Standard Life leases 13,500 square feet of office space in New York, New York as its corporate headquarters, 3,000 square feet of office space in Farmington, New York for its DBL claims processing center and 1,650 square feet of office space in Heathrow, Florida for a marketing office.
IndependenceCare - Minneapolis L.L.C. leases 3,000 square feet of office space in Minneapolis, Minnesota, IndependenceCare - Illinois L.L.C. leases 3,800 square feet in Vernon Hills, Illinois and IndependenceCare - Tennessee LLC leases 2,500 square feet in Franklin, Tennessee.
Independence Holding Company, a Delaware corporation ("IHC"), is a holding company engaged principally in the life and health insurance business through its wholly-owned subsidiaries, Standard Security Life Insurance Company of New York ("Standard Life"), Madison National Life Insurance Company, Inc. ("Madison Life"), First Standard Security Insurance Company ("First Standard"), IndependenceCare Holdings L.L.C. ("IndependenceCare") and their subsidiaries (collectively, the "Insurance Group"). IHC and its subsidiaries (including the Insurance Group) are collectively referred to as the "Company." All remaining income, principally income from parent company liquidity and expense items associated with parent company activities (including the Company's remaining real estate holdings) are included in Corporate (see Item 1 for a discussion of the business).
Additional information pertaining to the Company's business segments is provided in Note 18 of Notes to Consolidated Financial Statements.
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 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's operating income increased $.2 million to $14.6 million for the year ended December 31, 1999 from $14.4 million for the same period in 1998. Net income was $10.4 million, or $1.29 per share, diluted, for the year ended December 31, 1999 compared to $11.1 million, or $1.33 per share, diluted, for the year ended December 31, 1998. The Company had net realized and unrealized losses of $1.2 million in 1999 and gains of $2.0 million in 1998. Excluding net realized and unrealized gains, the Company had operating income of $15.7 million in 1999 as compared to $12.4 million in 1998, an increase of $3.3 million, which approximately consists of: an increase in acquisitions at Madison Life partially offset by a decrease due to other lines of business, and an increase in yields on investable assets. Income tax expense increased $.8 million to $4.2 million in 1999 from $3.4 million in 1998 reflecting a higher effective income tax rate in 1999, principally due to the loss of tax benefits associated with the utilization of net operating loss carryforwards which are no longer available and the phase out of the small life insurance company deductions.
Premiums earned increased $9.7 million to $90.4 million in 1999 from $80.7 million in 1998; premiums earned increased $9.5 million at Madison Life and $.2 million at Standard Life. The increase at Madison Life is comprised of: a $2.6 million increase in LTD premiums due to an increase in retention on this line of business and an increase in premiums written in 1999; a $9.4 million increase in ordinary life and individual accident and health premiums primarily due to the acquisition of several blocks of business effective June 30, 1999 and May 1, 1999; and a $.8 million increase in group term life premiums due to an increase in retention; such increases were offset by: a $2.7 million decrease in the credit line of business primarily due to the runoff of acquisitions from 1997; a $.3 million decrease in family group term life and a $.3 million decrease in all other lines of business. The increase at Standard Life is comprised of: an increase of $.8 million in group life due to the acquisition of the volunteer firefighters block of business effective April 1, 1999; an increase of $2.6 million in HMO reinsurance due to an increase in retention in 1999; an increase of $.5 million in POS also due to higher retention; an increase of $.4 million in the provider excess line of business due to increased production; and a $.3 million increase in group term life due to increased production; such increases were offset by: a $1.4 million decrease in its DBL line due to terminations in 1998 resulting in a lower premium base in 1999; a $.8 million decrease in an accident and health reinsurance facility assumed due to the runoff of this line; and a $2.2 million decrease in stop-loss health premiums due to an overall reduction in retention in 1999.
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 87% was invested in investment grade fixed income securities, resale agreements, policy loans and cash and cash equivalents at December 31, 2000. Also at such date, approximately 98% of the Company's fixed maturities were investment grade. These investments carry less risk and, therefore, lower interest rates than other types of fixed maturity investments. At December 31, 2000, approximately 2% of the carrying value of fixed maturities 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). Less than .1% of the Company's total investments were in real estate and mortgage loans. The Company has no non-performing fixed maturities.
The Company manages interest rate risk by seeking to maintain a portfolio with a duration and average life that falls within the band of the duration and average life of the applicable liabilities, and may utilize options to modify the duration and average life of such assets; see Note 1(F)(iv) of Notes to Consolidated Financial Statements.
The following summarizes the estimated pre-tax change in fair value (based upon hypothetical parallel shifts in the U.S. Treasury yield curve) of the fixed income portfolio assuming immediate changes in interest rates at specified levels at December 31, 2000:
In the Company's analysis of the asset-liability model, a 100 to 300 basis point change in interest rates on the Insurance Group's liabilities would not be expected to have a material adverse effect on the Company. With respect to its liabilities, if interest rates were to increase, the risk to the Company is that policies would be surrendered and assets would need to be sold. This is not a material exposure to the Company since a large portion of the Insurance Group's interest sensitive policies are burial policies that are not subject to the typical surrender patterns of other interest sensitive policies, and many of the Insurance Group's universal life and annuity policies come from liquidated companies which tend to exhibit lower surrender rates than such policies of continuing companies. Additionally, there are charges to help offset the benefits being surrendered. If interest rates were to decrease substantially, the risk to the Company is that some of its investment assets would be subject to early redemption. This is not a material exposure because the Company would have additional gains in its portfolio to help offset the future reduction of investment income. With respect to its investments, the Company employs (from time to time as warranted) investment strategies to mitigate interest rate and other market exposures.
The increase in cash is offset by the increase in due to brokers due to the timing of a securities trade. The increase in total investments is due to the increase in unrealized gains on such securities and the decrease in notes receivable that were paid off and subsequently reinvested in fixed maturities.
The Company had net receivables from reinsurers of $144.0 million at December 31, 2000. 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. Accordingly, no allowance for doubtful accounts was necessary at December 31, 2000.
Total Corporate liquidity (cash, cash equivalents, resale agreements, fixed maturities, equity securities and partnership interests) amounted to $12.8 million at December 31, 2000. During 2000, IHC repurchased 20,582 shares of common stock for $.2 million under a repurchase program initiated in 1991.
To facilitate its acquisition activity, IHC has contributed $35.0 million to Madison Life since 1993. These contributions served to further enhance the Insurance Group's already good capital ratios, broad licensing and excellent asset quality. The Company currently has corporate liquidity of $12.8 million. The Company also has $15.0 million available under its $30.0 million credit facility (further described in Note 11 of the Notes to Consolidated Financial Statements). The Company anticipates that it can use its current liquidity, its available line of credit and/or raise additional capital in the public or private markets to the extent determined necessary or desirable in order to pursue acquisitions.
The Company anticipates increasing its premium volume through: (i) investments in affiliated marketing subsidiaries; (ii) expansion of its network of MGUs, MGAs, HMOs, general agents and agents; (iii) acquisitions of blocks of business; (iv) greater geographical diversity; and (v) strategic marketing alliances. The Company is particularly interested in acquiring the following types of policies: traditional and group life, interest sensitive life, credit life and health, limited benefit health (e.g., cancer or hospital indemnity), medical stop-loss, DBL blocks, and certain other disability. In anticipation of increased acquisition opportunities, the Company has significantly improved its administration systems which has enabled it to more efficiently convert and manage acquired blocks.
Although federal and state legislative and regulatory bodies have proposed various health care and insurance reform initiatives in recent years (see Item 1. Business), the Company anticipates that its insurance products will continue to be viable in any such changed environment.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and in June 2000 issued SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities." The requirements for SFAS No. 133 were delayed by SFAS No. 137, "Deferral of the Effective Date of SFAS Statement No. 133." Both SFAS No. 133 and 138 are effective for financial statements for periods beginning after June 15, 2000. SFAS No. 133 establishes standards for accounting and reporting for derivative instruments and for hedging activities. It requires that an entity recognizes all derivatives as either assets or liabilities in the balance sheet and measures those instruments at fair value. The Company has evaluated the impact of SFAS No. 133 and 138 and would have recorded an additional loss of $66,000 before tax in the income statement had they been adopted at December 31, 2000.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. The statement requires the Company to reclassify certain financial assets pledged as collateral and to disclose certain information about its collateral activities at December 31, 2000. There was no impact on the financial statements of the Company at December 31, 2000. The Company is currently evaluating the impact of SFAS No. 140 for those provisions effective March 31, 2001, but does not expect it to have a material impact on the Company.
This report and other reports and statements filed by the Company with the Securities and Exchange Commission contain or may contain certain forward looking statements (as that term is defined in the Private Securities Litigation Reform Act of 1995) which are subject to certain risks and uncertainties. Among those factors which could cause the actual results to differ materially from those suggested by such statements are the following: catastrophic losses in the Company's insurance lines or a material aggregation of losses; changes in federal or state law affecting the Company's insurance products; availability of adequate retrocessional insurance coverage at appropriate prices; stock and bond market volatility; the effect of changes required by generally accepted accounting practices or statutory accounting practices; and other risks which are described from time to time in the Company's filings with the Securities and Exchange Commission.