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 $1.42 per share, diluted, for the year ended December 31, 1999 compared to $11.1 million, or $1.47 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. 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. 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 of $2.1 million, a decrease due to all other lines of business of $.6 million, and an increase in yields on investable assets of $1.8 million. 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 (see Capital Resources).
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. 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 for 1997, an increase of $.6 million, which approximately consists of: an increase in acquisitions at Madison Life of $.9 million and an increase due to all other lines of business of $1.9 million, offset by a decrease in yields on investable assets of $2.2 million. Income tax expense increased $1.3 million to $3.4 million in 1998 from $2.1 million in 1997 reflecting a higher effective income tax rate in 1998, principally due to reduced benefits associated with the utilization of the Company's remaining tax loss carryforwards (see Capital Resources).
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.
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 80.2% was invested in investment grade fixed income securities, resale agreements, policy loans and cash and cash equivalents at December 31, 1999. 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, 1999, approximately 2.0% 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.
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.
Total Corporate liquidity (cash, cash equivalents, resale agreements, fixed maturities, equity securities and partnership interests) amounted to $13.9 million at December 31, 1999. During 1999, IHC repurchased 232,500 shares of common stock for $2.7 million under a repurchase program initiated in 1991.
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 $13.7 million, net of deferred benefits of $1.6 million and net of deferred policy acquisition costs of $2.3 million in total stockholders' equity, reflecting unrealized losses of $11.0 million at December 31, 1999 versus unrealized gains of $2.6 million at December 31, 1998. From time to time, as warranted, the Company employs investment strategies to mitigate interest rate and other market exposures.
The results of 1999 reflect a higher effective tax rate than in 1998 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 deduction. As previously reported, the Company expects that its future results will continue to reflect higher effective tax rates.
Madison Life closed four assumption reinsurance transactions on December 9, 1999, three of which were effective June 30, 1999 and the fourth of which was effective November 30, 1999. The transactions were structured such that Madison Life received cash and notes equal to the statutory policy reserve liabilities, less policy loans and less ceding commissions credited for the purchase. The notes represent obligations of the Mississippi Guaranty Association ($26.3 million) and of the South Carolina Guaranty Association ($2.0 million), bear interest at 7.25% per annum, and are due on December 9, 2000. In January 2000, the Mississippi Guaranty Association prepaid $9.4 million of such notes. The policy loans represent cash loans, with an average interest rate of 7.0%, made to policyholders on the security of the cash values of their policies, and on the pledge of such policyholders to repay the loan by direct payment of cash or by net retention of proceeds at death or surrender. The Company borrowed $15.0 million under its revolving line of credit and contributed that amount to Madison Life in connection with these transactions.
All of the policies assumed, taken as a whole, represent long-term obligations of Madison Life. The cash received at closing has been, and the proceeds from the notes maturing in 2000 will be, invested in long-term assets so as to approximately match the maturities of the liabilities. Based upon Madison's Life's actuarial model, these blocks are expected to perform similarly to other blocks of Madison Life's acquired life and annuity policies with similar characteristics. Reserve assumptions used in these transactions are consistent with assumptions used in prior transactions (see Note 2 of Notes to Consolidated Financial Statements).
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The requirements for SFAS No. 133 were delayed by SFAS No. 137, "Deferral of the Effective Date of SFAS Statement No. 133," and are now 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 recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The Company is currently evaluating the impact of SFAS No. 133, but does not expect it to have a material impact on the Company.
See Index to Consolidated Financial Statements and Schedules on page 38.