CFLIC also intends to terminate another reinsurance arrangement under which business written by Bankers is reinsured by CFLIC. Under terms of the Agreement, ICH is responsible for the negotiation on CFLIC's behalf of both the Southwestern and Bankers recaptures and the management of the affairs of CFLIC and Marquette, including management of their investments, until the recaptures are effected. Upon completion of the recaptures, CFLIC will have no remaining insurance business.
From time to time, assessments are levied on ICH's insurance subsidiaries by life and health guaranty associations in states in which they are licensed to do business. Such assessments are made primarily to cover the losses of policyholders of insolvent or rehabilitated insurers. In some states, these assessments can be partially recovered through a reduction in future premium taxes. ICH's insurance subsidiaries, other than Bankers and Certified, paid assessments of $3.2 million, $2.2 million and $1.2 million in the years 1993, 1992 and 1991, respectively. Bankers and Certified paid assessments of $.6 million and $1.7 million for the ten months ended October 31, 1992 and the year 1991, respectively. Although the economy and other factors have recently caused the number and size of insurance company failures to increase, based on information currently available, ICH believes that any future assessments are not reasonably likely to have a material adverse effect on its insurance subsidiaries.
ICH pursues an investment strategy principally designed to balance the duration of investment assets against the liabilities of its insurance subsidiaries for future policy and contract benefits and, under certain circumstances, to manage its exposure to changes in market interest rates. Over the past several years, ICH has taken steps to restructure its investment portfolio in order to improve the overall quality of the portfolio. While these actions have resulted in substantially reduced exposure to credit risks, average yields have decreased from 9.1% in 1991 to 8.3% in 1992 and 6.9% in 1993. As a result of the investment portfolio restructuring, substantial investments were made in mortgage-backed securities and collateralized mortgage obligations in 1991 which were highly sensitive to subsequent changes in market interest rates and which contributed to the decline in investment yields. Further, the overall decline in market interest rates over the past several years has had a significant impact on ICH's ability to maintain the level of earnings on its invested assets.
The principal requirement for liquidity of ICH's insurance subsidiaries is their contractual obligations to policyholders, including policy loans and payments of benefits and claims. As a result of continued cash flows of its insurance subsidiaries, ICH believes that reserves maintained by such subsidiaries have been adequate to pay policy benefits and claims. Further, policy loans by ICH's subsidiaries have represented 7% or less of ICH's consolidated investment assets during the past three years.
The consolidated financial statements include the accounts of I.C.H. Corporation (Company) and its wholly-owned and majority-owned subsidiaries from date of acquisition or through date of divestiture. All significant intercompany accounts and transactions have been eliminated in consolidation. Previously reported amounts for 1992 and 1991 have in some instances been reclassified to conform to the 1993 presentation. See Note 2 for 1993 and 1992 organization changes.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) equity method, or at cost, adjusted for the Company's share, after allowance for possible dilution, of the undistributed earnings and losses (both realized and unrealized) since acquisition. At December 31, 1992 the carrying value of the Company's residual ownership interest in a divested subsidiary had been adjusted for (i) the excess of the sales proceeds received over (ii) the Company's basis in the 39.9% interest in the divested subsidiary retained by the Company. A portion of such excess of sales proceeds over the Company's basis was being amortized into earnings on a straight-line basis over ten years.
Costs which vary with and are related to the acquisition of new business have been deferred to the extent that such costs are deemed recoverable through future revenues. These costs include commissions, certain costs of policy issuance and underwriting and certain variable agency expenses. For traditional life and health products deferred costs are amortized with interest over the premium paying period in proportion to the ratio of anticipated annual premium revenue to the anticipated total premium revenue. Deferred policy acquisition costs related to universal life, interest-sensitive and investment products are amortized in relation to the present value, using the assumed crediting rate, of expected gross profits on the products, and retrospective adjustments of these amounts are made whenever the Company revises its estimates of current or future gross profits to be realized from a group of policies.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (I) UNIVERSAL LIFE AND INVESTMENT CONTRACT LIABILITIES
3. NOTES PAYABLE AND COLLATERALIZED MORTGAGE NOTE OBLIGATION (CONTINUED) $20,340,000 and $19,780,000, respectively. The Company has the right to set off its obligation against the notes receivable. In the accompanying balance sheets, the Company's notes receivables have been reflected net of amounts due under the notes payable.
On February 11, 1994, the Company purchased all of the 100,000 shares of its Class B Common Stock held by CNC for total cash consideration of $500,000. The Class B Common Stock had entitled CNC to elect 75% of the Company's Board of Directors (see Note 10). Concurrently with the purchase of such stock, the Company entered into Independent Contractor and Services Agreements (Services Agreements) with Robert T. Shaw and C. Fred Rice, the controlling shareholders of CNC. The Services Agreements provide for a lump sum payment to Messrs. Shaw and Rice totaling $2 million as of the closing date and additional payments totaling $8,575,000 over a ten-year period. In addition, the Company agreed to provide customary employee benefits to Messrs. Shaw and Rice and their dependents. In the event of the deaths of Messrs. Shaw or Rice, any amounts not previously paid under the Services Agreements will become immediately payable to their estates. In consideration for the Services Agreements, Messrs. Shaw and Rice agreed that they would attempt to identify business opportunities in the insurance industry which may be suitable for the Company and to consult with the Company regarding such other matters as the Company may reasonably request. In addition, Mr. Rice will continue to serve as an executive officer of the Company and, if re-elected, will continue to serve on the Company's Board of Directors. The Services Agreements replaced a management and consulting contract with CNC that provided for annual payments to CNC totaling $2 million. In addition, Mr. Shaw was granted an option, exercisable within a six month period, to acquire certain aircraft equipment currently owned by the Company at its depreciated book value. At December 31, 1993, the Company has provided a liability for the present value of amounts payable under the Services Agreements totaling $9,050,000.
4. RELATED PARTY TRANSACTIONS (CONTINUED) At December 31, 1993 and 1992, the Company held a $2 million promissory note from CNC bearing interest at 10% and payable in December 1995. The note and accrued interest were repaid on February 11, 1994.
5. INVESTMENTS (CONTINUED) their ultimate maturities. During 1992, the Company retained the services of three independent investment advisors to manage in excess of $1 billion of the Company's fixed maturities and, as a result, at December 31, 1992, the Company had classified its fixed maturities into three categories, including actively managed, held for sale and held to maturity. In 1993, the Company adopted the provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and has classified its fixed maturities into two categories, including available for sale and held to maturity. SFAS No. 115 also establishes criteria for the recognition of a permanent impairment in the carrying value of debt and equity securities. The Company reflected a charge for the cumulative effect of writedowns of certain mortgage-backed securities required under the provisions of SFAS No. 115 totaling $7,573,000. The cumulative charge has been reflected net of $2,651,000 in related income tax effects. The actively managed and held for sale securities in 1992 have been reclassified in the following tables as available for sale.
The carrying value of nonaffiliated invested assets for which no investment income was recorded during the twelve months ended December 31, 1993, was as follows (in thousands):
10. CAPITAL STOCK (CONTINUED) The holder of each outstanding share of Series 1986-A Preferred Stock is entitled to cumulative annual dividends of $1.75 and liquidating distributions of up to $25 per share. Such dividends and liquidating distributions are payable in preference to the Common Stock, Class B Common Stock and all other series of the Company's Preferred Stock currently outstanding. The Series 1986-A Preferred Stock may be converted, at the option of the holder, at any time into shares of Common Stock at the rate of .7692 shares of Common Stock for each share of Series 1986-A Preferred Stock. The Company may redeem, at its option, any or all shares of the Series 1986-A Preferred Stock at redemption prices declining annually to $25 per share after December 1, 1996 plus accrued and unpaid dividends. The Series 1986-A Preferred Stock is exchangeable, in whole but not in part, at the Company's option on any dividend payment date commencing December 1, 1988 for the Company's 7% Convertible Subordinated Debentures due 2011 at the rate of $25 principal amount of Debentures for each share of Series 1986-A Preferred Stock. The Series 1986-A Preferred Stock is nonvoting, except as required by law and except that, if six quarterly dividends are unpaid and past due, the holders of the Series 1986-A Preferred Stock may elect two directors to the Company's Board of Directors.
Amounts due from reinsurers at December 31, 1993, includes $334,633,000 due from Employers Reassurance Company (ERC) relative to certain annuity business which ERC has retroceded to CFLIC. The Company has begun the process of terminating the reinsurance arrangements with ERC and CFLIC (see Note 4).
At December 31, 1993, the Company and its subsidiaries had the following income tax carryforwards available (in millions):
Under provisions of the 1990 Stock Option Incentive Plan the Company is authorized to grant options to certain key employees for the purchase of up to 2.9 million shares of the Company's Common Stock at a price not less than fair market value at date of grant. The options are exercisable for up to ten years from date of grant and become exercisable at various times ranging from six months to three years. The Company had previously granted options for the purchase of up to 156,780 shares of the Company's Common Stock exercisable through June 1993. Stock options granted are summarized as follows:
19. OTHER OPERATING INFORMATION Other operating costs and expenses for the three years ended December 31, 1993, are as follows:
Notes payable at December 31, 1993 and 1992, are summarized as follows: