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 |
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| |||
| 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 | |||
|
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| |||
| 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 | |||
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| Item 5. Other Information | 43 | |||
|
| ||||
| Item 6. Exhibits | 44 | |||
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| Signatures | 45 | |||
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|
Copies of the Companys SEC filings can be found on its website at www.ihcgroup.com.
2
Forward-Looking Statements
This report on Form 10−Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created by those laws. We have based our forward-looking statements on our current expectations and projections about future events. Our forward-looking statements include information about possible or assumed future results of our operations. All statements, other than statements of historical facts, included or incorporated by reference in this report that address activities, events or developments that we expect or anticipate may occur in the future, including such things as the growth of our business and operations, our business strategy, competitive strengths, goals, plans, future capital expenditures and references to future successes may be considered forward-looking statements. Also, when we use words such as anticipate, believe, estimate, expect, intend, plan, probably or similar expressions, we are making forward-looking statements.
Numerous risks and uncertainties may impact the matters addressed by our forward-looking statements, any of which could negatively and materially affect our future financial results and performance. We describe some of these risks and uncertainties in greater detail in Item 1A, Risk Factors, of IHCs 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
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) | ||||||||||||||||||
|
|
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|
|
|
|
| ||
|
|
|
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|
|
|
|
|
|
|
|
|
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| ||
|
|
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|
| 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 | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
| ||
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 |
| 3 |
| 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
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) IHCs 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 managements assumptions and available market information. Significant unobservable inputs used in the fair value measurement of CMOs 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 Companys 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 |
| 9 |
| (30) |
| 1,885 |
|
|
|
|
|
|
|
|
|
Repayments and amortization of fixed maturities |
| (733) |
| - |
| 3 |
| (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 Companys 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 IHCs 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 IHCs stock incentive plans.
Stock Options
IHCs 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 Companys 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 Companys 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 AMICs 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
AMICs 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 AMICs 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 AMICs stock options vesting during the period.
23
As of September 30, 2013, the total unrecognized compensation expense related to AMICs 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 IHCs 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 IHCs 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) |
|
| - |