The principal executive offices of the Company are located in Schaumburg, Illinois in a building purchased by the Company in January 1994. The Company, through a subsidiary, owns three buildings in Rockford, Illinois and, through another subsidiary, also owns a building in the Dallas, Texas metropolitan area which currently serves as the main administrative office for the Group Medical Division. The Company leases the offices of its other regional service centers. The executive and administrative offices of Manhattan National Life are located in Cincinnati, Ohio, in leased space. The headquarters of the Company's Medical Utilization Management Division are located in Louisville, Kentucky in leased space. The Company believes these facilities will adequately serve its needs for the foreseeable future and could accommodate expansion of the Company's business.
The information set forth below is based on the Company's major product lines.
Other income increased $1.9 million, or 12%, from $16.6 million to $18.5 million, due to marketing commission overrides received from the sale of HMO products of unaffiliated companies.
The Company has historically held reserve margins in its accident and health claims reserve to provide for potential adverse deviation. The Company reduced reserve margins in the major medical claims reserves in 1994 by approximately $10.4 million. Excluding the reduction in claim reserve margins, the 1994 major medical loss ratio was 65.3%. Improvement in the loss ratio in 1995 was due to continued increases in PPO penetration and higher claim costs in 1994.
The amortization of DAC decreased $24.3 million, or 39%, from $62.3 million to $38.0 million. The decrease was due to a $16.7 million write-off of DAC in 1994, the lower 1995 new business levels, and the decline in first- year commission rates.
Revenue. Total revenue in the Life Insurance Division increased $44.4 million, or 63%, from $71.1 million to $115.5 million. The increase was due primarily to the acquisition of CNL in the first quarter of 1995 which added $5.8 million in premium and $23.2 million in investment income. The remaining increase was due to increased sales of the senior life insurance product marketed in conjunction with Medicare supplement and long-term care policies.
Net investment income increased $27.5 million, or 103%, from $26.9 million to $54.4 million. This increase was primarily due to the acquisition of CNL.
Insurance and General Expenses. Insurance and general expenses increased $10.4 million, or 90%, from $11.6 million to $22 million. The increase in general expenses and commissions was primarily due to the increase in the in-force block of business, legal fees associated with reinsurance litigation which was settled in 1995, and the acquisition of CNL. The unit cost of administration per policy in-force remained relatively constant in 1995.
Corporate expenses decreased $1.4 million, or 16%, from $8.9 million to $7.5 million (excluding the $5.2 million paid to holders of the Company's 8% Debentures and other expenses in connection with the conversion of the 8% Debentures, in the third quarter of 1995). Interest expense decreased $0.3 million, or 5%, from $4.9 million to $4.6 million, primarily due to the utilization of a portion of the Company's Credit Facility beginning in the fourth quarter of 1994 and continuing through the second quarter of 1995, offset by a decrease in interest expense due to the conversion of the Company's 8% Debentures. The general corporate overhead was down approximately $1.1 million due to improved operating efficiencies.
Net income. The Company's consolidated net income increased $3.9 million, or 22%, from $17.1 million to $21.0 million. This increase was due primarily to improved profitability in the Group Medical Division as a result of improved loss ratios and a lower level of DAC amortization.
Premiums and policy charges. Total premiums and policy charges decreased $17.1 million, or 2%, from $704.1 million to $687.0 million. This decrease was due to the decrease in accident and health premiums of $33.2 million, or 5%, which was due primarily to a decrease in premiums from major medical products of $26.9 million, or 6%. The decrease in premiums was primarily due to lower average premiums per policy sold, which resulted from the Company initiating sales of new managed care products. Total health insurance premiums attributable to Medicare supplement and long-term care products remained relatively constant. Life insurance premiums increased $16.2 million, or 36%, primarily due to the acquisition of CNL and new business sales.
Benefits. Total benefits increased $25.6 million, or 6%, from $450.2 million to $475.8 million. Accident and health benefits, which include the change in unearned premiums, decreased $8.2 million, or 2%, from $407.2 million to $399.0 million. Life and annuity benefits increased $33.9 million, or 79%. This increase was due to the acquisition of CNL and increased senior life insurance in-force.
Insurance and general expenses. Insurance and general expenses (which includes non-deferred commission compensation to agents) increased $25.6 million, or 13%, from $192.8 million to $218.4 million. Expenses for the Medical Utilization Management Division increased due to the increase in sales and the acquisition of ACMG. Expenses in the insurance divisions increased due to the development of new marketing and sales incentive programs, system development costs, and the acquisition of CNL. Corporate expenses increased $4.0 million due to $5.2 million in payments made to converting bondholders and other expenses relating to the August 1995 conversion of the Company's 8% Debentures.
Premiums and policy charges. Accident and health insurance premiums increased $57.5 million, or 10%. Premiums from major hospital plans increased $81.5 million, primarily due to the acquisition of CLAC completed in August 1993. Total premiums attributable to the remaining mix of Medicare supplement and long-term care products decreased $24.0 million, or 10%.
Insurance and general expenses. General expenses as a percent of premiums decreased due to the continued emphasis on cost reduction in the Senior Health and Life Division, the Group Medical Division and the Life Insurance Division. However, insurance and general expenses (which includes non-deferred commission compensation to agents) increased $30.0 million, or 18%. The increase was primarily caused by the increase in premium and policy charges and the acquisitions of HRC and CLAC.
Income tax rate. The effective tax rate of the Company decreased to approximately 34% from 35%. The decrease was due to the increased investment in tax-exempt securities included in the Company's portfolio.
Other. The Company acquired the building containing its corporate headquarters in Schaumburg, Illinois, in January 1994 resulting in the increase in investment real estate. Cash decreased due to increased investment in short-term investments. Reinsurance receivables decreased due to the timing of payments due from reinsurers. DAC decreased as a result of a write-down in the asset for certain medical business and the decrease in new business issued in 1994. General expenses and other liabilities decreased due to the timing of payments for federal income taxes and amounts due to reinsurers. Notes payable increased due to the utilization of the line of credit by the Company.
In pricing its insurance products, the Company gives effect to anticipated levels of inflation; however, the Company believes that the high rate of medical cost inflation during recent years has had an adverse impact on its major hospital accident and health claims experience. The Company continues to implement rate increases, as permitted by state regulations, in response to this experience.
The ability of the insurance subsidiaries to pay dividends and make other payments to the Company is subject to state insurance department regulations which generally permit dividends and other payments to be paid for any twelve month period in amounts equal to the greater of (i) net gain from operations in the case of a life insurance company or net income in the case of all other insurance companies for the preceding calendar year or (ii) 10% of surplus as of the preceding December 31st. Any dividends in excess of these levels require the prior approval of the Director or Commissioner of the applicable state insurance department. The amount of dividends that the Company's insurance subsidiaries could pay in 1996 without prior approval is approximately $3.7 million.
In July 1993 the Company issued $57.5 million of its 8% Debentures. Net proceeds from the offering totaled approximately $54.0 million. The 8% Debentures are convertible into the Company's Common Stock at any time prior to maturity, unless previously redeemed, at a conversion price of $11.75 per share. In August 1995, the Company accepted the conversion of $46.9 million of the outstanding 8% Debentures. The effect of the conversion was an increase in stockholders' equity of $45.3 million and a charge to income of $3.5 million, net of taxes, for payments to converting bondholders and other expenses relating to the conversion.
Under the March 1995 Term Loan, the Company borrowed $15.0 million from a group of banks to repay amounts borrowed under the Company's Credit Facility in conjunction with the acquisition of CNL. Interest on the March 1995 Term Loan is payable quarterly, currently at five percent. The note, which is unsecured, requires principal payments of $0.5 million plus interest per quarter with a final payment on December 31, 1999.
In June 1995, a non-insurance subsidiary of the Company borrowed $1.2 million from a commercial bank in order to fund HMO development. Interest on this secured facility is payable monthly at a fixed rate of 8.8%, with principal due at maturity. This facility matures in June, 1996.
In September 1995, a non-insurance subsidiary of the Company borrowed $3.3 million from a finance company to finance the purchase of certain equipment. The note, which is secured by the equipment purchased, bears interest at a fixed rate of 7.81% and has principal and interest payments of $0.04 million payable monthly through August 2005.
The Company has entered into an agreement to purchase all of the outstanding stock of Universal Fidelity for a total purchase price of approximately $26.0 million. Closing on the acquisition is subject to the approval of Universal Fidelity's shareholders and to regulatory approval. The transaction is expected to close in the first quarter of 1996. Universal Fidelity's business is primarily senior health insurance, including Medicare supplement, long-term care and other supplemental insurance.
For a discussion of a new long-lived assets accounting standard, and a new stock-based employee compensation accounting standard and the impact of these standards on the financial statements of the Company, see Note 2 of Notes to Consolidated Financial Statements.