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 September 30, 2013.


[   ]

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   [X]   No [  ]


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


Large Accelerated Filer [    ]

Accelerated Filer   [ X  ]

Non-Accelerated Filer   [  ]

Smaller Reporting Company   [     ]


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


Class

Outstanding at November 1, 2013

Common stock, $ 1.00  par value

17,687,669 Shares






INDEPENDENCE HOLDING COMPANY


INDEX


PART I – FINANCIAL INFORMATION

PAGE

 

 

NO.

 

 

 

Item 1. Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets

4

 

 

 

Condensed Consolidated Statements of Income

5

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss)

6

 

 

 

Condensed Consolidated Statement of Changes in Equity

7

 

 

 

Condensed Consolidated Statements of Cash Flows

8

 

 

 

Notes to Condensed Consolidated Financial Statements

9

 

 

 

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

 

 

and Results of Operations

28

 

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

41

 

 

 

Item 4. Controls and Procedures

42

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1.    Legal Proceedings

43

 

 

 

 

Item 1A. Risk Factors

43

 

 

 

 

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

43

 

 

 

 

Item 3.    Defaults Upon Senior Securities

43

 

 

 

 

Item 4.    Mine Safety Disclosures

43

 

 

 

 

Item 5.    Other Information

43

 

 

 

Item 6.    Exhibits

44

 

 

 

Signatures

45

 

 

 

 



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)

 

 

 

 

September 30, 2013

 

 

December 31, 2012

 

 

 

(Unaudited)

 

 

 

ASSETS:

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

Short-term investments

 

$

50

 

$

50

 

Securities purchased under agreements to resell

 

 

34,036

 

 

33,956

 

Trading securities

 

 

6,394

 

 

7,016

 

Fixed maturities, available-for-sale

 

 

546,707

 

 

719,602

 

Equity securities, available-for-sale

 

 

5,605

 

 

15,598

 

Other investments

 

 

26,302

 

 

35,134

 

Total investments

 

 

619,094

 

 

811,356

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

16,835

 

 

23,945

 

Deferred acquisition costs

 

 

29,578

 

 

33,401

 

Due and unpaid premiums

 

 

58,343

 

 

49,430

 

Due from reinsurers

 

 

377,802

 

 

166,880

 

Premium and claim funds

 

 

40,795

 

 

40,596

 

Goodwill

 

 

50,318

 

 

50,318

 

Other assets

 

 

83,984

 

 

86,382

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

1,276,749

 

$

1,262,308

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

Claims and claim adjustment expenses-health

 

$

232,688

 

$

194,480 

 

Future policy benefits-life and annuity

 

 

285,175

 

 

290,238 

 

Funds on deposit

 

 

276,379

 

 

278,084 

 

Unearned premiums

 

 

10,970

 

 

8,453 

 

Other policyholders' funds

 

 

24,975

 

 

22,373 

 

Due to reinsurers

 

 

36,734

 

 

48,192 

 

Accounts payable, accruals and other liabilities

 

 

75,861

 

 

71,495 

 

Debt

 

 

6,000

 

 

8,000 

 

Junior subordinated debt securities

 

 

38,146

 

 

38,146 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

 

986,928

 

 

959,461 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

IHC STOCKHOLDERS' EQUITY:

 

 

 

 

 

 

 

Preferred stock (none issued)

 

 

- - 

 

 

 

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

 

 

 

 

 

 

 

18,520,433 and 18,461,992 shares

 

 

 

 

 

 

 

issued; 17,711,526 and 17,932,954 shares outstanding

 

 

18,520

 

 

18,462 

 

Paid-in capital

 

 

127,683

 

 

126,589 

 

Accumulated other comprehensive income (loss)

 

 

(5,922)

 

 

15,013 

 

Treasury stock, at cost; 808,907 and 529,038 shares

 

 

(7,431)

 

 

(4,533)

 

Retained earnings

 

 

141,564

 

 

130,153 

 

 

 

 

 

 

 

TOTAL IHC STOCKHOLDERS’ EQUITY

 

 

274,414

 

 

285,684 

NONCONTROLLING INTERESTS IN SUBSIDIARIES

 

 

15,407

 

 

17,163 

 

 

 

 

 

 

 

 

 

TOTAL EQUITY

 

 

289,821

 

 

302,847 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND EQUITY

 

$

1,276,749

 

$

1,262,308 



See the accompanying Notes to Condensed Consolidated Financial Statements.



4



INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(In thousands, except per share data)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2013

 

2012

 

2013

 

2012

REVENUES:

 

 

 

 

 

 

 

 

 

Premiums earned

$

125,174 

$

92,236 

$

368,007 

$

261,479 

 

Net investment income

 

6,841 

 

9,346 

 

21,844 

 

25,706 

 

Fee income

 

6,290 

 

7,754 

 

18,871 

 

21,064 

 

Other income

 

922 

 

1,155 

 

3,933 

 

3,558 

 

Net realized investment gains

 

2,417 

 

1,011 

 

18,771 

 

3,998 

 

 

 

 

 

 

 

 

 

 

 

Other-than-temporary impairment losses:

 

 

 

 

 

 

 

 

 

Total other-than-temporary impairment losses

 

 

 

 

(992)

 

Portion of losses recognized in other comprehensive income

 

 

 

 

288 

 

Net impairment losses recognized in earnings

 

 

 

 

(704)

 

 

 

 

 

 

 

 

 

 

 

141,644 

 

111,502 

 

431,426 

 

315,101 

EXPENSES:

 

 

 

 

 

 

 

 

 

Insurance benefits, claims and reserves

 

88,177 

 

63,034 

 

262,913 

 

180,434 

 

Selling, general and administrative expenses

 

45,597 

 

39,791 

 

133,339 

 

109,594 

 

Amortization of deferred acquisitions costs

 

1,404 

 

1,587 

 

13,792 

 

4,812 

 

Interest expense on debt

 

470 

 

509 

 

1,447 

 

1,588 

 

 

 

 

 

 

 

 

 

 

 

135,648 

 

104,921 

 

411,491

 

296,428 

 

 

 

 

 

 

 

 

 

 

 

Income from operations before income taxes

 

5,996 

 

6,581 

 

19,935 

 

18,673 

 

Income taxes

 

2,080 

 

2,191 

 

6,821 

 

6,123 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

3,916 

 

4,390 

 

13,114 

 

12,550 

 

Less: Income from noncontrolling interests in subsidiaries

 

(277)

 

(472)

 

(1,083)

 

(1,179)

 

 

 

 

 

 

 

 

 

 

 

NET INCOME ATTRIBUTABLE TO IHC

$

3,639 

$

3,918 

$

12,031 

$

11,371 

 

 

 

 

 

 

 

 

 

Basic income per common share

$

.21 

$

.22 

$

.68 

$

.63 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING

 

17,683 

 

17,957 

 

17,784 

 

17,991 

 

 

 

 

 

 

 

 

 

Diluted income per common share

$

.21 

$

.22 

$

.67 

$

.63 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING

 

17,735 

 

18,028 

 

17,890 

 

18,076 












See the accompanying Notes to Condensed Consolidated Financial Statements.



5




INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

(In thousands)


 

 

Three Months Ended

 

Nine Months Ended

 

 

September  30,

 

September 30,

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

Net income

$

3,916 

$

4,390

$

13,114 

$

12,550 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on available-for-sale securities, pre-tax

 

(3,969)

 

6,227

 

(31,965)

 

13,534 

 

Tax expense (benefit) on unrealized gains (losses) on available-for-sale

 

 

 

 

 

 

 

 

 

securities

 

(1,454)

 

1,985

 

(10,359)

 

4,351 

 

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

 

(2,515)

 

4,242

 

(21,606)

 

9,183 

 

 

 

 

 

 

 

 

 

 

 

Other-than-temporary impairment losses, pre-tax

 

 

-

 

 

(288)

 

Tax benefit on other-than-temporary impairment losses

 

 

-

 

 

(41)

 

Other-than-temporary impairment losses, net of taxes

 

 

-

 

 

(247)

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedge:

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on cash flow hedge, pre-tax

 

97 

 

126

 

142 

 

118 

 

Tax expense (benefit) on unrealized gains (losses) on cash flow hedge

 

39 

 

50

 

57 

 

47 

 

Unrealized gains (losses) on cash flow hedge, net of taxes

 

58 

 

76

 

85 

 

71 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax

 

(2,457)

 

4,318

 

(21,521)

 

9,007 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME (LOSS), NET OF TAX

 

1,459 

 

8,708

 

(8,407)

 

21,557 

 

 

 

 

 

 

 

 

 

Comprehensive income, net of tax, attributable to noncontrolling

 

 

 

 

 

 

 

 

 

 

interests:

 

 

 

 

 

 

 

 

Income from noncontrolling interests in subsidiaries

 

(277)

 

(472)

 

(1,083)

 

(1,179)

Other comprehensive loss, net of tax, attributable to noncontrolling

 

 

 

 

 

 

 

 

 

interests:

 

 

 

 

 

 

 

 

 

Unrealized (income) loss on available-for-sale securities, net of tax

 

(6)

 

(137)

 

550 

 

(230)

 

Other comprehensive (income) loss, net of tax, attributable to

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

(6)

 

(137)

 

550 

 

(230)

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME, NET OF TAX,

 

 

 

 

 

 

 

 

 

ATTRIBUTABLE TO NONCONTROLLING INTERESTS

 

(283)

 

(609)

 

(533)

 

(1,409)

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME (LOSS), NET OF TAX,

 

 

 

 

 

 

 

 

 

ATTRIBUTABLE TO IHC

$

1,176 

$

8,099 

$

(8,940)

$

20,148 














See the accompanying Notes to Condensed Consolidated Financial Statements.




6



INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Unaudited)

NINE MONTHS ENDED SEPTEMBER 30, 2013 (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, 2012

$

18,462

$

126,589

$

15,013 

$

(4,533)

$

130,153 

$

285,684 

$

17,163 

$

302,847 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

12,031 

 

12,031 

 

1,083 

 

13,114 

Other comprehensive

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

loss, net of tax

 

 

 

 

 

(20,971)

 

 

 

 

 

(20,971)

 

(550)

 

(21,521)

Repurchases of common stock

 

 

 

 

 

 

 

(2,898)

 

 

 

(2,898)

 

 

(2,898)

Common stock dividend

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($.035 per share)

 

 

 

 

 

 

 

 

 

(620)

 

(620)

 

 

(620)

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

expenses and related

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

tax benefits

 

58

 

677

 

 

 

 

 

 

 

735 

 

 

735 

Acquire noncontrolling interests

 

 

 

403

 

36 

 

 

 

 

 

439 

 

(1,638)

 

(1,199)

Distributions to noncontrolling

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

interests

 

 

 

 

 

 

 

 

 

 

 

 

(654)

 

(654)

Other capital transactions

 

 

 

14

 

 

 

 

 

 

 

14 

 

 

17 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SEPTEMBER 30, 2013

$

18,520

$

127,683

$

(5,922)

$

(7,431)

$

141,564 

$

274,414 

$

15,407 

$

289,821 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 













See the accompanying Notes to Condensed Consolidated Financial Statements.



7




INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 (In thousands)

 

 

 

Nine Months Ended September 30,

 

 

2013

 

 

2012

CASH FLOWS PROVIDED BY (USED BY) OPERATING ACTIVITIES:

 

 

 

 

 

 

Net income

$

13,114 

 

$

12,550 

 

Adjustments to reconcile net income to net change in cash from

 

 

 

 

 

 

 operating  activities:

 

 

 

 

 

 

Amortization of deferred acquisition costs

 

13,792 

 

 

4,812 

 

Net realized investment gains

 

(18,771)

 

 

(3,998)

 

Other-than-temporary impairment losses

 

 

 

704 

 

Equity income from equity method investments

 

(2,150)

 

 

(1,362)

 

Depreciation and amortization

 

3,483 

 

 

3,052 

 

Share-based compensation expenses

 

956 

 

 

794 

 

Deferred tax  expense

 

3,891 

 

 

4,265 

 

Other

 

3,689 

 

 

5,159 

  Changes in assets and liabilities:

 

 

 

 

 

 

Net sales of trading securities

 

1,747 

 

 

63 

 

Change in insurance liabilities

 

27,441 

 

 

(139,719)

 

Additions to deferred acquisition costs, net

 

(4,382)

 

 

(4,615)

 

Change in  amounts due from reinsurers

 

(210,922)

 

 

(5,150)

 

Change in premium and claim funds

 

(199)

 

 

3,978 

 

Change in current income tax liability

 

2,761 

 

 

1,661 

 

Change in due and unpaid premiums

 

(8,913)

 

 

(8,165)

 

Change in other assets

 

(196)

 

 

(882)

 

Change in other liabilities

 

1,326 

 

 

(3,591)

 

 

 

 

 

 

 

 

Net change in cash from operating activities

 

(173,333)

 

 

(130,444)

 

 

 

 

 

 

CASH FLOWS PROVIDED BY (USED BY) INVESTING ACTIVITIES:

 

 

 

 

 

 

Change in net amount due from and to securities brokers

 

7,621 

 

 

5,318 

 

Net (purchases) sales of securities under resale and repurchase agreements

 

(80)

 

 

2,276 

 

Sales of equity securities

 

10,029 

 

 

7,567 

 

Purchases of equity securities

 

 

 

(2,963)

 

Sales of fixed maturities

 

518,399 

 

 

396,579 

 

Maturities and other repayments of fixed maturities

 

44,692 

 

 

53,039 

 

Purchases of fixed maturities

 

(413,937)

 

 

(328,968)

 

Change in other investments

 

 

 

1,535 

 

Cash paid in acquisitions of companies, net of cash acquired

 

 

 

(243)

 

Other investing activities

 

9,103 

 

 

(5,521)

 

 

 

 

 

 

 

Net change in cash from investing activities

 

175,827 

 

 

128,619 

 

 

 

 

 

 

CASH FLOWS PROVIDED BY (USED BY)  FINANCING ACTIVITIES:

 

 

 

 

 

 

Repurchases of common stock

 

(2,898)

 

 

(1,108)

 

Cash paid in acquisitions of noncontrolling interests

 

(1,199)

 

 

(58)

 

Proceeds (withdrawals) of investment-type insurance contracts

 

(2,342)

 

 

2,433 

 

Repayment of debt

 

(2,000)

 

 

(2,000)

 

Dividends paid

 

(620)

 

 

(1,051)

 

Proceeds from stock options exercised

 

400 

 

 

 

Other capital transactions

 

(945) 

 

 

(54)

 

 

 

 

 

 

 

Net change in cash from financing activities

 

(9,604)

 

 

(1,838)

 

 

 

 

 

 

Net change in cash and cash equivalents

 

(7,110)

 

 

(3,663)

Cash and cash equivalents, beginning of year

 

23,945 

 

 

18,227 

 

 

 

 

 

 

Cash and cash equivalents, end of period

$

16,835 

 

$

14,564 







See the accompanying Notes to Condensed Consolidated Financial Statements.



8


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 insurance companies, Standard Security Life Insurance Company of New York ("Standard Security Life"), Madison National Life Insurance Company, Inc. ("Madison National Life"), Independence American Insurance Company (“Independence American”); and (ii) its marketing and administrative companies, including IHC Risk Solutions, LLC, IHC Health Solutions, Inc. and IHC Specialty Benefits, Inc.  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 significant equity interest in a managing general underwriter (“MGU”) that writes medical stop-loss for Standard Security Life.  At September 30, 2013, the Company also owned an 80.6% interest in American Independence Corp. ("AMIC").

 

Geneve Corporation, a diversified financial holding company, and its affiliated entities held approximately 51.6% of IHC's outstanding common stock at September 30, 2013.


 

(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.



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 nine months ended September 30, 2013 are not necessarily indicative of the results to be anticipated for the entire year.




(C)

Recent Accounting Pronouncements



Recently Adopted Accounting Standards


In February 2013, the Financial Accounting Standards Board (“FASB”) issued guidance requiring an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. For other amounts, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. The adoption of this guidance, effective January 1, 2013, only affected the Company’s presentation of



9


information pertaining to other comprehensive income (loss) and did not affect the Company’s consolidated financial statements.


In July 2012, the FASB issued guidance to revise the subsequent measurement requirements for indefinite-lived intangible assets. In accordance with the amendments in this Update, an entity will have the option to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that an indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. The adoption of this guidance, effective January 1, 2013, did not have a material effect on the Company’s consolidated financial statements.


In December 2011 and March 2013, the FASB issued guidance to amend the disclosure requirements on offsetting financial instruments and related derivatives. Entities are required to provide both net and gross information for these assets and liabilities in order to enhance comparability. The adoption of this guidance, effective January 1, 2013, did not have a material effect on the Company’s consolidated financial statements.


Recently Issued Accounting Standards Not Yet Adopted


In July 2013, the FASB, issued guidance for the presentation of unrecognized tax benefits to better reflect the manner in which an entity would settle, at the reporting date, any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 31, 2013. The Company’s presentation of unrecognized tax benefits is consistent with this guidance and therefore the adoption of such guidance will not have an effect on the Company’s consolidated financial statements.


In July 2013, the FASB issued guidance that permits the Fed Funds Effective Swap Rate to be used as a U.S. benchmark interest rate for hedge accounting purposes and removes the restriction on using different benchmark rates for similar hedges. This guidance is effective prospectively for qualifying new or re-designated hedging relationships entered into on or after July 17, 2013 and is not expected to have an impact on the Company’s consolidated financial statements.


In July 2011, the FASB issued guidance specifying that the liability for the fees paid to the Federal Government by health insurers as a result of recent healthcare reform legislation should be estimated and recorded in full once the entity provides qualifying health insurance in the applicable calendar year in which the fee is payable with a corresponding deferred cost that is amortized to expense using a straight-line method of allocation unless another method better allocates the fee over the calendar year that it is payable. The amendments in this Update are effective for calendar years beginning after December 31, 2013, when the fee initially becomes effective. Management has not yet determined the impact that the adoption of this guidance will have on the Company’s consolidated financial statements.





(D)

Reclassifications


Certain amounts in prior year’s Condensed Consolidated Financial Statements and Notes thereto have been reclassified to conform to the 2013 presentation.






10



Note 2.

American Independence Corp.


As a result of share repurchases by AMIC in January 2013, (i) noncontrolling interests decreased by $1,638,000; (ii) the Company recorded a $403,000 credit to its paid-in capital; and (iii) IHC’s ownership interest in AMIC increased to 80.6%.


In October 2013, IHC purchased 762,640 shares of AMIC common stock in connection with a tender offer for such shares and, as a result, IHC and its subsidiaries further increased its ownership of AMIC to 90.0%.




Note 3.

Income Per Common Share



            Diluted income per share, computed using the treasury stock method, include incremental shares from; (i) the assumed exercise of dilutive stock options; (ii) the assumed vesting of dilutive restricted stock; and (iii) assumed share settlement of dilutive stock appreciation rights (“SARs”) of 52,000 and 106,000 shares, respectively, for the three months and nine months ended September 30, 2013, and 71,000 and 85,000 shares, respectively, for the three months and nine months ended September 30, 2012.




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 for the periods indicated (in thousands):



 

 

September 30, 2013

 

 

 

 

GROSS

 

GROSS

 

 

 

 

AMORTIZED

 

UNREALIZED

 

UNREALIZED

 

FAIR

 

 

COST

 

GAINS

 

LOSSES

 

VALUE

 

 

 

 

 

 

 

 

 

FIXED MATURITIES

 

 

 

 

 

 

 

 

    AVAILABLE-FOR-SALE:

 

 

 

 

 

 

 

 

    Corporate securities

$

216,279

$

1,895

$

(6,513)

$

211,661

    CMOs - residential (1)

 

3,338

 

714

 

-

 

4,052

    CMOs - commercial

 

975

 

-

 

(403)

 

572

    U.S. Government obligations

 

19,298

 

332

 

(71)

 

19,559

    Agency MBS - residential (2)

 

99

 

6

 

-

 

105

    GSEs (3)

 

31,572

 

132

 

(299)

 

31,405

    States and political subdivisions

 

249,622

 

2,825

 

(5,699)

 

246,748

    Foreign governments

 

30,574

 

24

 

(1,810)

 

28,788

    Redeemable preferred stocks

 

4,036

 

73

 

(292)

 

3,817

 

 

 

 

 

 

 

 

 

          Total fixed maturities

$

555,793

$

6,001

$

(15,087)

$

546,707

 

 

 

 

 

 

 

 

 


EQUITY SECURITIES

 

 

 

 

 

 

 

 

      AVAILABLE-FOR-SALE:

 

 

 

 

 

 

 

 

     Nonredeemable preferred stocks

$

5,504

$

112

$

(11)

$

5,605

 

 

 

 

 

 

 

 

 

          Total equity securities

$

5,504

$

112

$

(11)

$

5,605




11



 

 

December 31, 2012

 

 

 

 

GROSS

 

GROSS

 

 

 

 

AMORTIZED

 

UNREALIZED

 

UNREALIZED

 

FAIR

 

 

COST

 

GAINS

 

LOSSES

 

VALUE

 

 

 

 

 

 

 

 

 

FIXED MATURITIES

 

 

 

 

 

 

 

 

    AVAILABLE-FOR-SALE:

 

 

 

 

 

 

 

 

    Corporate securities

$

343,529

$

11,247

$

(953)

$

353,823

    CMOs - residential (1)

 

12,993

 

7,166

 

(65)

 

20,094

    CMOs - commercial

 

975

 

-

 

(405)

 

570

    U.S. Government obligations

 

18,376

 

492

 

(2)

 

18,866

    Agency MBS - residential (2)

 

397

 

31

 

-

 

428

    GSEs (3)

 

48,598

 

1,075

 

(67)

 

49,606

    States and political subdivisions

 

260,086

 

9,134

 

(995)

 

268,225

    Redeemable preferred stocks

 

6,323

 

1,667

 

-

 

7,990

 

 

 

 

 

 

 

 

 

          Total fixed maturities

$

691,277

$

30,812

$

(2,487)

$

719,602

 

 

 

 

 

 

 

 

 


EQUITY SECURITIES

 

 

 

 

 

 

 

 

      AVAILABLE-FOR-SALE:

 

 

 

 

 

 

 

 

     Nonredeemable preferred stocks

$

15,355

$

253

$

(10)

$

15,598

 

 

 

 

 

 

 

 

 

          Total equity securities

$

15,355

$

253

$

(10)

$

15,598


(1)

Collateralized mortgage obligations (“CMOs”).

(2)

Mortgage-backed securities (“MBS”).

(3)

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



The amortized cost and fair value of fixed maturities available-for-sale at September 30, 2013, by contractual maturity, are shown below (in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. CMOs and MBSs are shown separately, as they are not due at a single maturity.



 

 

 

 

 

 

 

 

 

 

AMORTIZED

 

 

FAIR

 

 

 

COST

 

 

VALUE

 

 

 

 

 

 

 

Due in one year or less

 

$

2,350

 

$

2,635

Due after one year through five years

 

 

54,528

 

 

55,024

Due after five years through ten years

 

 

183,314

 

 

178,605

Due after ten years

 

 

279,616

 

 

274,308

CMOs and MBSs

 

 

35,985

 

 

36,135

 

 

 

 

 

 

 

 

 

$

555,793

 

$

546,707




12


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



 

 

September 30, 2013

 

 

 

 

 

 

 

 

 

 

 

Less than 12 Months

 

 

12 Months or Longer

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

Unrealized

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate securities

$

142,526

 

$

6,169

 

$

4,684

 

$

344

 

$

147,210

$

6,513

CMOs - commercial

 

-

 

 

-

 

 

572

 

 

403

 

 

572

 

403

U.S. Government obligations

 

4,127

 

 

71

 

 

-

 

 

-

 

 

4,127

 

71

GSEs

 

3,574

 

 

91

 

 

5,482

 

 

208

 

 

9,056

 

299

States and political subdivisions

 

139,702

 

 

4,801

 

 

22,687

 

 

898

 

 

162,389

 

5,699

Foreign governments

 

26,215

 

 

1,684

 

 

1,327

 

 

126

 

 

27,542

 

1,810

Redeemable preferred stocks

 

3,471

 

 

292

 

 

-

 

 

-

 

 

3,471

 

292

   Total fixed maturities

 

319,615

 

 

13,108

 

 

34,752

 

 

1,979

 

 

354,367

 

15,087

Nonredeemable preferred stocks

 

1,238

 

 

11

 

 

-

 

 

-

 

 

1,238

 

11

   Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

       securities

$

320,853

 

$

13,119

 

$

34,752

 

$

1,979

 

$

355,605

$

15,098

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of securities in an

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   unrealized loss position

 

109

 

 

 

 

 

16

 

 

 

 

 

125

 

 


 

 

December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

Less than 12 Months

 

 

12 Months or Longer

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

Unrealized

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate securities

$

61,386

 

$

953

 

$

-

 

$

-

 

$

61,386

$

953

CMOs - residential

 

2,416

 

 

21

 

 

1,138

 

 

44

 

 

3,554

 

65

CMOs - commercial

 

-

 

 

-

 

 

570

 

 

405

 

 

570

 

405

U.S. Government obligations

 

5,667

 

 

2

 

 

-

 

 

-

 

 

5,667

 

2

GSEs

 

6,162

 

 

40

 

 

2,784

 

 

27

 

 

8,946

 

67

States and political subdivisions

 

53,036

 

 

657

 

 

17,707

 

 

338

 

 

70,743

 

995

   Total fixed maturities

 

128,667

 

 

1,673

 

 

22,199

 

 

814

 

 

150,866

 

2,487

Nonredeemable preferred stocks

 

1,378

 

 

10

 

 

-

 

 

-

 

 

1,378

 

10

   Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

       securities

$

130,045

 

$

1,683

 

$

22,199

 

$

814

 

$

152,244

$

2,497

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of securities in an

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   unrealized loss position

 

45

 

 

 

 

 

23

 

 

 

 

 

68

 

 



Substantially all of the unrealized losses on fixed maturities available-for-sale at September 30, 2013 and December 31, 2012 relate to investment grade securities and are attributable to changes in market interest rates. Because the Company does not intend to sell, nor is it more likely than not that the Company will have to sell such investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2013.



13


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



 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

Sales of available-for-sale securities:

 

 

 

 

 

 

 

 

   Fixed maturities

$

2,045 

$

1,282 

$

18,321 

$

4,625 

   Preferred stocks

 

 

(76)

 

177 

 

(567)

      Total sales of available-for-sale securities

 

2,045 

 

1,206 

 

18,498 

 

4,058 

 

 

 

 

 

 

 

 

 

Sales of trading securities

 

744 

 

184 

 

1,129 

 

289 

Other gains (losses)

 

(199)

 

 

(853)

 

      Total realized gains (losses)

 

2,590 

 

1,390 

 

18,774 

 

4,347 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on trading securities:

 

 

 

 

 

 

 

 

   Available-for-sale securities transferred

 

 

 

 

 

 

 

 

      to trading category

 

 

 

 

138 

   Change in unrealized gains (losses) on trading securities

 

(173)

 

65 

 

(3)

 

(43)

      Total unrealized gains (losses)  on trading securities

 

(173)

 

65 

 

(3)

 

95 

 

 

 

 

 

 

 

 

 

Loss on other investment

 

 

(444)

 

 

(444)

 

 

 

 

 

 

 

 

 

Net realized investment gains (losses)

$

2,417 

$

1,011 

$

18,771 

$

3,998 



For the three months and nine months ended September 30, 2013, the Company realized gross gains of $2,324,000 and $21,060,000, respectively, and realized gross losses of $279,000 and $2,562,000, respectively, on sales of available-for-sale securities. For the three months and nine months ended September 30, 2012, the Company realized gross gains of $2,170,000 and $8,259,000, respectively, and realized gross losses of $964,000 and $4,201,000, respectively, on sales of available-for-sale securities.


On January 1, 2012, the Company transferred equity securities previously classified as available-for-sale into the trading category and, as a result, recognized $287,000 of gross gains and $149,000 of gross losses in net realized investment gains on the accompanying Condensed Consolidated Statement of Income. These gains and losses were previously included in accumulated other comprehensive income.


Other-Than-Temporary Impairment Evaluations


We recognize an other-than-temporary impairment loss in earnings in the period that we determine: 1) we intend to sell the security; 2) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis; or 3) the security has a credit loss. Any non-credit portion of the other-than-temporary impairment loss is recognized in other comprehensive income (loss). See Note 1E(vi) to the Consolidated Financial Statements in the 2012 Annual Report for further discussion of the factors considered by management in its regular review to identify and recognize other-than-temporary impairments on available-for-sale securities. Our other-than-temporary impairment losses were as follows for the periods indicated (in thousands):




14



 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

Total other-than-temporary impairment losses

$

-

$

$

-

$

992 

Portion of losses recognized in other comprehensive

 

 

 

 

 

 

 

 

income (loss)

 

-

 

-

 

-

 

(288)

 

 

 

 

 

 

 

 

 

Net impairment losses recognized in earnings

$

-

$

$

-

$

704 



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



 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

Balance at beginning of year

$

563 

$

2,600

$

1,976 

$

2,555 

Credit losses during the period for which an other-

 

 

 

 

 

 

 

 

   than-temporary loss was not previously recognized

 

 

-

 

 

473 

Additional credit losses for which an other-than-

 

 

 

 

 

 

 

 

    temporary loss was previously recognized

 

 

-

 

 

148 

Securities sold

 

 

(624)

 

(1,413)

 

(1,200)

 

 

 

 

 

 

 

 

 

Balance at end of period

$

563 

$

1,976

$

563 

$

1,976 



The after-tax portion of other-than-temporary impairments included in accumulated other comprehensive income (loss) at September 30, 2013 and December 31, 2012 consists of $345,000 and $389,000, respectively, related to CMO securities; and $0 and $684,000, respectively, related to redeemable preferred stock.





Note 5.

Cash Flow Hedge


In connection with its outstanding amortizing term loan, a subsidiary of IHC entered into an interest rate swap on July 1, 2011 with the commercial bank lender, for a notional amount equal to the debt principal amount ($6,000,000 and $8,000,000 at September 30, 2013 and December 31, 2012, respectively), under which the Company receives a variable rate equal to the rate on the debt and pays a fixed rate (1.60%) in order to manage the risk in overall changes in cash flows attributable to forecasted interest payments. As a result of the interest rate swap, interest payments on this debt are fixed at 4.95%. There was no hedge ineffectiveness on this interest rate swap which was accounted for as a cash flow hedge. At September 30, 2013 and December 31, 2012, the fair value of interest rate swap was $221,000 and $363,000, respectively, which is included in other liabilities on the accompanying Consolidated Balance Sheets. See Note 6 for further discussion on the valuation techniques utilized to determine the fair value of the interest rate swap.




15




Note 6.

Fair Value Disclosures



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


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


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


Level 3 - Instruments where significant value drivers are unobservable.


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

  

Investments in fixed maturities and equity securities:

  

Available-for-sale securities included in Level 1 are equities with quoted market prices. Level 2 is primarily comprised of our portfolio of government securities, agency mortgage-backed securities, corporate fixed income securities, collateralized mortgage obligations, municipals, GSEs and certain preferred stocks that were priced with observable market inputs. Level 3 securities consist primarily of CMO securities backed by 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. Significant unobservable inputs used in the fair value measurement of CMO’s are prepayment rates, probability of default, and loss severity in the event of default. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for loss severity and a directionally opposite change in the assumption used for prepayment rates. Further we retain independent pricing vendors to assist in valuing certain instruments.


Trading securities:


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


Interest rate swap:

  

The financial liability included in Level 2 consists of an interest rate swap on IHC debt.  It is valued using market observable inputs including market price, interest rate, and volatility within a Black Scholes model.


    

  



16


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



 

 

September 30, 2013

 

 

Level 1

 

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

FINANCIAL ASSETS:

 

 

 

 

 

 

 

 

 

Fixed maturities available-for-sale:

 

 

 

 

 

 

 

 

 

   Corporate securities

$

-

 

$

211,661

$

-

$

211,661

   CMOs - residential

 

-

 

 

2,503

 

1,549

 

4,052

   CMOs - commercial

 

-

 

 

-

 

572

 

572

   US Government obligations

 

-

 

 

19,559

 

-

 

19,559

   Agency MBS - residential

 

-

 

 

105

 

-

 

105

   GSEs

 

-

 

 

31,405

 

-

 

31,405

   States and political subdivisions

 

-

 

 

244,275

 

2,473

 

246,748

   Foreign governments

 

-

 

 

28,788

 

-

 

28,788

   Redeemable preferred stocks

 

3,817

 

 

-

 

-

 

3,817

      Total fixed maturities

 

3,817

 

 

538,296

 

4,594

 

546,707

 

 

 

 

 

 

 

 

 

 

Equity securities available-for-sale:

 

 

 

 

 

 

 

 

 

   Nonredeemable preferred stocks

 

5,605

 

 

-

 

-

 

5,605

      Total equity securities

 

5,605

 

 

-

 

-

 

5,605

 

 

 

 

 

 

 

 

 

 

Trading securities - equities

 

6,394

 

 

-

 

-

 

6,394

       Total trading securities

 

6,394

 

 

-

 

-

 

6,394

 

 

 

 

 

 

 

 

 

 

Total Financial Assets

$

15,816

 

$

538,296

$

4,594

$

558,706

 

 

 

 

 

 

 

 

 

 

FINANCIAL LIABILITIES:

 

 

 

 

 

 

 

 

 

   Interest rate swap

$

-

 

$

221

$

-

$

221



 

 

December 31, 2012

 

 

Level 1

 

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

FINANCIAL ASSETS:

 

 

 

 

 

 

 

 

 

Fixed maturities available-for-sale:

 

 

 

 

 

 

 

 

 

   Corporate securities

$

-

 

$

353,823

$

-

$

353,823

   CMOs - residential

 

-

 

 

6,041

 

14,053

 

20,094

   CMOs - commercial

 

-

 

 

-

 

570

 

570

   US Government obligations

 

-

 

 

18,866

 

-

 

18,866

   Agency MBS - residential

 

-

 

 

428

 

-

 

428

   GSEs

 

-

 

 

49,606

 

-

 

49,606

   States and political subdivisions

 

-

 

 

265,667

 

2,558

 

268,225

   Redeemable preferred stocks

 

7,990

 

 

-

 

-

 

7,990

      Total fixed maturities

 

7,990

 

 

694,431

 

17,181

 

719,602

 

 

 

 

 

 

 

 

 

 

Equity securities available-for-sale:

 

 

 

 

 

 

 

 

 

   Nonredeemable preferred stocks

 

15,598

 

 

-

 

-

 

15,598

      Total equity securities

 

15,598

 

 

-

 

-

 

15,598

 

 

 

 

 

 

 

 

 

 

Trading securities - equities

 

7,016

 

 

-

 

-

 

7,016

       Total trading securities

 

7,016

 

 

-

 

-

 

7,016

 

 

 

 

 

 

 

 

 

 

Total Financial Assets

$

30,604

 

$

694,431

$

17,181

$

742,216

 

 

 

 

 

 

 

 

 

 

FINANCIAL LIABILITIES:

 

 

 

 

 

 

 

 

 

   Interest rate swap

$

-

 

$

363

$

-

$

363




17




            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. At September 30, 2013, 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 at September 30, 2013. 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 transferred out of the Level 3 category in 2013 or 2012. The changes in the carrying value of Level 3 assets and liabilities, for the periods indicated, are summarized as follows (in thousands):



 

 

Three Months Ended September 30, 2013

 

 

CMOs

 

States and

 

 

 

 

 

 

 

 

Political

 

 

 

 

Residential

 

Commercial

 

Subdivisions

 

Total

 

 

 

 

 

 

 

 

 

Beginning balance

$

4,370 

$

571

$

2,501 

$

7,442 

 

 

 

 

 

 

 

 

 

Gains (losses) included in earnings:

 

 

 

 

 

 

 

 

    Net realized investment gains

 

1,882 

 

-

 

 

1,882 

 

 

 

 

 

 

 

 

 

Gains (losses) included in other comprehensive income (loss):

 

 

 

 

 

 

 

 

    Net unrealized gains (losses)

 

(2,140)

 

1

 

(18)

 

(2,157)

 

 

 

 

 

 

 

 

 

Sales of securities

 

(2,343)

 

-

 

 

(2,343)

Repayments and amortization of fixed maturities

 

(220)

 

-

 

(10)

 

(230)

 

 

 

 

 

 

 

 

 

Balance at end of period

$

1,549 

$

572

$

2,473 

$

4,594 


 

 

Three Months Ended September 30, 2012

 

 

CMOs

 

States and

 

 

 

 

 

 

 

 

Political

 

 

 

 

Residential

 

Commercial

 

Subdivisions

 

Total

 

 

 

 

 

 

 

 

 

Beginning balance

$

12,969 

$

551 

$

2,614 

$

16,134 

 

 

 

 

 

 

 

 

 

Gains (losses) included in other comprehensive income (loss):

 

 

 

 

 

 

 

 

    Net unrealized gains (losses)

 

1,906 

 

 

(30)

 

1,885

 

 

 

 

 

 

 

 

 

Repayments and amortization of fixed maturities

 

(733)

 

 

 

(730)

 

 

 

 

 

 

 

 

 

Balance at end of period

$

14,142 

$

560 

$

2,587 

$

17,289 




18



 

 

Nine Months Ended September 30, 2013

 

 

CMOs

 

States and

 

 

 

 

 

 

 

 

Political

 

 

 

 

Residential

 

Commercial

 

Subdivisions

 

Total

 

 

 

 

 

 

 

 

 

Beginning balance

$

14,053 

$

570

$

2,558 

$

17,181 

 

 

 

 

 

 

 

 

 

Gains (losses) included in earnings:

 

 

 

 

 

 

 

 

   Net realized investment gains

 

6,517 

 

-

 

 

6,517 

 

 

 

 

 

 

 

 

 

Gains (losses) included in other comprehensive income (loss):

 

 

 

 

 

 

 

 

    Net unrealized gains (losses)

 

(6,389)

 

2

 

(60)

 

(6,447)

 

 

 

 

 

 

 

 

 

Sales of securities

 

(11,663)

 

-

 

 

(11,663)

Repayments and amortization of fixed maturities

 

(969)

 

-

 

(25)

 

(994)

 

 

 

 

 

 

 

 

 

Balance at end of period

$

1,549 

$

572

$

2,473 

$

4,594 


 

 

Nine Months Ended September 30, 2012

 

 

CMOs

 

States and

 

 

 

 

 

 

 

 

Political

 

 

 

 

Residential

 

Commercial

 

Subdivisions

 

Total

 

 

 

 

 

 

 

 

 

Beginning balance

$

22,127 

$

538 

$

-

$

22,665 

 

 

 

 

 

 

 

 

 

Purchases of securities

 

 

 

2,135

 

2,135 

 

 

 

 

 

 

 

 

 

Gains(losses) included in earnings:

 

 

 

 

 

 

 

 

   Net realized investment losses

 

(1,212)

 

 

-

 

(1,212)

   Other-than-temporary impairments

 

(231)

 

(473)

 

-

 

(704)

 

 

 

 

 

 

 

 

 

Gains (losses) included in other comprehensive income (loss):

 

 

 

 

 

 

 

 

    Net unrealized gains (losses)

 

2,976 

 

495 

 

424

 

3,895 

 

 

 

 

 

 

 

 

 

Sales of securities

 

(7,087)

 

 

-

 

(7,087)

Repayments and amortization of fixed maturities

 

(2,431)

 

 

28

 

(2,403)

 

 

 

 

 

 

 

 

 

Balance at end of period

$

14,142 

$

560 

$

2,587

$

17,289 



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




 

 

September 30, 2013

 

December 31, 2012

 

 

Level 2

 

 

 

 

Level 2

 

 

 

 

 

Fair

 

 

Carrying

 

Fair

 

 

Carrying

 

 

Value

 

 

Value

 

Value

 

 

Value

 

 

 

 

 

 

 

 

 

 

 

FINANCIAL ASSETS:

 

 

 

 

 

 

 

 

 

 

  Policy loans

$

14,462

 

$

11,182

$

28,748

 

$

22,165

 

 

 

 

 

 

 

 

 

 

 

FINANCIAL LIABILITIES:

 

 

 

 

 

 

 

 

 

 

  Funds on deposit

$

277,327

 

$

276,379

$

279,125

 

$

278,084

  Debt and junior subordinated

 

 

 

 

 

 

 

 

 

 

     debt securities

$

44,146

 

$

44,146

$

46,146

 

$

46,146






19


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


(A)

Policy Loans


The fair value of policy loans included in Level 2 of the fair value hierarchy 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. Both types of funds on deposit are included in Level 2 of the fair value hierarchy.


(C)

Debt


The fair value of debt with variable interest rates approximates its carrying amount and is included in Level 2 of the fair value hierarchy.





Note 7.

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 nine months of 2013 is as follows (in thousands):



 

 

 

 

Other Intangible Assets

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

Other

 

 

 

 

Definitive

 

Indefinite

 

Intangible

 

 

Goodwill

 

Lives

 

Lives

 

Assets

 

 

 

 

 

 

 

 

 

Balance at December 31, 2012

$

50,318

$

10,294

$

7,977

$

18,271

 

 

 

 

 

 

 

 

 

Medical Stop-Loss:

 

 

 

 

 

 

 

 

    Broker relationships

 

-

 

(183)

 

-

 

(183)

Amortization expense

 

-

 

 (2,443)

 

-

 

 (2,443)

 

 

 

 

 

 

 

 

 

Balance at September 30, 2013

$

50,318

$

7,668

$

7,977

$

15,645






Note 8.

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.


A)  IHC Share-Based Compensation Plans


Total share-based compensation was $436,000 and $153,000 for the three months ended September 30, 2013 and 2012, respectively, and was $926,000 and $770,000 for the nine months ended September 30, 2013 and 2012, respectively. Related tax benefits of $174,000 and $61,000 were recognized for the three months ended September 30, 2013 and 2012, respectively, and $369,000 and $307,000 were recognized for the nine months ended September 30, 2013 and 2012, respectively.




20


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 September 30, 2013, there were 380,970 shares available for future stock-based compensation grants under IHC’s stock incentive plans.


Stock Options


IHC’s stock option activity for the nine months ended September 30, 2013 is as follows:


 

 

Shares

 

Weighted- Average

 

 

Under Option

 

Exercise Price

 

 

 

 

 

December 31, 2012

 

693,836

 

$

9.36

Exercised

 

 (44,000)

 

9.09

Forfeited

 

 (27,500)

 

9.99

Expired

 

 (2,178)

 

10.47

September 30, 2013

 

620,158

 

$

9.35


The total intrinsic value of options exercised during the nine months ended September 30, 2013 was $228,000. In March 2013, 192,500 share options held by 5 employees were modified to extend the expiration term 5 years. The incremental cost of the modified awards was $618,000, which will be recognized over a new 2-year vesting period starting from the date of the modification.


The following table summarizes information regarding outstanding and exercisable options as of September 30, 2013:




 

 

Outstanding

 

Exercisable

 

 

 

 

 

Number of options

 

620,158

 

455,158

Weighted average exercise price per share

$

9.35

$

9.12

Aggregate intrinsic value for all options (in thousands)

$

3,058

$

2,351

Weighted average contractual term remaining

 

2.1 years

 

1.2 years



The fair value of an option award is estimated on the date of grant using the Black-Scholes option valuation model.


Compensation expense of $53,000 and $56,000 was recognized in the three months ended September 30, 2013 and 2012, respectively, and $143,000 and $177,000 was recognized in the nine months ended September 30, 2013 and 2012, respectively, for the portion of the grant-date fair value of stock options vesting during that period.


As of September 30, 2013, the total unrecognized compensation expense related to non-vested stock options was $386,000, which is expected to be recognized over the remaining requisite weighted-average service period of 1.46 years.




21


Restricted Stock


The following table summarizes restricted stock activity for the nine months ended September 30, 2013:



 

 

No. of

 

Weighted-Average

 

 

Non-vested

 

   Grant-Date

 

 

Shares

 

Fair Value

 

 

 

 

 

December 31, 2012

 

13,200 

 

$

9.37

 

Granted

 

7,425 

 

 

11.66

 

Vested

 

(5,775)

 

 

9.15

 

 

 

 

 

 

 

 

September 30, 2013

 

14,850 

 

$

10.60

 



IHC granted 7,425 shares of restricted stock awards during each of the nine months ended September 30, 2013 and 2012 with a weighted average grant-date fair value of $11.66 and $9.39, respectively, per share. The total fair value of restricted stock that vested during each of the first nine months of 2013 and 2012 was $69,000 and $40,000, respectively. Restricted stock expense was $19,000 and $13,000 for the three months ended September 30, 2013 and 2012, respectively, and was $47,000 and $31,000 for the nine months ended September 30, 2013 and 2012, respectively.


As of September 30, 2013, the total unrecognized compensation expense related to non-vested restricted stock awards was $136,000 which is expected to be recognized over the remaining requisite weighted-average service period of 2.0 years.


SARs and Share-Based Performance Awards


IHC had 251,800 and 269,950 SAR awards outstanding at September 30, 2013 and December 31, 2012, respectively. No SARs awards were granted during the nine months ended September 30, 2013. During the nine months ended September 30, 2012, the Company granted 44,000 SAR 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. For three months ended September 30, 2013, and 2012, IHC recorded $363,000, and $60,000, respectively, of compensation costs for these awards. For nine months ended September 30, 2013, and 2012, IHC recorded $741,000, and $511,000, respectively, of compensation costs for these awards. In the first nine months of 2013, 14,850 SARs were exercised with an aggregate intrinsic value of $74,000. No SARs were exercised during the nine months ended September 30, 2012. Included in Other Liabilities in the Company’s Condensed Consolidated Balance Sheets at September 30, 2013 and December 31, 2012 are liabilities of $1,350,000 and $683,000, respectively, pertaining to SARs.


Other outstanding awards include share-based performance awards. Compensation costs for these awards are recognized and accrued as performance conditions are met, based on the current share price. IHC discontinued these award programs in 2013. For the three months ended September 30, 2013, and 2012, IHC recorded $0 and $24,000, respectively, of compensation costs for these awards, and for the nine months ended September 30, 2013, and 2012, IHC recorded $(5,000) and $51,000, respectively.  The intrinsic value of share-based performance awards paid during the nine months ended September 30, 2013 and 2012 was $83,000 and $57,000, respectively. Included in the other liabilities on the Company’s Condensed Consolidated Balance Sheets at September 30, 2013 and December 31, 2012 are liabilities of $10,000 and $97,000, respectively, pertaining to share-based performance awards.




22


B)

AMIC Share-Based Compensation Plans


Total AMIC share-based compensation expense was $13,000 and $8,000 the three months ended September 30, 2013 and 2012, respectively, and was $30,000 and $24,000 for the nine months ended September 30, 2013 and 2012, respectively.  Related tax benefits of $4,000 and $3,000 were recognized for the three months ended September 30, 2013 and 2012; and were $10,000 and $9,000 for the nine months ended September 30, 2013 and 2012.


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.


Stock Options


AMIC’s stock option activity for the nine months ended September 30, 2013 is as follows:




 

 

Shares

 

Weighted- Average

 

 

Under Option

 

Exercise Price

 

 

 

 

 

 

December 31, 2012

 

227,285

 

$

11.40

Granted

 

13,334

 

 

7.01

Expired

 

(18,334)

 

 

7.50

September 30, 2013

 

222,285

 

$

11.46




The following table summarizes information regarding AMIC’s outstanding and exercisable options as of September 30, 2013:




 

 

Outstanding

 

Exercisable

 

 

 

 

 

Number of options

 

222,285

 

203,395

Weighted average exercise price per share

$

11.46

$

11.91

Aggregate intrinsic value for all options (in thousands)

$

236

$

173

Weighted average contractual term remaining

 

3.02 years

 

2.46 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 nine months ended September 30, 2013 was $4.04 per share. No options were granted during the nine months ended September 30, 2012. The assumptions set forth in the table below were used to value the stock options granted during the nine months ended September 30, 2013:




 

 

September 30

 

 

2013

 

 

 

Weighted-average risk-free interest rate

 

2.30%

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 $13,000 and $8,000 was recognized for the three-month periods ended September 30, 2013 and 2012, respectively, and was $30,000 and $24,000 for the nine-month periods ended September 30, 2013 and 2012, respectively, for the portion of the grant-date fair value of AMIC’s stock options vesting during the period.




23


As of September 30, 2013, the total unrecognized compensation expense related to AMIC’s non-vested options was $72,000 which will be recognized over the remaining requisite service periods.




Note 9.

Debt


In July 2013, the Company made a $2,000,000 principal debt repayment in accordance with the terms of its amortizing term note.




Note 10.

 Income Taxes



The provisions for income taxes shown in the Condensed Consolidated Statements of Income were computed based on the Company's actual results, which approximate the effective tax rate expected to be applicable for the balance of the current fiscal year in accordance with consolidated life/non-life group income tax regulations. Such regulations adopt a subgroup method in determining consolidated taxable income, whereby taxable income is determined separately for the life insurance company group and the non-life insurance company group.


At September 30, 2013, AMIC had net operating loss carryforwards of approximately $268,808,000 for federal income tax purposes, expiring in varying amounts through the year 2031, with a significant portion expiring in 2021. The net deferred tax asset relative to AMIC included in other assets on IHC’s Condensed Consolidated Balance Sheets was $10,885,000 and $12,173,000 at September 30, 2013 and December 31, 2012, respectively. Effective January 15, 2013, AMIC will be included in the consolidated Federal income tax returns of IHC on a June 30 fiscal year as a result of the increase in IHC’s ownership interest in AMIC to over 80%.




Note 11.

Reinsurance


Effective May 31, 2013, Madison National Life entered into a coinsurance agreement with an unaffiliated reinsurer, Guggenheim Life and Annuity Company, to cede approximately $218,633,000 of life and annuity reserves and, in accordance with its terms, transferred net cash and other assets, with an aggregate value of $215,137,000, to the reinsurer during the second quarter of 2013. As a result of this transaction, the Company: (i) recorded estimated amounts due from reinsurers of $218,296,000; (ii) recorded $6,643,000 of estimated deferred expenses (included in other assets) which will be amortized over the life of the underlying reinsured contracts; and (iii) wrote-off $9,307,000 of deferred acquisition costs associated with this block of policies. The write-off was more than offset by gains realized by the Company in the transaction, most of which resulted from the required sale and transfer of invested assets.




Note 12.

Supplemental Disclosures of Cash Flow Information


Tax refunds, net of tax payments, were $612,000 and $519,000 during the nine months ended September 30, 2013 and 2012.


Cash payments for interest were $1,458,000 and $1,601,000 during the nine months ended September 30, 2013 and 2012, respectively.




Note 13.

Contingencies


On September 1, 2013, Madison National Life entered into an agreement with a former policyholder for a return of premium in connection with health insurance business written during 2007.  The agreement was entered into in response to a potential lawsuit and, as a result, the Company has accrued $1,541,000 in return of premium reserves (net of recoveries). The Company terminated the MGU that produced this business in 2008.




24





Note 14.

Other Comprehensive Income (Loss)


The components of other comprehensive income (loss) include (i) 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 the non-credit related component of other-than-temporary impairments of fixed maturities and (ii) the after-tax unrealized gains and losses on a cash flow hedge.


Changes in the balances for each component of accumulated other comprehensive income (loss), shown net of taxes, for the periods indicated were as follows (in thousands):




 

 

Three Months Ended September 30, 2013

 

 

Unrealized

 

 

 

 

 

 

 

 

Gains (Losses) on

 

 

 

 

 

 

 

 

Available-for Sale

 

 

Cash Flow

 

 

 

 

 

Securities

 

 

Hedge

 

 

Total

 

 

 

 

 

 

 

 

 

Beginning balance

$

(3,268)

 

$

(191)

 

$

(3,459)

 

 

 

 

 

 

 

 

 

     Other comprehensive income (loss) before reclassifications

 

(1,364)

 

 

58 

 

 

(1,306)

 

 

 

 

 

 

 

 

 

     Amounts reclassified from accumulated OCI

 

(1,151)

 

 

 

 

(1,151)

 

 

 

 

 

 

 

 

 

Net other comprehensive income (loss)

 

(2,515)

 

 

58 

 

 

(2,457)

 

 

 

 

 

 

 

 

 

Less other comprehensive loss attributable

 

 

 

 

 

 

 

 

    to noncontrolling interests

 

(6)

 

 

 

 

(6)

 

 

 

 

 

 

 

 

 

Ending balance

$

(5,789)

 

$

(133)

 

$

(5,922)

 

 

 

 

 

 

 

 

 



 

 

Three Months Ended September 30, 2012

 

 

Unrealized

 

 

 

 

 

 

 

 

Gains (Losses) on

 

 

 

 

 

 

 

 

Available-for Sale

 

 

Cash Flow

 

 

 

 

 

Securities

 

 

Hedge

 

 

Total

 

 

 

 

 

 

 

 

 

Beginning balance

$

12,754 

 

$

(302)

 

$

12,452 

 

 

 

 

 

 

 

 

 

     Other comprehensive income (loss) before reclassifications

 

5,017 

 

 

76 

 

 

5,093 

 

 

 

 

 

 

 

 

 

     Amounts reclassified from accumulated OCI

 

(775)

 

 

 

 

(775)

 

 

 

 

 

 

 

 

 

Net other comprehensive income (loss)

 

4,242 

 

 

76 

 

 

4,318 

 

 

 

 

 

 

 

 

 

Less other comprehensive loss attributable

 

 

 

 

 

 

 

 

    to noncontrolling interests

 

(137)

 

 

 

 

(137)

Acquired from noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

$

16,859 

 

$

(226)

 

$

16,633 

 

 

 

 

 

 

 

 

 




25



 

 

Nine Months Ended September 30, 2013

 

 

Unrealized

 

 

 

 

 

 

 

 

Gains (Losses) on

 

 

 

 

 

 

 

 

Available-for Sale

 

 

Cash Flow

 

 

 

 

 

Securities

 

 

Hedge

 

 

Total

 

 

 

 

 

 

 

 

 

Beginning balance

$

15,231 

 

$

(218)

 

$

15,013 

 

 

 

 

 

 

 

 

 

     Other comprehensive income (loss) before reclassifications

 

(9,908)

 

 

85 

 

 

(9,823)

 

 

 

 

 

 

 

 

 

     Amounts reclassified from accumulated OCI

 

(11,698)