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. The Company believes these facilities will adequately serve its needs for the foreseeable future and could accommodate expansion of the Company's business. The Company, through another subsidiary, also owns a building in the Dallas, Texas metropolitan area which currently serves as the main administrative office for the Company's Group Medical Division. The Company leases the office of its other regional service centers. The executive and administrative offices of Manhattan National Life are located in Cincinnati, Ohio in leased space.
The following selected consolidated financial data for the five years ended December 31, 1994; are derived from the consolidated financial statements of the Company. The data should be read in conjunction with the consolidated financial statements, related notes, and other financial information included herein.
(In thousands except per share amounts) Year Ended December 31, -------------------------------------------- 1994 1993 1992 1991 1990 ------ ------ ------ ------ ------
Preferred stock dividends 1,904 2,021 2,039 2,039 2,164 ------- -------- ------- -------- --------
Net income (loss) per common share Primary $ 2.36 $ 1.51 $(2.85) $ 1.02 $(1.72) Fully diluted 1.58 1.26 (2.85) 1.02 (1.72)
Average common and common equivalent shares outstanding Primary 6,459 6,724 6,660 6,699 6,690 Fully diluted 12,734 10,731 8,195 8,234 8,226
(In thousands except per share amounts) December 31, ------------------------------------------- Balance Sheet Data 1994 1993 1992 1991 1990 ------ ------ ------ ------ ------
Group Medical $ 10,889 $ 6,528 Senior Health 13,420 12,255 Life Insurance 8,537 7,623 Medical Utilization Mgmt 2,026 (1,211) Corporate (8,850) (6,431) -------- -------- Total $ 26,022 $ 18,764 ======== ========
The increase in pre-tax income for 1994 was due primarily to inclusion of the profits of Continental Life & Accident Company (CLAC), acquired in August 1993, and continued cost reduction plans. CLAC produced pre-tax profits of $2,787,000 in 1994 compared to a small loss in 1993.
The increase in pre-tax income was due to the reduction in loss ratios, from 63.5% to 61.1%, primarily on a mature block of nursing home business and realized investment gains compared to realized losses of $2,520,000 in 1993.
The improvements were offset by a 6.8% reduction in collected premium revenue during 1994.
The increase in pre-tax income for the Life Insurance Division was due to a substantial increase in new sales, improved spreads on interest sensitive business, and a slight improvement in the unit cost per policy. Despite the decline in the average annual investment yield in 1994, the Division continued to aggressively manage the interest rate crediting strategy. The unit cost per policy improved 5% to approximately $76 in 1994 as compared to $80 in 1993. The mortality was consistent with levels experienced in 1993. Realized investment losses were $158,000 in 1994 compared to realized investment gains of $621,000 in 1993.
Interest expense increased in 1994 as compared to 1993 due to the issuance of the convertible subordinated debentures in July 1993 and the increase in other notes payable in 1994.
The Company reported net income of $17,149,000 for the twelve months ended December 31, 1994, compared to $12,145,000 for the comparable period in 1993. The increase was due to profits from Continental Life & Accident Company (CLAC), improved loss ratios in the Senior Health Division, expense reductions and improved spreads in the Life Insurance Division, and increased revenue and margins in the Medical Utilization Management Division.
Net investment income increased $2,544,000 or 6% in 1994 compared to 1993. Annualized investment yields decreased from 6.8% in 1993 to 6.3% in 1994. The decrease in the investment yield was principally due to the
shortening of the Company's average duration and the increased emphasis on tax-exempt securities included in the Company's portfolio.
In 1994 and 1993, managed healthcare efforts resulted in estimated net savings to the Company's Health Insurance Division of $67,000,000 and $41,000,000, respectively. These savings were primarily used to lower the amount of premium increases for policyholders, which the Company believes generally has the effect of decreasing lapse rates of these policies. The principal efforts and their approximate relative contributions to these estimated savings were as follows:
PPOs (preferred provider organization) networks 40% 49% Precertification 10 5 Large case management 22 32 Usual and customary, rebundling, and prompt pay discounts 28 14 --- --- 100% 100% === ===
Amortization of deferred policy acquisition costs (DAC) increased $23,198,000 or 30% in 1994 as compared to 1993. The increase was due primarily to the adjustment in the DAC asset on group and individual medical business issued in recent years. These blocks of business have achieved lower margins than expected due primarily to mandated state healthcare reforms. The Company is now assuming a lower level of profitability on these blocks. The Company continues to monitor the profitability of its business. Increased lapses or unprofitability on the business could result in an increase in the amortization rate of DAC, which would adversely impact future earnings.
The effective tax rate of the Company decreased to approximately 34% in 1994 from 35% in 1993. The decrease was due to the increased investment in tax-exempt securities included in the Company's portfolio and net operating loss carryforwards utilized from CLAC.
Accident and health insurance premiums increased $41,790,000, or 7%, in 1993 as compared to 1992. Premiums from major hospital plans increased $56,694,000 in 1993 as compared to 1992 due to rate increases implemented in 1993, and approximately $11,000,000 from the acquisition of Continental Life & Accident Company. Offsetting the increase was a decline in Medicare supplement premiums of $9,176,000 due to lower than anticipated new sales and a $3,496,000 decrease in premiums of specialty health care plans. Life and annuity premiums and policy charges increased $8,659,000 due to an increase in new life sales during 1993.
Other income and realized investment gains and losses increased $615,000, or 4% in 1993 as compared to 1992. Other income increased $1,904,000 in 1993 due to increased sales to unaffiliated customers in both the Group Medical Division and the Medical Utilization Management Division. Realized investment losses increased $1,289,000 due to write-downs on certain mortgage-backed derivative securities.
Amortization of deferred policy acquisition costs (DAC) decreased $23,840,000, or 24%, in 1993 as compared to 1992. The decrease was due to the $30,000,000 pre tax write-down of DAC in the fourth quarter of 1992 primarily on major medical policies sold in the self-employed and small business owner market. The 1993 amortization rate on Medicare supplement is higher than 1992 because of the accelerated rate increase implementation which occurred in 1993.
The Company's effective tax rate was approximately 35% in 1993. The Company recorded a tax benefit for 1992 due to the operating loss incurred. The effective federal income tax rate increased in 1993 due to the Revenue
Under generally accepted accounting principles, a deferred acquisition cost asset (DAC) is established to properly spread the acquisition costs for a block of policies against the expected future revenues from the policies. The acquisition costs which are capitalized and amortized consist of first year commissions in excess of renewal commissions and certain home office expenses related to selling, policy issue, and underwriting.
The deferred acquisition costs for accident and health policies and traditional life policies are amortized over future revenues of the business to which the costs are related. The rate of amortization depends on the expected pattern of future revenues for the block of policies. The scheduled amortization for a block of policies is established when the policies are issued.
The amortization schedule is based on the expected persistency and profitability of the policies. The actual amortization of DAC reflects the actual persistency and profitability of the business. For example, if actual policy terminations are higher than expected or actual profits are lower than originally assumed, DAC could be amortized more rapidly than originally scheduled.
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 had an adverse impact on its major hospital accident and health claims experience. The Company continues to implement rate increases in response to this experience.
The Company's life and health insurance subsidiaries require capital to fund acquisition costs incurred in the initial year of policy issuance and to maintain adequate surplus levels for regulatory purposes. These capital requirements have been met principally from internally generated funds, including premiums and investment income, and capital provided from reinsurance and the financing or sale of agent debit balances.
In August 1993 a subsidiary of the Company borrowed $1,500,000 to finance the acquisition of Healthcare Review Corporation. Interest on the note is payable quarterly at six percent. The note requires principal repayments of $75,000 per quarter through July 31, 1998.
Short-term notes payable included $18,950,000 at December 31, 1994, drawn under a line of credit arrangement. In March 1995, $15,000,000 of the line of credit was replaced with a five year term loan. The remaining balance under the line of credit is due in October 1995.
At December 31, 1994, a subsidiary of the Company had an unsecured loan of $1,125,000. The portion of the loan due in 1995 of $300,000 is included in short-term notes payable. The remainder of the note is included in long- term notes payable. The note bears interest currently at prime and is payable quarterly with the final payment due July 1998.
At December 31, 1994 a subsidiary of the Company had two unsecured loans totaling $2,275,000. The portion of the loans due in 1995 of $580,000 is included in short-term notes payable. The remainder of the notes are included in long-term notes payable. The notes bear interest at prime and are payable quarterly with the final payment due December 1999. The Company has guaranteed payment of the notes.
The concept of risk-based capital has been adopted for regulatory monitoring of the life and health insurance industry. Risk based capital standards are used by regulators to set in motion appropriate regulatory actions relating to insurers which show signs of weak or deteriorating conditions. The Company's insurance subsidiaries, total adjusted capital, authorized control risk based capital, and related ratio by company as disclosed in the 1994 annual statement are as follows:
The Company believes that it has the ability and intent to hold to maturity its fixed maturity investments that are classified as "held-to- maturity." However, the Company also recognizes that there may be circumstances where it may be appropriate to sell a security prior to maturity in response to unforeseen changes in circumstances. Recognizing the need for the ability to respond to changes in market conditions and in tax
At December 31, 1994, the Company had invested assets of $723,837,000, compared to $674,206,000 at December 31, 1993. The Company manages all of its investments internally with resource and evaluation assistance provided by independent investment consultants. Government and mortgage-backed obligations and corporate fixed maturity securities collectively comprised approximately 83% and 87% of the Company's investment portfolio at December 31, 1994 and 1993, respectively. The remainder of the invested assets were in short-term investments, equity securities, real estate, policy loans and mortgage loans.
Yields recognized in future periods on such investments may be less than yields recognized on other investments and will be less than the yield expected when the fixed maturity security was originally purchased. The affect on net income from declines in interest income and portfolio yield from impaired securities in future periods will depend on many factors, including, in life insurance business, the level of interest rates credited to policyholder account balances. Inasmuch as interest rates credited to the Company's policyholders are typically only guaranteed for one year, the Company does not expect any material adverse affect on net income in future periods from declines in yields from impaired securities.
In general, prepayments on the underlying mortgage loans, and subsequently the mortgage-related securities backed by these loans, increases when the level of prevailing interest rates declines significantly below the interest rates on such loans. When declines in interest rates occur, the proceeds from the prepayment of such securities are likely to be reinvested at lower rates than the Company was earning on such securities.
The Company's mortgage-related securities portfolio is well diversified as to collateral, maturity/duration and other characteristics. The majority
The following table summarizes the components of the Company's mortgage- related securities portfolio at December 31, 1994, and December 31, 1993 (in thousands):
December 31, 1994 December 31, 1993 ----------------- ----------------- Carrying Fair Carrying Fair Value Value Value Value -------- ----- -------- -----
Inverse floaters and interest only CMO tranches $ 14,961 $ 8,940 $ 18,954 $ 13,551 Accrual bonds: U.S. government agency - - 6,968 7,386
Other CMOs: U.S. government agency 151,697 137,138 187,871 190,141 Non-government agency 29,379 27,404 21,154 21,919 ------- ------- -------- -------- Total other CMOs 181,076 164,542 209,025 212,060