IHC has entered into a renewable short-term arrangement with Geneve Corporation for the use of 6,750 square feet of office space as its corporate headquarters in Stamford, Connecticut.
Madison Life leases 16,800 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, 2,400 square feet in Wilkesboro, North Carolina for its credit agency, and 4,200 square feet in South Windsor, Connecticut for its MGU.
The Selected Financial Data should be read in conjunction with the accompanying Consolidated Financial Statements and Notes thereto. All per share data has been retroactively restated to reflect the 10% stock dividend on August 28, 2000.
The Company's operating income increased $2.2 million to $16.8 million for the year ended December 31, 2000 from $14.6 million for the same period in 1999. Net income was $11.4 million, or $1.42 per share, diluted, for the year ended December 31, 2000 compared to $10.4 million, or $1.29 per share, diluted, for the year ended December 31, 1999. The Company had net realized and unrealized losses of $.2 million in 2000 and $1.2 million in 1999. 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 $17.0 million in 2000 as compared to $15.7 million in 1999, an increase of $1.3 million, which approximately consists of: an increase in profitability from the stop-loss line of business, an increase in income from the blocks of business acquired in 1999 by Madison Life ("1999 acquisitions"), and an increase in investment income due to the increase in investable assets slightly offset by a decrease in other lines of business. Income tax expense increased $1.3 million to $5.5 million in 2000 from $4.2 million in 1999 reflecting the increase in income and a higher effective income tax rate in 2000, principally due to the phase out of the small life insurance company deductions (see Capital Resources).
Premium revenues decreased $.1 million to $90.3 million in 2000 from $90.4 million in 1999; premium revenues decreased $1.5 million at Madison Life and increased $1.4 million at Standard Life. The decrease at Madison Life is comprised of: a $3.3 million decrease in the credit line of business, primarily due to the runoff of acquisitions of two single premium blocks of business effective in 1997; a $1.7 million decrease in dental premiums due to the runoff of this block; and a $.5 million decrease in other life and health lines of business; such decreases were offset by: a $2.3 million increase in long-term disability ("LTD") and $.3 million in group life, both as a result of an increase in premiums written in 2000; and a $1.4 million increase in ordinary life and individual accident and health premiums due to Madison Life's 1999 acquisitions. The increase at Standard Life is comprised of: a $.8 million increase in its provider excess line due to increased retention and a new distribution channel in 2000; a $2.2 million increase in the stop-loss line due to an increase in premium volume and rates; a $.4 million increase in the point of service line and a $.4 million increase in the behavioral health line both due to an increase in production; such increases are offset by: a $.4 million decrease in short-term statutory disability ("DBL") due to a rate reduction, a $1.5 million decrease in the HMO reinsurance line due to the loss of a distribution channel and a $.5 million decrease in other runoff lines.
Total net investment income increased $6.0 million primarily due to an increase in assets due to the acquisitions in 1999. The annualized return on investments of the Insurance Group was 7.1% for both years ended 2000 and 1999.
Other income decreased $2.2 million due to $1.4 million less fee income earned by Madison Life's majority owned managing general underwriter and a $1.4 million decrease at Standard Life due primarily to an increase in coinsurance reserves due to the surrender by a large group of policyholders in a modified coinsurance treaty; partially offset by an increase of $.6 million in fee income earned at IndependenceCare.
Amortization of deferred acquisition costs and general and administrative expenses for the Insurance Group increased $2.5 million. Madison Life's expenses increased $2.1 million representing an increase in net commission expense of $1.6 million and an increase of $.5 million in salaries, related benefits and administrative fees all arising from the 1999 acquisitions. Standard Life's expenses increased $.3 million due to an increase in commission expense and consulting fees. IndependenceCare's expenses increased $.1 million.
The Insurance Group's operating income increased $.9 million to $15.9 million in 1999 from $15.0 million in 1998. Operating income includes net realized and unrealized losses of $1.2 million in 1999 compared to gains of $2.1 million in 1998. Operating income (excluding net realized and unrealized gains) was $17.0 million in 1999 compared to $12.9 million in 1998, an increase of 32%.
Total net investment income increased $7.6 million primarily due to the increase in assets at Madison Life related to acquisitions, higher returns on certain limited partnership investments in 1999 ($3.0 million) and an increase in interest income earned from assumption reinsurance transactions ($3.4 million). The annualized return on investments of the Insurance Group in 1999 was 7.1% compared to 6.4% in 1998.
The Company monitors its investment portfolio on a continuous basis and believes that the liquidity of the Insurance Group will not be adversely affected by its current investments. This monitoring includes the maintenance of an asset-liability model that matches current insurance liability cash flows with current investment cash flows. This is accomplished by first creating an insurance model of the Company's in-force policies using current assumptions on mortality, lapses and expenses. Then, current investments are assigned to specific insurance blocks in the model using appropriate prepayment schedules and future reinvestment patterns. The results of the model specify whether the investments and their related cash flows can support the related current insurance cash flows. Additionally, various scenarios are developed changing interest rates and other related assumptions. These scenarios help evaluate the market risk due to changing interest rates in relation to the business of the Insurance Group.
Due to its good capital ratios, broad licensing and excellent asset quality and credit-worthiness, the Insurance Group remains well positioned to increase or diversify its current activities. It is anticipated that future acquisitions or other expansion of operations will be funded internally from existing capital and surplus and parent company liquidity, including the remaining $15.0 million availability under its credit facility. In the event additional funds are required, it is expected that they would be borrowed or raised in the public or private capital markets to the extent determined to be necessary or desirable.
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 gains of $12.3 million, net of deferred taxes of $.8 million and net of deferred policy acquisition costs of $2.3 million in total stockholders' equity, reflecting net unrealized gains of $1.2 million at December 31, 2000 versus net unrealized losses of $11.0 million at December 31, 1999. From time to time, as warranted, the Company employs investment strategies to mitigate interest rate and other market exposures.
The results of 2000 reflect a higher effective tax rate than in 1999 due to 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.
See Index to Consolidated Financial Statements and Schedules on page 32.