The Company's executive offices are located at 120 Monument Circle, Indianapolis, Indiana. Since 1991, the Company has sub-leased its executive offices at 120 Monument Circle in Indianapolis from Anthem pursuant to a sub- lease agreement. Each of the Acordia companies leases office space, primarily from unaffiliated lessors, for terms ranging from five to ten years. Rent expense under these operating lease agreements totaled $24.8 million for the year ended December 31, 1996. Certain of these leases for office space have options permitting renewals for additional periods. The Company expects that in the normal course of business most leases will be renewed or replaced by other leases. See Note 8 of the Notes to Consolidated Financial Statements for information with respect to the Company's rental commitments for office space, automobiles and various office equipment at December 31, 1996.
Operating profit for 1996 increased 17% to $87.9 million from $75.4 million in 1995. Operating profit for 1995 increased 4% to $75.4 million from $72.3 million in 1994. Net income for 1996 increased 27% to $29.9 million from $23.6 million in 1995. Net income for 1995 decreased 18% to $23.6 million from $28.8 million in 1994.
Total revenues for 1996 increased 19% to $661 million from $555.1 million in 1995. For 1995, total revenues increased 35% to $555.1 million from $412.2 million in 1994. Growth through acquisitions has been a
key component of the Company's strategic plan to broaden its product offerings and geographic scope. The Company made seven significant acquisitions (defined as acquisitions with a potential purchase price, including contingent payments, in excess of $1 million) in each of 1996 and 1995 and three significant acquisitions in 1994. In addition, three significant acquisitions have been made in the first quarter of 1997.
Commissions and fees for 1996 increased 19% to $650.8 million from $545.6 million in 1995. New acquisitions accounted for approximately $51.5 million of the increase. The remaining increase of approximately $53.7 million resulted primarily from net new business, the establishment of new business relationships with CIC and the assumption of the administration operation for Anthem's Indiana HMO. CIC has been an affiliate of the Company since its merger with Anthem, the Company's parent, in 1995.
Commissions and fees for 1995 increased 35% to $545.6 million from $404.7 million in 1994. Significant acquisitions made in 1995, primarily the operations purchased from Bain Hogg Robinson, Inc. ("BHR"), accounted for approximately $74 million of the increase. In 1995, the new business relationships with Southeastern resulted in commissions and fees of approximately $52.4 million. The remaining increase of approximately $14.5 million resulted primarily from net new business. Southeastern has been an affiliate of the Company since its merger with Anthem in 1993.
Commissions and fees from affiliated entities were $291 million, $233.1 million, and $175.6 million in 1996, 1995 and 1994, respectively. The net increase in 1996 was primarily attributable to the new business relationships established with CIC and the assumption of the administration operation for Anthem's Indiana HMO. The net increase in 1995 was primarily attributable to the new business relationships established with Southeastern.
Investment income and net realized investment gains totaled $6.9 million, $7.3 million, and $5.7 million in 1996, 1995 and 1994, respectively. Investment income consists primarily of interest earned on premiums and claims collected and held prior to being remitted to insurers and clients. Such funds are held in a fiduciary
capacity. The decrease in 1996 was primarily due to a decrease in the net investment yield during 1996. The increase in 1995 was due to higher invested assets and an increase in the net investment yield during 1995.
Effective January 1, 1994, the Company adopted the provisions of Statement of Financial Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain Investments in Debt and Equity Securities," for investments held as of or acquired after January 1, 1994. The cumulative effect of adopting SFAS 115 at January 1, 1994 was to increase the carrying amount of debt securities and stockholders' equity by $2,714,000 and $1,655,000, respectively.
Other revenues include revenues from marketing and consulting services, gains and losses on the sale of fixed assets and other miscellaneous items. Revenues from such sources increased 57% to $3.3 million in 1996 from $2.1 million in 1995. Other revenues increased 17% to $2.1 million in 1995 from $1.8 million in 1994.
Employee compensation and benefits costs for 1995 increased 37% to $296 million from $215.3 million in 1994. Significant acquisitions made in 1995, primarily the BHR operations, accounted for approximately $46.9 million of the increase. The new business relationships with Southeastern accounted for approximately $23.3 million of the increase. The remaining increase of $10.5 million was principally due to the expansion of existing operations and increased pension costs.
Other operating expenses in 1995 increased 47% to $183.6 million from $124.7 million in 1994. New acquisitions accounted for the majority of this increase with the remaining costs associated with expanding into new territories and product lines. Selling expenses increased $4.7 million, systems costs increased $23.7 million, and rent expense increased approximately $10.8 million. The increase in systems costs was primarily due to transaction costs associated with the administration of the Southeastern business. Rent expenses increased primarily due to the acquisition of the BHR operations. Other miscellaneous expenses, which include travel, insurance, postage, telephone, supplies, administrative fees, etc., increased approximately $19.7 million, primarily attributable to acquisitions.
During 1996, certain subsidiaries or assets were sold for prices aggregating approximately $10,700,000. These sales resulted in a gross gain of approximately $4,135,000 of which approximately $1,346,000 has been deferred because it is contingent on future operations.
The Company's effective income tax rate was 45.3% in 1996, 46% in 1995, and 43.8% in 1994. Income taxes include both federal and state income taxes. The decrease in the effective tax rate in 1996 from 1995 was due primarily to a reduction in the deferred state tax rate and the tax associated with non- deductible goodwill and other intangible assets related to prior and current year acquisitions which more than offset an increase in the state and local tax rate. The increase in the effective tax rate in 1995 from 1994 was due primarily to an increase in non-deductible goodwill and other intangible assets related to prior and current year acquisitions. An analysis of the effective income tax rates is presented in Note 7 of the Notes to Consolidated Financial Statements.
Net operating loss carryforwards ("NOLs") of approximately $4.4 million are related to purchased subsidiaries. For financial reporting purposes, a valuation allowance of $4.3 million has been recognized to offset the deferred tax assets related to these carryforwards. When realized, the tax benefit will be accounted for as a reduction of goodwill.
The Company's operations are not capital intensive. The Company anticipates that cash flow from operations and, if necessary, borrowings under its existing credit agreement will be sufficient to fund the liquidity needs of the Company's operations for the foreseeable future. During 1996, cash flow generated from operations and funds available under the Company's revolving credit agreement were sufficient to fund the operating and
Capital expenditures were $21 million, $20.7 million, and $12.5 million for 1996, 1995 and 1994, respectively. The increase from 1994 to 1995 primarily resulted from additional leasehold improvements made as a result of certain existing company offices expanding into additional space.
Net cash flow (used in)/provided by financing activities totaled ($18.2) million and $22.7 million for the years ended December 31, 1996 and 1995, respectively.
On January 31, 1996, the Board of Directors increased the quarterly dividend by 11% to $0.20 per share of common stock. The dividend had previously been increased by 20% to $0.18 per share of common stock on February 6, 1995. The Company intends to continue to pay quarterly dividends.
Other long-term liabilities primarily consist of future payments relating to purchase agreements negotiated with the previous owners of acquired businesses, deferred lease incentives and other liabilities not due within one year including the Company's retirement and employee benefit plans. The future contingent payments to the previous owners of acquired businesses are generally based upon the amount of net commission income generated from the books of business acquired. These amounts were $22.1 million and $19.8 million at December 31, 1996 and 1995, respectively.
In January 1997, the Company announced that its review of the 1997 business plan has led to a decision to undertake a strategic review to assess the changes occurring in the health care industry and the potential implication of those changes on the Company's relationship with Anthem. The Company has been informed by Anthem that Anthem is similarly undertaking its own strategic review, which includes an analysis of its business relationship with and investment in the Company. Anthem has retained Credit Suisse First Boston to assist Anthem in this analysis. Anthem has also informed the Company that no decision has as yet been made by Anthem as to what, if any, changes it believes should be made with respect to its business relationship with and investment in the Company. As part of the reevaluation process, Anthem has asked Credit Suisse First Boston to explore the possible sale of the Company's property and casualty brokerage business and the possible reorganization of the Company's health business.
The Company is well aware of intensifying competitive pressures in the health care industry and Anthem's need to reduce administrative and marketing costs associated with its health care business. Because of the high
In July 1996, the Company assumed virtually all of the existing wholesale marketing and distribution functions for Anthem products nationwide while Anthem reassumed and consolidated certain administrative functions previously performed by the Company outside of the midwest region. Subsequently in January 1997, Anthem and the Company, as a part of strategic developments within Anthem, decided that the wholesale marketing and distribution functions for Anthem products nationwide should be performed by Anthem. Anthem has agreed to pay the Company a one-time cancellation fee of $6 million. This fee will be paid one-half during each of the first two quarters of 1997.
Growth in the Company's health related operations has principally been achieved through providing sales, marketing and administrative services for Anthem. The Company expects that revenues from this business will be flat to slightly down in 1997 when compared to 1996. However, the Company does not believe that this will have a material impact on the operating profit related to these operations.
Softness in the property and casualty insurance market and uncertainty about the effects of national and state health care reform initiatives continue. The underwriting capacity of property and casualty insurance companies has continued to expand, increasing competition and decreasing premium rates, thereby reducing related commissions and fees. Many states where the Company does business have already initiated various
The statements under "Outlook" and the other statements which are not historical facts are forward looking. Such statements involve a number of risks and uncertainties. While the statements represent the Company's current judgment as to the near term future of its business, such risks and uncertainties could cause actual results to differ from the above statements. Factors which could cause actual results to differ include the following: the Company's relationship with Anthem, the effect of economic conditions, cyclicality of property and casualty and health insurance markets, the impact of competitive products and pricing, product development, technological difficulties, the results of financing efforts, the effect of the Company's accounting policies, unanticipated regulatory changes and other risks.