INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

                                             

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 June 30, 2010.


[   ]

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

For the transition period from: ________ to _________  


Commission File Number: 0-10306


INDEPENDENCE HOLDING COMPANY

(Exact name of registrant as specified in its charter)


Delaware

 

58-1407235

(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   [  ]   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   [     ]

Non-Accelerated Filer   [X ]

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 August 12, 2010

Common stock, $ 1.00  par value

15,232,865 Shares






INDEPENDENCE HOLDING COMPANY


INDEX



PART I – FINANCIAL INFORMATION

PAGE

 

 

NO.

 

 

 

Item 1. Financial Statements

 

 

 

 

 

 

Condensed Consolidated Balance Sheets -

4

 

 

June 30, 2010 (unaudited) and December 31, 2009

 

 

 

 

 

Condensed Consolidated Statements of Operations -

5

 

 

Three Months and Six Months Ended June 30, 2010 and 2009 (unaudited)

 

 

 

 

 

Condensed Consolidated Statement of Changes in Equity -

6

 

Six Months Ended June 30, 2010 (unaudited)

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows -

7

 

Six Months Ended June 30, 2010 and 2009 (unaudited)

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

8

 

 

 

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

31

 

 

and Results of Operations

 

 

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

47

 

 

 

Item 4. Controls and Procedures

47

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1.    Legal Proceedings

48

 

 

 

 

Item 1A. Risk Factors

48

 

 

 

 

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

48

 

 

 

 

Item 3.    Defaults Upon Senior Securities

48

 

 

 

 

Item 4.    Removed and Reserved

48

 

 

 

 

Item 5.    Other Information

48

 

 

 

Item 6.    Exhibits

49

 

 

 

Signatures

50

 

 

 

 


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 10Q 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)


 

 

 

June 30, 2010

 

 

December 31, 2009

 

 

 

(Unaudited)

 

 

 

ASSETS:

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

Short-term investments

 

$

53

 

$

52 

 

Securities purchased under agreements to resell

 

 

26,635

 

 

42,708 

 

Fixed maturities, available-for-sale

 

 

787,216

 

 

689,863 

 

Equity securities, available-for-sale

 

 

50,416

 

 

60,815 

 

Other investments

 

 

36,668

 

 

37,643 

 

Total investments

 

 

900,988

 

 

831,081 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

12,599

 

 

7,394 

 

Due from securities brokers

 

 

33,685

 

 

5,579 

 

Investment in American Independence Corp. ("AMIC")

 

 

-

 

 

19,234 

 

Deferred acquisition costs

 

 

39,631

 

 

44,244 

 

Due and unpaid premiums

 

 

47,770

 

 

48,731 

 

Due from reinsurers

 

 

172,830

 

 

184,583 

 

Premium and claim funds

 

 

45,453

 

 

43,663 

 

Notes and other receivables

 

 

19,640

 

 

13,528 

 

Goodwill

 

 

51,700

 

 

48,859 

 

Other assets

 

 

64,821

 

 

57,580 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

1,389,117

 

$

1,304,476 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY:

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

Insurance reserves-health

 

$

187,603

 

$

184,146 

 

Insurance reserves-life and annuity

 

 

275,586

 

 

270,987 

 

Funds on deposit

 

 

410,331

 

 

408,298 

 

Unearned premiums

 

 

11,342

 

 

13,217 

 

Policy claims-health

 

 

18,599

 

 

18,655 

 

Policy claims-life

 

 

12,474

 

 

11,392 

 

Other policyholders' funds

 

 

20,158

 

 

20,517 

 

Due to securities brokers

 

 

39,555

 

 

8,187 

 

Due to reinsurers

 

 

36,230

 

 

45,516 

 

Accounts payable, accruals and other liabilities

 

 

71,758

 

 

71,362 

 

Liabilities related to discontinued operations

 

 

1,085

 

 

1,546 

 

Debt

 

 

9,000

 

 

9,000 

 

Junior subordinated debt securities

 

 

38,146

 

 

38,146 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

 

1,131,867

 

 

1,100,969 

 

 

 

 

 

 

 

EQUITY:

 

 

 

 

 

 

IHC STOCKHOLDERS' EQUITY:

 

 

 

 

 

 

 

Preferred stock (none issued)

 

 

-

 

 

 

Common stock $1.00 par value, 20,000,000 shares authorized;

 

 

 

 

 

 

 

15,471,860 and 15,459,720 shares issued;  

 

 

 

 

 

 

 

15,232,705 and 15,426,965 shares outstanding

 

 

15,472

 

 

15,460 

 

Paid-in capital

 

 

100,784

 

 

100,447 

 

Accumulated other comprehensive income (loss)

 

 

1,827 

 

 

(7,104)

 

Treasury stock, at cost 239,155 and  32,755 shares

 

 

(1,917)

 

 

(326)

 

Retained earnings

 

 

111,817

 

 

94,490 

 

 

 

 

 

 

 

TOTAL IHC STOCKHOLDERS’ EQUITY

 

 

227,983

 

 

202,967 

NONCONTROLLING INTERESTS IN SUBSIDIARIES

 

 

29,267

 

 

540 

 

 

 

 

 

 

 

 

 

TOTAL EQUITY

 

 

257,250

 

 

203,507 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND EQUITY

 

$

1,389,117

 

$

1,304,476 


See the accompanying Notes to Condensed Consolidated Financial Statements.



4



INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data) (Unaudited)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2010

 

2009

 

2010

 

2009

REVENUES:

 

 

 

 

 

 

 

 

 

Premiums earned:

 

 

 

 

 

 

 

 

 

Health

$

75,822 

$

68,287 

$

137,664

$

134,925 

 

Life and annuity

 

8,792 

 

8,794 

 

17,834

 

18,589 

 

Net investment income

 

10,131 

 

11,428 

 

19,502

 

22,147 

 

Fee income

 

9,681 

 

7,870 

 

17,241

 

16,329 

 

Net realized investment gains

 

1,634 

 

1,262 

 

1,983

 

2,927 

 

Other-than-temporary impairment losses

 

(1,039)

 

 

(2,665)

 

(271)

 

Equity income from AMIC

 

-

 

235 

 

280

 

928 

 

Gain on bargain purchase of AMIC

 

-

 

-

 

27,830

 

-

 

Other income

 

1,410 

 

2,107 

 

3,112

 

3,204 

 

 

106,431 

 

99,983 

 

222,781

 

198,778 

EXPENSES:

 

 

 

 

 

 

 

 

 

Insurance benefits, claims and reserves:

 

 

 

 

 

 

 

 

 

Health

 

53,252 

 

48,444 

 

96,815

 

92,240 

 

Life and annuity

 

11,427 

 

11,979 

 

24,692

 

24,379 

 

Selling, general and administrative expenses

 

36,390 

 

34,991 

 

67,825

 

71,469 

 

Amortization of deferred acquisitions costs

 

1,720 

 

1,300 

 

3,038

 

2,350 

 

Interest expense on debt

 

477 

 

761 

 

948

 

1,531 

 

 

103,266 

 

97,475

 

193,318

 

191,969 

 

Income from continuing operations

 

 

 

 

 

 

 

 

 

 

before income taxes

 

3,165 

 

2,508

 

29,463

 

6,809 

 

Income taxes

 

847 

 

545 

 

10,768

 

1,497 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

2,318

 

1,963 

 

18,695

 

5,312

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

Loss from discontinued operations, net of tax

 

(55)

 

(117) 

 

(182)

 

(354) 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

2,263 

 

1,846

 

18,513

 

4,958

 

 

 

 

 

 

 

 

 

 

 

(Income) loss from noncontrolling interests in subsidiaries

 

(565)

 

13 

 

(781)

 

20

 

 

 

 

 

 

 

 

 

 

 

NET INCOME ATTRIBUTABLE TO IHC

$

1,698 

$

1,859

$

17,732

$

4,978

 

 

 

 

 

 

 

 

 

Basic income per common share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

$

.11 

$

.13

$

1.17

$

.35 

 

Loss from discontinued operations

 

-

 

(.01)

 

(.01)

 

(.03)

 

Basic income per common share

$

.11 

$

.12

$

1.16

$

.32 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING

 

15,266 

 

15,419 

 

15,303

 

15,413

 

 

 

 

 

 

 

 

 

Diluted income per common share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

$

.11 

$

.13 

$

1.17

$

.35 

 

Loss from discontinued operations

 

-

 

(.01)

 

(.01)

 

(.03)

 

Diluted income per common share

$

.11 

$

.12 

$

1.16

$

.32 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING

 

15,268 

 

15,419

 

15,306

 

15,415 



See the accompanying Notes to Condensed Consolidated Financial Statements.



5



INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Unaudited)

SIX MONTHS ENDED JUNE 30, 2010 (In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ACCUMULATED

 

 

 

 

 

 

 

NON-

 

 

 

 

 

 

 

 

OTHER

 

TREASURY

 

 

 

TOTAL IHC

 

CONTROLLING

 

 

 

 

COMMON

 

PAID-IN

 

COMPREHENSIVE

 

STOCK,

 

RETAINED

 

STOCKHOLDERS'

 

INTERESTS IN

 

TOTAL

 

 

STOCK

 

CAPITAL

 

INCOME (LOSS)

 

AT COST

 

EARNINGS

 

EQUITY

 

SUBSIDIARIES

 

EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DECEMBER 31, 2009

$

15,460

$

100,447 

$

(7,104)

$

(326)

$

94,490 

$

202,967 

$

540

$

203,507

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

17,732 

 

17,732 

 

781

 

18,513

Net change in unrealized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

gains (losses)

 

 

 

 

 

8,931 

 

 

 

 

 

8,931 

 

-

 

8,931

 

Total comprehensive

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

income

 

 

 

 

 

 

 

 

 

 

 

26,663 

 

781

 

27,444

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase of common stock

 

 

 

 

 

 

 

(1,591)

 

 

 

(1,591)

 

-

 

(1,591)

Acquisition of MedWatch

 

 

 

 

 

 

 

 

 

 

 

-

 

480

 

480

Acquisition of HBA

 

 

 

 

 

 

 

 

 

 

 

-

 

480

 

480

Acquisition of American

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Independence Corp.

 

 

 

(4)

 

 

 

 

 

 

 

(4)

 

26,960

 

26,956

Common Stock dividend

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

($0.025 Per share)

 

 

 

 

 

 

 

 

 

(381)

 

(381)

 

-

 

(381)

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

expenses and related

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

tax benefits

 

12

 

292 

 

 

 

 

 

 

 

304 

 

-

 

304

Other capital transactions

 

 

 

49 

 

 

 

 

 

(24)

 

25 

 

26

 

51

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

JUNE 30,  2010

$

15,472

$

100,784 

$

1,827

$

(1,917)

$

111,817 

$

227,983 

$

29,267

$

257,250

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 








See the accompanying Notes to Condensed Consolidated Financial Statements.



6




INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 (In thousands) (Unaudited)


 

 

Six Months Ended June 30,

 

 

2010

 

 

2009

CASH FLOWS PROVIDED BY (USED BY) OPERATING ACTIVITIES:

 

 

 

 

 

 

Net income

$

18,513 


$

4,958 

 

Adjustments to reconcile net income to net change in cash from

 

 


 

 

 

 operating  activities:

 

 


 

 

 

Gain on bargain purchase of AMIC

 

(27,830)


 

-

 

Loss from discontinued operations

 

182 


 

354 

 

Amortization of deferred acquisition costs

 

3,038 


 

2,350 

 

Net realized investment gains

 

(1,983)


 

(2,927)

 

Other-than-temporary impairment losses

 

2,665 


 

271 

 

Equity income from AMIC and other equity method investments

 

(487)


 

(1,346)

 

Depreciation and amortization

 

2,461 


 

2,742 

 

Share-based compensation expenses

 

348 


 

341 

 

Deferred tax (benefit) expense

 

12,811 


 

(996)

 

Other

 

666 


 

296 

  Changes in assets and liabilities:

 

 


 

 

 

Change in insurance liabilities

 

(21,980)


 

(8,724)

 

Additions to deferred acquisition costs, net

 

(2,170)


 

(1,477)

 

Change in net amounts due from and to reinsurers

 

11,075 


 

(47,109)

 

Change in premium and claim funds

 

2,556 


 

6,455 

 

Change in income tax liability

 

(2,820)


 

4,526 

 

Change in due and unpaid premiums

 

10,763 


 

4,627 

 

Change in other assets

 

1,400 


 

3,768 

 

Change in other liabilities

 

(11,182)


 

1,582 

 

Net change in cash from operating activities of continuing operations

 

(1,974)


 

(30,309)

 

Net change in cash from operating activities of discontinued operations

 

(767)


 

(1,598)

 

Net change in cash from operating activities

 

(2,741)


 

(31,907)

 

 

 


 

 

CASH FLOWS PROVIDED BY (USED BY) INVESTING ACTIVITIES:

 

 


 

 

 

Change in net amount due from and to securities brokers

 

2,913 


 

4,790 

 

Net purchases of short-term investments

 


 

(1)

 

Net sales of securities under resale and repurchase agreements

 

17,376 


 

37,025 

 

Sales of equity securities

 

28,613 


 

13,672 

 

Purchases of equity securities

 

(17,022)


 

 

Sales of fixed maturities

 

379,878 


 

273,842 

 

Maturities and other repayments of fixed maturities

 

67,702 


 

77,557 

 

Purchases of fixed maturities

 

(473,161)


 

(375,372)

 

Additional investments in other investments, net of distributions

 

1,428 


 

74 

 

Cash acquired in acquisition of AMIC, net of cash paid

 

4,562 


 

 

Cash paid in acquisitions of companies, net of cash acquired

 

(3,469)


 

(275)

 

Cash received in acquisition of policy blocks

 

1,192 


 

 

Change in notes and other receivables

 

(705)


 

893 

 

Other

 

(993)


 

(1,182)

 

Net change in cash from investing activities

 

8,314 


 

31,023 

 

 

 


 

 

CASH FLOWS PROVIDED BY (USED BY)  FINANCING ACTIVITIES:

 

 


 

 

 

Proceeds from issuance of common stock

 


 

 

Repurchases of common stock

 

(1,591)


 

 

Excess tax expense from expired stock options and vesting of restricted stock

 

(22)


 

(95)

 

Proceeds  of investment-type insurance contracts

 

1,587 


 

473 

 

Dividends paid

 

(386)


 

(385)

 

Other capital transactions

 

44 


 

 

Net change in cash from financing activities

 

(368)


 

(6)

 

 

 


 

 

Net change in cash and cash equivalents

 

5,205 


 

(890)

Cash and cash equivalents, beginning of year

 

7,394 


 

7,767 

 

 

 


 

 

Cash and cash equivalents, end of period

$

12,599 


$

6,877 



See the accompanying Notes to Condensed Consolidated Financial Statements.



7


INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)


Note 1.  

Significant Accounting Policies and Practices


(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 wholly owned insurance companies, Standard Security Life Insurance Company of New York ("Standard Security Life") and Madison National Life Insurance Company, Inc. ("Madison National Life"); (ii) its majority owned insurance company, Independence American Insurance Company (“Independence American”); and (iii) its marketing and administrative companies, including IHC Administrative Services, Inc., managing general underwriters ("MGUs") in which it owns a significant voting interest, IHC Health Solutions, Inc. (“IHC Health Solutions”), and Actuarial Management Corporation (“AMC”).  These companies are sometimes collectively referred to as the "Insurance Group," and IHC and its subsidiaries (including the Insurance Group) are sometimes collectively referred to as the "Company." IHC also owns a 50.1% interest in American Independence Corp. (AMIC).

 

Geneve Corporation, a diversified financial holding company, and its affiliated entities held approximately 54% of IHC's outstanding common stock at June 30, 2010.


(B)

Basis of Presentation


The 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 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; (ii) the disclosure of contingent assets and liabilities at the date of the financial statements; and (iii) 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 Condensed Consolidated Financial Statements.


IHC acquired a controlling interest in AMIC on March 5, 2010. Prior to obtaining control, IHC recorded its investment in AMIC using the equity method.  IHC recorded changes in its investment in AMIC in the “Equity income from AMIC” line in the Condensed Consolidated Statements of Operations.  Upon achieving control, on March 5, 2010, AMIC’s income and expense amounts became consolidated with IHC’s results.  The Condensed Consolidated Balance Sheet at June 30, 2010 includes the consolidated balance sheet of AMIC.


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 and six months ended June 30, 2010 are not necessarily indicative of the results to be anticipated for the entire year.




8


(C)

Recent Accounting Pronouncements


Recently Adopted Accounting Standards


In January 2010, the Financial Accounting Standards Board (“FASB”) issued standards requiring new disclosures regarding (i) transfers in and out of Level 1 and Level 2 fair value measurements and (ii) activity in Level 3 fair value measurements.  This guidance also clarifies existing disclosures regarding (i) the level of asset and liability disaggregation and (ii) fair value measurement inputs and valuation techniques.  The guidance is effective for interim and annual periods beginning after December 15, 2009, except for the requirement to provide Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010; early adoption is permitted.  The adoption of this guidance, effective January 1, 2010, did not have a material effect on the Company's consolidated financial statements.


In June 2009, the FASB issued standards which among other things, amends former guidance on the consolidation of variable interest entities. The standards (i) require an entity to perform an analysis to determine whether an entity's variable interest or interests give it a controlling financial interest in a variable interest entity; (ii) require ongoing reassessments of whether an entity is the primary beneficiary of a variable interest entity and eliminate the quantitative approach previously required for determining the primary beneficiary of a variable interest entity; (iii) amend previous guidance for determining whether an entity is a variable interest entity; and (iv) require enhanced disclosure that will provide users of financial statements with more transparent information about an entity's involvement in a variable interest entity. In December 2009, these standards were added to the Accounting Standards Codification (“Codification”). The adoption of this guidance, effective January 1, 2010, did not have a material effect on the Company's consolidated financial statements.


In June 2009, the FASB issued standards to revise previous authoritative guidance related to accounting for transfers of financial assets, and will require more disclosures about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. In December 2009, these standards were added to the Codification. Among other things, the guidance eliminates the concept of a "qualifying special-purpose entity", changes the requirements for derecognizing financial assets and enhances information reported to users of financial statements by providing greater transparency about transfers of financial assets and an entity's continuing involvement in transferred financial assets.  The guidance was effective for the first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter with earlier application prohibited.  The recognition and measurement provisions shall be applied to transfers that occur on or after the effective date. The adoption of this guidance, effective January 1, 2010, did not have a material effect on the Company's consolidated financial statements.


Recently Issued Accounting Standards Not Yet Adopted


In April 2010, the FASB issued guidance on the accounting effect, if any, that arises from the different signing dates between the Health Care and Education Reconciliation Act of 2010, which is a reconciliation bill that amends the Patient Protection and Affordable Care Act.  This guidance is applicable for registrants with a period end that falls between the signing dates for which the timing difference could have an accounting impact. The adoption of this guidance is not expected to have a material effect on the Company's consolidated financial statements.


(D)

 Reclassifications


Certain amounts in prior years' Condensed Consolidated Financial Statements and Notes thereto have been reclassified to conform to the 2010 presentation.




9


(E)

Subsequent Events


Subsequent events are events or transactions that occur after the balance sheet date but before the financial statements are issued or are available to be issued. The Company has evaluated all such events occurring subsequent to the balance sheet date herein of June 30, 2010. The effects of all subsequent events that provided additional evidence about conditions that existed at the date of the balance sheet, including estimates, if any, have been recognized in the accompanying Condensed Consolidated Balance Sheet and Condensed Consolidated Statements of Operations as of and for the three-month and  six-month periods ended June 30, 2010. The Company did not recognize subsequent events that provided evidence about conditions that arose after the balance sheet date.


Note 2.

 

American Independence Corp.


AMIC is an insurance holding company engaged in the insurance and reinsurance business. AMIC does business with the Insurance Group, including reinsurance treaties under which, in 2009, Standard Security Life and Madison National Life ceded to Independence American an average of 23% of their medical stop-loss business, 9% of a majority of their fully insured health business and 20% of their New York Statutory Disability business.


In March 2010, IHC acquired a controlling interest in AMIC as a result of the purchase of AMIC common stock in the open market. The principal reasons for acquiring control were: (i) the low market price of the AMIC stock; (ii) the improved financial presentation for IHC resulting from the consolidation of financial reporting; and (iii) a closer relationship that will create greater long-term value for both companies. The acquisition furthers IHC's goal of creating efficiencies by integrating the back office operations of our MGUs and marketing companies. Share purchases of 27,668 shares, or $141,000, through March 5, 2010 (the "Acquisition Date"), totaling 0.33% of voting equity interest, brought the total of AMIC shares owned by the Company to more than 50% of AMIC's outstanding common stock and as a result, IHC has included AMIC’s consolidated assets and liabilities and results of operations subsequent to the Acquisition Date in its condensed consolidated financial results as of and for the period ended June 30, 2010. At December 31, 2009, IHC owned 49.7% of AMIC's outstanding common stock which was purchased in various transactions from 2002 through 2008 and accounted for its investment in AMIC under the equity method. In the fourth quarter of 2009, under the equity method of accounting, due to the length of time, and the magnitude of the amount by which the quoted market price of AMIC had been below IHC’s carrying value, the Company recorded an other-than-temporary impairment loss of $29,198,000 on its investment in AMIC. At December 31, 2009, the carrying value of IHC's investment in AMIC was $19,234,000.


In determining the bargain purchase gain with regard to the acquisition of the controlling interest in AMIC, IHC first recognized a gain of $2,201,000 as a result of remeasuring its equity interest in AMIC to its fair value of $22,013,000 immediately before the acquisition based on the closing market price of AMIC's common stock. Then, upon the acquisition of a controlling interest on March 5, 2010, the Company consolidated the net assets of AMIC.  Accordingly, the Company determined the fair value of the identifiable assets acquired and liabilities assumed from AMIC on the Acquisition Date.  The fair value of the net assets acquired exceeded the sum of: (i) the fair value of the consideration paid; (ii) the fair value of IHC’s equity investment prior to the acquisition; and (iii) the fair value of the noncontrolling interests in AMIC, resulting in a bargain purchase gain of $25,629,000. The total gain, amounting to $27,830,000, pre-tax, is included in gain on bargain purchase of AMIC on the Company’s Condensed Consolidated Statement of Operations. This gain is a result of the quoted market price of AMIC being significantly less than the fair value of the net assets of AMIC.  This disparity is due to the low trading volume in AMIC shares, and a discount on the shares traded due to a lack of control by minority shareholders.  The fair value of the noncontrolling interests in AMIC was based on the closing market price of AMIC’s common stock on the Acquisition Date.

 



10


In connection with the acquisition, the Company recorded $12,200,000 of intangible assets. Of this amount, $1,700,000 represents the fair value of agent and marketing contracts and relationships, $1,000,000 represents the fair value of a domain name, and $2,000,000 represents the fair value of customer lists and all are amortizable over the life of the respective intangible asset. The remaining $7,500,000 represents non-amortizable intangible assets consisting of the fair value of insurance licenses with indefinite lives. As the AMIC acquisition was accounted for as a bargain purchase, the Company did not record goodwill in connection with the transaction.


The following table presents the identifiable assets acquired and liabilities assumed in the acquisition of AMIC on the Acquisition Date based on their respective fair values (in thousands).


 

 

 

 

Investments

 

$

58,418 

Cash and cash equivalents

 

 

4,761 

Identifiable intangible assets

 

 

12,200 

Deferred tax assets, net

 

 

10,654 

Other assets

 

 

31,127 

 

 

 

 

 

Total identifiable assets

 

 

117,160 

 

 

 

 

Insurance liabilities

 

 

27,671 

Other liabilities

 

 

19,023 

 

 

 

 

 

Total liabilities

 

 

46,694 

 

 

 

 

Net identifiable assets acquired

 

 

70,466 

 

 

 

 

Purchase consideration

 

 

(71)

Fair value of equity investment prior to the acquisition

 

 

(22,013)

Noncontrolling interests in AMIC

 

 

(22,065)

Elimination of the fair value adjustment related to AMIC’s

 

 

 

 

investment in Majestic

 

 

(688)

 

 

 

 

 

Gain on bargain purchase

 

 

25,629 

 

Gain on fair value of equity investment prior to the acquisition

 

 

2,201 

 

 

 

 

 

 

Total gain on bargain purchase of AMIC, pretax

 

 

27,830 

 

 

 

 

 

 

Deferred income taxes

 

 

11,097 

 

 

 

 

 

 

Total gain on bargain purchase of AMIC, after tax

 

$

16,733 


For the three-months ended June 30, 2010, the Company’s Condensed Consolidated Statement of Operations includes revenues and net income of $23,788,000 and $886,000, respectively, from AMIC.  


For the period from the Acquisition Date to June 30, 2010, the Company’s Condensed Consolidated Statement of Operations includes revenues and net income of $31,404,000 and $1,253,000, respectively, from AMIC.




11


The unaudited pro forma revenues and operating results had the acquisition occurred as of the beginning of each period are presented below. The unaudited pro forma information presented is not indicative of the results of operations in future periods, nor does it necessarily reflect the results of operations that would have resulted had the acquisition been completed as of the beginning of the applicable periods presented.


 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2010

 

 

2009

 

2010

 

 

2009

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Revenues

$

106,431

 

$

124,581

$

208,551

 

$

247,956

 

 

 

 

 

 

 

 

 

 

 

Net income

$

2,304

 

$

2,418

$

2,292

 

$

6,496

 

 

 

 

 

 

 

 

 

 

 


Pro forma adjustments to revenues principally reflect the elimination of intercompany fee income, the elimination of the Company’s equity income related to AMIC and, in 2010, the elimination of the gain resulting from the bargain purchase. Pro forma adjustments to net income principally reflect the elimination of the Company’s equity income related to AMIC and, in 2010, the elimination of the gain resulting from the bargain purchase.


Subsequent to the Acquisition Date, IHC purchased an additional 9,537 shares of AMIC common stock for a total consideration of $58,000 through June 30, 2010.


During the period from January 1, 2010 to the Acquisition Date (the “Stub Period”) IHC recorded $280,000 of equity income from its investment in AMIC. During the three months and six months ended June 30, 2009, IHC recorded $235,000 and $928,000, respectively, of equity income from its investments in AMIC. These amounts represent IHC's proportionate share of income based on its ownership interests during those periods. AMIC paid no dividends on its common stock during the Stub Period in 2010 or the three-month and six-month periods ended June 30, 2009.


The following disclosures summarize the effects of certain transactions between IHC and its subsidiaries with AMIC during the Stub Period and other periods prior to the Acquisition Date. Subsequent to the Acquisition Date, the effects of these transactions are eliminated in consolidation. IHC and its subsidiaries recorded income of $208,000 during the Stub Period in 2010 and $271,000 and $506,000, respectively, for the three months and six months ended June 30, 2009 from service agreements with AMIC and its subsidiaries. These are reimbursements to IHC and its subsidiaries, at agreed upon rates including an overhead factor, for management services provided by IHC and its subsidiaries, including accounting, legal, compliance, underwriting and claims. The Company ceded premiums to AMIC of $5,867,000 during the Stub Period in 2010 and $11,840,000 and $23,734,000, respectively, for the three months and six months ended June 30, 2009. Benefits to policyholders on business ceded to AMIC were $3,020,000 during the Stub Period in 2010 and $7,969,000 and $14,655,000, respectively, for the three months and six months ended June 30, 2009. Additionally, AMIC subsidiaries market, underwrite and provide administrative services (including premium collection, medical management and claims adjudication) for a substantial portion of the Medical Stop-Loss business written by the insurance subsidiaries of IHC. IHC recorded gross premiums of $8,452,000 during the Stub Period in 2010 and $15,977,000 and $32,849,000, respectively, for the three months and six months ended June 30, 2009 and IHC recorded net commission expense of $326,000 during the Stub Period in 2010 and $666,000 and $1,408,000, respectively, for the three months and six months ended June 30, 2009  for these services. The Company also contracts for several types of insurance coverage (e.g. directors and officers and professional liability coverage) jointly with AMIC. The cost of this coverage is allocated between the Company and AMIC according to the type of risk, and IHC’s portion is recorded in Selling, General and Administrative Expenses.




12



Included in the Company’s Condensed Consolidated Balance Sheet at December 31, 2009 are the following balances arising from transactions in the normal course of business with AMIC and its subsidiaries: Due from reinsurers $15,453,000; Other assets $2,632,000; and Other liabilities of $480,000.


Note 3.

Income Per Common Share


Income per share calculations are based on income from continuing operations attributable to the common shareholders of IHC for the three months and six months ended June 30, 2010 and 2009, as shown below (in thousands):


 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

Income from continuing operations

$

2,318 

$

1,963 

$

18,695 

$

5,312 

 

 

 

 

 

 

 

 

 

(Income) loss from noncontrolling interests

 

 

 

 

 

 

 

 

 

in subsidiaries

 

(565)

 

13 

 

(781)

 

20 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

 

 

 

 

 

 

 

 

attributable to IHC shareholders, net of tax

 

1,753 

 

1,976

 

17,914 

 

5,332 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations, net of tax

 

(55)

 

(117)

 

(182)

 

(354)

 

 

 

 

 

 

 

 

 

Net income attributable to IHC shareholders

$

1,698 

$

1,859 

$

17,732 

$

4,978 

 

 

 

 

 

 

 

 

 


Included in the diluted income per share calculations for the three months and six months ended June 30, 2010 are 2,000 and 3,000 of incremental shares, respectively, from the assumed exercise of dilutive stock options and the assumed vesting of dilutive restricted stock computed using the treasury stock method. Included in the diluted income per share calculations for the six months ended June 30, 2009 are 2,000 of incremental shares from assumed exercise of options and vesting of restricted stock using the treasury stock method. Such shares were deemed anti-dilutive for the three months ended June 30, 2009.




13


Note  4.

Investments


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:


 

 

June 30, 2010

 

 

 

 

GROSS

 

GROSS

 

 

 

 

AMORTIZED

 

UNREALIZED

 

UNREALIZED

 

FAIR

 

 

COST

 

GAINS

 

LOSSES

 

VALUE

 

 

(In thousands)

FIXED MATURITIES

 

 

 

 

 

 

 

 

 

AVAILABLE-FOR-SALE:

 

 

 

 

 

 

 

 

 

Corporate securities

$

294,122

$

4,945

$

(1,465)

$

297,602

 

CMOs- residential (1)

 

74,523

 

4,916

 

(4,756)

 

74,683

 

CMOs - commercial

 

1,446

 

-

 

(653)

 

793

 

U.S. Government obligations

 

11,461

 

326

 

-

 

11,787

 

Agency MBS - residential (2)

 

5,971

 

219

 

-

 

6,190

 

GSEs (3)

 

57,913

 

1,115

 

(142)

 

58,886

 

States and political subdivisions

 

337,338

 

3,268

 

(3,331)

 

337,275

 

 

 

 

 

 

 

 

 

 

 

Total fixed maturities

$

782,774

$

14,789

$

(10,347)

$

787,216

 

 

 

 

 

 

 

 

 

EQUITY SECURITIES

 

 

 

 

 

 

 

 

 

AVAILABLE-FOR-SALE:

 

 

 

 

 

 

 

 

 

Common stocks

$

8,866

$

220

$

(614)

$

8,472

 

Preferred stock - perpetuals

 

28,076

 

127

 

(853)

 

27,350

 

Preferred stock - with maturities

 

14,039

 

555

 

-

 

14,594

 

 

 

 

 

 

 

 

 

 

Total equity securities

$

50,981

$

902

$

(1,467)

$

50,416

 

 

 



 

 

December 31, 2009

 

 

 

 

GROSS

 

GROSS

 

 

 

 

AMORTIZED

 

UNREALIZED

 

UNREALIZED

 

FAIR

 

 

COST

 

GAINS

 

LOSSES

 

VALUE

 

 

(In thousands)

FIXED MATURITIES

 

 

 

 

 

 

 

 

 

AVAILABLE-FOR-SALE:

 

 

 

 

 

 

 

 

 

Corporate securities

$

207,554

$

332

$

(7,357)

$

200,529

 

CMOs - residential (1)

 

78,889

 

3,620

 

(8,582)

 

73,927

 

CMOs - commercial

 

868

 

-

 

(402)

 

466

 

U.S. Government obligations

 

6,319

 

44

 

-

 

6,363

 

Agency MBS - residential (2)

 

40,156

 

182

 

-

 

40,338

 

GSEs (3)

 

15,398

 

-

 

(251)

 

15,147

 

States and political subdivisions

 

358,012

 

3,170

 

(8,089)

 

353,093

 

 

 

 

 

 

 

 

 

 

 

Total fixed maturities

$

707,196

$

7,348

$

(24,681)

$

689,863

 

 

 

 

 

 

 

 

 

EQUITY SECURITIES

 

 

 

 

 

 

 

 

 

AVAILABLE-FOR-SALE:

 

 

 

 

 

 

 

 

 

Common stocks

$

3,790

$

151

$

(69)

$

3,872

 

Preferred stock - perpetuals

 

32,434

 

3,509

 

(215)

 

35,728

 

Preferred stock - with maturities

 

20,996

 

747

 

(528)

 

21,215

 

 

 

 

 

 

 

 

 

 

Total equity securities

$

57,220

$

4,407

$

(812)

$

60,815


(1)

Collateralized mortgage obligations (“CMOs”).

(2)

Mortgage-backed securities (“MBS”).

(3)

Government-sponsored enterprises (“GSEs”) which are the Federal Home Loan Mortgage Corporation, Federal National Mortgage Association and Federal Home Loan Banks. GSEs are private enterprises established and chartered by the Federal Government.



14



The cost basis of certain preferred stocks with maturities at June 30, 2010 and December 31, 2009 includes an adjustment of $2,394,000 related to other-than-temporary impairment losses recorded in accumulated other comprehensive income in prior periods.


Government-sponsored enterprise securities consist of Federal National Mortgage Association mortgage-backed securities and other fixed maturity securities issued by the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association.


The amortized cost and fair value of fixed maturities at June 30, 2010, by contractual maturity, are shown below. 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. The average life of mortgage-backed securities is affected by prepayments on the underlying loans and, therefore, is materially shorter than the original stated maturity.


 

 

 

 

 

 

 

 

% OF

 

 

 

AMORTIZED

 

 

FAIR

 

TOTAL FAIR

 

 

 

COST

 

 

VALUE

 

VALUE

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Due after one year through five years

 

$

191,382

 

$

193,907

 

24.6%

Due after five years through ten years

 

 

142,580

 

 

144,232

 

18.3%

Due after ten years

 

 

339,277

 

 

339,764

 

43.2%

 

 

 

673,239

 

 

677,903

 

86.1%

CMO and MBS

 

 

 

 

 

 

 

 

 

15 year

 

 

82,030

 

 

81,507

 

10.4%

 

20 year

 

 

5,136

 

 

5,101

 

0.6%

 

30 year

 

 

22,369

 

 

22,705

 

2.9%

 

 

 

 

 

 

 

 

 

 

 

$

782,774

 

$

787,216

 

100.0%


The following tables summarize, for all securities in an unrealized loss position at June 30, 2010 and December 31, 2009, respectively, the aggregate fair value and gross unrealized loss by length of time those securities that have continuously been in an unrealized loss position:



 

 

Less than 12 Months

 

 

12 Months or Longer

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

Unrealized

June 30, 2010

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

Losses

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate securities

$

37,323

 

$

624

 

$

22,462

 

$

841

 

$

59,785

$

1,465

CMOs - residential

 

4,414

 

 

597

 

 

24,601

 

 

4,159

 

 

29,015

 

4,756

CMO's - commercial

 

317

 

 

261

 

 

476

 

 

392

 

 

793

 

653

GSEs

 

14,076

 

 

120

 

 

1,800

 

 

22

 

 

15,876

 

142

States and political

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

subdivisions

 

112,758

 

 

2,862

 

 

11,699

 

 

469

 

 

124,457

 

3,331

Total fixed maturities

 

168,888

 

 

4,464

 

 

61,038

 

 

5,883

 

 

229,926

 

10,347

Common stocks

 

5,398

 

 

614

 

 

-

 

 

-

 

 

5,398

 

614

Preferred stocks-perpetual

 

10,288

 

 

223

 

 

4,995

 

 

630

 

 

15,283

 

853

Total temporarily

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

impaired securities

$

184,574

 

$

5,301

 

$

66,033

 

$

6,513

 

$

250,607

$

11,814





15



 

 

 

 

 

 

 

 

 

 

 

Less than 12 Months

 

 

12 Months or Longer

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

Unrealized

December 31, 2009

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

Losses

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate securities

$

122,122

 

$

2,287

 

$

66,652

 

$

5,070

 

$

188,774

$

7,357

CMOs - residential

 

7,937

 

 

990

 

 

35,757

 

 

7,592

 

 

43,694

 

8,582

CMOs - commercial

 

-

 

 

-

 

 

466

 

 

402

 

 

466

 

402

GSEs

 

9,901

 

 

186

 

 

5,246

 

 

65

 

 

15,147

 

251

States and political

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

subdivisions

 

132,180

 

 

4,459

 

 

52,196

 

 

3,630

 

 

184,376

 

8,089

Total fixed maturities

 

272,140

 

 

7,922

 

 

160,317

 

 

16,759

 

 

432,457

 

24,681

Common stocks

 

1,861

 

 

69

 

 

-

 

 

-

 

 

1,861

 

69

Preferred stocks-perpetual

 

416

 

 

8

 

 

8,060

 

 

207

 

 

8,476

 

215

Preferred stocks- with

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

maturities

 

-

 

 

-

 

 

8,692

 

 

528

 

 

8,692

 

528

Total temporarily

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

impaired securities

$

274,417

 

$

7,999

 

$

177,069

 

$

17,494

 

$

451,486

$

25,493



At June 30, 2010 and December 31, 2009, a total of 48 and 75 fixed maturities, respectively, and 20 and 13 equity securities, respectively, were in a continuous unrealized loss position for less than 12 months. At June 30, 2010 and December 31, 2009 a total of 33 and 56 fixed maturities, respectively, and 1 and 5 equity securities, respectively, had continuous unrealized losses for 12 months or longer. 


Substantially all of the unrealized losses on fixed maturities at June 30, 2010 and December 31, 2009 relate to investment grade securities and are attributable to changes in market interest rates and general disruptions in the credit market subsequent to purchase. The unrealized loss on corporate securities and state and political subdivisions are due to wider spreads. Spreads have widened as investors shifted funds to US Treasuries in response to the current market turmoil.  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, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2010.


At June 30, 2010, the Company had $28,433,000 invested in whole loan CMOs backed by Alt-A mortgages. Of this amount, 41.3% were in CMOs that originated in 2005 or earlier and 58.7% were in CMOs that originated in 2006. The unrealized losses on all other CMO’s relate to prime rate CMO’s and are primarily attributed to general disruptions in the credit market subsequent to purchase.


 Other-Than-Temporary Impairment Evaluations


The Company reviews its investment securities regularly and determines whether other-than- temporary impairments have occurred. If the Company intends to sell a debt security, or it is more likely than not that it would be required to sell a debt security before the recovery of its amortized cost basis, the entire difference between the security's amortized cost basis and its fair value at the balance sheet date would be recognized by a charge to total other-than-temporary impairment losses in the Consolidated Statement of Operations. For fixed maturities, if a decline in fair value is judged by management to be other-than-temporary, and the Company does not intend to sell the security and it is not more likely than not that it will be required to sell the security prior to recovery of the security’s amortized cost, the impairment is bifurcated into (a) the amount of the total impairment related to the credit loss, and (b) the amount of the total impairment related to all other factors. The amount of the other-than-temporary impairment related to the credit loss is recognized by a charge to total other-than-temporary impairment losses in the Consolidated Statements of Operations, establishing a new cost basis for the security. The amount of the other-than-temporary impairment related to all other factors is recognized in other comprehensive income in the



16


Consolidated Balance Sheets. The factors considered by management in its regular review include, but are not limited to:  the length of time and extent to which the fair value has been less than cost; the financial condition and near-term prospects of the issuer; adverse changes in ratings announced by one or more rating agencies; subordinated credit support; whether the issuer of a debt security has remained current on principal and interest payments; current expected cash flows; whether the decline in fair value appears to be issuer specific or, alternatively, a reflection of general market or industry conditions (including, in the case of fixed maturities, the effect of changes in market interest rates); and the Company's intent to sell, or be required to sell, the debt security before the anticipated recovery of its remaining amortized cost basis.


In assessing corporate debt securities for other-than-temporary impairment, the Company evaluates the ability of the issuer to meet its debt obligations and the value of the company or specific collateral securing the debt position. For transactions where loan level data is not available, the model uses a proxy based on the collateral characteristics. Assumptions about loss severity and defaults used in the model are primarily based on actual losses experienced and defaults in the collateral pool. Prepayment speeds, both actual and estimated, are also considered. The cash flows generated by the collateral securing these securities are then determined with these default, loss severity and prepayment assumptions. These collateral cash flows are then utilized, along with consideration for the issue’s position in the overall structure, to determine the cash flows associated with the mortgage-backed security held by the Company. In addition, the Company evaluates other asset-backed securities for other-than-temporary impairment by examining similar characteristics referenced above for mortgage-backed securities.  The Company evaluates U.S. Treasury securities and obligations of U.S. Government corporations, U.S. Government agencies, and obligations of states and political subdivisions for other-than-temporary impairment by examining similar characteristics referenced above for corporate debt securities.


To the extent that the present value of the cash flows generated by a debt security is less than the amortized cost, a credit loss exists, and an other-than-temporary impairment is recognized through earnings. It is reasonably possible that further declines in estimated fair values of such investments, or changes in assumptions or estimates of anticipated recoveries and/or cash flows, may cause further other-than-temporary impairments in the near term, which could be significant.


Equity securities may experience other-than-temporary impairment in the future based on the prospects for full recovery in value in a reasonable period of time and the Company’s ability and intent to hold the security to recovery. If a decline in fair value is judged by management to be other-than-temporary or management does not have the intent or ability to hold a security, a loss is recognized by a charge to total other-than-temporary impairment losses in the Consolidated Statements of Operations. For the purpose of other-than-temporary impairment evaluations, preferred stocks are treated in a manner similar to debt securities. Declines in the creditworthiness of the issuer of debt securities with both debt and equity-like features requires the use of the equity model in analyzing the security for other-than-temporary impairment.


Subsequent increases and decreases, if not an other-than-temporary impairment, in the fair value of available-for-sale securities that were previously impaired, are included in other comprehensive income in the Condensed Consolidated Balance Sheet.




17


Based on management’s review of the portfolio, which considered these factors, the Company recorded the following losses for other-than-temporary impairments in the Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 2010 and 2009 (in thousands):


 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other-than-temporary impairments:

 

 

 

 

 

 

 

 

 

Fixed maturities

$

1,039

$

-

$

2,665

$

 

Preferred stocks

 

 

-

 

 

 

(271)

 

 

$

1,039 

$

-

$

2,665

$

(271)


Other-than-temporary impairments of $1,039,000 and $2,665,000, respectively, were recorded on fixed maturities during the three months and six months ended June 30, 2010. Of these amounts, for the three months and six months ended June 30, 2010, $1,039,000 and $1,933,000, respectively, are credit losses resulting from expected cash flows of debt securities less than the debt securities’ amortized cost, and $732,000 was the result of the Company’s intent to sell certain municipal debt securities prior to the recovery of their amortized cost bases. No losses for other-than-temporary impairments were recognized in other comprehensive income for the three months or six months ended June 30, 2010.


At June 30, 2010 and December 31, 2009, cumulative credit losses for other-than-temporary impairments recorded on securities for which a portion of an other-than-temporary impairment was recognized in other comprehensive income remained $ 2,394,000.     


Further deterioration in credit quality of the companies backing the securities, further deterioration in the condition of the financial services industry, a continuation of the current imbalance in liquidity that exists in the marketplace, a continuation or worsening of the current economic recession, or additional declines in real estate values may further affect the fair value of these securities and increase the potential that certain unrealized losses be designated as other-than-temporary in future periods and the Company may incur additional write-downs.


Note 5.

Net Realized Investment Gains


Net realized investment gains for the three months and six months ended June 30, 2010 and 2009 are as follows (in thousands):


 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

Net realized investment gains (losses):

 

 

 

 

 

 

 

 

 

Fixed maturities

$

1,584 

$

1,274 

$

1,743

$

2,939 

 

Common stocks

 

65 

 

 

152

 

 

Preferred stocks

 

(15)

 

(12)

 

26

 

(12)

 

 

 

1,634 

 

1,262 

 

1,921

 

2,927 

 

 

 

 

 

 

 

 

 

Other

 

-

 

-

 

62

 

-

 

 

 

 

 

 

 

 

 

Net realized investment gains

$

1,634 

$

1,262 

$,262 

1,983

$

2,927 

 

 

 

 

 

 

 

 

 





18



For the three months and six months ended June 30, 2010, the Company realized gross gains of $3,445,000 and $5,181,000, respectively, and realized gross losses of $1,811,000 and $3,260,000, respectively, on sales of available-for-sale securities. For the three months and six months ended June 30, 2009, the Company realized gross gains of $3,131,000 and $4,829,000, respectively, and gross losses of $1,869,000 and $1,902,000, respectively, on sales of available-for-sale securities.


Note 6.

Derivative Instruments


In connection with its previously outstanding line of credit, a subsidiary of IHC entered into an interest rate swap with the commercial bank lender, for a notional amount equal to the debt principal amount, under which the Company received a variable rate equal to the rate on the debt and paid a fixed rate (6.65%) in order to manage the risk in overall changes in cash flows attributable to forecasted interest payments. There was no hedge ineffectiveness on this interest rate swap which was accounted for as a cash flow hedge and, in August 2009, the interest rate swap expired. For the six months ended June 30, 2009, the Company recorded $118,000 of gains on the effective portion of the interest rate swap in accumulated other comprehensive loss on the accompanying Condensed Consolidated Balance Sheets, net of related taxes of $78,000.


Note 7.

Fair Value Disclosures of Financial Instruments


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, collateralized mortgage obligations, municipals, GSEs and certain preferred stocks that were priced with observable market inputs. Level 3 securities consist of CMO securities, primarily Alt-A mortgages.  For these securities, we use industry-standard pricing methodologies, including discounted cash flow models, whose inputs are based on management’s assumptions and available market information. Further we retain independent pricing vendors to assist in valuing certain instruments.

    



19


  The following tables present our financial assets and liabilities measured at fair value on a recurring basis, at June 30, 2010 and December 31, 2009, respectively (in thousands):


June 30, 2010

 

 

 

 

 

 

 

 

 

 

 

Level 1

 

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

FINANCIAL ASSETS:

 

 

 

 

 

 

 

 

 

Fixed maturities available-for-sale:

 

 

 

 

 

 

 

 

 

 

Corporate securities

$

-

 

$

297,602

$

-

$

297,602

 

CMOs - residential

 

-

 

 

33,082

 

41,601

 

74,683

 

CMOs - commercial

 

-

 

 

-

 

793

 

793

 

US Government obligations

 

-

 

 

11,787

 

-

 

11,787

 

Agency MBS - residential

 

-

 

 

6,190

 

-

 

6,190

 

GSEs

 

-

 

 

58,886

 

-

 

58,886

 

States and political subdivisions

 

-

 

 

337,275

 

-

 

337,275

 

Total fixed maturities

 

-

 

 

744,822

 

42,394

 

787,216

 

 

 

 

 

 

 

 

 

 

Equity securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

Common stocks

 

8,472

 

 

-

 

-

 

8,472

 

Preferred stocks - perpetual

 

27,350

 

 

-

 

-

 

27,350

 

Preferred stocks - with maturities

 

12,044

 

 

2,550

 

-

 

14,594

 

Total equity securities

 

47,866

 

 

2,550

 

-

 

50,416

 

 

 

 

 

 

 

 

 

 

 

Total

$

47,866

 

$

747,372

$

42,394

$

837,632

 

 

 

 

 

 

 

 

 

 



December 31, 2009

 

 

 

 

 

 

 

 

 

 

 

Level 1

 

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

FINANCIAL ASSETS:

 

 

 

 

 

 

 

 

 

Fixed maturities available-for-sale:

 

 

 

 

 

 

 

 

 

 

Corporate securities

$

-

 

$

200,529

$

-

$

200,529

 

CMOs - residential

 

-

 

 

34,885

 

39,042

 

73,927

 

CMOs - commercial

 

-

 

 

-

 

466

 

466

 

US Government obligations

 

-

 

 

6,363

 

-

 

6,363

 

Agency MBS - residential

 

-

 

 

40,338

 

-

 

40,338

 

GSEs

 

-

 

 

15,147

 

-

 

15,147

 

States and political subdivisions

 

-

 

 

353,093

 

-

 

353,093

 

Total fixed maturities

 

-

 

 

650,355

 

39,508

 

689,863

 

 

 

 

 

 

 

 

 

 

Equity securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

Common stocks

 

3,872

 

 

-

 

-

 

3,872

 

Preferred stocks - perpetual

 

35,728

 

 

-

 

-

 

35,728

 

Preferred stocks - with maturities

 

19,015

 

 

2,200

 

-

 

21,215

 

Total equity securities

 

58,615

 

 

2,200

 

-

 

60,815

 

 

 

 

 

 

 

 

 

 

Total

$

58,615

 

$

652,555

$

39,508

$

750,678

 

 

 

 

 

 

 

 

 

 




20


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. For the six months ending June 30, 2010, there were no transfers of assets and liabilities between Level 1 and Level 2 of the fair value hierarchy. No securities were transferred out of Level 2 and into the Level 3 category as a result of limited or inactive markets during the first three months of 2010. All transfers into the Level 3 category during 2010 were the result of the AMIC acquisition. 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. No securities were sold or transferred out of the Level 3 category in 2010. For the six months ending June 30, 2010, the Company did not include in earnings any realized investment gains or losses related to sales of securities categorized as Level 3 securities. The changes in the carrying value of Level 3 assets and liabilities for the six months ended June 30, 2010 are summarized as follows (in thousands):


 

 

June 30, 2010

 

 

CMOs

 

 

 

 

Residential

 

Commercial

 

Total

 

 

 

 

 

 

 

Beginning balance

$

39,042 

$

466

$

39,508 

 

 

 

 

 

 

 

Transfers into Level 3:

 

 

 

 

 

 

Acquisition of AMIC

 

1,831 

 

305

 

2,136 

 

 

 

 

 

 

 

Gains(losses) included in earnings:

 

 

 

 

 

 

 

Other-than-temporary impairments

 

(1,933)

 

-

 

(1,933)

 

 

 

 

 

 

 

Net unrealized gains (losses) included in

 

 

 

 

 

 

 

accumulated other comprehensive loss

 

4,967 

 

22

 

4,989 

 

 

 

 

 

 

 

Repayments and amortization of fixed maturities

 

(2,306)

 

-

 

(2,306)

 

 

 

 

 

 

 

Balance at end of period

$

41,601 

$

793

$

42,394 


The following methods and assumptions were used to estimate the fair value of financial instruments not disclosed elsewhere in the Notes to Condensed Consolidated Financial Statements:


(A)

Policy Loans


The fair value of policy loans is estimated by projecting aggregate loan cash flows to the end of the expected lifetime period of the life insurance business at the average policy loan rates, and discounting them at a current market interest rate.


(B)

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.


(C)

Debt


The fair value of debt with variable interest rates approximates its carrying amount. The fair value of fixed rate debt is estimated by discounting the cash flows using current market interest rates.




21


The estimated fair values of financial instruments not disclosed elsewhere in the Notes to Condensed Consolidated Financial Statements are as follows:


 

 

 

June 30, 2010

 

December 31, 2009

 

 

 

Carrying

 

 

Fair

 

Carrying

 

 

Fair

 

 

 

Amount

 

 

Value

 

Amount

 

 

Value

 

 

 

(In thousands)

FINANCIAL ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

Policy loans

 

$

23,743

 

$

27,364

$

23,833

 

$

27,422

 

 

 

 

 

 

 

 

 

 

 

 

FINANCIAL

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

Funds on deposit

 

$

410,331

 

$

408,060

$

408,298

 

$

410,485

 

Debt and junior

 

 

 

 

 

 

 

 

 

 

 

 

subordinated debt

 

 

 

 

 

 

 

 

 

 

 

 

securities

 

 

47,146

 

 

47,146

 

47,146

 

 

47,146


Note 8.

Goodwill and Other Intangible Assets


The change in the carrying amount of goodwill and other intangible assets (included in other assets in the Condensed Consolidated Balance Sheets) for the first six months of 2010 is as follows (in thousands):


 

 

 

 

Other Intangible Assets

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

Other

 

 

 

 

Definitive

 

Indefinite

 

Intangible

 

 

Goodwill

 

Lives

 

Lives

 

Assets

 

 

 

 

 

 

 

 

 

Balance at December 31, 2009

$

48,859

$

7,785 

$

477

$

8,262 

Acquisitions:

 

 

 

 

 

 

 

 

 

AMIC

 

-

 

4,700 

 

7,500

 

12,200 

 

Alliance Underwriters

 

1,459

 

1,100 

 

-

 

1,100 

 

MedWatch

 

568

 

340 

 

20

 

360 

 

HBA

 

814

 

200 

 

-

 

200 

 

 

 

 

 

 

 

 

 

Capitalized software development

 

-

 

132 

 

-

 

132 

Amortization expense

 

-

 

(1,121)

 

-

 

(1,121)

 

 

 

 

 

 

 

 

 

Balance at June 30, 2010

$

51,700

$

13,136 

$

7,997

$

21,133 

 

 

 

 

 

 

 

 

 


In connection with the acquisition of a controlling interest in AMIC discussed in Note 2, the Company recorded $12,200,000 of intangible assets. Of this amount, $1,700,000 represents the fair value of agent and marketing contracts and relationships, which is being amortized over a weighted average period of 7.6 years, $1,000,000 represents the fair value of a domain name being amortized over a 10 year period, and $2,000,000 represents the fair value of customer lists, which are being amortized over a period of 5.0 years. The remaining $7,500,000 represents non-amortizable intangible assets consisting of the fair value of insurance licenses with indefinite lives. The AMIC acquisition was accounted for as a bargain purchase and accordingly, the Company did not record goodwill in connection with the transaction.


In January 2010, the Company acquired the assets of a managing general underwriter, Alliance Underwriters, LLC (“AU”) for a $2,500,000 purchase price. The Company recorded goodwill of $1,459,000 and other intangible assets of $1,100,000, for the fair value of customer relationships, which is being amortized over a weighted average period of 8.0 years. AU is a managing general underwriter that controls approximately $30 million of employer medical stop-loss business.



22



In January 2010, IHC Health Holdings Corp., a wholly owned subsidiary of the Company (“IHC Health Holdings”), acquired a 51% interest in the stock of MedWatch, LLC (“MedWatch”) for a $500,000 purchase price. The Company recorded goodwill of $568,000 and other intangible assets of $360,000, primarily for the fair value of customer relationships, which is being amortized over a weighted average period of 11.6 years. MedWatch provides utilization review and medical management services to fully insured and self-funded health plans.


In January 2010, IHC Health Holdings acquired a 51% interest in the stock of Hospital Bill Analysis, LLC (“HBA”), a hospital bill review company, for a $500,000 purchase price. The Company recorded goodwill of $814,000 and other intangible assets of $200,000, primarily for the fair value of customer relationships, which is being amortized over a weighted average period of 11.0 years.


Note 9.

Discontinued Operations


The Company sold its credit life and disability segment by entering into a 100% coinsurance agreement with an unaffiliated insurer effective December 31, 2007. Unearned premium reserves of this block and the corresponding amount in due from reinsurers of $7,009,000 and $8,847,000 are included in the Condensed Consolidated Balance Sheets at June 30, 2010 and December 31, 2009, respectively.


The Company recorded losses from discontinued operations representing expenses and changes in claims and reserves related to the insurance liabilities (currently in run-off status) for claims incurred prior to the sale on  December 31, 2007 as follows (in thousands):



 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

Pretax loss from discontinued operations

$

(85)

$

(181)

$

(280)

$

(545)

 

 

 

 

 

 

 

 

 

Tax benefits allocated to discontinued operations

 

30 

 

64 

 

98 

 

191 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations, net

$

(55)

$

(117)

$

(182)

$

(354)

 

 

 

 

 

 

 

 

 





23


Changes in the liabilities related to discontinued operations for the six months ended June 30, 2010 were as follows (in thousands):


 

 

Claims

 

Accrued

 

Termination

 

 

 

 

Liability

 

Expenses

 

Benefits

 

Total

 

 

 

 

 

 

 

 

 

Balance at beginning of year

$

1,522 

$

-

$

24 

$

1,546 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations:

 

 

 

 

 

 

 

 

 

Changes in claims and reserves

 

 

 

 

 

 

 

 

 

related to block in run-off

 

259 

 

-

 

-

 

259 

 

Expenses incurred related to block in run-off

 

-

 

21 

 

-

 

21 

 

 

 

 

 

 

 

 

280 

 

 

 

 

 

 

 

 

 

Payments of expenses accrued to administer

 

 

 

 

 

 

 

 

 

the business sold

 

 

 

(21)

 

(24)

 

(45)

 

 

 

 

 

 

 

 

 

Claim payments related to block in run-off

 

(696)

 

-

 

-

 

(696)

 

 

 

 

 

 

 

 

 

Balance at June 30, 2010

$

1,085 

$

-

$

-

$

1,085 


The Company believes that the net liabilities of discontinued operations at June 30, 2010 adequately estimate the remaining costs associated with the credit life and disability discontinued operations.


Note 10.

Share-Based Compensation


IHC and AMIC each have share-based compensation plans. The following is a summary of the activity pertaining to each of these plans. AMIC disclosures reflect the activity subsequent to the Acquisition Date.


A)

IHC Share-Based Compensation Plans


Total share-based compensation was $143,000 and $74,000 for the three months ended June 30, 2010 and 2009, respectively and $322,000 and $341,000 for the six months ended June 30, 2010 and 2009, respectively.  Related tax benefits of $57,000 and $29,000 were recognized for the three months ended June 30, 2010 and 2009, respectively and $128,000 and $136,000 for the six months ended June 30, 2010 and 2009, respectively.  


Under the terms of IHC’s stock-based compensation plans, option exercise prices are more than or equal to the quoted market price of the shares at the date of grant; option terms range from five to ten years; and vesting periods are three years for employee options.  The Company may also grant shares of restricted stock, share appreciation rights (“SARs”) and share-based performance awards. Restricted shares are valued at the quoted market price of the shares at the date of grant and have a three year vesting period. Exercise prices of SARs are more than or equal to the quoted market price of IHC shares at the date of the grant and have three year vesting periods. At June 30, 2010, there were 730,059 shares available for future stock-based compensation grants under the IHC stock incentive plans.




24


Stock Options


IHC’s stock option activity for the six months ended June 30, 2010 is as follows:


 

 

Shares

 

Weighted- Average

 

 

Under Option

 

Exercise Price

 

 

 

 

 

December 31, 2009

 

312,170 

 

$

14.62

Granted

 

461,800 

 

10.00

Expired

 

(6,490)

 

20.07

June 30, 2010

 

767,480 

 

 

11.79


The following table summarizes information regarding IHC’s outstanding and exercisable options as of June 30, 2010:


 

 

Outstanding

 

Exercisable

 

 

 

 

 

Number of options

 

767,480

 

239,010

Weighted average exercise price per share

$

11.79

$

15.48

Aggregate intrinsic value for all options

$

-

$

-

Weighted average contractual term remaining

 

3.6 years

 

2.0 years


The fair value of an option award is estimated on the date of grant using the Black-Scholes option valuation model. The weighted average grant-date fair-value of options granted during the six months ended June 30, 2010 was $1.57 per share. No options were granted during the six months ended June 30, 2009. The assumptions set forth in the table below were used to value the stock options granted during the six-month period ended June 30, 2010:


Weighted-average risk-free interest rate

 

 

 

2.3%

Annual dividend rate per share

 

 

$

.05

Weighted-average volatility factor of the Company's common stock

 

 

 

45.0%

Weighted-average expected term of options

 

 

 

4.5 years


Compensation expense of $135,000 and $15,000 was recognized in the three months ended June 30, 2010 and 2009, respectively, and $254,000 and $206,000 in the six months ended June 30, 2010 and 2009, respectively, for the portion of the grant-date fair value of stock options vesting during that period.


No options were exercised during the three months and six months ended June 30, 2010 or 2009.


As of June 30, 2010, the total unrecognized compensation expense related to non-vested stock options was $775,000 which is expected to be recognized over the remaining requisite weighted-average service period of 2.0 years.


Restricted Stock


IHC issued 2,250 shares of restricted stock during both the six months ended June 30, 2010 and 2009. The total fair value of IHC’s restricted stock that vested during the first six months of 2010 and 2009 was $23,000 and $70,000, respectively. Restricted stock expense was $7,000 and $28,000 for the three months ended June 30, 2010 and 2009, respectively, and was $19,000 and $80,000 for the six months ended June 30, 2010 and 2009, respectively.




25


The following table summarizes restricted stock activity for the six months ended June 30, 2010:


 

 

No. of

 

Weighted-Average

 

 

Non-vested

 

   Grant-Date

 

 

Shares

 

Fair Value

 

 

 

 

 

December 31, 2009

 

5,380 

 

$

12.43

 

Granted

 

2,250 

 

$

7.01

 

Vested

 

(3,130)

 

$

15.19

 

 

 

 

 

 

 

 

June 30, 2010

 

4,500 

 

$

7.80

 


As of June 30, 2010, the total unrecognized compensation expense related to IHC’s non-vested restricted stock awards was $34,000 which is expected to be recognized over the remaining requisite weighted-average service period of 2.3 years.


SARs and Share-Based Performance Awards


The fair value of SARs is calculated using the Black-Scholes valuation model at the grant date and each subsequent reporting period until settlement. Compensation cost is based on the proportionate amount of the requisite service that has been rendered to date. Once fully vested, changes in fair value of the SARs continue to be recognized as compensation expense in the period of the change until settlement. No SARs were exercised in the six months ended June 30, 2010 or 2009. Other liability-classified awards include share-based performance awards. Compensation costs for these plans are recognized and accrued as performance conditions are met, based on the current share price. The intrinsic value of all of IHC’s share-based liabilities paid in the six months ended June 30, 2010 and 2009 was $54,000 and $35,000, respectively. Included in Other Liabilities on the Company’s Condensed Consolidated Balance Sheets at June 30, 2010 and December 31, 2009 are liabilities of $53,000 and $58,000, respectively, pertaining to IHC’s SARs and share-based performance awards.


B.

AMIC Share-Based Compensation Plans


Total AMIC share-based compensation expense was $19,000 and $26,000, respectively, for the three months ended June 30, 2010 and the period between the Acquisition Date and June 30, 2010.  Related tax benefits of $7,000 and $10,000, respectively, were recognized for the three months ended June 30, 2010 and the period between the Acquisition Date and June 30, 2010.


Under the terms of the AMIC’s stock-based compensation plan, option exercise prices are equal to the quoted market price of the shares at the date of grant; option terms are ten years; and vesting periods range from three to four years.  AMIC may also grant shares of restricted stock, stock appreciation rights and share-based performance awards.  Restricted shares are valued at the quoted market price of the shares at the date of grant, and have a three year vesting period. At June 30, 2010, there were 6,537,222 shares available for future stock-based compensation grants under the AMIC stock incentive plan.





26


Stock Options


The following table summarizes information regarding AMIC’s outstanding and exercisable options for the period between the Acquisition Date and June 30, 2010:


 

 

Shares

 

Weighted- Average

 

 

Under Option

 

Exercise Price

 

 

 

 

 

March 5, 2010

 

355,900

 

$

10.00

Granted

 

13,334

 

4.60

Exercised

 

(10,000)

 

4.50

June 30, 2010

 

359,234

 

 

9.95


The following table summarizes information regarding AMIC’s outstanding and exercisable options as of June 30, 2010:


 

 

Outstanding

 

Exercisable

 

 

 

 

 

Number of options

 

359,234

 

337,330

Weighted average exercise price per share

$

9.95

$

10.20

Aggregate intrinsic value for all options

$

36,251

$

29,584

Weighted average contractual term remaining

 

3.8 years

 

3.5 years


The fair value of an option award is estimated on the date of grant using the Black-Scholes option valuation model. The weighted average grant-date fair-value of options granted during the period between the Acquisition Date and June 30, 2010 was $2.79 per share. The assumptions set forth in the table below were used to value the stock options granted during the period between the Acquisition Date and June 30, 2010:


Weighted-average risk-free interest rate

 

 

 

3.69%

Annual dividend rate per share

 

 

$

-

Weighted-average volatility factor of the Company's common stock

 

 

 

45.00

Weighted-average expected term of options

 

 

 

5 years


Compensation expense of $14,000 and $19,000 was recognized for the three months ended June 30, 2010 and the period between the Acquisition Date and June 30, 2010, respectively, for the portion of the grant-date fair value of AMIC’s stock options vesting during those periods.


AMIC received cash proceeds of $45,000 upon the exercise of 10,000 options with an intrinsic value of $1,000 during the period between the Acquisition Date and June 30, 2010.


As of June 30, 2010, the total unrecognized compensation expense related to AMIC’s non-vested options was $78,000 which will be recognized over the remaining requisite service periods.


Restricted Stock


AMIC issued 12,000 restricted stock awards in the second quarter of 2008, with a weighted average grant-date fair value of $6.92 per share.  No restricted stock awards were issued in 2010.  The total fair value of AMIC’s restricted stock that vested during the period between the Acquisition Date and June 30, 2010 was $13,000. Restricted stock expense was $5,000 and $7,000 for the three months ended June 30, 2010 and the period between the Acquisition Date and June 30, 2010, respectively.




27


The following table summarizes AMIC’s restricted stock activity for the period between the Acquisition Date and June 30, 2010:


 

 

No. of

 

Weighted-Average

 

 

Non-vested

 

   Grant-Date

 

 

Shares

 

Fair Value

 

 

 

 

 

March 5, 2010

 

6,333

 

$

6.92

 

Vested

 

(2,500)

 

$

6.92

 

Forfeited

 

(1,333)

 

$

6.92

 

 

 

 

 

 

 

 

June 30, 2010

 

2,500 

 

$

6.92

 


As of June 30, 2010, there was approximately $17,000 of total unrecognized compensation expense related to AMIC’s non-vested restricted stock which will be recognized over the remaining requisite service periods.


Note 11.

Income Taxes


The provision for income taxes shown in the Condensed Consolidated Statements of Operations was 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 deferred income tax expense allocated to stockholders' equity (principally for net unrealized gains on investment securities) for the six months ended June 30, 2010  was $4,986,000, representing the decrease in the related net deferred tax liability to $1,018,000 at June 30, 2010  from a tax asset of  $3,968,000 at December 31, 2009.


At June 30, 2010, AMIC, had net operating loss carryforwards of approximately $273,900,000 for federal income tax purposes which expire between 2019 and 2029. The federal deferred tax asset relative to AMIC included in other assets on IHC’s Condensed Consolidated Balance Sheet at June 30, 2010 was $10,633,000, net of a valuation allowance of $86,400,000. AMIC continues to file its own separate income tax return and is not included in the consolidated tax return of IHC.


Note 12.

Supplemental Disclosures of Cash Flow Information


Tax payments, net of tax refunds, were $436,000 during the six months ended June 30, 2010. Tax refunds, net of tax payments, were $1,961,000 during the six months ended June 30, 2009


Cash payments for interest were $938,000 and $1,687,000 during the six months ended June 30, 2010 and 2009, respectively.  


Note 13.

Comprehensive Income (Loss)


The components of comprehensive income (loss) include: (i) net income or loss reported in the Condensed Consolidated Statements of Operations; (ii) the after-tax net unrealized gains and losses on investment securities available for sale, including the subsequent increases and decreases in fair value of available-for-sale securities previously impaired; and (iii) the portion of other-than-temporary impairments of fixed maturities related to all other factors than those deemed to be a credit loss.




28


The comprehensive income for the three months and six months ended June 30, 2010 and 2009 is summarized as follows (in thousands):



 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

Net income

$

2,263 

$

1,846

$

18,513 

$

4,958

Unrealized gains arising

 

 

 

 

 

 

 

 

 

during the period, net of income taxes

 

4,507 

 

20,913

 

8,931 

 

28,316

 

 

 

 

 

 

 

 

 

Comprehensive income

 

6,770 

 

22,759

 

27,444 

 

33,274

Comprehensive (income) losses attributable to

 

 

 

 

 

 

 

 

 

noncontrolling interest

 

(565)

 

13

 

(781)

 

20

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to IHC

$

6,205 

$

22,772

$

26,663 

$

33,294


No losses for other-than-temporary impairments of fixed maturities were recognized in other comprehensive income during the three months or six months ended June 30, 2010.


Note 14.

 Segment Reporting


The Insurance Group principally engages in the life and health insurance business. Information by business segment for the three months and six months ended June 30, 2010 and 2009 is presented below (in thousands):



 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

Medical Stop-Loss (A)

$

37,446

$

35,879 

$

65,346

$

72,314 

Fully Insured Health (B)

 

37,478

 

30,376 

 

68,352

 

59,511 

Group disability, life, annuities and DBL (C)

 

16,632

 

16,632 

 

33,790

 

32,858 

Individual life, annuities and other

 

14,074

 

14,961 

 

28,169

 

30,785 

Corporate

 

206

 

873 

 

27,806

 

654 

 

 

105,836 

 

98,721 

 

223,463 

 

196,122 

Net realized investment gains

 

1,634 

 

1,262 

 

1,983 

 

2,927 

Other-than-temporary impairment losses, net

 

(1,039)

 

 

(2,665)

 

(271)

 

 

 

 

 

 

 

 

 

 

$

106,431 

$

99,983 

$

222,781 

$

198,778 

 

 

 

 

 

 

 

 

 

Income Before Income Taxes:

 

 

 

 

 

 

 

 

Medical Stop-Loss (A)

$

1,859

$

1,127 

$

2,452

$

2,776 

Fully Insured Health(B) (D)

 

(75)

 

(751)

 

1,079 

 

(750)

Group disability, life, annuities and DBL (C)

 

1,829

 

1,027 

 

1,314

 

3,381 

Individual life, annuities and other

 

761

 

491 

 

894

 

1,801 

Corporate

 

(1,327)

 

113 

 

25,354 

 

(1,524)

 

 

3,047

 

2,007 

 

31,093 

 

5,684 

Net realized investment gains

 

1,634

 

1,262 

 

1,983 

 

2,927 

Other-than-temporary impairment losses, net

 

(1,039)

 

-

 

(2,665)

 

(271)

Interest expense

 

(477)

 

(761)

 

(948)

 

(1,531)

 

 

 

 

 

 

 

 

 

 

$

3,165

$

2,508 

$

29,463 

$

6,809 




29


(A)

The amount includes equity income from AMIC (prior to its acquisition) of $165,000 for the three months ended June 30, 2009, and $14,000 and $653,000 for the six months ended June 30, 2010 and 2009, respectively.


(B)

The amount includes equity income from AMIC (prior to its acquisition) of $47,000 for the three months ended June 30, 2009 and $244,000 and $186,000 for six months ended June 30, 2010 and 2009, respectively.


(C)

The amount includes equity income from AMIC (prior to its acquisition) of $23,000 for the three months ended June 30, 2009, and $22,000 and $89,000 for six months ended June 30, 2010 and 2009, respectively.


(D)

The Fully Insured Health segment includes amortization of intangible assets recorded as a result of purchase accounting for the recent acquisitions. Total amortization expense was $669,000 and $616,000 for the three months ended June 30, 2010 and 2009, respectively, and $1,160,000 and $1,228,000 for the six months ended June 30, 2010 and 2009, respectively. Amortization expense for the other segments is insignificant.




30


ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS


The following discussion of the financial condition and results of operations of Independence Holding Company ("IHC") and its subsidiaries (collectively, the "Company") should be read in conjunction with, and is qualified in its entirety by reference to, the Consolidated Financial Statements of the Company and the related Notes thereto appearing in our annual report on Form 10-K for the fiscal year ended December 31, 2009, as filed with the Securities and Exchange Commission, and our unaudited Condensed Consolidated Financial Statements and related Notes thereto appearing elsewhere in this quarterly report.


Overview


Independence Holding Company, a Delaware corporation ("IHC"), is a holding company principally engaged in the life and health insurance business through: (i) its wholly owned insurance companies, Standard Security Life Insurance Company of New York ("Standard Security Life") and Madison National Life Insurance Company, Inc. ("Madison National Life"); (ii) its majority owned insurance company, Independence American Insurance Company (“Independence American”); and (iii) its marketing and administrative companies, including IHC Administrative Services, Inc., managing general underwriters ("MGUs") in which it owns a significant voting interest, IHC Health Solutions, Inc. (“IHC Health Solutions”), and Actuarial Management Corporation (“AMC”).  These companies are sometimes collectively referred to as the "Insurance Group," and IHC and its subsidiaries (including the Insurance Group) are sometimes collectively referred to as the "Company." IHC also owns a 50.1% interest in American Independence Corp. (“AMIC”).


While management considers a wide range of factors in its strategic planning and decision-making, underwriting profit is consistently emphasized as the primary goal in all decisions as to whether or not to increase our retention in a core line, expand into new products, acquire an entity or a block of business, or otherwise change our business model.  Management's assessment of trends in healthcare and morbidity, with respect to medical stop-loss, fully insured medical, disability and New York State short-term statutory disability benefit product ("DBL"); mortality rates with respect to life insurance; and changes in market conditions in general play a significant role in determining the rates charged, deductibles and attachment points quoted, and the percentage of business retained. IHC also seeks transactions that permit it to leverage its vertically integrated organizational structure by generating fee income from production and administrative operating companies as well as risk income for its carriers and profit commissions.  Management has always focused on managing the costs of its operations and providing its insureds with the best cost containment tools available.




31


The following is a summary of key performance information and events:


The results of operations for the three months and six months ended June 30, 2010 and 2009 are summarized as follows (in thousands):


 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

Revenues

$

106,431

$

99,983

$

222,781

$

198