IHC has entered into a renewable short-term arrangement with Geneve Corporation for the use of approximately 6,500 square feet of office space as its corporate headquarters in Stamford, Connecticut.
YEAR ENDED DECEMBER 31, ---------------------------------------------- 1996 1995 1994 1993 1992 ---------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The above table has been restated to reflect (i) Zimmerman as discontinued operations as described in Note 2 of Notes to Consolidated Financial Statements, (ii) the adoption of Statement of Financial Accounting Standards No. 113 "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts" in 1993 and (iii) the one-for-two reverse stock split of IHC's common stock effective June 28, 1996.
Independence Holding Company, a Delaware corporation ("IHC"), is a financial services 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 operations 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 been restated to present Zimmerman as discontinued operations (see Notes 2 and 10 of Notes to Consolidated Financial Statements).
Insurance Group - --------------- The Insurance Group's operating income increased 28% to $10.0 million in 1996 from $7.8 million in 1995. Operating income includes net realized and unrealized gains of $.2 million in 1996 compared to $.4 million of losses in 1995. Decisions to sell securities are based on cash flow needs, investment opportunities and economic and market conditions, thus creating fluctuations in gains (losses) from year to year. Operating income excluding net realized and unrealized gains (losses) was $9.8 million in 1996 compared to $8.2 million in 1995.
by Standard Life (the "TPA"). The foregoing increases were offset by a $.9 decrease in reinsurance recoveries.
1995 COMPARED TO 1994 - --------------------- Operating income from continuing operations increased to $4.8 million for the year ended December 31, 1995 from $1.7 million for the year ended December 31, 1994. The Company had net realized and unrealized losses of $1.9 million in 1994. Excluding net realized and unrealized gains, the Company had operating income from continuing operations of $4.8 million in 1995 as compared to $3.6 million for 1994. Net income applicable to common shares was $8.2 million or $1.08 per share for the year ended December 31, 1995 as compared to $4.2 million or $.54 per share for the year ended December 31, 1994. Income tax benefits increased to $1.4 million from $.7 million; reference is made to Note 15 of Notes to Consolidated Financial Statements.
Premium revenues increased $5.8 million. Madison Life had an increase of $2.0 million primarily due to an increase of $.8 million in group term life and an increase of $.6 million in group long-term disability as a result of additional written premiums, a $.4 million increase in other life and health lines of business and a $.2 million increase in the credit lines of business. Premium revenues at Standard Life increased $3.8 million due to an increase in stop-loss premiums of $3.5 million, a $.9 million increase in premiums from group accident and health business assumed, along with a $.4 million increase from a new POS product and a $.6 million increase from a new HMO reinsurance product. These increases were partially offset by a $1.4 million decrease in DBL premiums due to a higher level of lapses experienced and a $.2 million decrease in ordinary life business.
Net investment income increased $1.1 million primarily due to a realignment of the portfolio and higher returns on certain equity investments resulting in a 7.4% return on investments in 1995 compared to a 6.9% return on investments in 1994. Equity
income decreased $.9 million due to expenses sustained from certain start-up insurance related partnerships.
Insurance benefits, claims and reserves increased by $4.5 million for the year ended December 31, 1995 compared to the same period of 1994. Madison Life's expenses increased $2.1 million due to an increase of $.8 million in group term life and group long-term disability claims attributable to the additional writings in these lines of business; a $.5 million increase in ordinary life and individual accident and health claims and reserves; and an $.8 million increase in credit life and credit accident and health claims. Standard Life's expenses increased $2.4 million due to an increase in stop-loss claims and reserves of $1.5 million; an increase of $.4 million in reserves on the new line of HMO reinsured business; an increase of claims on the assumed block of group accident and health business of $.5 million; and a $.8 million increase in claims from the ordinary life annuity, individual and group accident and health lines of business primarily resulting from higher than anticipated claims on this closed block of business; the foregoing was partially offset by a decrease in DBL reserves of $.8 million due to favorable experience and reduced premium volume on this block of business.
Amortization of deferred acquisition costs and general and administrative expenses for the Insurance Group increased $2.2 million. Standard Life's expenses increased by $2.4 million resulting from an increase in commissions of $.9 million; and an increase in insurance taxes of $.3 million from higher premiums; and an increase in general expenses of $1.2 million. Madison Life's general expenses decreased by $.2 million. A decrease of $1.2 million in net commission expense due primarily from the credit blocks of business was offset by a $1.0 million increase in general expenses. The increase in general expenses for both Standard Life and Madison Life resulted from an increase in employee costs, consulting fees and premium taxes related to the growth and development of new business.
Corporate - --------- Corporate derives its funds principally from (i) dividends and interest income from the Insurance Group; (ii) tax payments pursuant to tax sharing agreements 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. In connection with the distribution of Zimmerman, the Company received a special cash dividend of $18.5 million, of which $10.0 million was used to repay all of the Company's indebtedness. Also in connection with the distribution, a subsidiary of the Company guaranteed $10.0 million of subordinated indebtedness of Zimmerman (see Note 10 of Notes to Consolidated Financial Statements).
OUTLOOK ------- Business - -------- Although federal and state legislative and regulatory bodies have proposed various healthcare and insurance reform initiatives in recent years, the Company anticipates that its insurance products will continue to be viable in any such changed environment.
The Company anticipates increasing its premium volume through (i) greater geographical diversity; (ii) expansion of its network of MGUs, MGAs, HMOs, general agents and agents; (iii) its role as lead underwriter on reinsurance facilities; and (iv) acquisitions.
The Company is particularly interested in acquiring traditional life policies, interest sensitive life polices, credit life and health policies, limited benefit health policies (e.g. cancer or hospital indemnity policies), DBL blocks, and certain other disability policies. In anticipation of increased acquisition opportunities, the Company contributed $5.0 million to Madison Life in the fourth quarter of 1996 (following a contribution of $15.0 million in 1993), and significantly improved its administration systems, which enabled it to more efficiently manage acquired blocks.
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.
Capital Resources - ----------------- 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.
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, the Company may carry its portfolio of fixed income securities either as held to maturity (carried as 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. Primarily as a result of the increase in interest rates, the Company experienced a change in unrealized loss of $2.0 million, net of deferred tax benefits of $.8 million, in total stockholders' equity, reflecting unrealized gains of $.5 million at December 31, 1995 versus unrealized losses of $1.5 million at December 31, 1996. The Company continues to employ investment strategies to mitigate interest rate and other market exposures.
New Accounting Pronouncements - ----------------------------- In June 1996, the Financial Accounting Standards Board ("FASB") issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." In December 1996 the FASB issued SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125." The requirements of SFAS No. 125 have been deferred by SFAS No. 127 for those types of transactions that are entered into by the Company and would be effective after December 31, 1997, and are to be applied prospectively. Earlier or retroactive application is not permitted. The Company is currently evaluating the Statement but does not believe it will have a material impact on the Company.
DISTRIBUTION OF ZIMMERMAN ------------------------- 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.
The terms of the distribution provided for IHC shareholders to receive one share of Zimmerman Common Stock for each five shares of IHC Common Stock, and cash in lieu of fractional shares. IHC received a ruling from the Internal Revenue Service that the distribution would be tax-free to IHC shareholders, and that IHC would not recognize income, gain or loss as a result of the transaction.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ------------------------------------------- See Index to Consolidated Financial Statements and Schedules on page 31.