Madison Life leases approximately 10,300 square feet of office space in Middleton, Wisconsin as its corporate headquarters.
Zimmerman owns a 79,000 square foot manufacturing facility in Longview, Texas, and owns a 10,000 square foot manufacturing facility adjacent to its 102,000 square foot leased plant in Jacksonville, Texas. In Dallas, Texas, 28,000 square feet of leased manufacturing space is sublet to a third party. Zimmerman owns 20 acres of industrial zoned land in Jacksonville, Texas. In 1994, Zimmerman leased 12,000 square feet of office space which serves as its corporate headquarters in Tyler, Texas. It also leases 1,200 square feet of office space in Dallas, Texas.
SELECTED FINANCIAL DATA ----------------------- The following is a summary of selected consolidated financial data with respect to the Company for each of the last five years:
Summary of investments......$185,031 $178,285 $184,398 $163,739 $159,755 Total assets................$286,207 $266,368 $276,989 $249,530 $263,991 Insurance policy benefits, claims and other policy liabilities................$158,233 $150,988 $159,090 $149,083 $159,483 Long-term debt..............$ 12,111 $ 14,111 $ 15,161 $ 161 $ 5,331
Common stockholders' equity.....................$ 71,607 $ 55,694 $ 62,051 $ 57,205 $ 55,730
Cash dividends declared per common share...............$ .02 $ .02 $ .02 $ .02 $ .02
The Selected Financial Data should be read in conjunction with the accompanying Consolidated Financial Statements and notes thereto.
Independence Holding Company and subsidiaries (the "Company" or "IHC") consists of one continuing operating segment: the Insurance Group. This segment is composed of IHC's wholly-owned subsidiaries, Standard Security Life Insurance Company of New York ("Standard Life"), Madison National Life Insurance Company, Inc. ("Madison Life") and First Standard Security Insurance Company ("First Standard") and their affiliates. All remaining income, principally income from parent company liquidity (cash, cash equivalents, resale agreements and marketable securities) and expense items associated with parent company activities, the Company's remaining real estate operations and certain other investments of the Company are included in Corporate. IHC is also engaged in sign manufacturing through its majority-owned subsidiary, Zimmerman Sign Company ("Zimmerman"). The Company intends, however, to reposition itself as strictly a financial services company engaged principally in insurance activities. In that regard, the Company is considering various alternative transactions which would result in the divestiture or significant reduction of the Company's investment in Zimmerman, although there can be no assurance that any such transactions would be consummated. The Consolidated Financial Statements of IHC have been restated to present Zimmerman as discontinued operations (see Note 2 of Notes to Consolidated Financial Statements). Additional information regarding the Company's segments is provided in Note 18 of Notes to Consolidated Financial Statements.
activities, including provider excess reinsurance, development and management of provider sponsored health plans and reinsurance of life and health insurance. The Insurance Group had operating income of $7.8 million for the year ended December 31, 1995 versus $4.7 million for the year ended December 31, 1994. Operating income includes net realized and unrealized losses of $.4 million for the year ended December 31, 1995 versus $2.0 million of losses for the year ended December 31, 1994. The Company makes decisions to sell securities based on cash flow needs, investment opportunities, and the condition of the market, thus creating fluctuations in gains from one year to the next. Operating income excluding net securities gains and losses was $8.2 million for the year ended December 31, 1995 as compared to $6.7 million for the year ended December 31, 1994. Premium revenues increased $5.8 million. Madison Life had an increase of $2.0 million primarily due to an increase of $.8 million in group term life and an increase of $.6 million in group long-term disability as a result of additional written premiums, a $.4 million increase in other life and health lines of business and a $.2 million increase in the credit lines of business. Premium revenues at Standard Life increased $3.8 million due to an increase in stop loss premiums of $3.5 million, a $.9 million increase in premiums from group accident and health business assumed, along with a $.4 million increase from a new POS product and a $.6 million increase from a new HMO reinsurance product. These increases were partially offset by a $1.4 million decrease in DBL premiums due to a higher level of lapses experienced and a $.2 million decrease in ordinary life business. Net investment income increased $1.1 million primarily due to a realignment of the portfolio and higher returns on certain equity investments resulting in a 7.4% return on investments in 1995 compared to a 6.9% return on investments in 1994. Equity income decreased $.9 million due to expenses sustained from certain start-up insurance related partnerships. Other income increased $2.2 million as a result of the following: (i) an increase of $.4 million in stop loss fees, a $.4 million reduction in lotto annuitant expenses and a $.3 million increase in reinsurance recoveries at Standard Life, and (ii) a charge against other income of $1.1 million made in 1994 for a stop loss treaty at Madison Life. Insurance benefits, claims and reserves increased by $4.5 million for the year ended December 31, 1995 compared to the same period of 1994. Madison Life's expenses increased $2.1 million due to an increase of $.8 million in group term life and group long-term disability claims attributable to the additional writings in these lines of business, a $.5 million increase in ordinary life and individual accident and health claims and reserves, and an $.8 million increase in credit life and credit accident and health claims. Standard Life's expenses increased $2.4 million due to an increase in stop loss claims and reserves of $1.5 million, an increase of $.4 million in reserves on the new line of HMO reinsured business, an increase of claims on the assumed block of group accident and health business of $.5
1994 COMPARED TO 1993 - --------------------- The Company's net income applicable to common shares was $4.2 million or $.27 per share for the year ended December 31, 1994 as compared to $5.1 million or $.31 per share for the comparable period of 1993. Operating income from continuing operations decreased to $1.7 million in the year ended December 31, 1994 from $5.6 million in the year ended December 31, 1993. The Company had
net realized and unrealized losses of $1.9 million in 1994 as compared to gains of $.8 million in 1993. Excluding net realized and unrealized gains, the Company had operating income from continuing operations of $3.6 million in 1994 as compared to $4.8 million for 1993. Net income from discontinued operations was $1.8 million for the year ended December 31, 1994 as compared to $1.4 million for the year ended December 31, 1993.
loss claims and reserves of $2.1 million resulting from the increase in premiums, an increase of $.5 million relating to the increase in DBL business and a $.7 million increase in claims due to the assumed group accident and health block of business. Amortization of deferred acquisition costs and general and administrative expenses for the Insurance Group increased $1.0 million: Standard Life's expenses increased by $1.0 million resulting from an increase in commissions of $.8 million from higher premiums and an increase in general expenses of $.2 million, while Madison Life's expenses remained constant.
Corporate --------- Net operating expense decreased $.2 million from 1993 levels. Investment income remained steady while realized gains increased $.3 million due to a corporate investment. Other income increased $.2 million from the sale of a real estate investment. Interest expense increased $.9 million due to a $15.0 million credit agreement entered into in late 1993 by a corporate subsidiary. At the end of 1994, $14.0 million remained outstanding under this credit agreement. Selling, general and administrative expenses decreased $.6 million due to a reduction in consulting expenses in 1994 compared to 1993, and the write down of certain real estate investments in 1993.
Discontinued Operations ----------------------- Operating income of Zimmerman increased $.8 million to $3.0 million for the year ended December 31, 1994 as compared to 1993. Sales increased $3.4 million while cost of sales increased $2.1 million, resulting in a gross profit margin of 23.2% in 1994 versus 21.6% in 1993. Interest expense and selling, general and administrative expenses increased by $.5 million primarily due to the higher sales volume.
General ------- The net cash provided by operating activities amounted to $11.5 million in 1995, while investing activities provided $3.4 million of cash. During 1995, $8.8 million of cash was used by financing activities including: the repurchase of $2.3 million of the Company's common stock, the repayment of long-term debt of $2.0 million, the payment of investment type insurance contracts of $4.2 million and the payment of a dividend on common stock of $.3 million declared in 1994 and paid in 1995.
Insurance Group --------------- The Insurance Group normally provides cash flow from operations, from the receipt of scheduled principal payments on its portfolio of fixed income securities and from earnings on short-term investments. Such cash flow is used partially to finance liabilities for insurance policy benefits. These liabilities represent long-term obligations which are calculated using certain assumed interest rates. The nature and quality of insurance company investments must comply with all applicable statutes and regulations which have been promulgated primarily for the protection of policyholders. Of the aggregate carrying value of the Insurance Group's investment assets, approximately 83% was invested in investment grade fixed income securities, resale agreements and cash and cash equivalents at December 31, 1995. These investments carry less risk and therefore lower interest rates than other types of fixed maturity investments. At December 31, 1995, approximately 4.7% of the carrying value of investable assets was invested in diversified non-investment grade fixed income securities (investments in such securities have different risks than investment grade securities, including greater risk of loss upon default, and thinner trading markets). Commensurate with the dramatic and rapid rise in interest rates during 1994 and continuing through the first quarter of 1995, the Company employed a strategy of hedging portions of its intermediate term and long-term fixed income securities against principal changes. This strategy utilized readily marketable short-term put and call options on interest rate futures contracts. The value of these put and call options varies depending upon the change in the underlying futures contract, which principally varies with interest rate movements on applicable U.S. Treasury securities. The Company will employ this strategy and other appropriate hedging strategies in considering the duration of its fixed income portfolio and insurance liabilities as well as its interest rate outlook. The Company monitors its investment portfolio on a continuous basis and believes the liquidity of the Insurance Group will not be adversely affected by its current investments.
Unrealized Gains ---------------- In accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, the Company may carry its portfolio of fixed income securities either as held to maturity (carried as amortized cost), as trading securities (carried at fair market value) or as available-for-sale (carried at fair market value); the Company has chosen to carry all of its debt securities as available-for-sale. Primarily as a result of the decline in interest rates, the Company experienced a change in unrealized gains of $9.7 million, net of deferred taxes of $1.2 million, in total stockholders' equity, reflecting a decrease in unrealized losses from $9.2 million at December 31, 1994 to net unrealized gains of $.5 million at December 31, 1995. The Company continues to employ investment strategies to mitigate interest rate and other market exposures.
Business -------- Although IHC is engaged in sign manufacturing through Zimmerman, the Company intends to reposition itself as strictly a financial services company engaged principally in insurance activities. In that regard, the Company is considering various
New Accounting Pronouncements ----------------------------- In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation" which is effective for fiscal years beginning after December 15, 1995. SFAS No. 123 establishes financial accounting and reporting standards for stock-based employee compensation plans, and allows either expensing the value of stock-based compensation over the period earned, or disclosing in the Notes to the Consolidated Financial Statements the pro forma impact to net income and earnings per share as if the fair value of the awards had been charged to compensation expense. The Company has not completed its analysis of the Statement, nor has it made a determination as to the expense recognition or disclosure provisions of the Statement.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ------------------------------------------- See Index to Consolidated Financial Statements and Schedules on page 29.