SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data for the five years ended December 31, 1995, 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 decreased $26.7 million, or 6%, from $457.6 million to $430.9 million. The decrease was primarily due to a reduction of premium revenue on the Company's major medical products of $26.9 million, or 6%, from $431.8 million to $404.9 million. A major portion of the decrease in major medical premium revenue was 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. In connection with the Company's decision to cease selling new products in these states, the Company's career agency force submitted $31.8 million of annualized HMO premiums to unaffiliated companies during 1995. While these premiums are not received by the Company, the Company receives marketing commission overrides from the unaffiliated companies for this production. The remaining decrease in major medical premium revenue was due to lower average premiums on new issues due to the increased use of managed care products.
Net investment income decreased $2.7 million, or 25%, from $10.4 million to $7.7 million, due to a reduction in invested assets caused by the decrease in major medical in-force business and the general decline in interest rates. Total realized investment losses decreased $0.6 million or 48% from $1.2 million to $0.6 million.
Benefits. The following table sets forth the earned premium, benefits, and loss ratios for products issued by the Group Medical Division: (DOLLARS IN THOUSANDS) 1995 1994 Earned premium (1) $414,160 $443,599 Benefits (1) . . 261,336 279,419 Loss ratio . . . 63.1% 63.0%
(1) In the Company's statement of consolidated operations, earned premiums represent premiums written, adjusted for reinsurance; the changes in unearned premiums are reflected in accident and health benefits.
Insurance and General Expenses. Insurance and general expenses increased $2.6 million, or 2%, from $116.9 million to $119.5 million. The expense ratio increased in 1995 due to system development costs, consolidation of claim operations, and the 6% drop in premium.
Revenue. Total revenue in the Senior Health and Life Division remained relatively constant. Senior health premium decreased $6.3 million, or 3%, from $227.3 million to $221.0 million. While the total new Medicare supplement business and new long-term care business increased, these increases were offset by a decrease in the total senior health premium due to lapses from the current in-force block of business and the fact that a greater percentage of the in-force block of business consisted of standardized Medicare supplement products on which the average premium per policy was lower due to benefit and agent compensation changes.
Net investment income increased $3.2 million, or 58%, from $5.6 million to $8.8 million, primarily due to a 10-basis point improvement in yields and increased invested assets. The total realized gains increased $4.2 million from $0.9 million to $5.1 million.
(DOLLARS IN THOUSANDS) 1995 1994 Earned premium (1) $217,302 $225,604 Benefits (1) . . 143,226 137,853 Loss ratio . . . 65.9% 61.1%
Insurance and General Expenses. The expense ratio remained relatively unchanged. The decline in administrative expense levels was offset by an increase in marketing expenses associated with new marketing initiatives. See "Business -- Products and Services."
Benefits. Total life and annuity policy benefits increased $33.9 million, or 79%, from $42.9 million to $76.8 million. Approximately $24.4 million of this increase was due to the acquisition of CNL and the remaining amount was due to increased senior life insurance in-force. The senior life mortality experience exceeded that which was developed in pricing and the Company has initiated rate increases and modification to underwriting procedures to improve profitability. The mortality experience on the remaining block of business was less than projected.
The amortization of DAC remained relatively unchanged, with the increase in senior life amortization offsetting a decrease in the amortization on the traditional term life block of business.
Pre-tax income decreased $1.3 million, or 65%, from $2.0 to $0.7 million. The decrease in profitability was due to expenses related to the development of preferred provider organizations and health maintenance organizations in selected states. The division expects continued pressure on earnings during 1996 as it continues development of these managed care programs. The Company has targeted its managed care development efforts in geographic locations where it already has strong concentrations of policyholders and sales agents.
Net investment income. Net investment income increased $28.2 million, or 66%, from $42.8 million to $71.0 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 Medical Utilization Management Division and the acquisition of ACMG, Inc. in July 1995. The remaining other income generated by the Company's non-insurance subsidiaries remained relatively unchanged.
Other. Investments, premiums and other receivables, amounts on deposit and due from reinsurers, accrued investment income and other assets increased principally due to the acquisition of CNL. The decrease in short-term notes payable and the increase in long-term notes payable resulted from the conversion of the Company's line of credit agreement at December 31, 1994 to a term loan during the first quarter of 1995. General expenses and other liabilities, and amounts due to reinsurers increased due primarily to the acquisition of CNL. The remaining balance sheet amounts remained relatively consistent with the amounts at December 31, 1994.
Net income. The Company's net income increased $5.0 million, or 41%, from $12.1 million to $17.1 million. The increase was due to profits from Continental Life & Accident Company ("CLAC"), improved health loss ratios in the Senior Health and Life Division, expense reductions and improved spreads in the Life Insurance Division, and increased revenue and margins in the Medical Utilization Management Division. Total revenues increased $75.0 million, or 11%. The increase in revenue was primarily due to the increase in premiums and policy charges of $63.1 million.
Net investment income. Net investment income increased $2.5 million, or 6%. Annualized investment yields decreased from 6.8% to 6.3%. 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.
Other revenue. Other income and realized investment gains and losses increased $9.3 million, or 52%. The increase in other income was due to the acquisitions of HRC and CLAC in August 1993. In addition, the Company realized increased sales to unaffiliated customers by the Medical Utilization Management Division and by its marketing subsidiaries. Realized investment losses decreased $0.9 million, or 69%, from $1.3 million to $0.4 million. The remaining other income generated by the Company's other non-insurance subsidiaries remained relatively unchanged.
Benefits. Total benefits increased $12.8 million, or 3%. Life and annuity benefits increased $3.5 million, or 9%, due to higher mortality on a closed block of universal life and an increase in in-force business. Accident and health benefits, which include the change in unearned premiums, increased $9.3 million, or 2%. The increase was due primarily to the increased amount of collected premiums. The accident and health loss ratios decreased to 62% from 66%. The improved loss ratios were due primarily to a reduction in the group medical claim reserve margins.
In 1994 and 1993, managed health care efforts resulted in estimated net pre-tax savings to the Company's Group Medical Division of $67.0 million and $41.0 million, 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: 1994 1993
PPO networks . . . . . . . . . . . . . . 40% 49% Precertification . . . . . . . . . . . . 10 5 Large case management . . . . . . . . . . 22 32 Usual and customary, rebundling, and 28 14 prompt pay discounts . . . . . . . . . .
100% 100% The Company expects to continue to emphasize medical utilization management procedures to control claim costs. Although the Company cannot accurately determine the amount of savings which may be realized from such efforts in the future, the Company believes that it will be increasingly difficult to maintain this level of growth in cost savings due to the efficiencies that have already been achieved.
Interest expense. Interest expense increased due to the issuance of the 8% Debentures in July 1993 and the increase in other notes payable in 1994.
Amortization of DAC. Amortization of DAC increased $23.2 million, or 30%. The increase was due primarily to a write-down in the DAC asset on certain group and individual medical business issued in recent years. Future losses were projected on these blocks of business due primarily to mandated state healthcare reforms. 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 Company's consolidated liquidity requirements are created and met primarily by operations of its subsidiaries. The insurance subsidiaries' primary sources of cash are premiums, investment income, and investment sales and maturities. The insurance subsidiaries' primary uses of cash are operating costs, policy acquisition costs, payments to policyholders and investment purchases. In addition, liquidity requirements of the holding company are created by the dividend requirements of the $2.125 Preferred Stock, Common Stock dividends, interest payments on the 8% Debentures and other debt service requirements. These liquidity requirements of the holding company have historically been met through dividends from the non-insurance subsidiaries which receive payments primarily from fees charged for administrative and marketing services provided to the Company's insurance subsidiaries and other unaffiliated companies. Dividends from the insurance subsidiaries could be required in the future to meet such liquidity requirements.
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 1995 and 1994 were $20.9 million and $24.4 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 $13.8 million of agent advances at December 31, 1995.
In August 1993, a non-insurance subsidiary of the Company borrowed $1.5 million from a commercial bank to finance the acquisition of HRC. Interest on the unsecured note is payable quarterly at the lending bank's prime rate of interest. The note requires principal repayments of $0.08 million per quarter plus interest through July 31, 1998.
In December 1994, a non-insurance subsidiary of the Company borrowed $0.4 million from a commercial bank to finance the purchase of certain equipment. The note, which is secured by the equipment purchased, bears interest at the lending bank's prime rate of interest and is payable quarterly, with principal payments of $0.02 million, through December 1, 1999.
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. Interest is payable on the note at the average earnings rate of these investments, currently eight percent.
In June 1995 a non-insurance subsidiary of the Company entered into a $1.0 million line of credit arrangement with a commercial bank in order to finance the subsidiary's working capital needs. Interest on this secured facility is payable monthly at the lending bank's prime rate of interest. This facility matures in June 1996.
Under the August 1995 Term Loan, the Company borrowed $11.1 million from a group of banks to repay amounts borrowed under the Company's Credit Facility to, among other things, fund payments to converting bondholders and other expenses relating to the conversion of the 8% Debentures. Interest on the August 1995 Term Loan is at the prime rate of the lending bank. The unsecured note requires principal repayments of $0.9 million plus interest per quarter through August 31, 1998.
The Company's debt agreements include provisions requiring maintenance of minimum working capital and risk based capital and limiting the Company's ability to incur additional indebtedness. The Company's debt agreements also restrict the amount of retained earnings which is available for dividends and require the maintenance of certain minimum insurance company ratings at the Company's subsidiaries.
In February, 1996 the Board of Directors announced a quarterly stock dividend of $.055 per share to be paid in April, 1996.
Management believes that the diversity of the Company's investment portfolio and the liquidity attributable to the large concentration of investments in highly liquid United States government agency securities provide sufficient liquidity to meet foreseeable cash requirements. See "Business-Investments." Because the Company's insurance subsidiaries experience strong positive cash flows, including monthly cash flows from mortgage-backed securities, the Company does not expect its insurance subsidiaries to be forced to sell the held to maturity investments prior to their maturities and realize material losses or gains. Although the Company has the ability and intent to hold those securities to maturity, there could occur infrequent and unusual conditions under which it would sell certain of these securities. Those conditions would include a significant deterioration of the issuer's creditworthiness, significant changes in tax law affecting the taxation of securities, a significant business acquisition or disposition, and changes in regulatory capital requirements or permissible investments.
Life insurance and annuity liabilities are generally long-term in nature although subject to earlier surrender as a result of the policyholder's ability to withdraw funds or surrender the policy, subject to surrender and withdrawal penalties. The Company believes its policyholder liabilities should be backed by an investment portfolio that generates predictable investment returns. The Company seeks to limit exposure to risks associated with interest rate fluctuations by concentrating its invested assets principally in high quality, readily marketable debt securities of intermediate duration and by attempting to balance the duration of its invested assets with the estimated duration of benefit payments arising from contract liabilities. See "Business-Investments."