Madison Life leases 17,500 square feet of office space in Middleton, Wisconsin as its corporate headquarters, 3,900 square feet in Birmingham, Alabama for its military and government individual life and annuity division, 1,300 square feet in Austin, Texas for executive office space, and 2,400 square feet in Wilkesboro, North Carolina for its credit agency.
Majestic leases 7,050 square feet of office space in Troy, Michigan as its corporate headquarters and 984 square feet in Hinsdale, Illinois.
SHA leases 8,002 square feet of office space in Rockford, Illinois as its corporate headquarters, 4,083 square feet in Tampa, Florida and 210 square feet in Pewaukee, Wisconsin.
The Company is a holding company principally engaged in health insurance throughout the United States, and is a leader in the medical stop-loss industry nationally. The Company operates through its two insurance carriers (Standard Life and Madison Life), Strategic Health Associates Inc ("SHA") and its 40% ownership interest in American Independence Corp. ("AMIC"), which owns medical stop-loss managing general underwriters (MGUs). Through its ownership of AMIC and other MGUs, IHC controls approximately 73% of the production sources for this core product, while maintaining profitability through disciplined underwriting. Through its ownership of Health Plan Administrators Inc. ("HPA"), IHC controls the distribution of its short-term medical products. Through its ownership interest in CA Insurance Services ("CA Services") and its contractual relationship with Insurers Administrative Corporation ("IAC"), the Company controls the distribution of its group major medical products. IHC also writes group disability/DBL, group life and annuities, individual life and annuities, and credit life and disability.
On July 15, 2004, moved the listing of IHC common stock to the New York Stock Exchange. The Company's stock now trades under the symbol "IHC";
Declared an 80% stock dividend resulting in shareholders as of the record date June 18, 2004, receiving eight additional shares for every 10 shares owned;
On January 5, 2005, acquired HPA, a TPA that specializes in short-term and temporary medical insurance products which had a block of $23 million in 2004;
IHC will begin writing group major medical in 36 states and short-term medical in 46 states in 2005;
96.6% of the Insurance Group's invested assets in investment grade fixed-income securities, cash and cash equivalents, resale agreements and policy loans; only .9% held directly in non-investment grade bonds and a negligible amount in mortgage loans.
Information pertaining to the Company's business segments is provided in Note 19 of Notes to Consolidated Financial Statements included in Item 8.
The Company accounts for its investments in debt and equity securities under Statement of Financial Accounting Standards No. 115 ("SFAS 115"), Accounting for Certain Investments in Debt and Equity Securities. The Company has classified all of its investments as available-for-sale or trading securities. These investments are carried at fair value based on quoted market prices with unrealized gains and losses reported in either accumulated other comprehensive income (loss) in the accompanying Consolidated Balance Sheets for available-for-sale securities or as unrealized gains or losses in the accompanying Consolidated Statements of Operations for trading securities. Net realized gains and losses on investments are computed using the specific identification method and are reported in the accompanying Consolidated Statements of Operations. Declines in value judged to be other-than-temporary are determined based on the specific identification method and are reported in the accompanying Consolidated Statements of Operations as net realized losses. The factors considered by management in determining when a decline is other than temporary include but are not limited to: the length of time and extent to which the fair value has been less than cost; the financial condition and near-term prospects of the issuer; adverse changes in ratings announced by one or more rating agencies; whether the issuer of a debt security has remained current on principal and interest payments; whether the decline in fair value appears to be issuer specific or, alternatively, a reflection of general market or industry conditions; and the Company's intent and ability to hold the security for a period of time sufficient to allow for a recovery in fair value. For securities within the scope of Emerging Issues Task Force Issue 99-20, such as purchased interest-only securities, an impairment loss is recognized when there has been a decrease in expected cash flows combined with a decline in the security's fair value below cost.
Premium revenues grew $24.7 million to $174.1 million in 2004 from $149.4 million in 2003; premium revenues increased $7.1 million at Madison Life and $17.6 million at Standard Life. The change at Madison Life is comprised of increases of: $4.2 million in the medical stop-loss line of business due to higher volume; $1.0 million from the ordinary life lines; $.8 million from the LTD line; $.6 million from the Group A&H lines from business assumed in 2004; $.3 million from the credit lines due to increased writings; and $.2 million from the GTL line. The change at Standard Life is comprised of the following increases: $16.9 million in medical stop-loss premiums due to higher volume in 2004; $1.0 million in the VFD line due to increased production; $.9 million in the ordinary life line; and $.5 million from blanket due to increased retention; partially offset by decreases of $.9 million in provider excess due to the termination of a reinsurance contract; and $.8 million from DBL due to the 20% coinsurance agreement with Independence American.
Insurance benefits, claims and reserves increased $23.8 million, reflecting increases of $7.9 million at Madison Life and $15.9 million at Standard Life. Madison Life's increase resulted from: a $2.8 million increase from interest credited on universal life and annuity policies; a $1.6 million increase in the stop-loss line from growth in the business; a $1.4 million increase in LTD due to higher claims; a $.8 million increase in the ordinary life due to the fourth quarter of 2003 acquisitions; a $1.0 million increase in GTL due to higher losses; and a $.4 million increase from Group A&H due to higher claims; partially offset by a $.1 million decrease from all other lines. The change at Standard Life is comprised of: higher claims and reserves of $14.5 million from the medical stop-loss line due to greater volume and an increase in claims experience; an increase in reserves of $1.5 million attributable to the ordinary life line of business that the Company assumed in November 2003; an increase of $1.1 million in VFD from greater volume and a $.9 million increase from interest credited on annuities; partially offset by a $1.1 million decrease from a provider excess due to the decrease in premiums; a $.5 million decrease from DBL due to the coinsurance agreement with Independence American; and a $.5 million decrease from HMO reinsurance due to improved experience.
Net income was $18.6 million, or $1.30 per share, diluted, for the year ended December 31, 2003 compared to $15.8 million, or $1.10 per share, diluted, for the year ended December 31, 2002. The Company's income before taxes increased $3.2 million to $28.7 million for the year ended December 31, 2003 from $25.5 million for 2002. The Company had net realized and unrealized gains of $.3 million in 2003 compared to net losses of $7.6 million in 2002. The net loss in 2002 was primarily attributable to other than temporary impairments on certain investment securities (see Liquidity). Decisions to sell securities are based on cash flow needs, investment opportunities and economic and market conditions, thus creating fluctuations in gains and losses from year to year. The $3.2 million increase in income before taxes primarily consisted of: an increase in realized gains of $7.9 million and increases from the stop-loss line and individual annuity and life lines in 2003, partially offset by 2002 gains of $8.1 million on a sale of a subsidiary and $1.3 million on the sale of real estate. Income tax expense increased $.5 million to $10.1 million in 2003 from $9.6 million 2002 reflecting the increase in income before taxes.
The Insurance Group's income before taxes increased $10.8 million to $30.8 million from $20.0 million in 2002. These results include net realized and unrealized gains of $.2 million in 2003 compared to net realized and unrealized losses of $7.6 million in 2002.
Amortization of deferred acquisition costs and general and administrative expenses for the Insurance Group increased $7.1 million due to an increase of $4.8 million from Madison Life; a $2.9 million increase from Standard Life; and a decrease of $.6 million from the sale of IndependenceCare to AMIC. Madison Life's expenses increased due to an increase in commission expense of $2.0 million; a $.9 million increase in amortization of deferred acquisition costs from acquisitions; and an increase in general expenses of $3.0 million due to higher administrative fees, salaries and taxes associated with the increase in premium volume; partially offset by a $1.1 million decrease from the sale of RAS to AMIC. Standard Life's increase is due to an increase of $1.4 million in commissions and general expenses due to higher compensation costs and a $1.5 million increase in taxes, licenses and fees.
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 reserves. These liabilities represent long-term and short-term obligations which are calculated using certain assumed interest rates.
In June 2004, the Board of Directors authorized an additional 450,000 share repurchase. As of December 31, 2004, 420,037 shares were still authorized to be repurchased under the plan. This repurchase plan, like the 450,000 share repurchase authorized in 2002, is a continuation of a program initiated in 1991 as described in Note 13 of Notes to Consolidated Financial Statements.
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, 2004:
Total investments and cash and cash equivalents increased $81.4 million at December 31, 2004 largely due to the net cash of $22.0 million provided by operating activities; cash of $25.8 million received in the purchase of policy blocks; and net proceeds of $14.5 million from the issuance of debt. The decrease in insurance reserves-health of $7.8 million is due to the timing of claims payments. The $36.8 million increase in funds on deposit is primarily a result of the purchase of individual annuity policies in the second quarter of 2004. The Company issued $15.5 million in junior subordinated debt securities to a wholly-owned unconsolidated trust during 2004. The $20.0 million increase in total stockholders' equity is due to net income generated in the year ended December 31, 2004, partially offset by a decrease in unrealized gains on investments and by the net purchases of the Company's common stock.
The Company had net receivables from reinsurers of $115.0 million at December 31, 2004. Substantially all of the business ceded to such reinsurers is of short duration. All of such receivables are either due from the Company's affiliate, Independence American, highly rated companies or are adequately secured. No allowance for doubtful accounts was necessary at December 31, 2004. As of December 31, 2004, the balance due from Independence American is $10.9 million.
Corporate derives its funds principally from: (i) dividends 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.
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. In 2004, the Company experienced a decrease in unrealized gains (losses) of $2.6 million, net of deferred tax benefits of $1.5 million and net of deferred policy acquisition costs of $.6 million in total stockholders' equity, reflecting net unrealized losses of $2.0 million at December 31, 2004 compared to net unrealized gains of $.6 million at December 31, 2003. From time to time, as warranted, the Company employs investment strategies to mitigate interest rate and other market exposures.
The Company increased its average retention on Medical Stop-Loss written by Standard Life and Madison Life from 30% in 2003 to 34% in 2004. In 2004, approximately 73% of the Company's Medical Stop-Loss business was underwritten by MGUs in which the Company or its affiliates have significant equity interests. The Company anticipates that these MGUs will continue to contribute a high percentage of the Insurance Group's premiums in the Medical Stop-Loss line of business in 2005. In addition, the Company exerts influence over its other MGUs through its high retention of risk and by working with only a selected group of reinsurers that share IHC's commitment to underwriting discipline. For all of its MGUs, Standard Life and Madison Life regularly audit the MGUs' compliance with the Company's underwriting, claims and policy issuance guidelines.
The Medical Stop-Loss market is generally cyclical in nature. When a product experiences several consecutive years of underwriting profitability, it is not unusual for there to be more competitors entering that line which can increase pressure on pricing and create a "softer" market. The Medical Stop-Loss market began to "soften" in 2003, and less favorable conditions continued through 2004. Despite these market conditions, the Company produced profitable results in 2003 and 2004, and expects continued profitability in 2005. As a result of these market conditions, the rate IHC is able to charge for Medical Stop-Loss increased at a lesser rate in recent years, however, increases in medical trend have also been held in check to a greater extent and deductibles and attachment points have increased. This reduces IHC's overall risk exposure. The Company remains optimistic that it will continue to produce profitable results, however, its ability to grow the Medical Stop-Loss line in 2005 may be somewhat limited, although the Company intends to appoint new MGUs which would generate additional premiums. IHC's new lines of business (major medical, short-term medical, dental and vision) are less volatile than Medical Stop-Loss. The Company is optimistic that these lines will yield profitable results while producing significant growth.
The Company's Results May Fluctuate as a Result of Factors Generally Affecting the Insurance and Reinsurance Industry
The results of companies in the insurance and reinsurance industry historically have been subject to significant fluctuations and uncertainties. Factors that affect the industry in general could also cause the Company's results to fluctuate. The industries and the Company's financial condition and results of operations may be affected significantly by:
Decreases in the Fair Market Value of Fixed Income Securities May Greatly Reduce the Value of the Company's Investment Portfolio, and as a Result, the Company's Financial Condition May Suffer
Prescribing the form and content of records of financial condition required to be filed;