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 June 30, 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 August 1, 2015
Common stock, $ 1.00 par value	17,299,351 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	29

		Item 3. Quantitative and Qualitative Disclosures about Market Risk		42

		Item 4. Controls and Procedures		43

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		44

		Item 3. Defaults Upon Senior Securities		44

		Item 4. Mine Safety Disclosures		44

		Item 5. Other Information		44

		Item 6. Exhibits		44

	Signatures			46

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)

						June 30, 2015		December 31, 2014
						(Unaudited)
ASSETS:
	Investments:
		Short-term investments			$	50	$	50
		Securities purchased under agreements to resell				23,429		16,790
		Trading securities				9,242		11,095
		Fixed maturities, available-for-sale				608,256		583,880
		Equity securities, available-for-sale				9,051		13,895
		Other investments				23,745		25,251
				Total investments		673,773		650,961

	Cash and cash equivalents					23,547		25,083
	Deferred acquisition costs					31,767		30,806
	Due and unpaid premiums					66,473		62,628
	Due from reinsurers					266,597		278,242
	Premium and claim funds					33,061		32,553
	Goodwill					56,452		50,318
	Other assets					51,533		57,126

				TOTAL ASSETS	$	1,203,203	$	1,187,717

LIABILITIES AND STOCKHOLDERS’ EQUITY:
LIABILITIES:
	Policy benefits and claims				$	249,556	$	236,803
	Future policy benefits					275,501		277,041
	Funds on deposit					181,307		186,782
	Unearned premiums					12,176		9,455
	Other policyholders' funds					17,637		18,802
	Due to reinsurers					49,067		47,945
	Accounts payable, accruals and other liabilities					66,516		67,641
	Debt					7,326		4,000
	Junior subordinated debt securities					38,146		38,146

				TOTAL LIABILITIES		897,232		886,615

STOCKHOLDERS’ EQUITY:
IHC STOCKHOLDERS' EQUITY:
	Preferred stock (none issued)					-		-
	Common stock $1.00 par value, 23,000,000 shares authorized;
			18,553,183 and 18,531,158 shares issued; 17,333,307 and
			17,371,040 shares outstanding			18,553		18,531
	Paid-in capital					127,451		127,098
	Accumulated other comprehensive income (loss)					(3,217)		22
	Treasury stock, at cost; 1,219,876 and 1,160,118 shares					(12,880)		(12,141)
	Retained earnings					167,092		157,667

TOTAL IHC STOCKHOLDERS’ EQUITY						296,999		291,177
NONCONTROLLING INTERESTS IN SUBSIDIARIES						8,972		9,925

				TOTAL EQUITY		305,971		301,102

				TOTAL LIABILITIES AND EQUITY	$	1,203,203	$	1,187,717

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				Six Months Ended
				June 30,				June 30,
				2015		2014		2015		2014
REVENUES:
	Premiums earned		$	120,443	$	121,135	$	242,557	$	244,405
	Net investment income			4,505		5,434		9,946		11,235
	Fee income			4,487		3,861		8,203		13,200
	Other income			1,570		1,070		2,564		2,181
	Net realized investment gains			2,100		4,519		4,100		6,070

				133,105		136,019		267,370		277,091
EXPENSES:
	Insurance benefits, claims and reserves			79,380		83,263		159,000		168,572
	Selling, general and administrative expenses			43,702		44,947		87,851		93,082
	Amortization of deferred acquisitions costs			1,424		1,189		2,888		2,471
	Interest expense on debt			478		337		910		818

				124,984		129,736		250,649		264,943

	Income before income taxes			8,121		6,283		16,721		12,148
	Income taxes			2,965		2,403		6,234		4,263

	Net income			5,156		3,880		10,487		7,885
	Less: Income from noncontrolling interests in subsidiaries			(124)		(32)		(236)		(336)

		NET INCOME ATTRIBUTABLE TO IHC	$	5,032	$	3,848	$	10,251	$	7,549

Basic income per common share			$	.29	$	.22	$	.59	$	.43

WEIGHTED AVERAGE SHARES OUTSTANDING				17,338		17,485		17,351		17,553

Diluted income per common share			$	.29	$	.22	$	.59	$	.43

WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING				17,501		17,657		17,516		17,709

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				Six Months Ended
						June 30,				June 30,
						2015		2014		2015		2014

Net income					$	5,156	$	3,880	$	10,487	$	7,885
Other comprehensive income (loss):
	Available-for-sale securities:
	Unrealized gains (losses) on available-for-sale securities, pre-tax					(6,445)		5,003		(5,140)		13,020
	Tax expense (benefit) on unrealized gains (losses) on available-for-sale
		securities				(2,286)		1,499		(1,889)		3,877
	Unrealized gains (losses) on available-for-sale securities, net of taxes					(4,159)		3,504		(3,251)		9,143

	Cash flow hedge:
	Unrealized gains on cash flow hedge, pre-tax					13		21		28		38
	Tax expense on unrealized gains on cash flow hedge					5		8		11		15
	Unrealized gains on cash flow hedge, net of taxes					8		13		17		23

	Other comprehensive income (loss), net of tax					(4,151)		3,517		(3,234)		9,166

		COMPREHENSIVE INCOME (LOSS), NET OF TAX				1,005		7,397		7,253		17,051

Comprehensive income, net of tax, attributable to noncontrolling
			interests:
Income from noncontrolling interests in subsidiaries						(124)		(32)		(236)		(336)
Other comprehensive (income) loss, net of tax, attributable to
		noncontrolling interests:
	Unrealized (gain) loss on available-for-sale securities, net of tax					33		(82)		(10)		(213)
	Other comprehensive (income) loss, net of tax, attributable to
		noncontrolling interests				33		(82)		(10)		(213)

		COMPREHENSIVE INCOME, NET OF TAX,
				ATTRIBUTABLE TO NONCONTROLLING INTERESTS		(91)		(114)		(246)		(549)

		COMPREHENSIVE INCOME (LOSS), NET OF TAX,
				ATTRIBUTABLE TO IHC	$	914	$	7,283	$	7,007	$	16,502

See the accompanying Notes to Condensed Consolidated Financial Statements.


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													10,251		10,251		236		10,487
Other comprehensive
	income, net of tax								(3,244)						(3,244)		10		(3,234)
Repurchases of common stock											(739)				(739)		-		(739)
Common stock dividend
		($.045 per share)											(783)		(783)		-		(783)
Acquisition of subsidiary															-		608		608
Purchases of noncontrolling
		interests					112		5						117		(1,851)		(1,734)
Share-based compensation
	expenses and related
			tax benefits		22		221								243		-		243
Other capital transactions							20						(43)		(23)		44		21

BALANCE AT
	JUNE 30, 2015			$	18,553	$	127,451	$	(3,217)	$	(12,880)	$	167,092	$	296,999	$	8,972	$	305,971

See the accompanying Notes to Condensed Consolidated Financial Statements.


INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)

						Six Months Ended June 30,
						2015		2014
CASH FLOWS PROVIDED BY (USED BY) OPERATING ACTIVITIES:
	Net income				$	10,487	$	7,885
	Adjustments to reconcile net income to net change in cash from
		operating activities:
			Amortization of deferred acquisition costs			2,888		2,471
			Net realized investment gains			(4,100)		(6,070)
			Equity income from equity method investments			(577)		(741)
			Depreciation and amortization			1,572		2,013
			Share-based compensation expenses			64		683
			Deferred tax expense			1,370		1,885
			Other			2,218		2,411
Changes in assets and liabilities:
			Net (purchases) sales of trading securities			2,173		(3,603)
			Change in insurance liabilities			9,603		(48,149)
			Additions to deferred acquisition costs			(3,939)		(2,974)
			Change in amounts due from reinsurers			11,646		48,580
			Change in premium and claim funds			47		(1,882)
			Change in current income tax liability			3,890		4,702
			Change in due and unpaid premiums			(3,845)		153
			Change in other assets			1,084		6,310
			Change in other liabilities			(2,031)		(6,303)

				Net change in cash from operating activities		32,550		7,371

CASH FLOWS PROVIDED BY (USED BY) INVESTING ACTIVITIES:
	Net (purchases) sales of securities under resale and repurchase agreements					(6,639)		3,334
	Sales of equity securities					9,187		288
	Purchases of equity securities					(4,423)		(998)
	Sales of fixed maturities					377,835		222,627
	Maturities and other repayments of fixed maturities					32,019		28,007
	Purchases of fixed maturities					(437,826)		(254,891)
	Acquisition of subsidiary, net of cash acquired					511		-
	Other investing activities					(693)		2,082

				Net change in cash from investing activities		(30,029)		449

CASH FLOWS PROVIDED BY (USED BY) FINANCING ACTIVITIES:
		Repurchases of common stock				(667)		(2,810)
		Cash paid in acquisitions of noncontrolling interests				(1,734)		-
		Withdrawals of investment-type insurance contracts				(1,191)		(1,555)
		Dividends paid				(609)		(620)
		Proceeds from exercise of stock options				133		-
		Other financing activities				11		(433)

				Net change in cash from financing activities		(4,057)		(5,418)

Net change in cash and cash equivalents						(1,536)		2,402
Cash and cash equivalents, beginning of year						25,083		24,229

Cash and cash equivalents, end of period					$	23,547	$	26,631

See the accompanying Notes to Condensed Consolidated Financial Statements.

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 June 30, 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 six months of 2015, IHC purchased shares of AMIC common stock thereby increasing its ownership interest in AMIC to approximately 92% as of June 30, 2015. At December 31, 2014, the Company owned approximately 90% of the outstanding common stock of AMIC. In the second quarter of 2015, AMIC acquired Global Accident Facilities, LLC (“GAF”). See Note 6 for more information regarding the acquisition of GAF.

Effects of Ownership Changes in Subsidiaries

The following table summarizes the effects of changes in the Company’s ownership interests in its subsidiaries on IHC’s equity for periods indicated (in thousands):


		Three Months Ended				Six Months Ended
		June 30,				June 30,
		2015		2014		2015		2014

Changes in IHC’s paid-in capital:
Purchase of AMIC shares	$	-	$	-	$	(199)	$	-
Purchase remaining IPA Family, LLC interests		311		-		311		-

Net transfers from noncontrolling interests	$	311	$	-	$	112	$	-

(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 are unaudited and 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 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 six months ended June 30, 2015 are not necessarily indicative of the results to be anticipated for the entire year.

(D)

Reclassifications

Certain amounts in prior year’s Condensed Consolidated Financial Statements and Notes thereto have been reclassified to conform to the 2015 presentation.

(E)

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 entity’s operations and financial results; and (ii) requiring expanded disclosures for discontinued operations. The adoption of this guidance did not have any effect on the Company’s consolidated financial statements.

Recently Issued Accounting Standards Not Yet Adopted

In May 2015, the FASB issued guidance requiring additional disclosures for short-duration contracts regarding the liability for unpaid claims and claim adjustment expenses. For public entities, the guidance is effective for annual reporting periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. Early adoption is permitted. The adoption of this guidance is not expected to have a significant effect on the Company’s consolidated financial statements.

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 Company’s 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 Company’s 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 Company’s consolidated financial statements.

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 163,000 and 165,000 shares for the three months and six months ended June 30, 2015, respectively; and 172,000 and 156,000 shares for the three months and six months ended June 30, 2014, respectively.

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):


		June 30, 2015
				GROSS		GROSS
		AMORTIZED		UNREALIZED		UNREALIZED		FAIR
		COST		GAINS		LOSSES		VALUE

FIXED MATURITIES
AVAILABLE-FOR-SALE:
Corporate securities	$	168,186	$	423	$	(5,256)	$	163,353
CMOs - residential ⁽¹⁾		3,385		4		(19)		3,370
CMOs - commercial		975		258		-		1,233
U.S. Government obligations		221,768		415		(25)		222,158
Agency MBS - residential ⁽²⁾		50		2		-		52
GSEs ⁽³⁾		12,086		18		(64)		12,040
States and political subdivisions		200,708		1,887		(2,633)		199,962
Foreign government obligations		1,847		9		-		1,856
Redeemable preferred stocks		4,036		196		-		4,232

Total fixed maturities	$	613,041	$	3,212	$	(7,997)	$	608,256


EQUITY SECURITIES
AVAILABLE-FOR-SALE:
Common stocks	$	5,154	$	-	$	(263)	$	4,891
Nonredeemable preferred stocks		4,004		156		-		4,160

Total equity securities	$	9,158	$	156	$	(263)	$	9,051


		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 June 30, 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 repayment 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	$	3,881	$	3,893
Due after one year through five years		275,912		275,874
Due after five years through ten years		97,880		96,774
Due after ten years		219,879		216,042
CMOs and MBSs		15,489		15,673

	$	613,041	$	608,256

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):


		June 30, 2015

		Less than 12 Months				12 Months or Longer				Total

		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
		Value		Losses		Value		Losses		Value		Losses

Corporate securities	$	98,506	$	3,527	$	32,146	$	1,729	$	130,652	$	5,256
CMOs - residential		2,030		19		-		-		2,030		19
U.S. Government obligations		196,800		25		-		-		196,800		25
GSEs		7,853		30		3,133		34		10,986		64
States and political subdivisions		87,890		1,081		42,539		1,552		130,429		2,633
Total fixed maturities		393,079		4,682		77,818		3,315		470,897		7,997

Common stocks		4,891		263		-		-		4,891		263
Total equity securities		4,891		263		-		-		4,891		263

Total temporarily impaired
securities	$	397,970	$	4,945	$	77,818	$	3,315	$	475,788	$	8,260

Number of securities in an
unrealized loss position		80				26				106


		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
CMO’s - 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 June 30, 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 June 30, 2015.

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


		Three Months Ended				Six Months Ended
		June 30,				June 30,
		2015		2014		2015		2014

Available-for-sale securities:
Fixed maturities	$	2,114	$	4,014	$	3,414	$	5,491
Common stocks		-		-		1,465		-
Preferred stocks		-		(5)		-		(5)
Total available-for-sale securities		2,114		4,009		4,879		5,486

Trading securities		86		25		(421)		30
Total realized gains (losses)		2,200		4,034		4,458		5,516

Unrealized gains (losses) on trading securities:
Change in unrealized gains (losses) on trading securities		(101)		483		(352)		552
Total unrealized gains (losses) on trading securities		(101)		483		(352)		552

Gain (losses) on other investments		1		2		(6)		2

Net realized investment gains	$	2,100	$	4,519	$	4,100	$	6,070

For the three months and six months ended June 30, 2015, proceeds from sales of available-for-sale securities were $279,598,000 and $386,013,000, respectively, and the Company realized gross gains of $2,659,000 and $5,773,000, respectively, and gross losses of $460,000 and $642,000, respectively, as a result of those sales. For the three months and six months ended June 30, 2014, proceeds from sales of available-for-sale securities were $127,977,000 and $225,527,000, respectively, and the Company realized gross gains of $3,999,000 and $6,604,000, respectively, and gross losses of $122,000 and $541,000, respectively, as a result of 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				Six Months Ended
		June 30,				June 30,
		2015		2014		2015		2014

Balance at beginning of year	$	473	$	473	$	473	$	473
Additional credit losses for which an other-than-
temporary loss was previously recognized		-		-		-		-
Securities sold		-		-		-		-

Balance at end of period	$	473	$	473	$	473	$	473

The after-tax portion of other-than-temporary impairments included in accumulated other comprehensive income (loss) at both June 30, 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 June 30, 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 June 30, 2015 and December 31, 2014, the fair value of interest rate swap was $55,000 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 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):


		June 30, 2015
		Level 1		Level 2		Level 3		Total

FINANCIAL ASSETS:
Fixed maturities available-for-sale:
Corporate securities	$	-	$	163,353	$	-	$	163,353
CMOs - residential		-		3,370		-		3,370
CMOs - commercial		-		-		1,233		1,233
US Government obligations		-		222,158		-		222,158
Agency MBS - residential		-		52		-		52
GSEs		-		12,040		-		12,040
States and political subdivisions		-		197,714		2,248		199,962
Foreign government obligations		-		1,856		-		1,856
Redeemable preferred stocks		4,232		-		-		4,232
Total fixed maturities		4,232		600,543		3,481		608,256

Equity securities available-for-sale:
Common stocks		4,891		-		-		4,891
Nonredeemable preferred stocks		4,160		-		-		4,160
Total equity securities		9,051		-		-		9,051

Trading securities - equities		9,242		-		-		9,242
Total trading securities		9,242		-		-		9,242

Total Financial Assets	$	22,525	$	600,543	$	3,481	$	626,549

FINANCIAL LIABILITIES:
Interest rate swap	$	-	$	55	$	-	$	55


		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 Company’s 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 June 30, 2015
				States and
		CMOs		Political
		Commercial		Subdivisions		Total

Beginning balance	$	1,016	$	2,281	$	3,297

Gains (losses) included in other comprehensive income (loss):
Net unrealized gains (losses)		217		(12)		205

Repayments and amortization of fixed maturities		-		(21)		(21)

Balance at end of period	$	1,233	$	2,248	$	3,481


		Three Months Ended June 30, 2014
				States and
		CMOs		Political
		Commercial		Subdivisions		Total

Beginning balance	$	869	$	2,410	$	3,279

Gains (losses) included in other comprehensive income (loss):
Net unrealized gains (losses)		37		(15)		22

Repayments and amortization of fixed maturities		-		(16)		(16)

Balance at end of period	$	906	$	2,379	$	3,285


		Six Months Ended June 30, 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)		280		(25)		255

Repayments and amortization of fixed maturities		-		(41)		(41)

Balance at end of period	$	1,233	$	2,248	$	3,481


		Six Months Ended June 30, 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)		313		(31)		282

Repayments and amortization of fixed maturities		-		(31)		(31)

Balance at end of period	$	906	$	2,379	$	3,285

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, for the periods indicated (in thousands):


		June 30, 2015					December 31, 2014
		Level 2					Level 2