UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________________________
FORM 10-Q
[X]
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the quarterly period ended March 31, 2015.
[ ]
Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the transition period from: ________ to _________
Commission File Number: 001-32244
INDEPENDENCE HOLDING COMPANY
(Exact name of registrant as specified in its charter)
Delaware |
| 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 May 1, 2015 |
Common stock, $ 1.00 par value | 17,336,816 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 | 25 | |||
|
| ||||
| Item 3. Quantitative and Qualitative Disclosures about Market Risk | 35 | |||
|
| ||||
| Item 4. Controls and Procedures | 35 | |||
|
| ||||
PART II - OTHER INFORMATION |
| ||||
|
| ||||
| Item 1. Legal Proceedings | 36 | |||
|
|
| |||
| Item 1A. Risk Factors | 36 | |||
|
|
| |||
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 36 | |||
|
|
| |||
| Item 3. Defaults Upon Senior Securities | 36 | |||
|
|
| |||
| Item 4. Mine Safety Disclosures | 36 | |||
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|
| |||
| Item 5. Other Information | 36 | |||
|
| ||||
| Item 6. Exhibits | 37 | |||
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| ||||
| Signatures | 39 | |||
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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
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES | ||||||||||
CONDENSED CONSOLIDATED BALANCE SHEETS | ||||||||||
(In thousands, except share data) | ||||||||||
| ||||||||||
|
|
| March 31, 2015 |
|
| December 31, 2014 | ||||
|
|
| (Unaudited) |
|
|
| ||||
ASSETS: |
|
|
|
|
|
| ||||
| Investments: |
|
|
|
|
|
| |||
| Short-term investments |
| $ | 50 |
| $ | 50 | |||
| Securities purchased under agreements to resell |
|
| 50,937 |
|
| 16,790 | |||
| Trading securities |
|
| 9,520 |
|
| 11,095 | |||
| Fixed maturities, available-for-sale |
|
| 564,144 |
|
| 583,880 | |||
| Equity securities, available-for-sale |
|
| 7,350 |
|
| 13,895 | |||
| Other investments |
|
| 25,484 |
|
| 25,251 | |||
| Total investments |
|
| 657,485 |
|
| 650,961 | |||
|
|
|
|
|
|
| ||||
| Cash and cash equivalents |
|
| 20,595 |
|
| 25,083 | |||
| Deferred acquisition costs |
|
| 31,143 |
|
| 30,806 | |||
| Due and unpaid premiums |
|
| 76,811 |
|
| 62,628 | |||
| Due from reinsurers |
|
| 273,712 |
|
| 278,242 | |||
| Premium and claim funds |
|
| 32,929 |
|
| 32,553 | |||
| Goodwill |
|
| 50,318 |
|
| 50,318 | |||
| Other assets |
|
| 62,739 |
|
| 57,126 | |||
|
|
|
|
|
|
| ||||
| TOTAL ASSETS |
| $ | 1,205,732 |
| $ | 1,187,717 | |||
|
|
|
|
|
|
| ||||
LIABILITIES AND STOCKHOLDERS EQUITY: |
|
|
|
|
|
| ||||
LIABILITIES: |
|
|
|
|
|
| ||||
| Policy benefits and claims |
| $ | 245,047 |
| $ | 236,803 | |||
| Future policy benefits |
|
| 275,803 |
|
| 277,041 | |||
| Funds on deposit |
|
| 181,119 |
|
| 186,782 | |||
| Unearned premiums |
|
| 11,042 |
|
| 9,455 | |||
| Other policyholders' funds |
|
| 18,326 |
|
| 18,802 | |||
| Due to reinsurers |
|
| 47,823 |
|
| 47,945 | |||
| Accounts payable, accruals and other liabilities |
|
| 79,052 |
|
| 67,641 | |||
| Debt |
|
| 4,000 |
|
| 4,000 | |||
| Junior subordinated debt securities |
|
| 38,146 |
|
| 38,146 | |||
|
|
|
|
|
|
| ||||
| TOTAL LIABILITIES |
|
| 900,358 |
|
| 886,615 | |||
|
|
|
|
|
|
| ||||
STOCKHOLDERS EQUITY: |
|
|
|
|
|
| ||||
IHC STOCKHOLDERS' EQUITY: |
|
|
|
|
|
| ||||
| Preferred stock (none issued) |
|
| - |
|
| - | |||
| Common stock $1.00 par value, 23,000,000 shares authorized; |
|
|
|
|
|
| |||
| 18,545,758 and 18,531,158 shares issued; 17,336,816 and |
|
|
|
|
|
| |||
| 17,371,040 shares outstanding |
|
| 18,546 |
|
| 18,531 | |||
| Paid-in capital |
|
| 127,113 |
|
| 127,098 | |||
| Accumulated other comprehensive income |
|
| 901 |
|
| 22 | |||
| Treasury stock, at cost; 1,208,942 and 1,160,118 shares |
|
| (12,738) |
|
| (12,141) | |||
| Retained earnings |
|
| 162,865 |
|
| 157,667 | |||
|
|
|
|
|
|
| ||||
TOTAL IHC STOCKHOLDERS EQUITY |
|
| 296,687 |
|
| 291,177 | ||||
NONCONTROLLING INTERESTS IN SUBSIDIARIES |
|
| 8,687 |
|
| 9,925 | ||||
|
|
|
|
|
|
|
| |||
| TOTAL EQUITY |
| 305,374 |
|
| 301,102 | ||||
|
|
|
|
|
|
|
| |||
| TOTAL LIABILITIES AND EQUITY |
| $ | 1,205,732 |
| $ | 1,187,717 |
See the accompanying Notes to Condensed Consolidated Financial Statements.
4
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES | ||||||
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) | ||||||
(In thousands, except per share data) | ||||||
| ||||||
|
| Three Months Ended | ||||
|
| March 31, | ||||
|
| 2015 |
| 2014 | ||
REVENUES: |
|
|
|
| ||
| Premiums earned | $ | 122,114 | $ | 123,270 | |
| Net investment income |
| 5,441 |
| 5,801 | |
| Fee income |
| 3,716 |
| 9,339 | |
| Other income |
| 994 |
| 1,111 | |
| Net realized investment gains |
| 2,000 |
| 1,551 | |
|
|
|
|
| ||
|
| 134,265 |
| 141,072 | ||
EXPENSES: |
|
|
|
| ||
| Insurance benefits, claims and reserves |
| 79,620 |
| 85,309 | |
| Selling, general and administrative expenses |
| 44,149 |
| 48,135 | |
| Amortization of deferred acquisitions costs |
| 1,464 |
| 1,282 | |
| Interest expense on debt |
| 432 |
| 481 | |
|
|
|
|
| ||
|
| 125,665 |
| 135,207 | ||
|
|
|
|
|
| |
| Income before income taxes |
| 8,600 |
| 5,865 | |
| Income taxes |
| 3,269 |
| 1,860 | |
|
|
|
|
|
| |
| Net income |
| 5,331 |
| 4,005 | |
| Less: Income from noncontrolling interests in subsidiaries |
| (112) |
| (304) | |
|
|
|
|
|
| |
| NET INCOME ATTRIBUTABLE TO IHC | $ | 5,219 | $ | 3,701 | |
|
|
|
|
| ||
Basic income per common share | $ | .30 | $ | .21 | ||
|
|
|
|
| ||
WEIGHTED AVERAGE SHARES OUTSTANDING |
| 17,364 |
| 17, 623 | ||
|
|
|
|
| ||
Diluted income per common share | $ | .30 | $ | .21 | ||
|
|
|
|
| ||
WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING |
| 17,531 |
| 17,763 |
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 | |||
|
| March 31, | |||
|
| 2015 |
| 2014 | |
|
|
|
|
| |
Net income | $ | 5,331 | $ | 4,005 | |
Other comprehensive income: |
|
|
|
| |
| Available-for-sale securities: |
|
|
|
|
| Unrealized gains on available-for-sale securities, pre-tax |
| 1,305 |
| 8,017 |
| Tax expense on unrealized gains on available-for-sale securities |
| 397 |
| 2,378 |
| Unrealized gains on available-for-sale securities, net of taxes |
| 908 |
| 5,639 |
|
|
|
|
|
|
| Cash flow hedge: |
|
|
|
|
| Unrealized gains on cash flow hedge, pre-tax |
| 15 |
| 17 |
| Tax expense on unrealized gains on cash flow hedge |
| 6 |
| 7 |
| Unrealized gains on cash flow hedge, net of taxes |
| 9 |
| 10 |
|
|
|
|
|
|
| Other comprehensive income, net of tax |
| 917 |
| 5,649 |
|
|
|
|
| |
| COMPREHENSIVE INCOME, NET OF TAX |
| 6,248 |
| 9,654 |
|
|
|
|
| |
Comprehensive income, net of tax, attributable to noncontrolling interests: |
|
|
|
| |
Income from noncontrolling interests in subsidiaries |
| (112) |
| (304) | |
Other comprehensive income, net of tax, attributable to noncontrolling interests: |
|
|
|
| |
| Unrealized gains on available-for-sale securities, net of tax |
| (43) |
| (131) |
| Other comprehensive income, net of tax, attributable to |
|
|
|
|
| noncontrolling interests |
| (43) |
| (131) |
|
|
|
|
| |
| COMPREHENSIVE INCOME, NET OF TAX, |
|
|
|
|
| ATTRIBUTABLE TO NONCONTROLLING INTERESTS |
| (155) |
| (435) |
|
|
|
|
| |
| COMPREHENSIVE INCOME, NET OF TAX, |
|
|
|
|
| ATTRIBUTABLE TO IHC | $ | 6,093 | $ | 9,219 |
See the accompanying Notes to Condensed Consolidated Financial Statements.
6
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES | |||||||||||||||||||
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Unaudited) (In thousands) | |||||||||||||||||||
| |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
| ACCUMULATED |
|
|
|
|
|
|
| NON- |
|
| |||
|
|
|
|
|
| OTHER |
| TREASURY |
|
|
| TOTAL IHC |
| CONTROLLING |
|
| |||
|
| COMMON |
| PAID-IN |
| COMPREHENSIVE |
| STOCK, |
| RETAINED |
| STOCKHOLDERS' |
| INTERESTS IN |
| TOTAL | |||
|
| STOCK |
| CAPITAL |
| INCOME |
| AT COST |
| EARNINGS |
| EQUITY |
| SUBSIDIARIES |
| EQUITY | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
BALANCE AT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
| DECEMBER 31, 2014 | $ | 18,531 | $ | 127,098 | $ | 22 | $ | (12,141) | $ | 157,667 | $ | 291,177 | $ | 9,925 | $ | 301,102 | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Net income |
|
|
|
|
|
|
|
|
| 5,219 |
| 5,219 |
| 112 |
| 5,331 | |||
Other comprehensive |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
| income, net of tax |
|
|
|
|
| 874 |
|
|
|
|
| 874 |
| 43 |
| 917 | ||
Repurchases of common stock |
|
|
|
|
|
|
| (597) |
|
|
| (597) |
| - |
| (597) | |||
Purchases of noncontrolling |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
| interests |
|
|
| (199) |
| 5 |
|
|
|
|
| (194) |
| (1,415) |
| (1,609) | ||
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
| expenses and related |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
| tax benefits |
| 15 |
| 205 |
|
|
|
|
|
|
| 220 |
| - |
| 220 | ||
Other capital transactions |
|
|
| 9 |
|
|
|
|
| (21) |
| (12) |
| 22 |
| 10 | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
BALANCE AT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
| MARCH 31, 2015 | $ | 18,546 | $ | 127,113 | $ | 901 | $ | (12,738) | $ | 162,865 | $ | 296,687 | $ | 8,687 | $ | 305,374 | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See the accompanying Notes to Condensed Consolidated Financial Statements.
7
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES | |||||||||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) | |||||||||
(In thousands) | |||||||||
| |||||||||
|
| Three Months Ended March 31, | |||||||
|
| 2015 |
|
| 2014 | ||||
CASH FLOWS PROVIDED BY (USED BY) OPERATING ACTIVITIES: |
|
|
|
|
| ||||
| Net income | $ | 5,331 |
| $ | 4,005 | |||
| Adjustments to reconcile net income to net change in cash from |
|
|
|
|
| |||
| operating activities: |
|
|
|
|
| |||
| Amortization of deferred acquisition costs |
| 1,464 |
|
| 1,282 | |||
| Net realized investment gains |
| (2,000) |
|
| (1,551) | |||
| Equity income from equity method investments |
| (365) |
|
| (433) | |||
| Depreciation and amortization |
| 732 |
|
| 1,005 | |||
| Share-based compensation expenses |
| 58 |
|
| 16 | |||
| Deferred tax expense |
| 3,639 |
|
| 824 | |||
| Other |
| 1,699 |
|
| 1,275 | |||
Changes in assets and liabilities: |
|
|
|
|
| ||||
| Net (purchases) sales of trading securities |
| 1,291 |
|
| (2,889) | |||
| Change in insurance liabilities |
| 2,935 |
|
| 2,552 | |||
| Additions to deferred acquisition costs |
| (1,954) |
|
| (1,383) | |||
| Change in amounts due from reinsurers |
| 4,531 |
|
| 227 | |||
| Change in premium and claim funds |
| (376) |
|
| (909) | |||
| Change in current income tax liability |
| (789) |
|
| 522 | |||
| Change in due and unpaid premiums |
| (14,183) |
|
| (2,837) | |||
| Change in other assets |
| 337 |
|
| (1,777) | |||
| Change in other liabilities |
| 4,482 |
|
| 4,125 | |||
|
|
|
|
|
|
| |||
| Net change in cash from operating activities |
| 6,832 |
|
| 4,054 | |||
|
|
|
|
|
| ||||
CASH FLOWS PROVIDED BY (USED BY) INVESTING ACTIVITIES: |
|
|
|
|
| ||||
| Net purchases of securities under resale and repurchase agreements |
| (34,147) |
|
| (12,377) | |||
| Sales of equity securities |
| 3,902 |
|
| 250 | |||
| Purchases of equity securities |
| - |
|
| (250) | |||
| Sales of fixed maturities |
| 92,089 |
|
| 83,746 | |||
| Maturities and other repayments of fixed maturities |
| 12,067 |
|
| 17,344 | |||
| Purchases of fixed maturities |
| (81,963) |
|
| (94,159) | |||
| Other investing activities |
| 10 |
|
| 3,018 | |||
|
|
|
|
|
| ||||
| Net change in cash from investing activities |
| (8,042) |
|
| (2,428) | |||
|
|
|
|
|
| ||||
CASH FLOWS PROVIDED BY (USED BY) FINANCING ACTIVITIES: |
|
|
|
|
| ||||
| Repurchases of common stock |
| (597) |
|
| (1,120) | |||
| Cash paid in acquisitions of noncontrolling interests |
| (1,609) |
|
| - | |||
| Withdrawals of investment-type insurance contracts |
| (607) |
|
| (816) | |||
| Dividends paid |
| (609) |
|
| (620) | |||
| Proceeds from exercise of stock options |
| 133 |
|
| - | |||
| Other financing activities |
| 11 |
|
| (218) | |||
|
|
|
|
|
| ||||
| Net change in cash from financing activities |
| (3,278) |
|
| (2,774) | |||
|
|
|
|
|
| ||||
Net change in cash and cash equivalents |
| (4,488) |
|
| (1,148) | ||||
Cash and cash equivalents, beginning of year |
| 25,083 |
|
| 24,229 | ||||
|
|
|
|
|
| ||||
Cash and cash equivalents, end of period | $ | 20,595 |
| $ | 23,081 |
See the accompanying Notes to Condensed Consolidated Financial Statements.
8
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1.
Organization, Consolidation, Basis of Presentation and Accounting Policies
(A)
Business and Organization
Independence Holding Company, a Delaware corporation (IHC), is a holding company principally engaged in the life and health insurance business through: (i) its insurance companies, Standard Security Life Insurance Company of New York ("Standard Security Life"), Madison National Life Insurance Company, Inc. ("Madison National Life"), Independence American Insurance Company (Independence American); and (ii) its marketing and administrative companies, including IHC Risk Solutions, LLC, IHC Health Solutions, Inc., IHC Specialty Benefits Inc. and IHC Carrier Solutions, Inc. IHC also owns a significant equity interest in a managing general underwriter (MGU) that writes medical stop-loss. Standard Security Life, Madison National Life and Independence American are sometimes collectively referred to as the Insurance Group. IHC and its subsidiaries (including the Insurance Group) are sometimes collectively referred to as the "Company", or IHC, or are implicit in the terms we, us and our.
Geneve Corporation, a diversified financial holding company, and its affiliated entities, held 52.8% of IHC's outstanding common stock at March 31, 2015.
(B)
Consolidation
American Independence Corp.
American Independence Corp. (AMIC) is an insurance holding company engaged in the insurance and reinsurance business. During the first quarter of 2015, IHC purchased shares of AMIC common stock thereby increasing its ownership interest in AMIC to approximately 92% as of March 31, 2015. At December 31, 2014, the Company owned approximately 90% of the outstanding common stock of AMIC.
Effects of Ownership Changes in Subsidiaries
The following table summarizes the effects of changes in the Companys ownership interests in its subsidiaries on IHCs equity for the three months ended March 31, 2015 (in thousands):
Changes in IHCs paid-in capital: |
|
|
|
Purchases of AMIC shares |
| $ | (199) |
|
|
|
|
Net transfers from noncontrolling interests |
| $ | (199) |
(C)
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 and the disclosure of contingent assets and liabilities at the date of the financial statements; and (ii) the reported amounts of revenues and expenses during the
9
reporting period. Actual results could differ from those estimates. IHCs 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 ended March 31, 2015 are not necessarily indicative of the results to be anticipated for the entire year.
(D)
Recent Accounting Pronouncements
Recently Adopted Accounting Standards
In April 2014, the FASB issued guidance: (i) improving the definition of discontinued operations by limiting the reporting of discontinued operations to disposals of components that represent strategic shifts that have (or will have) a major effect on an entitys operations and financial results; and (ii) requiring expanded disclosures for discontinued operations. The adoption of this guidance did not have any effect on the Companys consolidated financial statements.
Recently Issued Accounting Standards Not Yet Adopted
In February 2015, the FASB issued guidance that modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities or voting interest entities for the purpose of consolidation. For public entities, this guidance is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. Early adoption is permitted. Management has not yet determined the impact that the adoption of this guidance will have on the Companys consolidated financial statements.
In June 2014, the FASB issued explicit guidance for entities that grant their employees share-based payments in which the terms of the award include a performance target that affects vesting and could be achieved after the requisite service period. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Earlier adoption is permitted. The guidance may be applied either prospectively to all awards granted or modified after the effective date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The adoption of this guidance is not expected to have a material effect on the Companys consolidated financial statements.
In May 2014, the FASB issued revenue recognition guidance for entities that either enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards such as insurance contracts or lease contracts. The amendment provides specific steps that an entity should apply in order to achieve its main objective which is recognizing revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For public entities, this guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and requires one of two specified retrospective methods of application. Early application is prohibited. Management has not yet determined the impact that the adoption of this guidance will have on the Companys consolidated financial statements.
10
Note 2.
Income Per Common Share
Diluted earnings per share was computed using the treasury stock method and includes incremental common shares, primarily from the dilutive effect of share-based payment awards, amounting to 167,000 and 140,000 shares for the three months ended March 31, 2015 and 2014.
Note 3.
Investment Securities
The cost (amortized cost with respect to certain fixed maturities), gross unrealized gains, gross unrealized losses and fair value of investment securities are as follows for the periods indicated (in thousands):
|
| March 31, 2015 | ||||||
|
|
|
| GROSS |
| GROSS |
|
|
|
| AMORTIZED |
| UNREALIZED |
| UNREALIZED |
| FAIR |
|
| COST |
| GAINS |
| LOSSES |
| VALUE |
|
|
|
|
|
|
|
|
|
FIXED MATURITIES |
|
|
|
|
|
|
|
|
AVAILABLE-FOR-SALE: |
|
|
|
|
|
|
|
|
Corporate securities | $ | 252,958 | $ | 1,971 | $ | (3,384) | $ | 251,545 |
CMOs - residential (1) |
| 5,567 |
| 120 |
| - |
| 5,687 |
CMOs - commercial |
| 975 |
| 41 |
| - |
| 1,016 |
U.S. Government obligations |
| 20,627 |
| 321 |
| - |
| 20,948 |
Agency MBS - residential (2) |
| 61 |
| 3 |
| - |
| 64 |
GSEs (3) |
| 14,246 |
| 81 |
| (60) |
| 14,267 |
States and political subdivisions |
| 227,497 |
| 3,666 |
| (1,600) |
| 229,563 |
Foreign government obligations |
| 36,651 |
| 279 |
| (37) |
| 36,893 |
Redeemable preferred stocks |
| 4,036 |
| 125 |
| - |
| 4,161 |
|
|
|
|
|
|
|
|
|
Total fixed maturities | $ | 562,618 | $ | 6,607 | $ | (5,081) | $ | 564,144 |
EQUITY SECURITIES |
|
|
|
|
|
|
|
|
AVAILABLE-FOR-SALE: |
|
|
|
|
|
|
|
|
Common stocks | $ | 3,255 | $ | - | $ | (94) | $ | 3,161 |
Nonredeemable preferred stocks |
| 4,004 |
| 185 |
| - |
| 4,189 |
|
|
|
|
|
|
|
|
|
Total equity securities | $ | 7,259 | $ | 185 | $ | (94) | $ | 7,350 |
11
|
| December 31, 2014 | ||||||
|
|
|
| GROSS |
| GROSS |
|
|
|
| AMORTIZED |
| UNREALIZED |
| UNREALIZED |
| FAIR |
|
| COST |
| GAINS |
| LOSSES |
| VALUE |
|
|
|
|
|
|
|
|
|
FIXED MATURITIES |
|
|
|
|
|
|
|
|
AVAILABLE-FOR-SALE: |
|
|
|
|
|
|
|
|
Corporate securities | $ | 264,162 | $ | 1,076 | $ | (3,314) | $ | 261,924 |
CMOs - residential (1) |
| 5,073 |
| 55 |
| (22) |
| 5,106 |
CMOs - commercial |
| 975 |
| - |
| (22) |
| 953 |
U.S. Government obligations |
| 22,766 |
| 126 |
| - |
| 22,892 |
Agency MBS - residential (2) |
| 65 |
| 4 |
| - |
| 69 |
GSEs (3) |
| 14,706 |
| 36 |
| (86) |
| 14,656 |
States and political subdivisions |
| 238,514 |
| 3,253 |
| (2,386) |
| 239,381 |
Foreign government obligations |
| 34,863 |
| 136 |
| (299) |
| 34,700 |
Redeemable preferred stocks |
| 4,036 |
| 163 |
| - |
| 4,199 |
|
|
|
|
|
|
|
|
|
Total fixed maturities | $ | 585,160 | $ | 4,849 | $ | (6,129) | $ | 583,880 |
EQUITY SECURITIES |
|
|
|
|
|
|
|
|
AVAILABLE-FOR-SALE: |
|
|
|
|
|
|
|
|
Common stocks | $ | 8,452 | $ | 1,452 | $ | (147) | $ | 9,757 |
Nonredeemable preferred stocks |
| 4,004 |
| 134 |
| - |
| 4,138 |
|
|
|
|
|
|
|
|
|
Total equity securities | $ | 12,456 | $ | 1,586 | $ | (147) | $ | 13,895 |
(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 March 31, 2015, 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 |
| $ | 18,337 |
| $ | 18,293 |
Due after one year through five years |
|
| 130,742 |
|
| 131,020 |
Due after five years through ten years |
|
| 174,298 |
|
| 176,095 |
Due after ten years |
|
| 219,399 |
|
| 218,751 |
CMOs and MBSs |
|
| 19,842 |
|
| 19,985 |
|
|
|
|
|
|
|
|
| $ | 562,618 |
| $ | 564,144 |
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 (in thousands):
|
| March 31, 2015 | ||||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
|
| Less than 12 Months |
|
| 12 Months or Longer |
|
| Total | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair |
|
| Unrealized |
|
| Fair |
|
| Unrealized |
|
| Fair |
| Unrealized |
|
| Value |
|
| Losses |
|
| Value |
|
| Losses |
|
| Value |
| Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities | $ | 85,635 |
| $ | 2,326 |
| $ | 48,574 |
| $ | 1,058 |
| $ | 134,209 | $ | 3,384 |
GSEs |
| - |
|
| - |
|
| 5,200 |
|
| 60 |
|
| 5,200 |
| 60 |
States and political subdivisions |
| 35,045 |
|
| 315 |
|
| 56,185 |
|
| 1,285 |
|
| 91,230 |
| 1,600 |
Foreign government obligations |
| 4,684 |
|
| 3 |
|
| 1,374 |
|
| 34 |
|
| 6,058 |
| 37 |
Total fixed maturities |
| 125,364 |
|
| 2,644 |
|
| 111,333 |
|
| 2,437 |
|
| 236,697 |
| 5,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks |
| 3,161 |
|
| 94 |
|
| - |
|
| - |
|
| 3,161 |
| 94 |
Total equity securities |
| 3,161 |
|
| 94 |
|
| - |
|
| - |
|
| 3,161 |
| 94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities | $ | 128,525 |
| $ | 2,738 |
| $ | 111,333 |
| $ | 2,437 |
| $ | 239,858 | $ | 5,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities in an |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unrealized loss position |
| 54 |
|
|
|
|
| 34 |
|
|
|
|
| 88 |
|
|
|
| December 31, 2014 | ||||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
|
| Less than 12 Months |
|
| 12 Months or Longer |
|
| Total | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair |
|
| Unrealized |
|
| Fair |
|
| Unrealized |
|
| Fair |
| Unrealized |
|
| Value |
|
| Losses |
|
| Value |
|
| Losses |
|
| Value |
| Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities | $ | 77,868 |
| $ | 1,473 |
| $ | 69,498 |
| $ | 1,841 |
| $ | 147,366 | $ | 3,314 |
CMOs - residential |
| 2,062 |
|
| 16 |
|
| 1,562 |
|
| 6 |
|
| 3,624 |
| 22 |
CMOs - commercial |
| - |
|
| - |
|
| 953 |
|
| 22 |
|
| 953 |
| 22 |
GSEs |
| - |
|
| - |
|
| 9,581 |
|
| 86 |
|
| 9,581 |
| 86 |
States and political subdivisions |
| 58,819 |
|
| 744 |
|
| 67,318 |
|
| 1,642 |
|
| 126,137 |
| 2,386 |
Foreign government obligations |
| 21,148 |
|
| 171 |
|
| 12,229 |
|
| 128 |
|
| 33,377 |
| 299 |
Total fixed maturities |
| 159,897 |
|
| 2,404 |
|
| 161,141 |
|
| 3,725 |
|
| 321,038 |
| 6,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks |
| 2,007 |
|
| 136 |
|
| 348 |
|
| 11 |
|
| 2,355 |
| 147 |
Total equity securities |
| 2,007 |
|
| 136 |
|
| 348 |
|
| 11 |
|
| 2,355 |
| 147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities | $ | 161,904 |
| $ | 2,540 |
| $ | 161,489 |
| $ | 3,736 |
| $ | 323,393 | $ | 6,276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities in an |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unrealized loss position |
| 70 |
|
|
|
|
| 46 |
|
|
|
|
| 116 |
|
|
Substantially all of the unrealized losses on fixed maturities available-for-sale at March 31, 2015 and December 31, 2014 relate to investment grade securities and are attributable to changes in market interest rates. Because the Company does not intend to sell, nor is it more likely than not that the Company will have to sell such investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2015.
13
Net realized investment gains are as follows for periods indicated (in thousands):
|
| Three Months Ended | ||
|
| March 31, | ||
|
| 2015 |
| 2014 |
|
|
|
|
|
Available-for-sale securities: |
|
|
|
|
Fixed maturities | $ | 1,300 | $ | 1,477 |
Common stocks |
| 1,465 |
| - |
Total sales of available-for-sale securities |
| 2,765 |
| 1,477 |
|
|
|
|
|
Trading securities |
| (507) |
| 5 |
Total realized gains |
| 2,258 |
| 1,482 |
|
|
|
|
|
Unrealized gains (losses) on trading securities: |
|
|
|
|
Change in unrealized gains (losses) on trading securities |
| (251) |
| 69 |
Total unrealized gains (losses) on trading securities |
| (251) |
| 69 |
|
|
|
|
|
Gains (losses) on other investments |
| (7) |
| - |
|
|
|
|
|
Net realized investment gains | $ | 2,000 | $ | 1,551 |
For the three months ended March 31, 2015 and 2014, proceeds from sales of available-for-sale securities were $106,415,000 and $97,550,000, respectively, and the company realized gross gains of $3,114,000 and $2,605,000, respectively, and gross losses of $182,000 and $419,000, respectively, on those sales.
Other-Than-Temporary Impairment Evaluations
We recognize other-than-temporary impairment losses in earnings in the period that we determine: 1) we intend to sell the security; 2) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis; or 3) the security has a credit loss. Any non-credit portion of the other-than-temporary impairment loss is recognized in other comprehensive income (loss). See Note 1G(iv) to the Consolidated Financial Statements in the 2014 Annual Report for further discussion of the factors considered by management in its regular review to identify and recognize other-than-temporary impairments on available-for-sale securities. The Company did not recognize any other-than-temporary impairments on available-for-sale securities in 2015 or 2014.
Credit losses were recognized on certain fixed maturities for which each security also had an impairment loss recognized in other comprehensive income (loss). The rollforward of these credit losses were as follows for the periods indicated (in thousands):
|
| Three Months Ended | ||
|
| March 31, | ||
|
| 2015 |
| 2014 |
|
|
|
|
|
Balance at beginning of year | $ | 473 | $ | 473 |
Additional credit losses for which an other-than-temporary |
|
|
|
|
loss was previously recognized |
| - |
| - |
Securities sold |
| - |
| - |
|
|
|
|
|
Balance at end of period | $ | 473 | $ | 473 |
14
The after-tax portion of other-than-temporary impairments included in accumulated other comprehensive income (loss) at both March 31, 2015 and December 31, 2014 consists of $335,000 related to CMO securities.
Note 4.
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 ($4,000,000 at both March 31, 2015 and December 31, 2014), 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 March 31, 2015 and December 31, 2014, the fair value of interest rate swap was $41,000 and $83,000, respectively, which is included in other liabilities on the accompanying Condensed Consolidated Balance Sheets. See Note 5 for further discussion on the valuation techniques utilized to determine the fair value of the interest rate swap.
Note 5.
Fair Value Disclosures
For all financial and non-financial assets and liabilities accounted for at fair value on a recurring basis, the Company utilizes valuation techniques based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market expectations. These two types of inputs create the following fair value hierarchy:
Level 1 - Quoted prices for identical instruments in active markets.
Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 - Instruments where significant value drivers are unobservable.
The following section describes the valuation methodologies we use to measure different assets at fair value.
Investments in fixed maturities and equity securities:
Available-for-sale securities included in Level 1 are equities with quoted market prices. Level 2 is primarily comprised of our portfolio of government securities, agency mortgage-backed securities, corporate fixed income securities, foreign government obligations, collateralized mortgage obligations, municipals and GSEs that were priced with observable market inputs. Level 3 securities consist primarily of CMO securities backed by commercial mortgages and municipal tax credit strips. 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.
15
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):
|
| March 31, 2015 | |||||||
|
| Level 1 |
|
| Level 2 |
| Level 3 |
| Total |
|
|
|
|
|
|
|
|
|
|
FINANCIAL ASSETS: |
|
|
|
|
|
|
|
|
|
Fixed maturities available-for-sale: |
|
|
|
|
|
|
|
|
|
Corporate securities | $ | - |
| $ | 251,545 | $ | - | $ | 251,545 |
CMOs - residential |
| - |
|
| 5,687 |
| - |
| 5,687 |
CMOs - commercial |
| - |
|
| - |
| 1,016 |
| 1,016 |
US Government obligations |
| - |
|
| 20,948 |
| - |
| 20,948 |
Agency MBS - residential |
| - |
|
| 64 |
| - |
| 64 |
GSEs |
| - |
|
| 14,267 |
| - |
| 14,267 |
States and political subdivisions |
| - |
|
| 227,282 |
| 2,281 |
| 229,563 |
Foreign government obligations |
| - |
|
| 36,893 |
| - |
| 36,893 |
Redeemable preferred stocks |
| 4,161 |
|
| - |
| - |
| 4,161 |
Total fixed maturities |
| 4,161 |
|
| 556,686 |
| 3,297 |
| 564,144 |
|
|
|
|
|
|
|
|
|
|
Equity securities available-for-sale: |
|
|
|
|
|
|
|
|
|
Common stocks |
| 3,161 |
|
| - |
| - |
| 3,161 |
Nonredeemable preferred stocks |
| 4,189 |
|
| - |
| - |
| 4,189 |
Total equity securities |
| 7,350 |
|
| - |
| - |
| 7,350 |
|
|
|
|
|
|
|
|
|
|
Trading securities - equities |
| 9,520 |
|
| - |
| - |
| 9,520 |
Total trading securities |
| 9,520 |
|
| - |
| - |
| 9,520 |
|
|
|
|
|
|
|
|
|
|
Total Financial Assets | $ | 21,031 |
| $ | 556,686 | $ | 3,297 | $ | 581,014 |
|
|
|
|
|
|
|
|
|
|
FINANCIAL LIABILITIES: |
|
|
|
|
|
|
|
|
|
Interest rate swap | $ | - |
| $ | 41 | $ | - | $ | 41 |
16
|
| December 31, 2014 | |||||||
|
| Level 1 |
|
| Level 2 |
| Level 3 |
| Total |
|
|
|
|
|
|
|
|
|
|
FINANCIAL ASSETS: |
|
|
|
|
|
|
|
|
|
Fixed maturities available-for-sale: |
|
|
|
|
|
|
|
|
|
Corporate securities | $ | - |
| $ | 261,924 | $ | - | $ | 261,924 |
CMOs residential |
| - |
|
| 5,106 |
| - |
| 5,106 |
CMOs commercial |
| - |
|
| - |
| 953 |
| 953 |
US Government obligations |
| - |
|
| 22,892 |
| - |
| 22,892 |
Agency MBS - residential |
| - |
|
| 69 |
| - |
| 69 |
GSEs |
| - |
|
| 14,656 |
| - |
| 14,656 |
States and political subdivisions |
| - |
|
| 237,067 |
| 2,314 |
| 239,381 |
Foreign government |
| - |
|
| 34,700 |
| - |
| 34,700 |
Redeemable preferred stocks |
| 4,199 |
|
| - |
| - |
| 4,199 |
Total fixed maturities |
| 4,199 |
|
| 576,414 |
| 3,267 |
| 583,880 |
|
|
|
|
|
|
|
|
|
|
Equity securities available-for-sale: |
|
|
|
|
|
|
|
|
|
Common stocks |
| 9,757 |
|
| - |
| - |
| 9,757 |
Nonredeemable preferred stocks |
| 4,138 |
|
| - |
| - |
| 4,138 |
Total equity securities |
| 13,895 |
|
| - |
| - |
| 13,895 |
|
|
|
|
|
|
|
|
|
|
Trading securities - equities |
| 11,095 |
|
| - |
| - |
| 11,095 |
Total trading securities |
| 11,095 |
|
| - |
| - |
| 11,095 |
|
|
|
|
|
|
|
|
|
|
Total Financial Assets | $ | 29,189 |
| $ | 576,414 | $ | 3,267 | $ | 608,870 |
|
|
|
|
|
|
|
|
|
|
FINANCIAL LIABILITIES: |
|
|
|
|
|
|
|
|
|
Interest rate swap | $ | - |
| $ | 83 | $ | - | $ | 83 |
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. The Company does not transfer out of Level 3 and into Level 2 until such time as observable inputs become available and reliable or the range of available independent prices narrow. The Company did not transfer any securities between Level 1, Level 2 or Level 3 in either 2015 or 2014. The following table presents the changes in fair value of our Level 3 financial instruments for the periods indicated (in thousands):
|
| Three Months Ended March 31, 2015 | ||||
|
|
|
| States and |
|
|
|
| CMOs |
| Political |
|
|
|
| Commercial |
| Subdivisions |
| Total |
|
|
|
|
|
|
|
Beginning balance | $ | 953 | $ | 2,314 | $ | 3,267 |
|
|
|
|
|
|
|
Gains (losses) included in other comprehensive income (loss): |
|
|
|
|
|
|
Net unrealized gains (losses) |
| 63 |
| (13) |
| 50 |
|
|
|
|
|
|
|
Repayments and amortization of fixed maturities |
| - |
| (20) |
| (20) |
|
|
|
|
|
|
|
Balance at end of period | $ | 1,016 | $ | 2,281 | $ | 3,297 |
17
|
| Three Months Ended March 31, 2014 | ||||
|
|
|
| States and |
|
|
|
| CMOs |
| Political |
|
|
|
| Commercial |
| Subdivisions |
| Total |
|
|
|
|
|
|
|
Beginning balance | $ | 593 | $ | 2,441 | $ | 3,034 |
|
|
|
|
|
|
|
Gains (losses) included in other comprehensive income (loss): |
|
|
|
|
|
|
Net unrealized gains (losses) |
| 276 |
| (16) |
| 260 |
|
|
|
|
|
|
|
Repayments and amortization of fixed maturities |
| - |
| (15) |
| (15) |
|
|
|
|
|
|
|
Balance at end of period | $ | 869 | $ | 2,410 | $ | 3,279 |
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, for the periods indicated (in thousands):
|
| March 31, 2015 |
| December 31, 2014 | ||||||
|
| Level 2 |
|
|
|
| Level 2 |
|
|
|
|
| Fair |
|
| Carrying |
| Fair |
|
| Carrying |
|
| Value |
|
| Value |
| Value |
|
| Value |
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL ASSETS: |
|
|
|
|
|
|
|
|
|
|
Policy loans | $ | 13,192 |
| $ | 10,535 | $ | 13,356 |
| $ | 10,667 |
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL LIABILITIES: |
|
|
|
|
|
|
|
|
|
|
Funds on deposit | $ | 181,539 |
| $ | 181,119 | $ | 187,213 |
| $ | 186,782 |
Debt and junior subordinated |
|
|
|
|
|
|
|
|
|
|
debt securities | $ | 42,146 |
| $ | 42,146 | $ | 42,146 |
| $ | 42,146 |
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.
18
Note 6.
Goodwill and Other Intangible Assets
The carrying amount of goodwill was $50,318,000 at both March 31, 2015 and December 31, 2014.
The Company has net other intangible assets of $11,730,000 and $12,135,000 at March 31, 2015 and December 31, 2014, respectively, which are included in other assets in the Condensed Consolidated Balance Sheets. These intangible assets consist of: (i) finite-lived intangible assets, principally the fair value of acquired agent and broker relationships, which are subject to amortization; and (ii) indefinite-lived intangible assets which consist of the estimated fair value of insurance licenses that are not subject to amortization. The gross carrying amounts of these other intangible assets are as follows for the periods indicated (in thousands):
|
| March 31, 2015 |
| December 31, 2014 | ||||
|
| Gross |
|
|
| Gross |
|
|
|
| Carrying |
| Accumulated |
| Carrying |
| Accumulated |
|
| Amount |
| Amortization |
| Amount |
| Amortization |
|
|
|
|
|
|
|
|
|
Finite-lived Intangible Assets: |
|
|
|
|
|
|
|
|
Agent and broker relationships | $ | 22,725 | $ | 18,972 | $ | 22,725 | $ | 18,567 |
Total finite-lived |
| 22,725 | $ | 18,972 | $ | 22,725 | $ | 18,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| March 31, |
| December 31, |
|
|
|
|
|
| 2015 |
| 2014 |
Indefinite-lived Intangible Assets: |
|
|
|
|
|
|
|
|
Insurance licenses |
|
|
|
| $ | 7,977 | $ | 7,977 |
Total indefinite-lived |
|
|
|
| $ | 7,977 | $ | 7,977 |
Amortization expense was $404,000 and $679,000 for the three months ended March 31, 2015 and 2014, respectively.
Note 7.
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 March 31, 2015, AMIC had net operating loss carryforwards of approximately $263,184,000 for federal income tax purposes, expiring in varying amounts through the year 2028 with a significant portion expiring in 2020. The net deferred tax asset relative to AMIC included in other assets on IHCs Condensed Consolidated Balance Sheets was $10,864,000 and $11,517,000 at March 31, 2015 and December 31, 2014, respectively.
Note 8.
Accumulated 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.
19
Changes in the balances for each component of accumulated other comprehensive income, shown net of taxes, for the periods indicated were as follows (in thousands):
|
| Three Months Ended March 31, 2015 | ||||||
|
| Unrealized |
|
|
|
|
|
|
|
| Gains (Losses) on |
|
|
|
|
|
|
|
| Available-for Sale |
|
| Cash Flow |
|
|
|
|
| Securities |
|
| Hedge |
|
| Total |
|
|
|
|
|
|
|
|
|
Beginning balance | $ | 72 |
| $ | (50) |
| $ | 22 |
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications |
| 2,685 |
|
| 9 |
|
| 2,694 |
Amounts reclassified from accumulated OCI |
| (1,777) |
|
| - |
|
| (1,777) |
Net other comprehensive income |
| 908 |
|
| 9 |
|
| 917 |
|
|
|
|
|
|
|
|
|
Less: Other comprehensive income attributable |
|
|
|
|
|
|
|
|
to noncontrolling interests |
| (43) |
|
| - |
|
| (43) |
Acquired from noncontrolling interests |
| 5 |
|
| - |
|
| 5 |
|
|
|
|
|
|
|
|
|
Ending balance | $ | 942 |
| $ | (41) |
| $ | 901 |
|
| Three Months Ended March 31, 2014 | ||||||
|
| Unrealized |
|
|
|
|
|
|
|
| Gains (Losses) on |
|
|
|
|
|
|
|
| Available-for Sale |
|
| Cash Flow |
|
|
|
|
| Securities |
|
| Hedge |
|
| Total |
|
|
|
|
|
|
|
|
|
Beginning balance | $ | (10,350) |
| $ | (122) |
| $ | (10,472) |
|
|
|
|
|
|
|
|
|
Other comprehensive income before reclassifications |
| 6,618 |
|
| 10 |
|
| 6,628 |
Amounts reclassified from accumulated OCI |
| (979) |
|
| - |
|
| (979) |
Net other comprehensive income |
| 5,639 |
|
| 10 |
|
| 5,649 |
|
|
|
|
|
|
|
|
|
Less: Other comprehensive income attributable |
|
|
|
|
|
|
|
|
to noncontrolling interests |
| (131) |
|
| - |
|
| (131) |
|
|
|
|
|
|
|
|
|
Ending balance | $ | (4,842) |
| $ | (112) |
| $ | (4,954) |
Presented below are the amounts reclassified out of accumulated other comprehensive income (loss) and recognized in earnings for each of the periods indicated (in thousands):
|
| Three Months Ended | ||
|
| March 31, | ||
|
| 2015 |
| 2014 |
|
|
|
|
|
Unrealized gains (losses) on available-for-sale securities |
|
|
|
|
reclassified during the period to the following income |
|
|
|
|
statement line items: |
|
|
|
|
Net realized investment gains | $ | 2,765 | $ | 1,477 |
|
|
|
|
|
Income before income tax |
| 2,765 |
| 1,477 |
Tax effect |
| 988 |
| 498 |
|
|
|
|
|
Net income | $ | 1,777 | $ | 979 |
20
Note 9.
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
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 are generallyfive years; and vesting periods are generally three years. The fair value of an option award is estimated on the date of grant using the Black-Scholes option valuation model. In addition to stock options, the Company has also granted restricted stock units, share appreciation rights (SARs) and share-based performance awards under the plans. Restricted share units are valued at the quoted market price of the shares at the date of grant and have athree year vesting period. Compensation costs for options and restricted share units are recognized over the stated vesting periods on a straight-line basis. Exercise prices of SARs are more than or equal to the quoted market price of IHC shares at the date of the grant and havethree year vesting periods. 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.
At March 31, 2015, there were 377,286 shares available for future stock-based compensation grants under IHCs stock incentive plans. The following table summarizes share-based compensation expense, which is included in selling, general and administrative expenses on the Condensed Consolidated Statements of Income, applicable to the IHC plans, by award type for each of the periods indicated (in thousands):
|
| Three Months Ended | ||
|
| March 31, | ||
|
| 2015 |
| 2014 |
IHCs Share-based Compensation Plan: |
|
|
|
|
Stock options | $ | 55 | $ | 66 |
Restricted stock units |
| 21 |
| 19 |
SARs |
| (29) |
| (81) |
|
|
|
|
|
Share-based compensation expense, pre-tax |
| 47 |
| 4 |
Tax benefits |
| 19 |
| 1 |
|
|
|
|
|
Share-based compensation expense, net | $ | 28 | $ | 3 |
Stock Options
The IHCs stock option activity during 2015 was as follows:
|
| Shares |
| Weighted- Average | |
|
| Under Option |
| Exercise Price | |
|
|
|
|
| |
December 31, 2014 |
| 614,680 |
| $ | 9.33 |
Exercised |
| (14,600) |
|