1. Data for the years 1996 to 1998 has been restated to reflect the effect of the stock dividend which was paid on March 17, 1999.
2. Net income per share for the year 1996 has been restated to reflect the effect of FAS 128.
Premium income, net of reinsurance, for the year 2000 was $10.87 million, as compared to $11.13 million for the year 1999 and $10.89 million for the year 1998. This source of revenues is related to the traditional life insurance and accident & health insurance book of business of ILCO's insurance subsidiaries. The increase in premium income from 1998 to 1999 was due primarily to the acquisition of the book of business from Grinnell Life Insurance Company in 1998. The results for 1998 include, for the period beginning on June 30, 1998, the operations of Grinnell Life. Grinnell Life was acquired on June 30, 1998, through a subsidiary of ILCO, for an adjusted purchase price of $16.6 million. A portion of the purchase price ($12.37 million) was paid by way of a dividend to the seller immediately prior to the closing of the transaction; the balance of the purchase price was paid by ILCO's subsidiary. As part of the transaction, Grinnell Life was immediately merged with and into that subsidiary, with that subsidiary being the surviving entity. The decrease from 1999 to 2000 is attributable to the decrease in the traditional life insurance book of business. Reinsurance premiums ceded were $3.04 million in 2000, as compared to $3.47 million in 1999 and $2.94 million in 1998. Premiums ceded decreased between 1999 and 2000 consistent with the decrease in premium income, and increased from 1998 to 1999 consistent with the increase in premium income.
Policyholder benefits and expenses for the year ended December 31, 2000 were $32.46 million, as compared to $32.00 million for the year ended December 31, 1999 and $38.37 million for the year ended December 31, 1998. The $6.4 million decrease from 1998 to 1999 was due to a lower level of death claims ($2.6 million lower in 1999 than in 1998) and a $4.4 million decrease in reserves related to policyholder surrenders.
The expense related to the amortization of present value of future profits of acquired businesses was $3.81 million for the year ended December 31, 2000, $3.84 million for the year ended December 31, 1999, and $5.90 million for the year ended December 31, 1998. The $2.1 million decrease in expenses from 1998 to 1999 is attributable to the final amortization in 1998 of a portion of the business. The small decrease from 1999 to 2000 is in line with the expected amortization of the remaining book of business.
The expense related to the amortization of deferred policy acquisition costs was $2.51 million for the year ended December 31, 2000, $2.37 million for the year ended December 31, 1999, and $2.13 million for the year ended December 31, 1998. The slight increase in amortization of deferred policy acquisition costs over the three year period can be attributed to the continued capitalization of expenses incurred in connection with the writing of new business.
The operating expenses of the Company were $17.10 million for the year ended December 31, 2000, as compared to $17.03 million for the year ended December 31, 1999 and $14.85 million for the year ended December 31, 1998. The level of expenses for the year 1999 was affected by expenses incurred in connection with the data processing Year 2000 compliance. The level of expenses in the year 2000 was affected by costs associated with the Company's move to River Place Pointe and the increased amount of rent paid by the Company at its new offices.
The provision for federal income taxes was $7.02 million in 2000 as compared to $5.97 million in 1999 and $6.47 million in 1998. The decrease in the year 1999 was due to the tax deduction attributable to the donation of the Standard Life Building. Prior to December, 1999, Investors-NA owned an office building, located at 206 West Pearl Street, Jackson, Mississippi, which was the former headquarters of Standard Life Insurance Company the ("Standard Life Building"). On December 29, 1999, Investors-NA donated the Standard Life Building to the Jackson Redevelopment Authority ("JRA"). Contemporaneously with the donation of the Standard Life Building, Investors-NA and Financial Industries Corporation ("FIC") sold all of the adjacent parcels they owned to the JRA for a total sale price of $2,500,000.00, which has been allocated according to the respective ownership interests of Investors-NA (approximately 59.28%) and FIC (approximately 40.72%). The donation and sale was made pursuant to the terms of the Donation, Purchase and Sale Agreement dated July 17, 1998. Investors-NA claimed an income tax deduction on tax return filed in 2000 in an amount of $864,231. The donation and sale transaction referenced above resulted in a net gain (GAAP basis) of $992,000 for ILCO and $409,000 for FIC (or a combined total of $1.401 million).
During 2000, the lapse rate with respect to universal life insurance policies decreased from the lapse rate experienced in 1999. The rate in 2000 was 5.84 %, as compared to 6.30 % in 1999. The lapse rate with respect to traditional (non-universal) life insurance policies also decreased from the levels experienced in 1999. The rate in 2000 was 6.45% compared to 8.15% in 1999. The lapse rates experienced during the 2000 period were within the ranges anticipated by management.
ILCO is an insurance holding company. The principal assets of ILCO consist of the outstanding capital stock of Investors-NA and its subsidiary, Investors-IN. Prior to June 30, 2000, ILCO's principal source of liquidity consisted of the periodic payment of principal and interest by Investors-NA, pursuant to the terms of the Surplus Debentures. The Surplus Debentures were originally issued by Standard Life Insurance Company and their terms were previously approved by the Mississippi Insurance Commissioner. In connection with the 1993 merger of Standard Life into Investors-NA, the obligations of the Surplus Debentures were assumed by Investors-NA. As of June 30, 2000, the outstanding principal balance of the Surplus Debentures was completely paid off. For periods subsequent to June 30, 2000, ILCO's available source of liquidity is dividends paid to it from its subsidiaries. Applicable state insurance laws generally restrict the ability of insurance companies to pay cash dividends in excess of prescribed limitations without prior approval. The ability of Investors-NA to pay shareholder dividends is and will continue to be subject to restrictions set forth in the insurance laws and regulations of Washington, its domiciliary state. The Washington insurance law limits how and when Investors-NA can pay shareholder dividends by including the "greater of" standard for payment of dividends to shareholders, and requiring that prior notification of a proposed dividend be given to the Washington Insurance Commissioner and that cash dividends may be paid only from earned surplus. Under the "greater of" standard, an insurer may pay a dividend in an amount equal to the greater of (i) 10% of the policyholder surplus or (ii) the insurer's net gain from operations for the previous year. As of December 31, 2000, Investors-NA had earned surplus of $69.1 million.
ILCO's cash and cash equivalents at December 31, 2000 was $9.07 million as compared to $3.36 million at December 31, 1999 and $12.21 million at December 31, 1998. The $5.7 million increase in cash and cash equivalents at December 31, 2000 from 1999 was due primarily to a large decrease in cash used in operating activities. The decrease in cash and cash equivalents from 1998 to 1999 was primarily attributable to a decrease of cash flow provided by investing activities due to an increase in investments purchased and a decrease in the value of short-term investments attributable to interest rate fluctuations during 1999.
ILCO's net cash flow used in operating activities was $(1.91) million for the year ended December 31, 2000, as compared to $(20.89) million for the year ended December 31, 1999 and $(17.33) million for the year ended December 31, 1998. The $19.0 million increase in cash flow from 1999 to 2000 was primarily attributable to a $4.6 million decrease in agent advances and other receivables, a $5.8 million decrease in policy liabilities and contractholder deposit funds due to fewer surrenders of policies, and a $13.9 million increase in deferred federal income taxes due primarily to the gain on the Company's bond portfolio.
The fixed maturities available for sale portion of invested assets at December 31, 2000 was $440.75 million. The amortized cost of the fixed maturities available for sale segment as of December 31, 2000 was $437 million, representing a net unrealized gain of $3.75 million. This unrealized gain principally reflects changes in interest rates from the date the respective investments were purchased. At December 31, 1999,
the fixed maturities available for sale portion of invested assets was $404.2 million and the amortized cost was $411.5 million, representing a net unrealized loss of $7.3 million. The overall increase from 1999 to 2000 was attributable to additional purchases of fixed maturities available for sale as well as more favorable interest rates for these investments in 2000. To reduce the exposure to interest rate changes, portfolio investments are selected so that diversity, maturity and liquidity factors approximate the duration of associated policyholder liabilities.
Invested real estate and other invested assets increased from $21.1 million at December 31, 1999 to $33.0 million as of December 31, 2000. This increase is related primarily to the ongoing development by Investors-NA of River Place Pointe.
The liquidity of our insurance operations is also related to the overall quality of our investments. The assets held by ILCO's life insurance subsidiaries must comply with applicable state insurance laws and regulations. In selecting investments for the portfolios of its life insurance subsidiaries, the Company's emphasis is to obtain targeted profit margins, while minimizing the exposure to changing interest rates. This objective is implemented by selecting primarily short- to medium-term, investment grade fixed income securities. In making such portfolio selections, the Company generally does not select new investments which are commonly referred to as "high yield" or "non-investment grade."
The consolidated balance sheets of the Company as of December 31, 2000 include $35.3 million of "Notes receivable from affiliates", represented by (i) a loan of $22.5 million from Investors-NA to Family Life Corporation and a $2.5 million loan from Investors-CA to Financial Industries Corporation (which is now owned by Investors-NA as a result of the merger of Investors-CA into Investors-NA) and $2.0 million of additions to the $2.5 million note made in accordance with the terms of such note; these loans were granted in connection with the 1991 acquisition of Family Life Insurance Company by a wholly- owned subsidiary of FIC (ii) a loan of $30 million by Investors-NA to Family Life Corporation made in July, 1993, in connection with the prepayment by the FIC subsidiaries of indebtedness which had been previously issued to Merrill Lynch as part of the 1991 acquisition and (iii) a loan of $4.5 million by Investors-NA to Family Life Insurance Investment Company made in July, 1993, in connection with the same transaction described above.
In December, 1998, FLIIC was dissolved. In connection with the dissolution, all of the assets and liabilities of FLIIC became the obligations of FLIIC's sole shareholder (FIC). Accordingly, the obligations under the provisions of the $4.5 million note described above are now the obligations of FIC.
On the day that ILCO publicly announced the formation of a special committee to evaluate a potential merger with FIC, two class action lawsuits were filed against ILCO, FIC and the officers and directors of ILCO. The actions allege that a cash consideration in the proposed merger is unfair to the shareholders of ILCO, that it would prevent the ILCO shareholders from realizing the true value of ILCO, and that FIC and the named officers and directors had material conflicts of interest in approving the transaction.
In their initial pleadings, the plaintiffs sought certification of the cases as class actions and the named plaintiffs as class representatives, and among other relief, requested that the merger be enjoined (or, if consummated, rescinded and set aside) and that the defendants account to the class members for their damages.
In March, 2001, ILCO announced that its board of directors approved the payment of an annual cash dividend in the amount of $0.41 per share. The dividend is payable on April 12, 2001, to record holders as of the close of business on March 19, 2001.
1. Report of PricewaterhouseCoopers LLP, Independent Accountants, dated April 2, 2001.