Investors leases approximately 6,700 square feet of office space on the third floor of a building at 3030 Hartley Road, Jacksonville, Florida 32257. This lease expires on October 31, 1996.
Neither the Company or its subsidiaries own any commercial real estate.
Income (Loss) before income taxes $ (0.19 $ (1.07) $ (0.18) $ 0.12 $ 0.32
1 In 1994, the Company changed its method of accounting for ceding commissions. For a discussion of this issue, see "Change in Accounting for Ceding Commission" in Note 1 to the financial statements in Item 8. If the new accounting principle had been in effect in prior years, the results above would have been different. Those pro forma amounts that would have been changed are presented in the table below.
1993 1992 1991 ---- ---- ---- Revenue $13,614 $ 11,236 $10,241
Income (loss) before income tax $ (0.78) $ (0.48) $ 0.11
The following analysis discusses the results of operations and financial condition of Investors Insurance Group, Inc. (the "Company") and its wholly- owned subsidiaries, primarily Investors Insurance Corporation ("Investors"), and should be read in conjunction with the Company's consolidated financial statements and notes thereto included elsewhere in this report.
The Company, through its subsidiary Investors, specializes in the sale of flexible premium deferred annuity products ("FPDA") as a retirement savings vehicle for individuals. During the past three years, sales of FPDAs have accounted for over 95% of the Company's total premiums received and were $106.3 million, $123.8 million and $95.9 million in 1995, 1994 and 1993, respectively.
Under generally accepted accounting principles ("GAAP"), premiums received on FPDAs are not recognized as revenue at the time of sale but rather are reflected as future policy liabilities. Similarly, policy acquisition costs (primarily commissions) related to such sales are not recognized as expenses but rather are capitalized as deferred acquisition costs ("DAC"). As a result of this process, no profit or loss is realized at the time of sale.
The Company's operating earnings from this product are derived from the excess of investment income (including interest and investment gains (losses) and surrender fees over the sum of interest credited to annuity contracts and acquisition and maintenance expenses. Over the life of an annuity, net investment income, net investment gains (losses) and policy fees are recognized as revenue and DAC is amortized as an expense. The timing of the DAC amortization is based on the estimated gross profits which is adjusted based on actual experience. The Company's earnings depend, in large part, upon persistency of its annuities to enable it to recover the unamortized portion of its DAC. The Company uses surrender charges in annuity policies both to discourage, and to mitigate, the effect of premature withdrawals.
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. Under its terms, this agreement became effective on December 31, 1995 and, with Delaware's approval, was reflected in Investors' 1995 statutory statement. (However, since the agreement did not actually close until 1996, it was reflected as a 1996 transaction under generally accepted accounting principles.) This additional reinsurance reduced the ratio below Delaware's target.
During 1996, the Company plans to continue its efforts to raise additional capital (see discussion below under Liquidity and Capital Resources). This additional capital will enable the Company to reduce its coinsurance rate on new business and grow its block of inforce business without adversely impacting the ratio.
Investors receives acquisition ceding commissions and continuing service fees on coinsured business. Until December 31, 1993, the Company's accounting policy was to reduce the deferred acquisition costs related to the ceded annuity contracts by the portion of the costs recovered through the ceding commission and to recognize the excess ceding commission at the time it was received. Effective January 1, 1994, the Company adopted a new accounting policy under which the recovered acquisition cost and excess ceding commission are recognized over the life of the related annuity contracts.
The new accounting policy is derived from provisions of Statement of Financial Accounting Standards (SFAS) No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts." Under SFAS 113, ceding profits of an insurance company resulting from ceding insurance risks (as specifically defined) are recognized over the life of the related insurance policy, rather than as the risk is ceded. SFAS No. 113 provides specific guidance on accounting for the excess ceding commissions that result from the transfer of insurance risks. For other types of risk transfer arrangements, such as the Company's coinsurance of its annuity contracts, SFAS No. 113 simply specifies "deposit accounting" and does not provide specific guidance for applying this method of accounting. Many insurance companies have adopted a type of "deposit accounting" very similar to the accounting specified for insurance risks, under which excess ceding commissions are recognized over the life of the related contracts. In view of this emerging consensus, and in the interest of comparability of its financial statements with those of other insurance companies, the Company decided to adopt this approach to accounting for its excess ceding commissions. Under the new accounting method the deferred acquisition costs related to the annuities are not reduced; the full ceding commission, including the ceding profit and the recovery of the annuity acquisition costs, is treated as unearned income. This unearned ceding commission is treated as earned in direct relation to the present value of expected gross profits of the related annuity contracts, which is the same manner in which the related deferred acquisition costs are amortized. Like deferred acquisition costs, the unearned ceding commission will be adjusted retrospectively when changes are made to the current or future estimated gross profits. As the ceding commission is earned, the profit portion is recognized as commission income and the cost recovery portion is offset against the amortization of deferred acquisition costs.
The Company's Medicare supplement plan was specifically designed to attract female non-smokers, while the accelerated benefit plan was designed to provide a 100% acceleration of the death benefit upon the diagnoses of a 12 month terminal illness. Development and marketing efforts were quite extensive and cost over $630,000 during 1993. Following the introduction of the Medicare supplement product, this very competitive market became subject to much uncertainty, primarily attributed to the intense scrutiny placed on health care by federal and state governments. In addition, the promotion of Medicare HMOs put a significant strain on the Company's ability to compete effectively in this market. In December 1993, with expected premium volumes well below break-even levels, management withdrew the Medicare supplement policy from the market. To further reduce its exposure to future losses, in April 1994, the Company negotiated the sale of its in force Medicare supplement business to Old Surety Life Insurance Company.
The accelerated benefit life product, while well received by some agents, did not generate significant interest in the marketplace and management withdrew the product from the market in December 1994.
Premiums and policy fees increased $397,000, or 31.4%, to $1.7 million in 1995 from $1.3 million in 1994. This increase is primarily attributable to the surrender or conversion of annuity policies. As these transactions take place, the Company earns fees from surrender charges and premium income from conversion to policies with life-contingent settlement options.
Commission and other income increased $0.1 million, or 15.9%, to $0.9 million in 1995 from $0.8 million in 1994. This increase is primarily due to the increasing service fees on the growing block of reinsured policies. This increase in service fee income is partially off-set by the reduction of reinsurance commission income related to Medicare supplement and accelerated life products which were discontinued in 1994.
Commission and other income decreased $1.3 million, or 61.9%, to $0.8 million in 1994 from $2.1 million in 1993. Commission income makes up the majority of this item and relates to compensation for the Company's sales and distribution system received from its coinsurer. This change is primarily the result of the change in the timing of the recognition of the ceding commission income from the specific ceding date to recognition over the life of the related annuity contract.
Interest on investment contracts increased $0.4 million, or 4.5%, to $9.1 in 1994 from $8.7 million in 1993. The increase in interest on investment contracts of 4.2% in 1994 compared to 1993 is attributed to the growth of investment contracts inforce. Partially off-setting this increase, the weighted average crediting rate for investment contract deposits declined from 6.5% in 1993 to 6.0% in 1994, as credited rates on contracts issued in 1993 and 1992 were renewed in the 4% to 5% range.
Other expenses increased $0.2 million in 1994, or 32.4%, to $1.0 million in 1994 from $0.8 million in 1993. This category consists of interest expense on the $8.0 million secured subordinated debenture and amortization on the cost in excess of net assets of businesses acquired asset. Effective December 1, 1994, management revised the estimated life of the cost in excess of net assets of businesses acquired asset from 40 to 20 years. As a result of this revision, the remaining unamortized balance of the cost in excess of net assets of businesses acquired asset will be amortized over approximately 13 years, and the 1994 amortization was increased by $13,000. In 1994, other expenses also includes an allowance of $237,000 against a reduction of the original purchase cost of Investors. The former owner of Investors is currently under state supervision and it is unclear whether any of this purchase price reduction will be realized.
against prior year returns. These non-life losses will be available for carryforward in future years. However, the "change in control" that could result from the issuance of the preferred stock to new investors as discussed below could substantially reduce the Company's ability to utilize its non-life loss carryforwards.
Net loss decreased $6.6 million, or 94.6%, to $0.4 in 1995 from $7.0 million in 1994. This decrease is primarily due to the change in accounting in 1994 and the change in realized investment gains (losses).
Net loss increased $6.1 million, or 813.6%, to $7.0 million in 1994 from $0.9 in 1993. The increase in loss from 1993 to 1994 is primarily attributable to the change in accounting related to the timing of the recognition of ceding commission income and the recognition of the unrealized loss on the common stock of an affiliate.
Investors must maintain adequate statutory capital and surplus in order to continue producing annuity premium in the jurisdictions in which it is licensed. As discussed above, Delaware has expressed concern over Investors' ratio of capital and surplus to policyholder liabilities, which was approximately twenty to one at the end of 1994. At the end of 1995, as a result of the increase in the coinsurance rates and the New Era agreement, this ratio is less than fourteen to one, below Delaware's target of fifteen to one.
Both California and Arizona (which together account for approximately 57% of Investors new business in 1995) have expressed concern about Investors' ability to continue writing new business unless its capital is substantially increased. Investors has agreed to arrange a capital infusion that would raise its statutory capital and surplus to $11 million by June 30, 1996 in order to continue writing new business in California.
Under the terms of the agreement, which is scheduled to close on June 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.
The Company's independent auditors have included an explanatory paragraph in their report on the Company's financial statements stating that the Company's significant operating losses, accumulated deficit and liquidity problems raise substantial doubt about the Company's ability to continue as a going concern. If this agreement closes as scheduled, management believes the resulting funds should be adequate to assure that both IIG and Investors can continue to operate in the normal course of business. If the agreement fails to close as scheduled, management will attempt to 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.
Interest rate changes may have temporary effects on the sales levels and profitability of the annuity products offered by the Company. For example, regardless of whether interest rates rise or fall, competing investment products (such as annuities offered by the Company's competitors, bank certificates of deposit and mutual funds) may temporarily become more attractive to potential customers. The Company constantly monitors interest rates with respect to a spectrum of durations and sells annuities that permit flexible responses to interest rate changes as part of its management of interest spreads. As required, the Company adjusts the rate credited to its policyholders to maintain its competitive position and to achieve its required interest spread.
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 factor, among other risks and uncertainties inherent in the Company's business:
Changes in the federal income tax laws and regulations which may affect the relative tax advantage of the Company's products.
FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993:
(A) Schedule I - Summary of Investments 61 (B) Schedule IV - Reinsurance (incorporated in Note 5 of Notes to Consolidated Financial Statements)
The Board of Directors Investors Insurance Group, Inc. and Subsidiaries Jacksonville, Florida
We have audited the accompanying consolidated balance sheet of Investors Insurance Group, Inc. and Subsidiaries as of December 31, 1995 and the related consolidated statements of operations, shareholders' equity (capital deficit) and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
Cash and cash equivalents 11,372 3,530 Investment in common stock of affiliate, at market (costs $992 in both 1995 and 1994) 803 874 Accrued investment income 1,090 999 Deferred acquisition costs 42,468 45,405 Investment contract benefits recoverable 351,489 262,058 Reinsurance benefits recoverable 2,438 1,069 Cost in excess of net assets of businesses acquired (less accumulated amortization of $1,014 in 1995 and $738 in 1994) 3,666 3,942 Other assets 541 418 -------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY (CAPITAL DEFICIT) 1995 1994 ---- ---- Liabilities: Future policy benefits and claims: Investment contracts $511,315 $422,937 Life insurance reserves 7,189 5,325 Accident & health claim reserves 5 11 Unearned ceding commission (including deferred gross profits of $7,031 in 1995 and $6,959 in 1994) 38,062 36,755 Note payable 8,000 8,000 Amounts due to coinsurer 5,998 2,988 Accrued expenses 250 267 Other liabilities 2,239 2,076 -------- --------
1,428 (16,318) ------- ------- Total Liabilities and Shareholders' Equity (Capital Deficit) $574,486 $462,041 ======== =======
INVESTORS INSURANCE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (Dollars in thousands, except per share data)
Cumulative effect to December 31, 1993 of changing to a different method of recognizing ceding commission income - (1.39) - ------- ------- -------
Net loss $ (0.14) $ (2.54) $ (0.31) ======== ========= ========
Weighted Average Number of Shares Outstanding 2,764,205 2,766,982 2,766,982 ========= ========= =========
INVESTORS INSURANCE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CAPITAL DEFICIT) YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (Dollars in thousands)
Common Stock Net -------------- Additional unrealized Number of Paid-in investment Accumulated Treasury shares Amount capital gains (losses) deficit stock --------- ------- ------- ------------- --------- ------- Balance at January 1, 1993 2,831,482 $ 1,417 $ 3,657 $ (1,299) $ (2,407) $ (40) Retirement of treasury shares (52,926) (26) (5) - - 31 Change in net unrealized losses - - - 121 -- Net loss - - - - (864) - --------- ------- ------- --------------- --------- ------- Balance at December 31, 1993 2,781,556 1,391 3,652 (1,178) (3,271) (9)
Cumulative effect of change in accounting principle regarding fixed maturity securities - - - 2,540 - - Retirement of treasury shares (14,574) (8) (1) - - 9 Change in net unrealized losses - - - (12,413) - - Net loss - - - - (7,030) - --------- ------- ------- --------------- --------- -------
34 INVESTORS INSURANCE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (Dollars in thousands)
As described more fully in Note 11, the Company has signed an agreement to issue preferred stock in exchange for up to $7,000,000. While the agreement is subject to certain contingencies, if it closes as scheduled, the Company believes the resulting funds should be adequate to assure that both IIG 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.
Premiums and discounts related to mortgage based investments are amortized based on expected prepayments. As differences arise between actual and expected prepayments, the effective yield is recalculated to reflect the actual prepayments to date and anticipated future prepayments. The net investment is then adjusted to the amount that would have existed had the new effective yield been applied since its acquisition.
Short-term investments are carried at cost, which approximates market value. These investments consist of highly liquid investments with maturities of one year or less from date of purchase.
Cash equivalents consist of highly liquid investments with maturities of three months or less at the date of purchase.
A portion of the life insurance business in force is participating policies. The provision for the policyholders' dividend liability, based on dividend scales contemplated when the policies were issued, is included in the liability for policy reserves. Dividends are determined annually and are payable only upon declaration by the Board of Directors.
The Company coinsures portions of its life insurance and annuity contract exposure under traditional coinsurance arrangements. Generally, the Company enters into these arrangements to assist in diversifying its insurance and investment risks and to manage its statutory capital and surplus.
The Company's liability for Future Policy Benefits and Claims includes amounts that are recoverable under these coinsurance agreements. Recoverable amounts related to the transfer of insurance risks are presented as Reinsurance Benefits Recoverable; Recoverable amounts related to the transfer of investment risks represented as Investment Contract Benefits Recoverable. (see below - Change in Accounting for Ceding Commissions)
The Company receives a commission on the transfer of investment contracts risk to the coinsurer. This commission is compensation for the Company's annuity sales and distribution system that originated the contracts. The Company has no future obligation with respect to this commission and, prior to January 1, 1994, the portion representing excess ceding commission was recognized in earnings and the portion representing recovery of acquisition expenses was charged to deferred acquisition costs when the risk was transferred to the coinsurer. As discussed below under Change in Accounting for Ceding Commissions, after 1993, these commissions are deferred and recognized in earnings in proportion to the earnings generated directly from the related annuity contracts (without consideration of the impact of the coinsurance agreement).
Currently, IIG and its non-life subsidiaries file a consolidated federal income tax return. Beginning in 1995, Investors may be included in this consolidated return.
Life insurance companies with total assets less that $500 million are allowed a deduction which is not available to larger life companies. As a "small" life insurance company, 60% of the first $3 million of "life insurance company taxable income" is deductible. This deduction phases out on a pro-rata basis as income increases from $3 million to $15 million.
As the Company sells an annuity contract, it cedes a significant portion of the resulting investment risk and benefit to another insurance company under a coinsurance agreement. Similar to an insurance agency, the Company receives a commission from the coinsurer to compensate it for its sales and distribution efforts. Any excess of this ceding commission over the related policy acquisition cost is profit to the Company. The Company's right to this commission is in no way contingent; other than the risk of default on the part of the coinsurer, the Company has no further potential for profit or loss from the portion of the business ceded. Prior to January 1, 1994, the Company used an accounting policy that recognized the earnings process as completed when these investment risks and benefits were ceded.
Thus, the related excess ceding commissions were recognized at the time of receipt of the ceding commission.
Under the provisions of Statement of Financial Accounting Standards (SFAS) No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long- Duration Contracts", excess ceding commissions of an insurance company resulting from ceding insurance risks (as specifically defined) are recognized over the life of the related insurance policy, rather than as the risk is ceded. SFAS No. 113 provides specific accounting guidance for accounting for the excess ceding commissions that result from the transfer of insurance risks. For other types of arrangements where insignificant amounts of insurance risk is transferred, such as the Company's coinsurance of its annuity contracts, SFAS No. 113 simply specifies "deposit accounting" and does not provide specific guidance for applying this method of accounting. Many insurance companies have adopted a type of "deposit accounting" very similar to the accounting specified for insurance risks: excess ceding commissions are recognized over the life of the related contracts. In view of this emerging consensus, and in the interest of comparability of its financial statements with those of other insurance companies, the Company has decided to adopt this approach to accounting for its excess ceding commissions.
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments. Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of December 31, 1995.
The FASB has issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets Being Disposed of," which provides guidance on how and when impairment losses are recognized on long-lived assets. This statement, when adopted, is not expected to have a material impact on the Company.
(2) INVESTMENTS ----------- The amortized cost and fair values of fixed maturity and equity investments as of December 31 are summarized as follows (in thousands):
Gross Gross Amortized Unrealized Unrealized Fair Cost Gain Loss Value --------- ------ -------- ------- 1995: Held to maturity: U.S. Treasury obligations $ 9,004 $1,052 $ - $ 10,056 Progress Financial Corporation 500 - - 500 Available for sale: Securities issued by U.S. Government agencies and authorities 141,474 7,791 34 149,231 Equity securities 339 27 - 366 --------- ------ ------- --------
151,317 8,870 34 160,153 1994: --------- ------ ------- -------- Held to maturity: U.S. Treasury obligations $ 9,009 $ - $ 552 $ 8,457 Progress Financial Corporation 500 - - 500 Available for sale: Securities issued by U.S. Government agencies and authorities 144,426 - 12,401 132,025 Equity securities 407 255 - 662 --------- ------ ------- --------
1995 1994 ---- ---- Market Value $803,127 $873,991 ======== ======== Cost $992,098 $992,098 ======== ========
Cash equivalents and other investments totaling $9,968,000 and $8,064,000 at December 31, 1995 and 1994, respectively, were on deposit with state agencies to meet regulatory requirements.
Realized investments gains (losses) and changes in the unrealized investment gains (losses) for the year ended December 31 were as follows (in thousands):
Gross investment income 11,728 10,872 10,175 Less investment expenses 130 121 123 ------ ------ ------
There is action pending against the Company in the Supreme Court of the State of New York, County of New York, entitled Federal Insurance Company vs. Gemco National, Inc. in which Federal Insurance Company ("Federal") seeks compensatory damages in excess of $550,000 for an alleged breach of contract. Federal alleges that Gemco breached its agreement with Federal to pay the premiums on its automobile, workers' compensation and commercial insurance policies underwritten by Federal for the Gemco's subsidiary, the Ampat Group, Inc. No activity with respect to this action has occurred since early 1990. However, under New York law, lawsuits remain pending indefinitely. Although management believes the Company has valid defenses to this claim, the ultimate outcome cannot be predicted with any degree of certainty.
Net deferred tax assets and liabilities $ - $ - ======== ========
When the Preferred Shares discussed in Notes 10 and 11 are issued, the resulting "change in control" could substantially reduce the Company's ability to utilize its non-life loss carryforwards.
Investors' "policyholders surplus account," which arose under prior tax law, is generally that portion of the gain from operations that has not been subjected to tax, plus certain deductions. The balance of this account, which, under provision of the Tax Reform Act of 1984, will not increase after 1983, is approximately $1.7 million. This amount has not been subjected to current income taxes but, under certain conditions that management considers to be remote, may become subject to income taxes in future years. At current tax rates, the maximum amount of such tax (for which no provision has been made in the financial statements) is approximately $595,000.
Investors reduces its overall risk on whole life, immediate annuity and health insurance policies through an uncollateralized program of quota share coinsurance and excess of loss reinsurance. As the direct insurer, Investors retains primary liability to the policyholder on all risks transferred. The premium income and benefit expenses presented in the Statement of Operations for the year ended December 31 are reflected net of the reinsurance transactions outlined below (in thousands):
1995 1994 1993 Quota Share Contracts: ---- ---- ---- Premium ceded $ 1,850 $ 617 $ 703 Surrender Fees $ 1,674 $ 834 $ 451 Benefits recovered $ 225 $ 465 $ 612 Interest on investment contracts recovered $ 19,273 $12,367 $ 8,580 Amortization of deferred acquisition cost $ 1,130 $ 1,375 $ 505
Excess of Loss Contracts: Premium ceded $ - $ 79 $ 55 Benefits recovered $ - $ - $ -
Republic-Vanguard Life Insurance Company ("RVL"), is the Company's primary reinsurer and a member of the Winterthur Swiss Insurance Group (one of the largest Swiss insurance companies). The substantial portion of the Company's reinsurance is coinsurance related to investment risks transferred to RVL totaling approximately $351.5 million at December 31, 1995 and recorded as investment contract benefits recoverable on the accompanying balance sheet. From October 1, 1991 through September 30, 1994, 80% of Investors's annuity production was transferred to RVL. For contracts issued subsequent to October 1, 1994 and May 1, 1995, this percentage was revised to 90% and 100%, respectively, due to concerns over Investors' ratio of statutory policy liabilities to capital and surplus (See Note 8). See Note 1 for additional information on the accounting for coinsurance arrangements.
The Company's Accelerated Benefit life policies are being reinsured with WLR on a 80% coinsurance contract.
The Agents Plan was initiated by the Board of Directors in September 1994 and is subject to renewal annually at the discretion of the Board of Directors. This Plan allows issuance of options on up to 75,000 shares of common stock annually to Investors' most productive agents. However, in 1995, the Board authorized the issuance of options on 97,000 shares. If unexpired, these options expire two years after the date of grant.
Outstanding options to purchase common stock at December 31, 1995 were as follows: Average Outstanding Options Option Year of Options Exercisable Price Expiration
1982 Plan 147,074 147,074 $ 0.6250 2000 1992 Plan 417,500 405,500 $ 1.6164 2002-04 Agents Plan 82,200 82,200 $ 1.8212 1997
The statutory accounting practices prescribed or permitted by regulatory authorities differ in certain respects from GAAP. The principal differences between GAAP and statutory accounting are as follows:
-Deferred Acquisition Costs. These costs are treated as a period expense on a statutory basis, but are amortized over the expected gross profits under GAAP;
-Investment Market Value Adjustment. All fixed maturity securities are reported at amortized cost for statutory purposes, while GAAP requires the fixed maturities classified as "available for sale" to be reported at market value;
-Goodwill. The excess of the purchase price of Investors over its identifiable assets and liabilities is deferred and amortized for GAAP. These costs are not recognized under statutory accounting.
-Non-Admitted Assets. Certain designated assets are not recognized under statutory accounting;
-Deferred Income Taxes. Under certain conditions, the impact of certain variances from taxable income is recognized as an adjustment to income tax expense for GAAP, but not for statutory accounting purposes; and
-Premium Revenue. Under GAAP, premiums related to certain interest sensitive products is excluded from revenue.
As a result of these differences, the statutory net income (loss) was $ (1,279,992), $ 297,634 and $430,623 in 1995, 1994 and 1993, respectively. The impact of these differences on the reported net worth of the Company is summarized below: 1995 1994 ---- ---- Investors' statutory capital and surplus $ 5,457,006 $ 7,107,826 Deferred acquisition costs 42,467,973 45,404,640 Policy liability adjustment (89,888,981) (18,765,202) Unearned ceding commission (38,062,255) (36,754,673) Investment market value adjustment 7,756,735 (12,402,028) Goodwill 3,665,559 3,942,195 Interest maintenance and asset valuation reserves 1,272,892 2,357,143 Reinsurance payable to New Era 76,306,929 0 Non-admitted assets 208,584 120,008 Other, net 155,710 254,194 ---------- ----------
IIG's investment in Investors 9,340,152 (8,735,897) IIG's note payable (8,000,000) (8,000,000) Other assets and liabilities of IIG 88,024 417,241 ---------- -----------
Investors tests the ability of its investment portfolio to fund its liability to its policyholders under several possible future interest rate environments. The results of these tests are used by the state regulatory authorities to assess the adequacy of Investors' statutory liabilities. Based on the results of these tests, no adjustments to the statutory liabilities have been required.
Liabilities: Note payable $ 8,000 $ 8,000 Deficit investment in wholly-owned subsidiary - 8,668 Accrued expenses 300 330 ------- -------
Loss before income taxes (358) (3,171) (863) Income tax expense - - 1 ------ ------- ----- Loss before cumulative effect of change in accounting principle (358) (3,171) (864) Cumulative effect to December 31, 1994 of changing to a different method of recognizing ceding commission income - (3,859) - ------ ------- -----
Year Ended December 31, ------------------------- 1995 1994 1993 ---- ---- ---- Cash flows from operating activities: Net loss $ (358) (7,030) $(864) Adjustments to reconcile net loss to net cash used in operating activities: Cumulative effect to December 31, 1993 of changing to a different method of recognizing ceding commission income - 3,859 - Equity in net loss of subsidiaries 299 1,450 468 Realized investment (gains) losses (382) 1,276 - Change in other assets and other liabilities, net (48) 131 82 ------ ------ -------
Net cash used in operating activities (489) (314) (314) ------ ------- ------- Cash flows from investing activities: Proceeds from the sale of investments 577 216 - Purchases of equity securitie (15) - (12) ------ ------- ------- Net cash provided by (used in) investing activities 562 216 (12) ------ ------- ------- Cash flows from financing activities: Common stock issued 1 - - Treasury shares purchased (8) - - ------ ------- -------
Cash and cash equivalents, end of year $ 272 $ 206 $ 304 ====== ======= =======
Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 640 $ 640 $ 640 Income taxes - - 1
At the annual shareholders meeting held on November 17, 1995, the shareholders authorized the Company to issue up to 20,000,000 shares of no par preferred stock. Further, the shareholders authorized the Board of Directors to establish the actual number of shares to be issued in a series, and to fix the designations, powers, preferences and rights within a series of shares and the qualifications, limitations or restrictions thereof without further shareholder approval. As of May 1, 1996, the Board has taken no action relating to these shares and none have been issued.
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. Therefore, 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. Investors agreed to arrange a capital infusion that would raise its statutory capital and surplus to $11 million by June 30, 1996 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.
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 IIG's insurance subsidiary, Investors Insurance Corporation. The insurance company 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.
If this agreement closes as scheduled, the additional capital should satisfy the conditions set by both California and Arizona and reduce the level of regulatory scrutiny from Delaware.
Under a consulting agreement which was terminated in March 1996, Mr. Goebert (one of the Company's directors) received $100,000 in 1995 and 1994. The law firm of Palmarella & Sweeney, P. C., in which Mr. Palmarella (one of the Company's directors) is a principal shareholder, received legal fees of $117,415 and $90,900 in 1995 and 1994, respectively.
The following is a tabulation of the unaudited quarterly results of operations for the years ended December 31, 1995 and 1994 (in thousands, except per share amounts): Net Net Total Income Income (Loss) Revenues (Loss) Per Share -------- -------- --------- 1995 Quarters First $ 3,630 $ (324) $ (0.12) Second 4,234 24 0.01 Third 3,511 (593) (0.21) Fourth 3,885 512 0.18
1994 Quarters First $3,165 $(4,472) $(1.62)* Second 4,132 (1,461 (0.53) Third 3,445 (131) (0.05) Fourth 1,711 (966) (0.35)
Amount at Cost or which Amortized Fair shown Type of Investment Cost Value in the ------------------ balance sheet --------- ----- ------------- Held to maturity: Fixed maturities:
U.S. Government treasury obligations $ 9,004 $10,056 $ 9,004 Banks 500 500 500 ------- ------- -------
Total held to maturity 9,504 10,556 9,504 ------- ------- ------- Securities available for sale: Fixed maturities: U.S. Government agencies and authorities 141,474 149,231 149,231
Total securities available for sale 141,813 149,597 149,597 ------- ------- -------
Mortgage loans on real estate 564 564 564 Policy loans 598 598 598 Short-term investments 356 356 356 ------- ------- -------