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General | People (50) | Filings (751) | Annual reports (6) | Stock | News

INDEPENDENCE HOLDING CO SEC Filing Form 10-Q Quartely report 2/2017, submited: 2017-06-16

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Form 10-Q

The SEC form 10-Q is a comprehensive report of a company's performance that must be submitted quarterly by all public companies to the Securities and Exchange Commission. In the 10-Q, firms are required to disclose relevant information regarding their financial position. The form must be submitted on time, and the information should be available to all interested parties.

The 10-Q is due 35 days (it used to be 45 days) after each of the first three fiscal quarters. There is no filing after the fourth quarter because that is when the 10-K is filed.

INDEPENDENCE HOLDING COMPANY - Form 10-Q SEC filing
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

__________________________________________

 

FORM 10-Q

 

[X]   Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended March 31, 2017.

 

[   ]   Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period from: ________ to _________  

 

Commission File Number: 001-32244

 

INDEPENDENCE HOLDING COMPANY

(Exact name of registrant as specified in its charter)

 

Delaware

 

581407235

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

96 CUMMINGS POINT ROAD, STAMFORD, CONNECTICUT                      06902

                                 (Address of principal executive offices)                                              (Zip Code)

 

Registrant's telephone number, including area code: (203) 358-8000

 

NOT APPLICABLE

Former name, former address and former fiscal year, if changed since last report.

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes   [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer [    ]

Accelerated Filer   [ X ]

Non-Accelerated Filer   [   ]

Smaller Reporting Company   [     ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ]   No [X]

 

Class

Outstanding at June 15, 2017

Common stock, $ 1.00  par value

16,377,756 Shares



 

INDEPENDENCE HOLDING COMPANY

 

INDEX

 

PART I – FINANCIAL INFORMATION

PAGE

 

 

NO.

 

 

 

Item 1. Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets

4

 

 

 

Condensed Consolidated Statements of Income

5

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss)

6

 

 

 

Condensed Consolidated Statement of Changes in Equity

7

 

 

 

Condensed Consolidated Statements of Cash Flows

8

 

 

 

Notes to Condensed Consolidated Financial Statements

9

 

 

 

Item 2. Management's Discussion and Analysis of Financial Condition

 

 

and Results of Operations

29

 

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

39

 

 

 

Item 4. Controls and Procedures

39

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1.    Legal Proceedings

40

 

 

 

 

Item 1A. Risk Factors

41

 

 

 

 

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

41

 

 

 

 

Item 3.   Defaults Upon Senior Securities

41

 

 

 

 

Item 4.    Mine Safety Disclosures

41

 

 

 

 

Item 5.    Other Information

41

 

 

 

Item 6.    Exhibits

42

 

 

 

Signatures

44

 

 

 

 

 

 

Copies of the Company’s SEC filings can be found on its website at www.ihcgroup.com.


2


Forward-Looking Statements

 

This report on Form 10−Q contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created by those laws. We have based our forward-looking statements on our current expectations and projections about future events. Our forward-looking statements include information about possible or assumed future results of our operations. All statements, other than statements of historical facts, included or incorporated by reference in this report that address activities, events or developments that we expect or anticipate may occur in the future, including such things as the growth of our business and operations, our business strategy, competitive strengths, goals, plans, future capital expenditures and references to future successes may be considered forward-looking statements. Also, when we use words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “probably” or similar expressions, we are making forward-looking statements.

 

Numerous risks and uncertainties may impact the matters addressed by our forward-looking statements, any of which could negatively and materially affect our future financial results and performance.  We describe some of these risks and uncertainties in greater detail in Item 1A, Risk Factors, of IHC’s annual report on Form 10-K as filed with Securities and Exchange Commission.

 

Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of these assumptions, and, therefore, also the forward-looking statements based on these assumptions, could themselves prove to be inaccurate. In light of the significant uncertainties inherent in the forward-looking statements that are included in this report, our inclusion of this information is not a representation by us or any other person that our objectives and plans will be achieved. Our forward-looking statements speak only as of the date made, and we will not update these forward-looking statements unless the securities laws require us to do so. In light of these risks, uncertainties and assumptions, any forward-looking event discussed in this report may not occur.


3


PART I - FINANCIAL INFORMATION

Item 1.Financial Statements      

 

 

INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

 

 

 

March 31, 2017

 

 

December 31, 2016

 

 

 

(Unaudited)

 

 

 

ASSETS:

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

Short-term investments

 

$

804  

 

$

6,912 

Securities purchased under agreements to resell

 

 

18,221  

 

 

28,962 

Trading securities

 

 

567  

 

 

592 

Fixed maturities, available-for-sale

 

 

415,712  

 

 

449,487 

Equity securities, available-for-sale

 

 

5,360  

 

 

5,333 

Other investments

 

 

23,060  

 

 

23,534 

Total investments

 

 

463,724  

 

 

514,820 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

51,160  

 

 

22,010 

Due and unpaid premiums

 

 

25,422  

 

 

42,896 

Due from reinsurers

 

 

409,806  

 

 

440,285 

Premium and claim funds

 

 

8,735  

 

 

17,952 

Goodwill

 

 

50,691  

 

 

41,573 

Other assets

 

 

55,728  

 

 

54,928 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

1,065,266  

 

$

1,134,464 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY:

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

Policy benefits and claims

 

$

182,292  

 

$

219,113  

Future policy benefits

 

 

219,105  

 

 

219,450  

Funds on deposit

 

 

146,723  

 

 

145,749  

Unearned premiums

 

 

10,663  

 

 

9,786  

Other policyholders' funds

 

 

9,781  

 

 

9,769  

Due to reinsurers

 

 

10,789  

 

 

35,796  

Accounts payable, accruals and other liabilities

 

 

51,420  

 

 

55,477  

Liabilities attributable to discontinued operations

 

 

38  

 

 

68  

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

 

630,811  

 

 

695,208  

 

 

 

 

 

 

 

Commitments and contingencies (Note 14)

 

 

 

 

 

 

Redeemable noncontrolling interest

 

 

2,008  

 

 

-  

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

Preferred stock $1.00 par value, 100,000 shares authorized;

 

 

 

 

 

 

none issued or outstanding

 

 

-  

 

 

-  

Common stock $1.00 par value, 23,000,000 shares authorized;

 

 

 

 

 

 

18,620,508 shares issued; and 16,377,756 and

 

 

 

 

 

 

17,102,525 shares outstanding

 

 

18,620  

 

 

18,620  

Paid-in capital

 

 

126,534  

 

 

126,468  

Accumulated other comprehensive loss

 

 

(4,443) 

 

 

(6,964) 

Treasury stock, at cost; 2,242,752 and 1,517,983 shares

 

 

(31,885) 

 

 

(17,483) 

Retained earnings

 

 

320,854  

 

 

315,918  

 

 

 

 

 

 

 

TOTAL IHC STOCKHOLDERS’ EQUITY

 

 

429,680  

 

 

436,559  

NONCONTROLLING INTERESTS IN SUBSIDIARIES

 

 

2,767  

 

 

2,697  

 

 

 

 

 

 

 

TOTAL EQUITY

 

 

432,447  

 

 

439,256  

 

 

 

 

 

 

 

TOTAL LIABILITIES AND EQUITY

 

$

1,065,266  

 

$

1,134,464  

 

 

 

See the accompanying Notes to Condensed Consolidated Financial Statements.


4


INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(In thousands, except per share data)

 

 

 

Three Months Ended

 

 

March 31,

 

 

2017

 

2016

REVENUES:

 

 

 

 

Premiums earned

$

62,941  

$

62,562  

Net investment income

 

3,911  

 

4,436  

Fee income

 

3,225  

 

5,079  

Other income

 

1,591  

 

3,258  

Net realized investment gains

 

172  

 

560  

 

 

 

 

 

 

 

71,840  

 

75,895  

EXPENSES:

 

 

 

 

Insurance benefits, claims and reserves

 

32,211  

 

30,743  

Selling, general and administrative expenses

 

32,082  

 

35,227  

Interest expense on debt

 

-  

 

453  

 

 

 

 

 

 

 

64,293  

 

66,423  

 

 

 

 

 

Income from continuing operations, before income taxes

 

7,547  

 

9,472  

Income taxes

 

2,538  

 

3,576  

 

 

 

 

 

Income from continuing operations, net of tax

 

5,009  

 

5,896  

 

 

 

 

 

Discontinued operations:

 

 

 

 

 Income from discontinued operations, before income taxes

 

-  

 

117,636  

 Income taxes on discontinued operations

 

-  

 

7,866  

 Income from discontinued operations, net of tax

 

-  

 

109,770  

 

 

 

 

 

Net income

 

5,009  

 

115,666  

Less: Income from noncontrolling interests in subsidiaries

 

(73) 

 

(9,656) 

 

 

 

 

 

NET INCOME ATTRIBUTABLE TO IHC

$

4,936  

$

106,010  

 

 

 

 

 

Basic income per common share:

 

 

 

 

Income from continuing operations

$

0.30 

$

0.34  

Income from discontinued operations

 

- 

 

5.81  

Basic income per common share

$

0.30 

$

6.15  

 

 

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING

 

16,701 

 

17,243  

 

 

 

 

 

Diluted income per common share:

 

 

 

 

Income from continuing operations

$

0.29 

$

0.33  

Income from discontinued operations

 

- 

 

5.75  

Diluted income per common share

$

0.29 

$

6.08  

 

 

 

 

 

WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING

 

16,978 

 

17,449  

 

 

 

 

 

 

 

 

 

See the accompanying Notes to Condensed Consolidated Financial Statements.


5


INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(In thousands)

 

 

 

Three Months Ended

 

 

March  31,

 

 

2017

 

2016

 

 

 

 

 

 

 

Net income

$

5,009  

$

115,666  

Other comprehensive income:

 

 

 

 

Available-for-sale securities:

 

 

 

 

Unrealized gains on available-for-sale securities, pre-tax

 

3,981  

 

4,703  

Tax expense on unrealized gains on available-for-sale securities

 

1,460  

 

1,685  

Unrealized gains on available-for-sale securities, net of taxes

 

2,521  

 

3,018  

 

 

 

 

 

Other comprehensive income, net of tax

 

2,521  

 

3,018  

 

 

 

 

 

COMPREHENSIVE INCOME, NET OF TAX

 

7,530  

 

118,684  

 

 

 

 

 

Comprehensive income, net of tax, attributable to noncontrolling interests:

 

 

 

 

Income from noncontrolling interests in subsidiaries

 

(73) 

 

(9,656) 

Other comprehensive income, net of tax, attributable to noncontrolling interests:

 

 

 

 

Unrealized gains on available-for-sale securities, net of tax

 

- 

 

(57) 

Other comprehensive income, net of tax, attributable to

 

 

 

 

   noncontrolling interests

 

- 

 

(57) 

 

 

 

 

 

COMPREHENSIVE INCOME, NET OF TAX,

 

 

 

 

   ATTRIBUTABLE TO NONCONTROLLING INTERESTS

 

(73) 

 

(9,713) 

 

 

 

 

 

COMPREHENSIVE INCOME, NET OF TAX,

 

 

 

 

   ATTRIBUTABLE TO IHC

$

7,457  

$

108,971  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See the accompanying Notes to Condensed Consolidated Financial Statements.


6


 

 

INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Unaudited) (In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ACCUMULATED

 

 

 

 

 

 

 

NON-

 

 

 

 

 

 

 

 

OTHER

 

TREASURY

 

 

 

TOTAL IHC

 

CONTROLLING

 

 

 

 

COMMON

 

PAID-IN

 

COMPREHENSIVE

 

STOCK,

 

RETAINED

 

STOCKHOLDERS'

 

INTERESTS IN

 

TOTAL

 

 

STOCK

 

CAPITAL

 

INCOME

 

AT COST

 

EARNINGS

 

EQUITY

 

SUBSIDIARIES

 

EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DECEMBER 31, 2016

$

18,620 

$

126,468 

$

(6,964) 

$

(17,483) 

$

315,918  

$

436,559  

$

2,697 

$

439,256  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

4,936  

 

4,936  

 

70 

 

5,006  

Other comprehensive

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

income, net of tax

 

 

 

 

 

2,521  

 

 

 

 

 

2,521  

 

- 

 

2,521  

Repurchases of common stock

 

 

 

 

 

 

 

(14,402) 

 

 

 

(14,402) 

 

- 

 

(14,402) 

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

expenses

 

 

 

66 

 

 

 

 

 

 

 

66  

 

- 

 

66  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MARCH 31, 2017

$

18,620 

$

126,534 

$

(4,443) 

$

(31,885) 

$

320,854  

$

429,680  

$

2,767 

$

432,447  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See the accompanying Notes to Condensed Consolidated Financial Statements.


7


 

 

INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

 

 

 

Three Months Ended March 31,

 

 

2017

 

 

2016

CASH FLOWS PROVIDED BY (USED BY) OPERATING ACTIVITIES:

 

 

 

 

 

Net income

$

5,009  

 

 

115,666  

Adjustments to reconcile net income to net change in cash from

 

 

 

 

 

operating  activities:

 

 

 

 

 

Gain on disposal of discontinued operations, net of tax

 

-  

 

 

(109,304) 

Amortization of deferred acquisition costs

 

91  

 

 

86  

Net realized investment gains

 

(172) 

 

 

(560) 

Equity (income) loss from equity method investments

 

(201) 

 

 

30  

Depreciation and amortization

 

299  

 

 

472  

Deferred tax expense (benefit)

 

889  

 

 

(901) 

Other

 

1,285  

 

 

3,105  

 Changes in assets and liabilities:

 

 

 

 

 

Net (purchases) sales of trading securities

 

-  

 

 

3,180  

Change in insurance liabilities

 

(59,880) 

 

 

(31,725) 

Change in  amounts due from reinsurers

 

30,479  

 

 

20,985  

Change in premium and claim funds

 

17,474  

 

 

(19,562) 

Change in current income tax liability

 

1,087  

 

 

(1,428) 

Change in due and unpaid premiums

 

9,217  

 

 

4,430  

Other operating activities

 

(5,666) 

 

 

(6,057) 

 

 

 

 

 

 

Net change in cash from operating activities

 

(89) 

 

 

(21,583) 

 

 

 

 

 

 

CASH FLOWS PROVIDED BY (USED BY) INVESTING ACTIVITIES:

 

 

 

 

 

Net sales and maturities of short-term investments

 

6,099  

 

 

-  

Net (purchases) sales of securities under resale agreements

 

10,741  

 

 

7,089  

Sales of fixed maturities

 

78,313  

 

 

32,447  

Maturities and other repayments of fixed maturities

 

4,132  

 

 

10,342  

Purchases of fixed maturities

 

(41,741) 

 

 

(30,723) 

Proceeds on sales of subsidiaries, net of cash divested

 

-  

 

 

134,625  

Payments to acquire business, net of cash acquired

 

(12,287) 

 

 

-  

Other investing activities

 

(157) 

 

 

(1,107) 

 

 

 

 

 

 

Net change in cash from investing activities

 

45,100  

 

 

152,673  

 

 

 

 

 

 

CASH FLOWS PROVIDED BY (USED BY) FINANCING ACTIVITIES:

 

 

 

 

 

Repurchases of common stock

 

(14,402) 

 

 

(821) 

Withdrawals of investment-type insurance contracts

 

(433) 

 

 

(500) 

Repayments of debt

 

-  

 

 

(939) 

Dividends paid

 

(1,026) 

 

 

(779) 

Other financing activities

 

-  

 

 

145  

 

 

 

 

 

 

Net change in cash from financing activities

 

(15,861) 

 

 

(2,894) 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

29,150  

 

 

128,196  

Cash and cash equivalents, beginning of year

 

22,010  

 

 

17,500  

 

 

 

 

 

 

Cash and cash equivalents, end of period

$

51,160  

 

 

145,696  

 

 

 

 

 

 

 

See the accompanying Notes to Condensed Consolidated Financial Statements.


8


INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

Note 1.     Organization, Consolidation, Basis of Presentation and Accounting Policies 

 

(A)      Business and Organization 

 

 Independence Holding Company, a Delaware corporation (“IHC”), is a holding company principally engaged in the life and health insurance business through: (i) its insurance companies, Standard Security Life Insurance Company of New York ("Standard Security Life"), Madison National Life Insurance Company, Inc. ("Madison National Life"), and Independence American Insurance Company (“Independence American”); and (ii) its marketing and administrative companies, including IHC Specialty Benefits Inc., IHC Carrier Solutions, Inc. and PetPartners, Inc. IHC also owns a significant equity interest in Ebix Health Exchange Holdings, LLC (“Ebix Health Exchange”), an administration exchange for health insurance. Standard Security Life, Madison National Life and Independence American are sometimes collectively referred to as the “Insurance Group”. IHC and its subsidiaries (including the Insurance Group) are sometimes collectively referred to as the "Company", or “IHC”, or are implicit in the terms “we”, “us” and “our”.   

 

 Geneve Corporation, a diversified financial holding company, and its affiliated entities, held approximately 56% of IHC's outstanding common stock at March 31, 2017.  

 

(B)       Basis of Presentation 

 

The unaudited Condensed Consolidated Financial Statements have been prepared in conformity with U.S. generally accepted accounting principles ("GAAP") for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited Condensed Consolidated Financial Statements include the accounts of IHC and its consolidated subsidiaries. All significant intercompany transactions have been eliminated in consolidation. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect:  (i) the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements; and (ii) the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. IHC’s annual report on Form 10-K as filed with the Securities and Exchange Commission should be read in conjunction with the accompanying unaudited Condensed Consolidated Financial Statements.

 

In the opinion of management, all adjustments (consisting only of normal recurring accruals) that are necessary for a fair presentation of the consolidated financial position and results of operations for the interim periods have been included. The condensed consolidated results of operations for the three months ended March 31, 2017 are not necessarily indicative of the results to be anticipated for the entire year.

 

(C)     Reclassifications 

 

Certain amounts in prior year’s consolidated financial statements and Notes thereto have been reclassified to conform to the 2017 presentation.

 

(D)     Recent Accounting Pronouncements 

 

Recently Adopted Accounting Standards

 

In October 2016, the Financial Accounting Standards Board (“FASB”) issued guidance that amends the consolidation analysis for a reporting entity that is the single decision maker of a variable interest entity. The amendments in this guidance require the decision maker’s evaluation of its interests held through related


9


parties that are under common control on a proportionate basis rather than in their entirety when determining whether it is the primary beneficiary of that variable interest entity. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

 

In March 2016, the FASB issued guidance that simplify several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification in the statement of cash flows. New guidance related to the classifications in the statement of cash flows were applied on a prospective transition basis. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

 

In March 2016, the FASB issued guidance that eliminates the requirement for retroactive adjustments on the date that a previously held investment qualifies for the equity method of accounting as a result of an increase in ownership interest or degree of influence. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

 

Recently Issued Accounting Standards Not Yet Adopted

 

In May 2017, the FASB issued guidance to provide clarity and reduce both (i) diversity in practice; and (ii) cost and complexity when accounting for a change in the terms or conditions of a share-based payment award. The amendments in this guidance should be applied prospectively in annual periods beginning after December 15, 2017, including interim periods within those periods, with early adoption permitted. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.

 

In March 2017, the FASB issued guidance requiring premium amortization on callable debt securities to be amortized to the earliest call date to more closely align the amortization period with expectations incorporated in market pricing of the underlying securities. The amendments in this guidance should be applied using a modified retrospective approach for annual periods beginning after December 15, 2018, including interim periods within those periods. Additional disclosures are required in the period of adoption. Early adoption is permitted. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.

 

In February 2017, the FASB issued guidance to simplify the accounting for sales of nonfinancial assets by clarifying the definition of nonfinancial assets and adding guidance pertaining to partial sales of nonfinancial assets. The amendments in this guidance can be applied using either a retrospective approach or a modified retrospective approach in annual periods beginning after December 15, 2017, including interim periods within those periods. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.

 

In January 2017, the FASB issued guidance to simplify the test for goodwill impairment by eliminating Step 2 in the goodwill impairment test. Instead, under the amendments in this Update, an entity should perform its annual or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Additionally, an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The amendments in this guidance are effective for public business entities for annual, or any interim, goodwill impairment tests in fiscal years beginning after December 15, 2019. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.

 

In January 2017, the FASB issued guidance that clarifies the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. The amendments in this guidance should be applied prospectively in annual periods beginning after December 15, 2017, including interim periods within those periods, with early adoption permitted. The adoption of this guidance is not expected to


10


have a material effect on the Company’s consolidated financial statements.

 

In November 2016, the FASB issued guidance requiring entities to show the changes in the total cash, cash equivalents, restricted cash and restricted cash equivalent in the statement of cash flows. The amendments in this guidance should be applied retrospectively and is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.

 

In October 2016, the FASB issued guidance requiring an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments in this guidance should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption and are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.

 

In August 2016, the FASB issued guidance that changes how certain cash receipts and cash payments are presented and classified in the cash flows statement. The amendments in this Update are effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.

 

In June 2016, the FASB issued guidance requiring financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. An allowance for credit losses will be deducted from the amortized cost basis to present the net carrying value at the amount expected to be collected with changes in the allowance recorded in earnings. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses rather than the currently applied U.S. GAAP method of taking a permanent impairment of the security, which would be limited to the amount by which fair value is below the amortized cost. Certain existing requirements used to evaluate credit losses have been removed. For public entities that are SEC filers, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, including interim periods within those years. Early adoption is permitted for fiscal years beginning after December 15, 2018. The amendments in this guidance should be applied through a cumulative effect adjustment to retained earnings upon adoption as of the beginning of the first reporting period in which the guidance is effective. Management is evaluating the requirements and potential impact that the adoption of this guidance will have on the Company’s consolidated financial statements.

 

In February 2016, the FASB issued guidance that requires lessees to recognize the assets and liabilities that arise from leases, including operating leases, on the statement of financial position. The amendments in this guidance are effective for fiscal years beginning after December 31, 2018, including interim periods within those fiscal years, using a modified retrospective approach. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.

 

In January 2016, the FASB issued guidance that eliminates the requirement to classify equity securities with readily determinable fair values as trading or available-for-sale. The guidance requires equity securities, other than those that result in consolidation or are accounted for under the equity method, (including other ownership interests, such as partnerships, unincorporated joint ventures, and limited liability companies) to be measured at fair value with changes in the fair value recognized through net income, simplifies the impairment assessment of equity securities without readily determinable fair values and requires changes in disclosure requirements. For public entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted in certain circumstances. The amendments in this Update should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values (including disclosure


11


requirements) should be applied prospectively to equity investments that exist as of the date of adoption of the guidance. The adoption of this guidance is not expected to have a material effect on the Company’s Consolidated Balance Sheet or IHC’s stockholders’ equity.

 

In May 2014, the FASB issued revenue recognition guidance for entities that either enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards such as insurance contracts or lease contracts. The amendment provides specific steps that an entity should apply in order to achieve its main objective which is recognizing revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In 2016, additional guidance and technical corrections were issued to clarify certain aspects of the implementation guidance and to clarify the identification of performance obligations. In August 2015, the effective date of this guidance has been deferred. For public entities, this guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and requires one of two specified retrospective methods of application. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company anticipates that any impact will only relate to contracts with customers outside the scope of Accounting Standards Codification Topic 944, Financial Services - Insurance. Our administrative and other service contracts that will be subject to the amendments in this Update are recorded in the Fee Income line item of the Condensed Consolidated Statement of Income and represents approximately 4% of our consolidated revenues for the three months ended March 31, 2017. Management is still in the process of evaluating the impact that the adoption of this guidance will have on the Company’s consolidated financial statements and the method of adoption that we will ultimately choose.

 

Note 2.    Income Per Common Share 

 

Diluted income per share was computed using the treasury stock method and includes incremental common shares, primarily from the dilutive effect of share-based payment awards, amounting to 277,000 and 206,000 shares for the three months ended March 31, 2017 and 2016.

 

 

The following is a reconciliation of income available to common shareholders used to calculate income per share for the periods indicated (in thousands):

 

 

 

Three Months Ended

 

 

March 31

 

 

2017

 

2016

 

 

 

 

 

Income from continuing operations, net of tax

$

5,009  

$

5,896  

Less:  Income from continuing operations attributable to

 

 

 

 

     noncontrolling interests

 

(73) 

 

(106) 

 

 

 

 

 

   Income from continuing operations attributable to IHC

 

 

 

 

     common shareholders

$

4,936  

$

5,790  

 

 

 

 

 

Income from discontinued operations, net of tax

$

-  

$

109,770  

Less:  Income from discontinued operations attributable to

 

 

 

 

     noncontrolling interests

 

-  

 

(9,550) 

 

 

 

 

 

   Income from discontinued operations attributable to IHC

 

 

 

 

     common shareholders

$

-  

$

100,220  

 

 

 

 

 

  Net income attributable to IHC

$

4,936  

$

106,010  

 

 

 

 

 


12


Note 3.    Discontinued Operations 

 

On March 31, 2016, IHC and its subsidiary Independence American sold the stock of Risk Solutions to Swiss Re Corporate Solutions, a division of Swiss Re (“Swiss Re”).  In addition, under the purchase and sale agreement, all of the in-force stop-loss business of Standard Security Life and Independence American produced by Risk Solutions is co-insured by Westport Insurance Corporation (“Westport”), Swiss Re’s largest US carrier, as of January 1, 2016.  The aggregate purchase price was $152,500,000 in cash, subject to adjustments and settlements. Approximately 89% of the purchase price was allocated to AMIC, with the balance being paid to Standard Security Life and other IHC subsidiaries. In the three months ended March 31, 2016, the Company recorded a gain of $99,793,000, net of taxes and amounts attributable to noncontrolling interests, as a result of the transaction. The aforementioned transaction, which includes the sale of Risk Solutions and the corresponding coinsurance agreement, is collectively referred to as the “Risk Solutions Sale and Coinsurance Transaction”.  IHC’s block of Medical Stop-Loss business is in run-off. The sale of Risk Solutions and exit from the medical stop-loss business represented a strategic shift that has had a major effect on the Company’s operations and financial results. The disposal transaction qualified for reporting as a discontinued operation in the first quarter of 2016 as a result of the Board of Directors commitment to a plan for its disposal in January 2016. Aside from reinsurance and marketing of Westport small group stop-loss, there has been no further involvement with the discontinued operation.

 

The following is a reconciliation of the major line items constituting the pretax profit of discontinued operations included in the Condensed Consolidated Statement of Income for the three months ended March 31, 2016 (in thousands):

 

 

 

2016

Revenue

$

6,406  

Selling, general and administrative expenses

 

5,689  

 

 

 

Pretax profit of discontinued operations

 

717  

Gain on disposal of discontinued operations, pretax

 

116,919  

 

 

 

    Income from discontinued operations, before income taxes

 

117,636  

     Income taxes on discontinued operations

 

7,866  

 

 

 

      Income from discontinued operations

$

109,770  

 

Liabilities attributable to discontinued operations at March 31, 2017 and December 31, 2016 consist of $38,000 and $68,000, respectively, of accounts payable and accrued liabilities.

 

 Total operating cash flows from discontinued operations for the three months ended March 31, 2016 amounted to $339,000. The Company elected to classify the proceeds received from the sale of discontinued operations in the investing activities section of Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2016. 

 

In connection with the Risk Solutions Sale and Coinsurance Transaction in March 2016, AMIC utilized a significant amount of its Federal NOL carryforwards and made a corresponding adjustment to its valuation allowance. On a consolidated basis, the Company recorded income taxes on discontinued operations of $7,866,000 for the three months ended March 31, 2016, consisting of $5,799,000 of state taxes and $2,067,000 of Federal taxes, net of a $38,565,000 decrease in AMIC’s valuation allowance.


13


Note 4.    Investment Securities 

 

The cost (amortized cost with respect to certain fixed maturities), gross unrealized gains, gross unrealized losses and fair value of investment securities are as follows for the periods indicated (in thousands):

 

 

 

 March 31, 2017 

 

 

 

 

 GROSS 

 

 GROSS 

 

 

 

 

AMORTIZED

 

UNREALIZED

 

UNREALIZED

 

 FAIR 

 

 

 COST 

 

 GAINS 

 

 LOSSES 

 

 VALUE 

 

 

 

 

 

 

 

 

 

FIXED MATURITIES

 

 

 

 

 

 

 

 

AVAILABLE-FOR-SALE:

 

 

 

 

 

 

 

 

Corporate securities

$

162,187 

$

974 

$

(3,970) 

$

159,191 

CMOs - residential (1)

 

7,377 

 

- 

 

(142) 

 

7,235 

U.S. Government obligations

 

37,632 

 

117 

 

(382) 

 

37,367 

Agency MBS - residential (2)

 

20 

 

- 

 

-  

 

20 

GSEs (3)

 

10,229 

 

1 

 

(233) 

 

9,997 

States and political subdivisions

 

190,883 

 

764 

 

(4,078) 

 

187,569 

Foreign government obligations

 

4,372 

 

17 

 

(107) 

 

4,282 

Redeemable preferred stocks

 

10,006 

 

125 

 

(80) 

 

10,051 

 

 

 

 

 

 

 

 

 

Total fixed maturities

$

422,706 

$

1,998 

$

(8,992) 

$

415,712 

 

EQUITY SECURITIES

 

 

 

 

 

 

 

 

AVAILABLE-FOR-SALE:

 

 

 

 

 

 

 

 

Common stocks

$

1,612 

$

154 

$

- 

$

1,766 

Nonredeemable preferred stocks

 

3,588 

 

49 

 

(43) 

 

3,594 

 

 

 

 

 

 

 

 

 

Total equity securities

$

5,200 

$

203 

$

(43) 

$

5,360 

 

 

 

 December 31, 2016 

 

 

 

 

 GROSS 

 

 GROSS 

 

 

 

 

AMORTIZED

 

UNREALIZED

 

UNREALIZED

 

 FAIR 

 

 

 COST 

 

 GAINS 

 

 LOSSES 

 

 VALUE 

 

 

 

 

 

 

 

 

 

FIXED MATURITIES

 

 

 

 

 

 

 

 

AVAILABLE-FOR-SALE:

 

 

 

 

 

 

 

 

Corporate securities

$

192,976 

 

209 

 

(5,490) 

 

187,695 

CMOs - residential (1)

 

6,021 

 

8 

 

(116) 

 

5,913 

U.S. Government obligations

 

43,417 

 

133 

 

(441) 

 

43,109 

Agency MBS - residential (2)

 

22 

 

1 

 

-  

 

23 

GSEs (3)

 

10,301 

 

1 

 

(422) 

 

9,880 

States and political subdivisions

 

191,146 

 

780 

 

(5,115) 

 

186,811 

Foreign government obligations

 

5,098 

 

13 

 

(157) 

 

4,954 

Redeemable preferred stocks

 

11,454 

 

96 

 

(448) 

 

11,102 

 

 

 

 

 

 

 

 

 

Total fixed maturities

$

460,435 

 

1,241 

 

(12,189) 

 

449,487 

 

EQUITY SECURITIES

 

 

 

 

 

 

 

 

AVAILABLE-FOR-SALE:

 

 

 

 

 

 

 

 

Common stocks

$

1,612 

 

178 

 

-  

 

1,790 

Nonredeemable preferred stocks

 

3,588 

 

30 

 

(75) 

 

3,543 

 

 

 

 

 

 

 

 

 

Total equity securities

$

5,200 

 

208 

 

(75) 

 

5,333 

 

(1) Collateralized mortgage obligations (“CMOs”). 

(2)  Mortgage-backed securities (“MBS”). 

(3) Government-sponsored enterprises (“GSEs”) are private enterprises established and chartered by the Federal Government or its various insurance and lease programs which carry the full faith and credit obligation of the U.S. Government. 


14


 

 

The amortized cost and fair value of fixed maturities available-for-sale at March 31, 2017, by contractual maturity, are shown below (in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. CMOs and MBSs are shown separately, as they are not due at a single maturity.

 

 

 

 

 

AMORTIZED

 

 

FAIR

 

 

 

COST

 

 

VALUE

 

 

 

 

 

 

 

Due in one year or less

 

$

8,303

 

$

8,319

Due after one year through five years

 

 

125,951

 

 

124,869

Due after five years through ten years

 

 

129,017

 

 

126,441

Due after ten years

 

 

141,809

 

 

138,830

CMOs and MBSs

 

 

17,626

 

 

17,253

 

 

 

 

 

 

 

 

 

$

422,706

 

$

415,712

 

 

The following tables summarize, for all available-for-sale securities in an unrealized loss position, the aggregate fair value and gross unrealized loss by length of time those securities that have continuously been in an unrealized loss position for the periods indicated (in thousands):

 

 

 

 

March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

Less than 12 Months

 

 

12 Months or Longer

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

Unrealized

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate securities

$

110,148

 

$

2,557 

 

$

14,565

 

$

1,413 

 

$

124,713

$

3,970 

CMOs - residential

 

7,138

 

 

142 

 

 

-

 

 

- 

 

 

7,138

 

142 

U.S. Government obligations

 

24,076

 

 

382 

 

 

-

 

 

- 

 

 

24,076

 

382 

GSEs

 

-

 

 

- 

 

 

9,980

 

 

233 

 

 

9,980

 

233 

States and political subdivisions

 

119,213

 

 

3,194 

 

 

29,118

 

 

884 

 

 

148,331

 

4,078 

Foreign government obligations

 

3,067

 

 

107 

 

 

-

 

 

- 

 

 

3,067

 

107 

Redeemable preferred stocks

 

-

 

 

- 

 

 

3,683

 

 

80 

 

 

3,683

 

80 

  Total fixed maturities

 

263,642

 

 

6,382 

 

 

57,346

 

 

2,610 

 

 

320,988

 

8,992 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonredeemable preferred stocks

 

833

 

 

18 

 

 

1,301

 

 

25 

 

 

2,134

 

43 

  Total equity securities

 

833

 

 

18 

 

 

1,301

 

 

25 

 

 

2,134

 

43 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      securities

$

264,475

 

$

6,400 

 

$

58,647

 

$

2,635 

 

$

323,122

$

9,035 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of securities in an

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  unrealized loss position

 

109

 

 

 

 

 

25

 

 

 

 

 

134

 

 

 


15


 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

Less than 12 Months

 

 

12 Months or Longer

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

Unrealized

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate securities

$

145,205

 

 

3,818 

 

 

19,841 

 

 

1,672 

 

 

165,046 

 

5,490 

CMO’s - residential

 

5,038

 

 

116 

 

 

- 

 

 

- 

 

 

5,038 

 

116 

U.S. Government obligations

 

28,406

 

 

441 

 

 

- 

 

 

- 

 

 

28,406 

 

441 

GSEs

 

3,640

 

 

166 

 

 

6,220 

 

 

256 

 

 

9,860 

 

422 

States and political subdivisions

 

144,357

 

 

4,561 

 

 

18,132 

 

 

554 

 

 

162,489 

 

5,115 

Foreign government obligations

 

3,738

 

 

157 

 

 

- 

 

 

- 

 

 

3,738 

 

157 

Redeemable preferred stocks

 

-

 

 

- 

 

 

3,315 

 

 

448 

 

 

3,315 

 

448 

  Total fixed maturities

 

330,384

 

 

9,259 

 

 

47,508 

 

 

2,930 

 

 

377,892 

 

12,189 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonredeemable preferred stocks

 

826

 

 

25 

 

 

1,277 

 

 

50 

 

 

2,103 

 

75 

  Total equity securities

 

826

 

 

25 

 

 

1,277 

 

 

50 

 

 

2,103 

 

75 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      securities

$

331,210

 

 

9,284 

 

 

48,785 

 

 

2,980 

 

 

379,995 

 

12,264 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of securities in an

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  unrealized loss position

 

156

 

 

 

 

 

23

 

 

 

 

 

179

 

 

 

Substantially all of the unrealized losses on fixed maturities available-for-sale at March 31, 2017 and December 31, 2016 relate to investment grade securities and are attributable to changes in market interest rates. Because the Company does not intend to sell, nor is it more likely than not that the Company will have to sell such investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2017.

 

Net realized investment gains are as follows for periods indicated (in thousands):

 

 

 

 

Three Months Ended

 

 

March 31,

 

 

2017

 

2016

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

  Fixed maturities

$

197  

$

628  

     Total sales of available-for-sale securities

 

197  

 

628  

 

 

 

 

 

Trading securities

 

-  

 

-  

     Total realized gains

 

197  

 

628  

 

 

 

 

 

Unrealized gains (losses) on trading securities:

 

 

 

 

  Change in unrealized gains (losses) on trading securities

 

(25) 

 

(70) 

     Total unrealized gains (losses)  on trading securities

 

(25) 

 

(70) 

 

 

 

 

 

Gains (losses) on other investments

 

-  

 

2  

 

 

 

 

 

Net realized investment gains

$

172  

$

560  

 

 

For the three months ended March 31, 2017 and 2016, proceeds from sales of available-for-sale securities were $77,456,000 and $31,494,000, respectively, and the Company realized gross gains of $956,000 and $615,000, respectively, and gross losses of $724,000 and $17,000, respectively, on those sales.

 


16


Other-Than-Temporary Impairment Evaluations

 

We recognize other-than-temporary impairment losses in earnings in the period that we determine: 1) we intend to sell the security; 2) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis; or 3) the security has a credit loss. Any non-credit portion of the other-than-temporary impairment loss is recognized in other comprehensive income (loss). See Note 1G(iv) to the Consolidated Financial Statements in the 2016 Annual Report for further discussion of the factors considered by management in its regular review to identify and recognize other-than-temporary impairments on available-for-sale securities. The Company did not recognize any other-than-temporary impairments on available-for-sale securities in the first three months of 2017 or 2016.

 

Credit losses were recognized on certain fixed maturities for which each security also had an impairment loss recognized in other comprehensive income (loss). The rollforward of these credit losses were as follows for the periods indicated (in thousands):

 

 

 

 

Three Months Ended

 

 

March 31,

 

 

2017

 

2016

 

 

 

 

 

Balance at beginning of year

$

-  

$

473  

Securities sold

 

-  

 

(473) 

 

 

 

 

 

Balance at end of period

$

-  

$

-  

 

 

 

 

Note 5. Fair Value Disclosures  

 

 

For all financial and non-financial assets and liabilities accounted for at fair value on a recurring basis, the Company utilizes valuation techniques based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market expectations. These two types of inputs create the following fair value hierarchy:

 

Level 1 - Quoted prices for identical instruments in active markets.

 

Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

 

Level 3 - Instruments where significant value drivers are unobservable.

 

 

The following section describes the valuation methodologies we use to measure different assets at fair value.

 

Investments in fixed maturities and equity securities:

 

Available-for-sale securities included in Level 1 are equities with quoted market prices. Level 2 is primarily comprised of our portfolio of government securities, agency mortgage-backed securities, corporate fixed income securities, foreign government obligations, collateralized mortgage obligations, municipals and GSEs that were priced with observable market inputs. Level 3 securities consist of municipal tax credit strips.  The valuation method used to determine the fair value of municipal tax credit strips is the present value of the remaining future tax credits (at the original issue discount rate) as presented in the redemption tables in the Municipal Prospectuses.   This original issue discount is accreted into income on a constant yield basis over the term of the debt instrument. Further we retain independent pricing vendors to assist in valuing certain instruments.

 


17


Trading securities:

 

 Trading securities included in Level 1 are equity securities with quoted market prices. 

 

The following tables present our financial assets measured at fair value on a recurring basis for the periods indicated (in thousands):

 

 

 

March 31, 2017

 

 

Level 1

 

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

FINANCIAL ASSETS:

 

 

 

 

 

 

 

 

 

Fixed maturities available-for-sale:

 

 

 

 

 

 

 

 

 

  Corporate securities

$

- 

 

$

159,191 

$

- 

$

159,191 

  CMOs - residential

 

- 

 

 

7,235 

 

- 

 

7,235 

  US Government obligations

 

- 

 

 

37,367 

 

- 

 

37,367 

  Agency MBS - residential

 

- 

 

 

20 

 

- 

 

20 

  GSEs

 

- 

 

 

9,997 

 

- 

 

9,997 

  States and political subdivisions

 

- 

 

 

185,574 

 

1,995 

 

187,569 

  Foreign government obligations

 

- 

 

 

4,282 

 

- 

 

4,282 

  Redeemable preferred stocks

 

10,051 

 

 

- 

 

- 

 

10,051 

     Total fixed maturities

 

10,051 

 

 

403,666 

 

1,995 

 

415,712 

 

 

 

 

 

 

 

 

 

 

Equity securities available-for-sale:

 

 

 

 

 

 

 

 

 

  Common stocks

 

1,766 

 

 

- 

 

- 

 

1,766 

  Nonredeemable preferred stocks

 

3,594 

 

 

- 

 

- 

 

3,594 

     Total equity securities

 

5,360 

 

 

- 

 

- 

 

5,360 

 

 

 

 

 

 

 

 

 

 

Trading securities - equities

 

567 

 

 

- 

 

- 

 

567 

      Total trading securities

 

567 

 

 

- 

 

- 

 

567 

 

 

 

 

 

 

 

 

 

 

Total Financial Assets

$

15,978 

 

$

403,666 

$

1,995 

$

421,639 

 


18


 

 

 

December 31, 2016

 

 

Level 1

 

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

FINANCIAL ASSETS:

 

 

 

 

 

 

 

 

 

Fixed maturities available-for-sale:

 

 

 

 

 

 

 

 

 

  Corporate securities

$

-

 

$

187,695

$

-

$

187,695

  CMOs - residential

 

-

 

 

5,913

 

-

 

5,913

  US Government obligations

 

-

 

 

43,109

 

-

 

43,109

  Agency MBS - residential

 

-

 

 

23

 

-

 

23

  GSEs

 

-

 

 

9,880

 

-

 

9,880

  States and political subdivisions

 

-

 

 

184,778

 

2,033

 

186,811

  Foreign government obligations

 

-

 

 

4,954

 

-

 

4,954

  Redeemable preferred stocks

 

11,102

 

 

-

 

-

 

11,102

     Total fixed maturities

 

11,102

 

 

436,352

 

2,033

 

449,487

 

 

 

 

 

 

 

 

 

 

Equity securities available-for-sale:

 

 

 

 

 

 

 

 

 

  Common stocks

 

1,790

 

 

-

 

-

 

1,790

  Nonredeemable preferred stocks

 

3,543

 

 

-

 

-

 

3,543

     Total equity securities

 

5,333

 

 

-

 

-

 

5,333

 

 

 

 

 

 

 

 

 

 

Trading securities - equities

 

592

 

 

-

 

-

 

592

      Total trading securities

 

592

 

 

-

 

-

 

592

 

 

 

 

 

 

 

 

 

 

Total Financial Assets

$

17,027

 

$

436,352

$

2,033

$

455,412

 

 

It is the Company’s policy to recognize transfers of assets and liabilities between levels of the fair value hierarchy at the end of a reporting period. The Company does not transfer out of Level 3 and into Level 2 until such time as observable inputs become available and reliable or the range of available independent prices narrow. The Company did not transfer any securities between Level 1, Level 2 or Level 3 in either 2017 or 2016.

 

The following table presents the changes in fair value of our Level 3 financial assets for the periods indicated (in thousands):

 

 

 

Three Months Ended March 31,

 

 

2017

 

 

2016

 

 

States and

 

Total

 

 

 

 

States and

 

Total

 

 

Political

 

Level 3

 

 

CMOs

 

Political

 

Level 3

 

 

Subdivisions

 

Assets

 

 

Commercial

 

Subdivisions

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

2,033  

$

2,033  

 

$

1,195  

$

2,179  

$

3,374  

 

 

 

 

 

 

 

 

 

 

 

 

Increases (decreases) recognized in earnings:

 

 

 

 

 

 

 

 

 

 

 

   Net realized investment gains

 

-  

 

-  

 

 

141  

 

-  

 

141  

 

 

 

 

 

 

 

 

 

 

 

 

Gains (losses) included in other

 

 

 

 

 

 

 

 

 

 

 

  comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

    Net unrealized gains (losses)

 

(9) 

 

(9) 

 

 

(296) 

 

(11) 

 

(307) 

 

 

 

 

 

 

 

 

 

 

 

 

Repayments and amortization of

 

 

 

 

 

 

 

 

 

 

 

   fixed maturities

 

(29) 

 

(29) 

 

 

(74) 

 

(25) 

 

(99) 

Sales

 

-  

 

-  

 

 

(966) 

 

-  

 

(966) 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at end of period

$

1,995  

$

1,995  

 

$

-  

$

2,143  

$

2,143  

 


19


During 2016, the Company had contingent liabilities classified in Level 3 of the fair value hierarchy. These liabilities were paid out by December 31, 2016; there were no comparable amounts in 2017. The following table presents the changes in fair value of our Level 3 financial liabilities for the periods indicated (in thousands):

 

 

 

 

Three Months Ended

 

 

 

March 31, 2016

 

 

 

 

 

Total

 

 

 

Contingent

 

Level 3

 

 

 

Liabilities

 

Liabilities

 

 

 

 

 

 

Beginning balance

 

$

1,650  

$

1,650  

 

 

 

 

 

 

Gains (losses) included in earnings:

 

 

 

 

 

   Net investment income

 

 

(633) 

 

(633) 

   Other income

 

 

538  

 

538  

 

 

 

 

 

 

Balance at end of period

 

$

1,555  

$

1,555  

 

The following table provides carrying values, fair values and classification in the fair value hierarchy of the Company’s financial instruments, for the periods indicated, that are not carried at fair value but are subject to fair value disclosure requirements, for the periods indicated (in thousands):

 

 

 

March 31, 2017

 

December 31, 2016

 

 

Level 1

 

Level 2

 

 

 

Level 1

 

Level 2

 

 

 

 

Fair

 

Fair

 

Carrying

 

Fair

 

Fair

 

Carrying

 

 

Value

 

Value

 

Value

 

Value

 

Value

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

FINANCIAL ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

  Short-term investments

$

804 

$

- 

$

804 

$

6,912 

$

- 

$

6,912 

 

 

 

 

 

 

 

 

 

 

 

 

 

FINANCIAL LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

  Funds on deposit

$

- 

$

147,049 

$

146,723 

$

- 

$

146,098 

$

145,749 

 

The following methods and assumptions were used to estimate the fair value of the financial instruments that are not carried at fair value in the Condensed Consolidated Financial Statements:

 

Short-term Investments

 

Investments with original maturities of 91 days to one year are considered short-term investments and are carried at cost, which approximates fair value.

 

Funds on Deposit

 

The Company has two types of funds on deposit. The first type is credited with a current market interest rate, resulting in a fair value which approximates the carrying amount. The second type carries fixed interest rates which are higher than current market interest rates. The fair value of these deposits was estimated by discounting the payments using current market interest rates. The Company's universal life policies are also credited with current market interest rates, resulting in a fair value which approximates the carrying amount. Both types of funds on deposit are included in Level 2 of the fair value hierarchy.

 


20


 

Note 6.    Variable Interest Entities 

 

 The Company has a minority interest in certain limited partnerships that we have determined to be Variable Interest Entities (“VIEs”). The aforementioned VIEs are not required to be consolidated in the Company’s condensed consolidated financial statements as we are not the primary beneficiary since we do not have the power to direct the activities that most significantly impact the VIEs’ economic performance.  

 

The Company will periodically reassess whether we are the primary beneficiary in any of these investments. The reassessment process will consider whether we have acquired the power to direct the most significant activities of the VIE through changes in governing documents or other circumstances. Our maximum loss exposure is limited to our combined $9,255,000 carrying value in these equity investments that are included in other investments in the Condensed Consolidated Balance Sheet as of March 31, 2017.

 

Note 7.    Acquisition of PetPartners, Inc. 

 

On March 24, 2017 (the "Acquisition Date"), the Company acquired 85% of the stock of PetPartners, Inc. (“PetPartners”), a pet insurance marketing and administration company, for a purchase price of $12,677,000, including and subject to certain post-closing and working capital adjustments. The Company acquired PetPartners for the purpose of owning additional distribution and administration sources for its pet insurance. Any time after March 24, 2019, shares owned by the noncontrolling interest are puttable to the Company at fair value and are therefore presented on the balance sheet as redeemable noncontrolling interest.

 

Upon the acquisition, the Company consolidated the assets and liabilities of PetPartners. The following table presents the identifiable assets acquired and liabilities assumed in the acquisition of PetPartners on the Acquisition Date based on their respective fair values (in thousands):

 

 

Cash

 

$

390 

Intangible assets

 

 

5,880 

Other assets

 

 

567 

 

 

 

 

Total identifiable assets

 

 

6,837 

 

 

 

 

Other liabilities

 

 

174 

Deferred tax liability

 

 

1,099 

 

 

 

 

Total liabilities

 

 

1,273 

 

 

 

 

Net identifiable assets acquired

 

$

5,564 

 

 

 

 

Redeemable noncontrolling interest

 

$

2,005 

 

In connection with the acquisition, the Company recorded $9,118,000 of goodwill and $5,880,000 of intangible assets (see Note 8). Goodwill reflects the synergies between PetPartners and Independence American as PetPartners will provide Independence American with increased distribution sources for its pet insurance business through its marketing relationship with the American Kennel Club. Goodwill was calculated as the excess of the sum of: (i) the acquisition date fair value of total cash consideration transferred of $12,677,000; and (ii) the fair value of the redeemable noncontrolling interest in PetPartners of $2,005,000 on the acquisition date; over (iii) the net identifiable assets of $5,564,000 that were acquired. The enterprise value of PetPartners was determined by an independent appraisal using a discounted cash flow model based upon the projected future earnings of PetPartners including a control premium.  The fair value of the redeemable noncontrolling interest was determined based upon their percentage of the PetPartners enterprise value discounted for a lack of control. The fair value of the acquired identifiable intangible assets


21


and deferred taxes are provisional pending receipt of the final valuations for those assets and liabilities.  The Company expects to finalize the preliminary estimates of the fair value of the intangible assets and deferred taxes by the end of this year. Acquisition-related costs, primarily legal and consulting fees, were expensed and are included in selling, general and administrative expenses in the Condensed Consolidated Statement of Income.

 

For the period from the Acquisition Date to March 31, 2017, the Company’s Condensed Consolidated Statement of Income includes revenues and net income of $114,000 and $15,000, respectively, from PetPartners.

 

 Pro forma adjustments to present the Company’s consolidated revenues and net income as if the acquisition date was January 1, 2016 are not material. 

 

 

Note 8.    Goodwill and Other Intangible Assets 

 

The carrying amount of goodwill was $50,691,000 and $41,573,000 at March 31, 2017 and December 31, 2016, respectively.

 

The Company has net other intangible assets of $15,848,000 and $10,122,000 at March 31, 2017 and December 31, 2016, respectively, which are included in other assets in the Condensed Consolidated Balance Sheets. These intangible assets consist of: (i) finite-lived intangible assets, principally the fair value of acquired agent and broker relationships, which are subject to amortization; and (ii) indefinite-lived intangible assets which consist of the estimated fair value of insurance licenses that are not subject to amortization.

 

The gross carrying amounts of these other intangible assets are as follows for the periods indicated (in thousands):

 

 

 

 

March 31, 2017

 

December 31, 2016

 

 

Gross

 

 

 

Gross

 

 

 

 

Carrying

 

Accumulated

 

Carrying

 

Accumulated

 

 

Amount

 

Amortization

 

Amount

 

Amortization

 

 

 

 

 

 

 

 

 

Finite-lived Intangible Assets:

 

 

 

 

 

 

 

 

  Agent and broker relationships

$

18,153 

$

12,012 

$

13,052 

$

11,882 

  Domain

 

1,000 

 

50 

 

1,000 

 

25 

  Software systems

 

780 

 

- 

 

- 

 

- 

     Total finite-lived

 

19,933 

$

12,062 

$

14,052 

$

11,907 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

 

 

 

 

2017

 

2016

Indefinite-lived Intangible Assets:

 

 

 

 

 

 

 

 

   Insurance licenses

 

 

 

 

$

7,977 

$

7,977 

     Total indefinite-lived

 

 

 

 

$

7,977 

$

7,977 

 

 In connection with the acquisition of PetPartners in the first quarter of 2017 discussed in Note 7, the Company recorded $9,118,000 of goodwill and $5,880,000 of intangible assets associated with the Specialty Health segment. None of the goodwill is deductible for income tax purposes. The intangible assets primarily represent the fair value of customer relationships and are being amortized over a weighted average period of 9.6 years. 

 

Amortization expense was $154,000 and $340,000 for the three months ended March 31, 2017 and 2016, respectively.


22


Note 9.     Income Taxes 

 

The provisions for income taxes shown in the Condensed Consolidated Statements of Income were computed based on the Company's actual results, which approximate the effective tax rate expected to be applicable for the balance of the current fiscal year in accordance with consolidated life/non-life group income tax regulations. Such regulations adopt a subgroup method in determining consolidated taxable income, whereby taxable income is determined separately for the life insurance company group and the non-life insurance company group. The differences between the Federal statutory income tax rate of 35% and the Company’s effective income tax rate resulted principally from the dividends received deduction and tax exempt interest income, state and local income taxes, and health insurer specific tax provisions.

 

 

Note 10.    Policy Benefits and Claims 

 

Policy benefits and claims is the liability for unpaid loss and loss adjustment expenses. It is comprised of unpaid claims and estimated IBNR reserves. Summarized below are the changes in the total liability for policy benefits and claims for the periods indicated (in thousands).

 

 

 

Three Months Ended

 

 

March 31,

 

 

2017

 

 

2016

 

 

 

 

 

 

Balance at beginning of year

$

219,113  

 

$

245,443 

Less: reinsurance recoverable

 

88,853  

 

 

65,362 

Net balance at beginning of year

 

130,260  

 

 

180,081 

 

 

 

 

 

 

Amount incurred, related to:

 

 

 

 

 

  Current year

 

38,882  

 

 

36,425 

  Prior years

 

(5,756) 

 

 

(6,231) 

 

 

 

 

 

 

  Total incurred

 

33,126  

 

 

30,194 

 

 

 

 

 

 

Amount paid, related to:

 

 

 

 

 

  Current year

 

7,258  

 

 

7,238 

  Prior years

 

30,081  

 

 

64,105 

 

 

 

 

 

 

  Total paid

 

37,339  

 

 

71,343 

 

 

 

 

 

 

Net balance at end of year

 

126,047  

 

 

138,932