IndependenceCare leases 4,000 square feet of office space in Minneapolis, Minnesota, 3,800 square feet in Vernon Hills, Illinois and 2,500 square feet in Franklin, Tennessee.
The following is a summary of selected consolidated financial data of the Company for each of the last five years.
Additional information pertaining to the Company's business segments is provided in Note 16 of Notes to Consolidated Financial Statements.
Other income increased $2.4 million due to a $2.2 million increase at Standard Life comprised of a decrease in a modified coinsurance reserves adjustment resulting from the surrender in 2000 by a large group of assumed ordinary life policies that are in runoff (such increase in other income is offset by an increase in insurance benefits and claims); and an increase of $1.1 million in fee income earned at IndependenceCare offset by $.9 million less fee income earned by Madison Life's majority-owned managing general underwriter.
Insurance benefits, claims and reserves increased $15.3 million, reflecting an increase of $1.9 million at Madison Life and $13.4 million at Standard Life. Madison Life's increase resulted from: a $2.9 million increase in ordinary life and individual accident and health reserves, claims and surrenders; a $.3 increase in group term life benefits; and a $.7 million increase in LTD claims and reserves due to the increase in premium volume; such increases were offset by: a $1.9 million decrease in the credit line of business due to the runoff of acquisitions and a $.1 million decrease in claims and reserves in other life and health lines of business. The change at Standard Life is comprised of: a $4.9 million increase in medical stop-loss reserves due to the increase in premiums, slightly offset by lower loss ratios; a $1.4 million increase in the HMO reinsurance line due to the increase in volume; and a $2.0 million increase in the closed block of ordinary life business due to the surrender by a large group of policyholders in 2000; a $1.7 million increase in DBL claims and reserves due to the increase in volume and slightly higher loss ratios; a $.8 million increase in blanket accident reserves resulting from this being a new line of business; a $.7 increase in the provider excess line due to the increase in volume; a $.6 million increase in the personal accident line due to higher loss ratios; a $.7 million increase in point of service claims due to the increase in premiums, and a $.6 million increase in all other lines. The group life line at Standard Life would have reported a net decrease of $.4 million due to lower loss ratios except for a $.4 million loss in the Volunteer Fire Fighters Division as a consequence of the September 11th tragedy.
Operating income for the year ended December 31, 2001 decreased by $1.0 million resulting from a loss of $3.7 million in 2001 compared to a loss of $2.7 million in 2000. This decrease in income is due to a decrease of $1.0 million in investment income due to lower returns on certain equity investments and an increase of $.5 million in general and administrative expenses due to salary related expenses, partially offset by a $.1 million increase in other income and a $.4 million decrease in interest expense due to lower interest rates and debt repayments in 2001.
Insurance benefits, claims and reserves decreased $1.5 million, reflecting an increase of $.4 million at Madison Life and a decrease of $1.9 million at Standard Life. Madison Life's increase resulted from: a $.2 million increase in ordinary life and individual accident and health reserves, claims and surrenders and a $.8 million increase in interest on annuity policies, resulting from the 1999 acquisitions; a $.3 increase in group term life benefits; and a $2.8 million increase in LTD claims and reserves due to the increase in premium volume and an increase in loss ratios; such increases were offset by: a $1.4 million decrease in the credit line of business due to the runoff of acquisitions slightly offset by higher loss ratios in this line; a $1.2 million decrease in dental reserves due to the runoff of this line; a $.6 million decrease in dividends paid to policyholders; and a $.5 million decrease in claims and reserves in other life and health lines of business. The change at Standard Life is comprised of: a $3.3 million decrease in stop-loss reserves due to lower loss ratios; a $.9 million decrease in the HMO reinsurance line due to the decrease in volume; and a $1.3 million decrease in the closed block of ordinary life business due to the surrender by a large group of policyholders; such decreases were offset by: a $1.8 million increase in DBL claims and reserves due to higher loss ratios; a $.4 million increase in interest expense and group annuity and life reserves due to an acquisition in 1999; a $.9 million increase in the personal accident assumed line of business due to higher loss ratios and a $.5 million increase in point of service claims due to the increase in premiums.
Amortization of deferred acquisition costs and general and administrative expenses for the Insurance Group increased $2.5 million. Madison Life's expenses increased $2.1 million representing an increase in net commission expense of $1.6 million and an increase of $.5 million in salaries, related benefits and administrative fees all arising from the 1999 acquisitions. Standard Life's expenses increased $.3 million due to an increase in commission expense and consulting fees. IndependenceCare's expenses increased $.1 million.
Operating income for the year ended December 31, 2000 decreased by $1.4 million to a loss of $2.7 million in 2000 from a loss of $1.3 million in 1999. This decrease in income is due to an increase in interest expense of $1.1 million attributable to the borrowing of $15.0 million during the fourth quarter of 1999, a decrease of $.9 million in investment income due to lower returns on certain equity investments partially offset by a decrease of $.6 million in general and administrative expenses due to a reduction in salary related expenses.
The Company had net receivables from reinsurers of $117.8 million at December 31, 2001. Substantially all of the business ceded to such reinsurers is of short duration. All of such receivables are either due from highly rated companies or are adequately secured. No allowance for doubtful accounts was necessary at December 31, 2001.
Total Corporate liquidity (cash, cash equivalents, resale agreements, fixed maturities, equity securities and partnership interests) amounted to $7.4 million at December 31, 2001. On September 4, 2001 IHC completed a "Modified Dutch Auction" tender offer by repurchasing 202,680 shares of its common stock at a purchase price of $16.75 per share. During 2001, including those shares from the Modified Dutch Auction, IHC repurchased 219,433 shares of common stock for $3.6 million under a repurchase program initiated in 1991. In the second quarter of 2001, IHC received $1.7 million upon exercise of 68,100 Warrants for 114,337 shares of common stock. All unexercised Warrants have now expired in accordance with their terms.
In accordance with SFAS No. 115, the Company may carry its portfolio of fixed income securities either as held to maturity (carried at 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. The Company experienced a change in unrealized losses of $1.1 million, net of deferred taxes of $.7 million and net of deferred policy acquisition costs of $1.0 million in total stockholders' equity, reflecting net unrealized gains of $.1 million at December 31, 2001 versus $1.2 million at December 31, 2000. From time to time, as warranted, the Company employs investment strategies to mitigate interest rate and other market exposures.
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, Business Combinations ("SFAS 141") and SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS 141 requires that the purchase method of accounting be used for all business combinations. SFAS 141 specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported separately from goodwill. SFAS 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS 142. SFAS 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS 121 and, after its adoption, SFAS 144.
The provisions of SFAS 141 were effective as of July 1, 2001 and SFAS 142 were effective January 1, 2002. Upon adoption of SFAS 142, the Company is required to evaluate its existing intangible assets and goodwill that were acquired in purchase business combinations, and to make any necessary reclassifications in order to conform with the new classification criteria in SFAS 141 for recognition separate from goodwill. Any transitional impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle. As of December 31, 2001, the Company had unamortized goodwill in the amount of $4.0 million and unamortized identifiable intangible assets in the amount of $.5 million, all of which will be subject to the transition provisions of SFAS 142. Amortization expense related to goodwill was $.6 million for the year ended December 31, 2001. Because of the extensive effort needed to comply with adopting SFAS No. 142, it is not practicable to reasonably estimate the impact of the adoption of the Statement on the Company's financial statements, including whether it will be required to recognize any transitional impairment losses.
See Index to Consolidated Financial Statements and Schedules on page 31.