Standard Life leases 13,500 square feet of office space in New York, New York as its corporate headquarters, and 3,000 square feet of office space in Rochester, New York for its DBL claims processing center.
Madison Life leases 11,000 square feet of office space in Middleton, Wisconsin as its corporate headquarters.
PER SHARE DATA: Cash dividends declared per common share........... .05 .05 .04 .04 .04
RESULTS OF OPERATIONS --------------------- 1997 COMPARED TO 1996 - --------------------- The Company's operating income from continuing operations increased $6.5 million, or 95%, to $13.3 million in 1997 from $6.8 million in 1996. The Company had net realized and unrealized gains of $.5 million in 1997 and $.2 million in 1996. Excluding net realized and unrealized gains, the Company had operating income from continuing operations of $12.8 million in 1997 compared to $6.6 million for 1996. Net income applicable to common shares was $11.2 million or $1.49 per share, diluted, for the year ended December 31, 1997 compared to $7.8 million or $1.04 per share, diluted, for the year ended December 31, 1996. Income tax expense increased to $2.1 million from $.1 million in 1996; reference is made to Note 15 of Notes to Consolidated Financial Statements for a reconciliation of the effective tax rate. In December 1997, the Company adopted SFAS No. 128 "Earnings per Share." SFAS No. 128 establishes standards for computing and presenting earnings per share; accordingly, all prior earnings per share calculations have been restated to reflect the new standard.
Insurance Group - --------------- The Insurance Group's operating income increased 28% to $12.8 million in 1997 from $10.0 million in 1996. Operating income includes net realized and unrealized gains of $.5 million in 1997 compared to $.2 million in 1996. 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 was $12.3 million in 1997 compared to $9.8 million in 1996.
Other income decreased $1.6 million from 1996 to 1997 resulting from: a decrease of $.1 million in reinsurance recoveries at Madison Life; and a decrease at Standard Life of $1.5 million resulting from the surrender by a large group of policyholders in a coinsurance treaty, offset by the credit to reserves relating to the closed blocks of life, annuity and individual and group accident and health lines of business discussed below.
million increase in the credit line of business due to acquisitions and the addition of new accounts throughout the current year; and a $.4 million increase in other life and health lines of business, all of the foregoing offset by a $.3 million decrease in ordinary life and individual accident and health claims and reserves. The change at Standard Life is comprised of: a $3.6 million increase in DBL claims and reserves due to increased volume; a $2.0 million increase in medical stop-loss reserves due to reserve strengthening; and a net $.8 million increase in claims and reserves in the HMO reinsurance line of business. Such change was offset by a $2.9 million decrease in claims and reserves of the closed blocks of life, annuity and individual and group accident and health lines of business due to the surrender by a large group of policyholders in a coinsurance treaty and a $.1 million decrease in POS claims and reserves.
Corporate - --------- Operating income for the year ended December 31, 1997 increased by $3.7 million from 1996. Investment income increased $1.0 million due to higher corporate liquidity in 1997. Other income increased by $1.0 million due to the sale of the Company's remaining real estate in Florida. Interest expense decreased $.7 million due to the repayment of all long-term debt during 1996. Selling, general and administrative expenses decreased $1.0 million due to a reduction in expenses related to salaries, legal fees and the Florida real estate.
Premium revenues increased $13.2 million or 23% to $69.6 million in 1996 from $56.4 million in 1995; premium revenues at Madison Life increased $2.5 million while Standard Life showed a $10.7 million increase in premiums. The increase at Madison Life is comprised of: a $.6 million increase in the credit lines of business primarily due to new accounts added during 1996; a $.5 million increase in long-term disability premiums; a $.6 million increase in the ordinary life and individual accident and health lines of business primarily from the acquisition of a pre-need (funeral expense coverage) block of business effective January 1, 1996; a $.4 million increase in group term life premiums; and a $.4 million increase in other life and health lines of business. The change at Standard Life is comprised of the following: $6.7 million in additional stop-loss premiums reflecting increased retention along with the continued growth in this line of business; $2.0 million from the development of a POS product; $1.3 million from the development of an HMO reinsurance product; and $1.1 million in its DBL business due to an acquisition of a block in the third quarter of 1996. All of the foregoing were offset by a $.4 million decrease due to the continuing runoff in the closed blocks of life, annuity and individual and group accident and health lines of business.
Other income increased $.9 million from 1995 to 1996 resulting from: an increase of $.6 million in reinsurance recoveries at Madison Life; an increase at Standard Life in stop- loss fee income earned of $.4 million; $.8 million of administrative fee income received from International Benefits Administrators L.L.C., a third party administrator, formerly majority-owned by Standard Life (the "TPA"). The foregoing
The nature and quality of insurance company investments must comply with all applicable statutes and regulations which have been promulgated primarily for the protection of policyholders. Of the aggregate carrying value of the Company's investment assets, approximately 83% was invested in investment grade fixed income securities, resale agreements, policy loans and cash and cash equivalents at December 31, 1997. Also at such date, approximately 98% of the Company's fixed maturities were investment grade. These investments carry less risk and, therefore, lower interest rates than other types of fixed maturity investments. At December 31, 1997, approximately 2% of the carrying value of fixed maturities was invested in diversified non-investment grade fixed income securities (investments in such securities have different risks than investment grade securities, including greater risk of loss upon default, and thinner trading markets). Less than .1% of the Company's total investments were in real estate, non-performing fixed maturities and mortgage loans.
Total corporate liquidity (cash, cash equivalents, resale agreements and marketable securities) amounted to $18.1 million at December 31, 1997. At the present time, the Company is not in need of any additional long-term financing.
Business - -------- Although federal and state legislative and regulatory bodies have proposed various health care 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 has continued and will continue to take all steps necessary to address Year 2000 compliance issues. Since the Company has updated and enhanced many of its primary systems in the past two years, it does not believe that the Year 2000 problem will pose operational difficulties. The cost of updating the Company's remaining systems is not expected to have a material effect on the Company or its results of operations, and is expected to be completed by the beginning of 1999. The Company has requested information from, among others, its MGUs, MGAs, HMOs, agents and reinsurers regarding the status of their Year 2000 compliance programs, and is in the process of evaluating any possible impact on the Company.
This report and other reports and statements filed by the Company with the Securities and Exchange Commission contain or may contain certain forward looking statements (as that term is defined in the Private Securities Litigation Reform Act of 1995), and which are subject to certain risks and uncertainties. Among those factors which could cause the actual results to differ materially from those suggested by such statements are the following: catastrophic losses in the Company's insurance lines or a material aggregation of losses; changes in federal or state law affecting the Company's insurance products; availability of adequate retrocessional insurance coverage at appropriate prices; stock and bond market volatility; 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.
In June 1996, FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." In December 1996, 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, are effective after December 31, 1997, and will be applied prospectively; earlier or retroactive application is not permitted. The Company is evaluating SFAS No. 125, but does not believe it will have a material impact on the Company.
In connection with the distribution, Zimmerman entered into banking arrangements in October 1996 to borrow up to an aggregate of $33.0 million, of which $10.0 million consists of subordinated debt guaranteed by a subsidiary of IHC. The proceeds of borrowings by Zimmerman under such arrangements were used, among other things, to repay all of its prior outstanding indebtedness and to pay a $19.7 million special cash dividend to its shareholders. From its $18.5 million portion of the special dividend, the Company repaid all of its $10.0 million of indebtedness, contributed $5.0 million to Madison Life in exchange for a surplus note and used the balance for working capital. Expenses of $1.1 million in connection with the distribution transaction are recorded in discontinued operations, net on the consolidated statement of operations.