Standard Life leases 13,500 square feet of office space in New York, New York as its corporate headquarters, and 3,000 square feet of office space in Farmington, New York for its DBL claims processing center.
IndependenceCare leases 1,500 square feet of office space in Minneapolis, Minnesota as its corporate headquarters.
YEAR ENDED DECEMBER 31, 1998 1997 1996 1995 1994 ---------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME DATA: Total revenues.............$110,614 $106,757 $ 89,344 $ 71,427 $ 61,504 Net realized and unrealized gains (losses). 2,013 539 190 - (1,921) Income applicable to common shares from continuing operations..... 11,057 11,187 6,710 6,172 2,396 Operating income excluding net realized and unrealized gains.......... 12,397 11,703(1) 6,630 4,772 3,594
BALANCE SHEET DATA: Total investments.......... 326,156 309,013 249,008 185,867 179,856 Total assets............... 500,312 454,738 336,401 286,207 266,368 Future insurance policy benefits, claims and other policy liabilities........ 328,491 278,092 202,278 158,233 150,988 Long-term debt............. - - - 12,111 14,111 Common stockholders' equity 109,527 91,005 76,856 71,607 55,694
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 and (iii) the one-for-two reverse stock split of IHC's common stock effective June 28, 1996.
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, fixed maturities and equity securities and partnership interests) 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).
On December 31, 1996, IHC consummated the distribution of the common stock of its majority-owned sign manufacturing subsidiary, Zimmerman Sign Company ("Zimmerman"), on a pro rata basis to the holders of record of IHC's common stock as of December 20, 1996. Since December 1995, the Consolidated Financial Statements of the Company have presented Zimmerman as discontinued operations (see Notes 2 and 10 of Notes to Consolidated Financial Statements).
RESULTS OF OPERATIONS --------------------- 1998 COMPARED TO 1997 - --------------------- The Company's operating income increased $1.1 million to $14.4 million for the year ended December 31, 1998 from $13.3 million for the same period in 1997. Net income was $11.1 million, or $1.47 per share, diluted, for the year ended December 31, 1998 compared to $11.2 million, or $1.49 per share, diluted, for the year ended December 31, 1997. The Company had net realized and unrealized gains of $2.0 million in 1998 and $.5 million in 1997. Decisions to sell securities are based on cash flow needs, investment opportunities and economic and market conditions, thus creating fluctuations in gains from year to year. Additionally, the 1997 results includes a gain of $1.0 million or $.14 per share, diluted, from the sale of real estate carried by IHC at nominal value (there was no tax attributable to such gain). Excluding net realized and unrealized gains and the real estate gain, the Company had operating income of $12.4 million in 1998 as compared to $11.8 million in 1997, an increase of $.6 million, which approximately consists of: an increase in
Insurance Group - --------------- The Insurance Group's operating income increased $2.2 million to $15.0 million in 1998 from $12.8 million in 1997. Operating income includes net realized and unrealized gains of $2.1 million in 1998 compared to $.5 million in 1997. Operating income (excluding net realized and unrealized gains) was $12.9 million in 1998 compared to $12.3 million in 1997, an increase of 5.5%.
Premiums earned decreased $1.5 million to $80.7 million in 1998 from $82.2 million in 1997; premiums earned increased $4.5 million at Madison Life and decreased $6.0 million at Standard Life. The increase at Madison Life is comprised of: a $2.3 million increase in the credit lines of business primarily due to the acquisition of two single premium blocks of business effective April 1 and October 1, 1997, the full impact of which is reflected in the 1998 results; a $.7 million increase in long- term disability premiums due to higher sales volume; a $1.6 million increase in the ordinary life and individual accident and health lines of business due to acquisitions effective December 31, 1997 and June 1, 1998; a $.3 million increase in group term life; and a $.2 million increase in other group life and accident and health premiums; the foregoing is offset by a $.6 million decrease in dental premiums due to the runoff of this line of business. The change at Standard Life is comprised of: a $1.0 million decrease in its DBL line due to a higher lapse rate in 1998; a $2.8 million decrease in HMO premiums due to a reinsurance adjustment on an assumed block of business; a $1.9 million decrease in POS premiums due to the loss of one large policy contract in 1998; and a $.9 million decrease in its closed blocks of life, annuity and individual group accident and health lines of business that are in runoff; offset by a $.6 million increase in group life as a result of increased production in this line of business.
Total net investment income increased $.3 million primarily due to the increase in assets at Madison Life related to acquisitions, offset by lower returns on certain hedged equity and distressed situation investments in 1998. The annualized return on investments of the Insurance Group in 1998 was 6.4% compared to 7.6% in 1997.
of business as a result of the increase in gross premiums and a $1.1 million decrease in general expenses from the TPA.
Corporate - --------- Operating income for the year ended December 31, 1998 decreased $1.1 million to a loss of $.6 million as compared to income of $.5 million for the year ended December 31, 1997. Operating income includes realized and unrealized losses of $.1 million in 1998. Included in the 1997 results of Corporate is the $1.0 million gain from the real estate sale. Excluding realized and unrealized gains and the real estate gain, Corporate had a loss of $.5 million in both 1998 and 1997. Investment income decreased $.2 million from 1997 due to lower returns on certain hedged equity investments in 1998. Other income increased $.2 million as a result of fee income earned from the termination of the guarantee of certain subordinated indebtedness of Zimmerman. Selling, general and administrative expenses remained constant.
RESULTS OF OPERATIONS --------------------- 1997 COMPARED TO 1996 - --------------------- The Company's operating income from continuing operations increased $6.5 million, or 95%, to $13.3 million in 1997 from $6.8 million in 1996. The Company had net realized and unrealized gains of $.5 million in 1997 and $.2 million in 1996. Additionally, the 1997 results include the gain on sale of real estate of $1.0 million. Excluding net realized and unrealized gains and the real estate gain, the Company had operating income from continuing operations of $11.8 million in 1997 compared to $6.6 million for 1996. The overall increase in operating income approximately consists of: acquisitions made at Madison Life of $1.5 million, the increase in yields on investable assets of $1.8 million, and the continued growth of the Insurance Group and all other of $1.9 million. Net income was $11.2 million or $1.49 per share, diluted, for the year ended December 31, 1997 compared to $7.8 million or $1.04 per share, diluted, for the year ended December 31, 1996. Income tax expense increased to $2.1 million from $.1 million in 1996; reference is made to Note 15 of Notes to Consolidated Financial Statements for a reconciliation of the effective tax rate.
Insurance Group - --------------- The Insurance Group's operating income increased $12.8 million in 1997 from $10.0 million in 1996. Operating income includes net realized and unrealized gains of $.5 million in 1997 compared to $.2 million in 1996. Operating income excluding net realized and unrealized gains was $12.3 million in 1997 compared to $9.8 million in 1996.
Other income decreased $1.6 million from 1996 to 1997 resulting from: a decrease of $.1 million in reinsurance recoveries at Madison Life; and a decrease at Standard Life of $1.5 million. The decrease at Standard Life is the result of a $2.1 million decrease related to the surrender by a large group of policyholders offset by a credit to reserves relating to the closed blocks of life, annuity and individual and group accident and health lines of business; a $.3 million increase related to administrative fees; and a $.2 million increase related to an increase in POS activity.
Insurance benefits, claims and reserves increased $8.8 million 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 million increase in the credit line of business due to acquisitions and the addition of new accounts throughout the current year; and a $.4 million increase in other life and health lines of business, all of the foregoing offset by a $.3 million decrease in ordinary life and individual accident and health claims and reserves. The change at Standard Life is comprised of: a $3.6 million increase in DBL claims and reserves due to increased volume; a $2.0 million increase in medical stop-loss reserves due to reserve strengthening; and a net $.8 million increase in claims and
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 84.2% was invested in investment grade fixed income securities, resale agreements, policy loans and cash and cash equivalents at December 31, 1998. Also at such date, approximately 97.6% of the Company's fixed maturities were investment grade. These investments carry less risk and, therefore, lower interest rates than other types of fixed
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, 1998: Estimated Estimated Change in Change in Interest Rates Fair Value Fair Value - ------------------------ ---------- ---------- (in millions)
The decrease in cash and cash equivalents and securities purchased under agreements to resell from December 31, 1997 was offset by a decrease in due to brokers attributable to the settlement of a securities trade that was placed at the end of December 1997, and settled in January 1998. The increase in due from and to reinsurers is attributable to the increase in Standard Life's special disability business of which a large portion is reinsured. The increase in future policy liabilities and fixed maturities is due to the acquisition of two blocks of business by Madison Life. The first block was both universal life and traditional ordinary life policies, involved the transfer of $11.2 million in reserves and was effective June 1, 1998. The second block of business consisted entirely of traditional ordinary life policies and had an effective date of January 1, 1998. Assets were transferred on July 15, 1998 on this block and consisted of $30.1 million of reserves. The decrease in liability for business transferred and corresponding credit to paid-in- capital resulted from the termination of the guarantee of certain subordinated indebtedness of Zimmerman on September 30, 1998 (see Note 10 of Notes to Consolidated Financial Statements).
The Company had net receivables from reinsurers of $114.1 million at December 31, 1998. Substantially all of the business ceded to such reinsurers is of short duration. All of such receivables are current and are either due from highly rated companies or are adequately secured. Accordingly, no allowance for doubtful accounts was necessary at December 31, 1998.
Corporate derives its funds principally from: (i) dividends and interest income from the Insurance Group; (ii) 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.
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.
The Year 2000 issue is the result of computer programs being written using two digits rather than four digits to define the applicable year. If not corrected, computer applications could fail or create erroneous results by or at the Year 2000. The Company, together with outside vendors engaged by the Company, has made assessments of the Company's potential Year 2000 exposure, and has begun testing all of the Company's systems. Since the Company has spent in excess of $1.3 million to update and enhance many of its primary systems in the past several years, the Company does not believe that the Year 2000 issue will pose internal operational difficulties. Many of the Company's internal software and hardware have already been tested and are compliant, and the Company expects that all internal systems will
The Company is in the development stages of formulating a contingency plan with respect to this exposure. With respect to functions performed internally by the Company, if one of the Company's systems is not compliant, the Company could resort to manual collection of premiums and processing of claims, or could temporarily transfer these functions to affiliated or unaffiliated entities. With respect to functions currently performed externally, the Company could consider temporarily performing these functions internally, or transferring the functions to another of the Company's vendors that is Year 2000 compliant.
issues and the resulting disruption which could occur in the Company's systems, could have material adverse effects on the Company's business, results of operations, cash flows and financial condition.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. SFAS No. 133 establishes standards for accounting and reporting for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measures those instruments at fair value. The Company is evaluating the statement 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; Year 2000 non- compliance by material vendors; 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.
Due to its superior capital ratios, broad licensing and excellent asset quality and credit-worthiness, the Insurance Group remains well positioned to increase or diversify its current activities, and to raise additional capital in the public or private markets to the extent determined to be necessary or desirable, in order to pursue acquisitions or otherwise expand its operations.
It is anticipated that future acquisitions will be funded internally from existing capital and surplus and parent company liquidity. In the event additional funds are required, it is expected that they would be borrowed.
On September 30, 1998, the guarantee of $10.0 million of Zimmerman debt was terminated; accordingly, the deferred credit (which was incurred in connection with the spin-off of Zimmerman) of $7.9 million, or $1.06 per share, was credited to stockholders' equity as of September 30, 1998.