assets acquired was calculated as
follows: (in thousands)
13
<PAGE> 14
<TABLE>
<CAPTION>
ALFC II TOTAL
<S> <C> <C> <C>
Acquisition of common stock
$17,575 929 18,504
Estimated fair value of net
assets acquired (9,436) (990) (10,426)
======= ==== =======
Excess of cost (purchase price)
over net assets acquired
$8,139 (61) 8,078
</TABLE>
(f) Revaluation of policy benefit reserves to reflect Company
reserve assumption with regard to interest rates, lapse rates
and surrenders.
(g) Establish deferred taxes for basis differences between book
and tax value of assets and liabilities at June 30, 1995.
(h) Eliminate ALFC and II capital, minority interest, and retained
earnings and record the cost of net assets acquired as
increased capital of the Company due to the issuance of
additional Class A common shares.
14
<PAGE> 15
PRO-FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL HISTORICAL PURCHASE
CITIZENS INC AND ALFC AND INSURANCE ADJUSTMENTS AND PRO-FORMA
SUBSIDIARIES SUBSIDIARIES INVESTORS ELIMINATIONS CONSOLIDATED
------------ ------------ --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Premiums $20,611 $3,782 $33 $24,426
Net investment income 3,124 580 68 3,772
Other (48) 128 0 0 80
------- ------ ----- ------ -------
Total revenues 23,687 4,490 101 0 28,278
Benefits and Expenses
Policy benefits 15,286 1,990 55 17,331
Commissions 5,251 0 0 5,251
Capitalization of DAC (5,498) 0 0 (250) (a) (5,748)
Amortization of DAC 3,871 666 3 (500) (a) 4,040
Amortization of cost
of insurance acquired 177 0 0 278 (b) 455
Amortization of other
intangibles 0 0 0 94 (c) 94
Amortization of excess
of cost over net assets
acquired 93 0 0 198 (d) 291
Other expenses 2,806 1,668 80 0 4,554
------- ------ ----- ------ -------
Total benefits and
expenses 21,986 4,324 138 (180) 26,106
------- ------ ----- ------ -------
Income (loss) before taxes $1,701 $166 $ (37) $ (180) $2,010
======= ====== ===== ====== =======
Net income per share $0.10 (e)
=======
</TABLE>
15
<PAGE> 16
EXPLANATION OF PRO-FORMA STATEMENT OF OPERATIONS FOR THE
SIX-MONTH PERIOD ENDED JUNE 30, 1995:
(a) Amortization and capitalization of deferred policy acquisition
costs are reflected in the accompanying pro-forma statement of
operations as follows: (in thousands)
<TABLE>
<CAPTION>
CAPITALIZATION AMORTIZATION
-----------------------------------
<S> <C> <C>
Historical Citizens (5,498) 3,871
Historical ALFC and II 0 669
------- -----
Total Historical (5,498) 4,540
------- -----
Reverse Historical ALFC and II 0 (669)
Capitalization of Post-Purchase (250) 169
------- -----
Net Pro-Forma adjustment (250) (500)
------- -----
Net (5,748) 4,040
</TABLE>
(b) Amortization of cost of insurance acquired is presented in the
accompanying pro-forma statement of operations as follows: (in
thousands)
<TABLE>
<S> <C>
Historical Citizens $177
-----
Interest accrued @ 7% (205)
Amortization of ALFC and II cost of
insurance 483
-----
Net Pro-Forma adjustment 278
-----
Pro-forma amortization $455
</TABLE>
Estimated amortization of cost of insurance acquired of ALFC
and II, assuming a purchase date of January 1, 1995, is
$482,000, $433,000, $390,000, $360,000 and $336,000 for each
year, respectively, in the five year period ending December
31, 1999.
(c) Identifiable intangible assets include state licenses and
agency force and are being amortized over 10 years. Such
amortization amounted to $94,000 for the six months ended June
30, 1995.
(d) Excess of cost over net assets acquired is being amortized
over a 20-year period. Such amortization, reflected in the
accompanying pro-forma statement of operations is $198,000.
(e) Calculated using estimated common shares outstanding of
19,433,080.
16
<PAGE> 17
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SIX-MONTHS ENDED JUNE 30, 1995 AND 1994
The net loss for the first six months of 1995 was $38,693, compared to a loss
of $75,998 in the previous year. Decreases in operating expenses and increased
investment income were the primary reasons for the improvement.
Premium income for the first six months of 1995 was $33,575 compared to $29,172
for the same period in 1994. The increase is due primarily to a reduction in
the amount of deferred premium seen in previous periods. The Company has not
written new policies for the past several years.. Currently, there are no
products qualified for sale under the revised life insurance reserve law that
was effective for years beginning after January 1, 1989. Increases in
requirements for Statutory capital and surplus of the Company s life insurance
subsidiary, coupled with the relatively high cost of regulatory compliance for
a company the size of Insurance Investors, have severely limited the resources
available in recent years that are necessary for the development and sale of
new products. As a result, the Company s in-force block of business is in a
"run-off" state.
Net investment income grew substantially during 1995 to $62,618 compared to
$51,543 for the same period in 1994. The increase results from higher yields
that are available upon reinvestment of matured securities that bore lower
interest rates.
Policy benefits increased to $63,363 during 1995 from $51,647 during the first
half of 1994. Death benefits increased substantially during the first half of
1995 to $30,060, compared to $18,153 for the same period in 1994. Management
does not believe the increase in such benefits to be indicative of an adverse
trend, but rather normal fluctuations which occur over time. Surrender expense
decreased to $13,762 from $17,082 in the previous year. Other benefits
amounted to $19,541 compared to $16,412 in 1994.
Future policy benefit reserves reflected a decrease of $8,640 compared to an
increase of $308 for the first half of 1995. The decrease in policy reserves
is partially explained by the increased death claim activity since as claims
are paid, the policy reserves that have historically been established are
released. Deferred premium reserves increased by $902 in 1995 compared to $91
for 1994. The increase reflects the aging of the policies in force.
General expenses were lower as a result of decreases in salaries, office
expenses and the
17
<PAGE> 18
timing of audit and actuarial expenses. As Management works toward
consummation of the sale of the Company to Citizens, Inc. as discussed in the
"Notes to Financial Statements" the overhead of the Company has been trimmed
due to the execution of a Management Services Agreement with Citizens.
Interest expense was higher in the first six months of 1995 reaching $12,694
from $8,209 in the previous year. The increase was due to additional loans
made by the Company's President, Mr. Frank Wilkins, to provide adequate
liquidity and capital. The loans are due upon the closing of the Citizens
acquisition.
THREE-MONTHS ENDED JUNE 30, 1995 AND 1994
The net loss for the quarter ended June 30, 1995 was $7,692 compared to $31,830
in the prior year. Increased investment income, coupled with lower operating
expenses and higher premium receipts narrowed the operating loss.
Premium income for the quarter was $19,196 in 1995 compared to $13,950 in the
previous year. Reductions in deferred premiums contributed to the increase.
Investment income grew to $33,117 from $26,341, primarily as the result of
higher yields available in the bond market as matured funds were reinvested.
Policy benefits increased to $30,973 through June 30, 1995, compared to $13,275
in the previous year. An increase in death claims during the quarter was the
primary reason for the increase.
Policy reserves declined $8,206 for the quarter, compared to an increase of
$5,124 in the prior year. The increased claims contributed to the lower
reserves as was discussed above.
General expenses declined to $32,406 from $44,540 primarily as the result of
the reductions in overhead discussed previously.
LIQUIDITY AND CAPITAL RESOURCES
Stockholders' equity as of June 30, 1995 totaled $901,848, compared to $933,641
at December 31, 1994. The loss from operations is the primary reason for the
decline in equity since year end.
A majority of the Company's invested assets are in bonds guaranteed by the U.S.
Government. As a result, the bond portfolio offers better than average
liquidity to meet the demands of the outstanding obligations. The Company has
no investments in mortgage loans or real estate and minimal policy loans.
18
<PAGE> 19
The Illinois legislature established $1,200,000 as the minimum statutory
capital and surplus for an Illinois-domiciled life insurance company after
December 31, 1990. On December 31, 1995, the requirement increases to
$1,500,000. The traditional "grandfathering" of existing companies was not
permitted in the new legislation, meaning that the Company's subsidiary must
increase its Capital and Surplus to the $1,500,000 level. At the end of June,
1995, the subsidiary reported capital and surplus of $1,222,856. The sale of
the Company to Citizens, Inc. will afford the Company the strength to comply
with the requirements of the new law.
The Company's ability to allocate funds to product development has been
extremely limited. The burden of maintaining two accounting systems (Statutory
and GAAP) as well as maintaining the capital and surplus of the life insurance
subsidiary have been the leading constraints.
FINANCIAL ACCOUNTING STANDARDS
In February 1992, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Statement 109 requires a change from the deferred method of accounting
for income taxes of APB Opinion 11 to the asset and liability method of
accounting for income taxes. Under the asset and liability method of Statement
109, deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates in effect for the year in which those temporary differences are expected
to be recovered or settled. Under Statement 109, the effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. The Company adopted Statement 109.
The implementation had no impact on operations or stockholders' equity.
In December 1990, the FASB issued Statement 106, "Employers' Accounting for
Post Retirement Benefits Other than Pensions", ("Statement 106"). Statement
106 establishes accounting standards for employers' accounting for, primarily,
post retirement health care benefits. The statement was effective for fiscal
years beginning after December 15, 1992. Since the Company currently pays no
such benefits, implementation had no impact on the results of operations of the
Company.
In December 1992, the FASB issued Statement 113 "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts" ("Statement 113").
Statement 113 eliminated the net reporting of reinsurance amounts in the
balance sheet previously required by Statement 60 "Accounting by Insurance
Enterprises." Statement 113 also provides accounting guidance for ceding
enterprises as well as disclosure requirements and guidance on assessing
transfer of risk in reinsurance contracts. Furthermore, it precludes immediate
recognition of gains related to reinsurance contracts unless the ceding
enterprises liability to its policyholders is extinguished.
The Company adopted Statement 113 in the first quarter of 1993. There was no
impact on the consolidated financial statements due to implementation of the
risk transfer provisions.
In May 1993, the FASB issued Statement 114, "Accounting by Creditors for
Impairment of a Loan"
19
<PAGE> 20
("Statement 114"). Statement 114 requires impaired loans be measured based on
the present value of expected future cash flows discounted at the loan's
effective interest rate or at the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent. Statement 114 is
effective for years beginning after December 15, 1994. Statement 114 does not
have a material impact on the Company's financial statements.
Also in 1993, the FASB issued Statement 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("Statement 115"). Statement 115
requires the classification of debt and equity securities as held to maturity,
trading or available for sale based on established criteria. Trading
securities are bought and held principally for the purpose of selling them in
the near term. The Company had no investment securities classified as trading
or available for sale at January 1, 1994, December 31, 1994 or June 30, 1995.
Held-to-maturity securities are those in which the Company has the ability and
intent to hold the security until maturity.
Trading and available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost, adjusted for the
amortization or accretion of premiums or discounts. Unrealized holding gains
and losses on trading securities are included in earnings. Unrealized holding
gains and losses, net of the related tax effect, on available-for-sale
securities are excluded from earnings and are reported as a separate component
of stockholders' equity until realized. Transfers of securities between
categories are recorded at fair value at the date of transfer. Unrealized
holding gains and losses are recognized in earnings for transfers into trading
securities. Unrealized holding gains or losses associated with transfers of
securities from held-to-maturity to available-for-sale are recorded as a
separate component of stockholders' equity. The unrealized holding gains or
losses included in the separate component of equity for securities transferred
from available-for-sale to held-to-maturity are maintained and amortized into
earnings over the remaining life of the security as an adjustment to yield in a
manner consistent with the amortization or accretion of premium or discount on
the associated security.
A decline in the market value of any available-for-sale or held-to-maturity
security below cost that is deemed other than temporary is charged to earnings
resulting in the establishment of a new cost basis for the security.
Premiums and discounts are amortized or accredited over the life of the related
security as an adjustment to yield using the effective interest method.
Dividend and interest income are recognized when earned. Realized gains and
losses for securities classified as available-for-sale and held-to-maturity are
included in earnings and are derived using the specific identification method
for determining the cost of securities sold. The Company adopted Statement 115
at January 1, 1994. The impact on the consolidated stockholders' equity due to
the implementation was $0.
20
<PAGE> 21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2 CHANGES IN SECURITIES
None, other than disclosed in the Notes to the Financial
Statements or Management's Discussion and Analysis of Financial
Condition and Results of Operations.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION 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 - 27 Financial Data Schedule
b. Reports on Form 8-K filed during the period covered by
this report - None.
21
<PAGE> 22
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.
INSURANCE INVESTORS
& HOLDING CO.
By: /s/ Frank J. Wilkins
--------------------------------
Frank J. Wilkins, President
and Chief Accounting Officer
Date: September 19, 1995
<PAGE> 23
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT DESCRIPTION PAGE
----------- ------------------- ----
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 1,967,747
<DEBT-MARKET-VALUE> 1,964,961
<EQUITIES> 65,376
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 2,138,300
<CASH> 210,777
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 48,671
<TOTAL-ASSETS> 2,429,727
<POLICY-LOSSES> 708,801
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 68,345
<POLICY-HOLDER-FUNDS> 290,216
<NOTES-PAYABLE> 319,400
<COMMON> 866,491
0
0
<OTHER-SE> 35,357
<TOTAL-LIABILITY-AND-EQUITY> 2,429,727
33,575
<INVESTMENT-INCOME> 62,618
<INVESTMENT-GAINS> 4,805
<OTHER-INCOME> 0
<BENEFITS> 44,126
<UNDERWRITING-AMORTIZATION> 2,591
<UNDERWRITING-OTHER> 80,494
<INCOME-PRETAX> (36,810)
<INCOME-TAX> 0
<INCOME-CONTINUING> (38,693)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (38,693)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
