The following selected consolidated financial data for the five years ended December 31, 1996, 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.
Revenue. Total revenue in the Group Medical Division increased $9.0 million, or 2%, from $430.9 million to $439.9 million. The increase was due to the assumption of the small group and individual health business of Washington National Insurance Company (WNIC) which added net of reinsurance $50.2 million in revenue during 1996. The increase in revenue from the WNIC block offset the decline in the Company's direct major medical business. The division continued to scale back marketing in certain states due to regulatory concerns.
The amortization of DAC decreased $3.8 million, or 10%, from $38.0 million to $34.2 million. The decrease was due to the lower 1996 new business levels.
Net investment income increased $5.4 million, or 61%, from $8.8 million to $14.2 million, primarily due to the acquisition of Universal Fidelity and an overall increase in invested assets. The investment yields remained relatively unchanged during 1996. The total realized gains decreased $1.0 million from $5.1 million to $4.1 million.
The loss ratio on the renewal block of medicare supplement business acquired from Universal Fidelity was 71.9% which is higher than the Company's historical loss ratios. The remaining increase in loss ratio in 1996 is due to the runoff of the pre-standardized medicare supplement products which carry a lower loss ratio than the Company's standardized forms.
The amortization of DAC decreased $3.6 million, or 17%, from $21.6 million to $18.0 million. The decreased level of amortization was due to improved persistency on the in-force Medicare supplement business.
Revenue. Total revenue in the Life Insurance Division increased $20.3 million, or 18%, from $115.5 million to $135.8 million. The increase was due primarily to a 28% increase in new business sales.
Benefits. Total life and annuity policy benefits increased $13.9 million, or 18%, from $76.8 million to $90.7 million due primarily to a 23% increase in life insurance in-force and $1.6 million associated with higher than expected claims on the Company's senior life products. The senior life mortality continued to exceed that which was developed in pricing and the Company has continued to initiate rate increases and modify underwriting procedures to improve profitability. The mortality experience on the remaining block of business was consistent with projected levels.
Net income. The Company's consolidated net income increased $9.5 million, or 45%, from $21.0 million to $30.5 million. This increase was due primarily to improved operating profitability in the Senior Health and Life Divisions.
Other revenue. Other income and realized investment gains and losses remained relatively unchanged.
Benefits. Total benefits increased $81.6 million, or 17%, from $475.8 million to $557.4 million. Accident and health benefits, which include the change in unearned premiums, increased $67.8 million, or 17%, from $399.0 million to $466.7 million. Life and annuity benefits increased $13.8 million, or 18%.
Income tax rate. The effective federal income tax rate was 34% due to the investment in tax-exempt securities included in the Company's portfolio.
Net income. The Company's consolidated net income increased $3.9 million, or 21%, 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 the Company's decision to market unaffiliated companies' HMO products in states such as California, where competitive pressures and state reforms made it difficult to underwrite the Company's indemnity products on a profitable basis. 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.
Net investment income. Net investment income increased $28.2 million, or 66%, from $42.8 million to $71.0 million. Invested assets increased 44% to $1,043 million and annualized investment yields increased from 6.3% to 7.0%. These increases were primarily due to the acquisition of CNL.
Other revenue. Other income and realized investment gains and losses increased $14.8 million, or 54%, from $27.3 million to $42.1 million. The increase in other income was due to increased sales to unaffiliated clients by the Company's managed care subsidiaries and the acquisition of ACMG, Inc. in July 1995. The remaining other income generated by the Company's non-insurance subsidiaries remained relatively unchanged.
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 managed care subsidiaries 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 primarily 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.
The deferred acquisition costs for accident and health policies and traditional life policies are amortized over future premium revenues of the business to which the costs are related. The rate of amortization depends on the expected pattern of future premium revenues for the block of policies. The scheduled amortization for a block of policies is established when the policies are issued. However, the actual amortization of DAC will reflect the actual persistency and profitability of the business. For example, if actual policy terminations are higher than expected or if future losses are anticipated, DAC could be amortized more rapidly than originally scheduled or written-off, which would reduce earnings in the applicable period.
The Company has offered commission advances to certain of its agents and marketing organizations which consist primarily of annualization of first year commissions. This means that when the first year premium is paid in installments, the Company will advance a percentage of the commissions that the agent would otherwise receive over the course of the first policy year. The Company, through a subsidiary, has entered into agreements with an unaffiliated corporation to provide financing for a portion of its agent commission advance program through the sale of agent receivables. Proceeds from such sales for 1996 and 1995 were $26.2 million and $20.9 million, respectively. The termination date of the current program is December 31, 1997, subject to extension or termination as provided therein. The Company has retained approximately $14.2 million of agent advances at December 31, 1996.
In January 1995, an insurance subsidiary of the Company issued a note in the amount of $1.7 million as a portion of the acquisition price of CNL. The principal balance of the note may be reduced by the amount of capital losses incurred by the Company on mortgage loan and real estate holdings of CNL through January 31, 1997. During 1996, a net capital loss reduced the principal balance to $1.0 million. Interest is payable on the note at the average earnings rate of these investments, currently 8.7%. The note matures in November 1997.
In March 1996, the Company issued $86.25 million of its 6 1/2% Notes. Net proceeds from the offering totaled $83.0 million. The notes are convertible into the Company's Common Stock at any time prior to maturity, unless previously redeemed, at a conversion price of $20 per share.