Edgar Filing: INDEPENDENCE HOLDING CO

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.

Forward-Looking Statements

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

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

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

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.


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.

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.


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		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.


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.

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

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.

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


		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

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.

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):


		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.

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.

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

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		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


		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

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.

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.

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.

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.

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.

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


		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)		-