Madison Life leases 12,000 square feet of office space in Middleton, Wisconsin as its corporate headquarters.
PER SHARE DATA: Cash dividends declared per common share.......... .05 .05 .05 .04 .04 Basic income per common share from continuing operations................ 1.49 1.51 .90 .81 .31 Diluted income per common share from continuing operations..... 1.47 1.49 .90 .81 .31
Additional information pertaining to the Company's business segments is provided in Note 18 of Notes to Consolidated Financial Statements.
Other income increased $4.8 million. Madison Life had an increase of $2.8 million due to fee income earned by the managing general underwriter ("MGU") in which Madison Life acquired a controlling interest effective December 31, 1997; such fee income was offset by expenses described below in general and administrative expenses. Other income at Standard Life increased $2.0 million due to an increase in coinsurance reserves of $2.1 million from the surrender by a large group of policyholders in a coinsurance treaty in the second quarter of 1997, for which there was no similar surrender in 1998, and an increase of $.8 million in POS fee income; the foregoing was offset by a $.9 million decrease in fee income from the third party administrator ("TPA") in which Standard Life sold its interest in December 1997. Equity income from insurance related partnerships decreased $.2 million.
Insurance benefits, claims and reserves increased $1.1 million reflecting an increase of $5.1 million at Madison Life and a decrease of $4.0 million at Standard Life. Madison Life's increase results from: a $1.9 million increase in the credit lines of business due to the 1997 acquisitions described above; a $2.8 million expected increase in surrenders on its new blocks of business; a $.4 million increase in ordinary life and individual accident and health claims and reserves due to acquisitions; and a $.4 million increase in group term life claims; the foregoing was offset by a $.4 million decrease in dental claims due to a decrease in premiums from this line of business. The change at Standard Life is comprised of: a $2.7 million decrease in HMO reserves due to a reinsurance adjustment on an assumed block of business; a $4.0 million decrease in additional DBL claims and reserves due to improved experience ($3.4 million) and lower premiums ($.6 million); a $1.0 million decrease in POS claims and reserves due to a retroactive adjustment and the loss of one large policy contract in 1998; a $.6 million decrease in reserves on the runoff pool of accident and health business. The foregoing were partially offset by: a $1.9 million increase in reserves in the closed blocks of life, annuity and individual and group accident and health lines of business; a $2.0 million increase in stop-loss reserves due to higher claims experience; a $.1 million increase in dividends to policyholders; and a $.3 million increase in group life claims and reserves.
Premium revenues increased $12.6 million to $82.2 million in 1997 from $69.6 million in 1996; premium revenues at Madison Life increased $7.8 million while Standard Life showed a $4.8 million increase in premiums. The increase at Madison Life is comprised of: a $6.4 million increase in the credit lines of business primarily due to the acquisitions of two single premium blocks of business effective April 1 and October 1, 1997; a $.5 million increase in long-term disability premiums; a $.7 million increase in dental premiums; and a $.2 million increase in group term life premiums. The increase at Standard Life is comprised of: a $5.3 million increase in its DBL line of business primarily due to an acquisition and the continued growth in this line; a $.8 million increase in HMO reinsurance business; and a $.4 million combined increase in the provider-excess and special disability businesses. These increases were offset by a $1.1 million decrease in the closed blocks of life, annuity and individual and group accident and health lines of business and a $.6 million decrease in the medical stop-loss line of business.
Total net investment income increased $3.7 million due to an increase in assets at Madison Life related to acquisitions and higher returns on certain hedged equity investments. The annualized return on investments in 1997 was 7.6% compared to 7.2% in 1996. Equity income increased $.4 million due to the increased profitability of certain insurance related partnerships.
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.
Amortization of deferred acquisition costs and general and administrative expenses increased $3.7 million at Madison Life and $.1 million at Standard Life primarily due to increases in net commission expense of $2.3 million, salary and related expenses of $.7 million and other general expenses of $.8 million related to the increase in premium volume at both insurance companies, and the acquisition of new blocks of business at Madison Life.
Operating income for the year ended December 31, 1997 increased by $3.7 million to $.5 million in 1997 from a loss of $3.2 million in 1996. Included in the 1997 results is the real estate gain of $1.0 million. Excluding the real estate gain in 1997, Corporate had an increase in operating income of $2.7 million. Investment income increased $1.0 million due to higher corporate liquidity in 1997. 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.
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 policy benefits. These liabilities represent long-term and short-term obligations which are calculated using certain assumed interest rates.
The Company manages interest rate risk by seeking to maintain a portfolio with a duration and average life that falls within the band of the duration and average life of the applicable liabilities, and may utilize options to modify the duration and average life of such assets; see Note 1(G)(iv) of Notes to Consolidated Financial Statements.
100 basis point rise $209 ($11) Base scenario 220 - 100 basis point decline 228 8
In the Company's analysis of the asset-liability model, a 100 basis point change in interest rates on the Insurance Group's liabilities would not be expected to have a material adverse effect on the Company. With respect to its liabilities, if
interest rates were to increase, the risk to the Company is that policies would be surrendered and assets would need to be sold. This is not a material exposure to the Company since a large portion of the Insurance Group's interest sensitive policies are burial policies that are not subject to the typical surrender patterns of other interest sensitive policies, and many of the Insurance Group's universal life and annuity policies come from liquidated companies which tend to exhibit lower surrender rates than such policies of continuing companies. Additionally, there are charges to help offset the benefits being surrendered. If interest rates were to decrease substantially, the risk to the Company is that some of its investment assets would be subject to early redemption. This is not a material exposure because the Company would have additional gains in its portfolio to help offset the future reduction of investment income. With respect to its investments, the Company employs (from time to time as warranted) investment strategies to mitigate interest rate and other market exposures.
Total Corporate liquidity (cash, cash equivalents, resale agreements, fixed maturities, equity securities and partnership interests) amounted to $17.6 million at December 31, 1998. During 1998, IHC repurchased 68,669 shares of common stock for $.9 million under a repurchase program initiated in 1991.
The Company anticipates increasing its premium volume through: (i) acquisitions; (ii) greater geographical diversity; (iii) expansion of its network of MGUs, MGAs, HMOs, general agents and agents; and (iv) investments in affiliated marketing subsidiaries. The Company is particularly interested in acquiring the following types of policies: traditional and group life, interest sensitive life, credit life and health, limited benefit health (e.g., cancer or hospital indemnity), medical stop-loss, DBL blocks, and certain other disability. In anticipation of increased acquisition opportunities, the Company significantly improved its administration systems commencing in the latter part of 1996, which has enabled it to more efficiently convert and manage acquired blocks. It is anticipated that future acquisitions will be funded internally from existing capital and surplus and parent company liquidity, including a new $30.0 million credit facility (see Note 22 of Notes to Consolidated Financial Statements).
be Year 2000 compliant prior to June 30, 1999. The cost of updating the Company's remaining systems is not expected to exceed $100,000.
The Company believes that its greatest Year 2000 exposure arises from the possibility of non-compliance by, among others, its MGUs, MGAs, HMOs, agents, TPAs, producers, reinsurers, securities brokers and bankers. The Company has requested information from these third parties and is continuing to monitor their responses and evaluate any possible impact on the Company. All of Standard Life's medical stop-loss and group life MGU's have represented that they are or will be Year 2000 compliant by December 31, 1999 and Madison Life's largest MGA for group life and long-term disability has indicated that it will be compliant by June 30, 1999. Standard Life has required that its MGUs obtain Year 2000 compliance certifications from, and has supplied the MGUs with questionnaires to be completed by, TPAs and producers with whom they place business. In addition, the U.S. Senate Special Committee on the Year 2000 Technology Problem determined that the healthcare industry lags in its progress towards Year 2000 preparedness. In particular, the Committee cited concerns over the preparedness of large, rural and inner-city hospitals, and doctor's offices, the availability of pharmaceuticals and the preparedness of health claim billing systems.
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
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 consisted 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.
See Index to Consolidated Financial Statements and Schedules on page 38.