SELECTED FINANCIAL DATA ----------------------- The following is a summary of selected consolidated financial data of the Company for each of the last five years.
YEAR ENDED DECEMBER 31, 1997 1996 1995 1994 1993 --------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME DATA: Total revenues..............$106,757 $ 89,344 $ 71,427 $ 61,504 $ 65,444 Net realized and unrealized gains (losses).. 539 190 - (1,921) 835 Income applicable to common shares from continuing operations before cumulative effect of accounting changes...... 11,187 6,710 6,172 2,396 4,041
BALANCE SHEET DATA: Total investments........... 309,013 249,008 185,867 179,856 184,790 Total assets................ 454,738 336,401 286,207 266,368 276,989 Insurance policy benefits, claims and other policy liabilities................ 278,092 202,278 158,233 150,988 159,090 Long-term debt.............. - - 12,111 14,111 15,161 Common stockholders' equity. 91,005(1) 76,856(1) 71,607 55,694 62,051
Diluted income per common share from continuing operations before cumulative effect of accounting changes...... 1.49 .90 .81 .31 .50
(1) Excludes the credit of $7,905,000 to common stockholders' equity (or $1.06 per common share) that would be recorded upon termination of the guarantee of Zimmerman's indebtedness by a subsidiary of the Company (see Note 10 of Notes to Consolidated Financial Statements).
The above table has been restated to reflect (i) the adoption of Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," (ii) Zimmerman as discontinued operations as described in Note 2 of Notes to Consolidated Financial Statements, (iii) the one-for-two reverse stock split of IHC's common stock effective June 28, 1996 and (iv) the adoption of SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts" in 1993.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ------------------------------------------------- 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") and First Standard Security Insurance Company ("First Standard") 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 (cash, cash equivalents, resale agreements and marketable securities) and expense items associated with parent company activities, the Company's remaining real estate holdings and certain other investments of the Company, are included in Corporate (see Item 1 for a discussion of the business).
Premium revenues increased $12.6 million or 18% to $82.2 million in 1997 from $69.6 million in 1996; premium revenues at Madison Life increased $7.8 million while Standard Life showed a $4.8 million increase in premiums. The increase at Madison Life is comprised of: a $6.4 million increase in the credit lines of business primarily due to the acquisitions of two single premium blocks of business effective April 1 and October 1, 1997; a $.5 million increase in long-term disability premiums; a $.7 million increase in dental premiums; and a $.2 million increase in group term life premiums. The increase at Standard Life is comprised of: a $5.3 million increase in its DBL line of business primarily due to an acquisition and the continued growth in this line; a $.8 million increase in HMO reinsurance business; and a $.4 million combined increase in the provider-excess and special disability business. These increases were offset by a $1.1 million decrease in the closed blocks of life, annuity and individual and group accident and health lines of business and a $.6 million decrease in the stop-loss line of business.
Total net investment income increased $3.7 million due to an increase in assets at Madison Life related to acquisitions, and higher returns on certain equity investments. The annualized return on investments in 1997 was 7.6% compared to 7.2% in 1996. Equity income increased $.4 million due to the increased profitability of certain insurance related partnerships.
Insurance benefits, claims and reserves increased $8.8 million, or 18%, reflecting an increase of $5.4 million at Madison Life and $3.4 million at Standard Life. Madison Life's increase resulted from: a $.5 million increase in long-term disability claims; a $.9 million increase in dental claims due to the increase in premium volume; a $.9 million increase in interest credited to universal life and annuity products; a $3.0
1996 COMPARED TO 1995 - --------------------- The Company's operating income from continuing operations increased $2.0 million, or 42%, to $6.8 million in 1996 from $4.8 million in 1995. The Company had net realized and unrealized gains of $.2 million in 1996. Excluding net realized and unrealized gains, the Company had operating income from continuing operations of $6.6 million in 1996 compared to $4.8 million for 1995. Net income applicable to common shares was $7.8 million or $1.04 per share, diluted, for the year ended December 31, 1996 compared to $8.2 million or $1.08 per share, diluted, for the year ended December 31, 1995. Income tax expense increased to $.1 million from a benefit of $1.4 million in 1995; reference is made to Note 15 of Notes to Consolidated Financial Statements for a reconciliation of the effective tax rate.
Total net investment income increased $2.9 million due to a realignment of the securities portfolio, higher returns on certain equity investments, an increase in assets at Madison Life related to the acquisition of the pre-need and interest-sensitive blocks of business, and the infusion of a $5.0 million surplus note in the fourth quarter of 1996. The annualized return on investments in 1996 was 7.2% compared to 7.4% in 1995. Equity income increased $.4 million due to a reduction in expenses sustained by certain start-up insurance related partnerships in which the Insurance Group invested in 1995.
increases were offset by a $.9 million decrease in reinsurance recoveries.
Insurance benefits, claims and reserves increased $12.5 million, or 33%, reflecting an increase of $4.7 million at Madison Life and $7.8 million at Standard Life. Madison Life's increase resulted from the following: a $.8 million increase in ordinary life and individual accident and health claims and reserves primarily due to the acquisition of the pre-need block of business; a $.5 million increase in long-term disability claims; a $.6 million increase in group term life claims; a $.3 million increase in claims and reserves in other life and health lines of business; a $1.7 million increase in interest credited to universal life and annuity products primarily as a result of the acquisition of the pre-need block of business and the interest sensitive whole life block of business; and a $.8 million increase in the credit line of business due to new accounts. The change at Standard Life is comprised of the following increases: $4.9 million in stop-loss claims incurred as a result of the increased retention and the increased premiums in this line of business; additional claims and reserves of $1.1 million relating to the POS product; $1.2 million in claims and reserves from the HMO reinsurance product; $.6 million relating to the assumed block of group accident and health line of business; and $.9 million in DBL claims due to increased volume. The foregoing increases were offset by a $.9 million decrease in claims and reserves due to the continuing runoff of the closed blocks of life, annuity and individual and group accident and health lines of business.
LIQUIDITY --------- Insurance Group - --------------- The Insurance Group normally provides cash flow from: (i) operations; (ii) the receipt of scheduled principal payments on its portfolio of fixed income securities; and (iii) earnings on 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 Company monitors its investment portfolio on a continuous basis and believes that the liquidity of the Insurance Group will not be adversely affected by its current investments.
Corporate - --------- Corporate derives its funds principally from: (i) dividends and interest income from the Insurance Group; (ii) tax payments pursuant to tax sharing agreements with, and management fees from, its subsidiaries; and (iii) investment income from Corporate liquidity. Regulatory constraints historically have not affected the Company's consolidated liquidity, although state insurance laws have provisions relating to the ability of the parent company to use cash generated by the Insurance Group to fund operating expenses, interest and dividend payments at
Corporate. The Company remains contingently liable in connection with the guarantee of $10.0 million of subordinated indebtedness of Zimmerman (see Note 10 of Notes to Consolidated Financial Statements).
The Company anticipates increasing its premium volume through (i) acquisitions; (ii) greater geographical diversity; (iii) expansion of its network of MGUs, MGAs, HMOs, general agents and agents; and (iv) its role as lead underwriter on reinsurance facilities. 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 significantly improved its administration systems commencing in the latter part of 1996, which enabled it to more efficiently convert and manage acquired blocks.
The Company expects that its future results will be impacted by a significantly higher effective income tax rate, principally due to reduced benefits associated with the utilization of its remaining tax loss carryforwards.
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 gains of $3.4 million, net of deferred taxes of $1.0 million, in total stockholders' equity, reflecting unrealized gains of $1.9 million at December 31, 1997 versus unrealized losses of $1.5 million at December 31, 1996. From time to time, as warranted, the Company employs investment strategies to mitigate interest rate and other market exposures.
Accounting Pronouncements Not Yet Adopted - ----------------------------------------- In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No.'s 130 and 131 are effective for fiscal years beginning after December 15, 1997. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. SFAS No. 131 establishes standards for the way that public business enterprises report information about
operating segments in annual financial statements, and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders.
On December 31, 1996, IHC consummated the distribution of the common stock of Zimmerman on a pro rata basis to holders of record of IHC's common stock as of December 20, 1996.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ------------------------------------------- See Index to Consolidated Financial Statements and Schedules on page 32.