INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

                                             

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

__________________________________________


FORM 10-Q


[X]

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended September 30, 2016.


[   ]

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 November 7, 2016

Common stock, $ 1.00  par value

17,067,875 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

33

 

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

46

 

 

 

Item 4. Controls and Procedures

47

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1.    Legal Proceedings

48

 

 

 

 

Item 1A. Risk Factors

48

 

 

 

 

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

48

 

 

 

 

Item 3.    Defaults Upon Senior Securities

48

 

 

 

 

Item 4.    Mine Safety Disclosures

48

 

 

 

 

Item 5.    Other Information

48

 

 

 

Item 6.    Exhibits

50

 

 

 

Signatures

52

 

 

 

 



Copies of the Company’s SEC filings can be found on its website at www.ihcgroup.com.



2



Forward-Looking Statements


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


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


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




3


PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements

    


INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

 

 

 

September  30, 2016

 

 

December 31, 2015

 

 

 

(Unaudited)

 

 

 

ASSETS:

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

Short-term investments

 

$

8,151 

 

$

50 

 

Securities purchased under agreements to resell

 

 

11,282 

 

 

28,285 

 

Trading securities

 

 

1,135 

 

 

1,259 

 

Fixed maturities, available-for-sale

 

 

472,348 

 

 

428,601 

 

Equity securities, available-for-sale

 

 

6,685 

 

 

8,426 

 

Other investments

 

 

21,178 

 

 

21,538 

 

Total investments

 

 

520,779 

 

 

488,159 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

79,208 

 

 

17,500 

 

Due and unpaid premiums

 

 

57,454 

 

 

69,075 

 

Due from reinsurers

 

 

478,845 

 

 

483,073 

 

Premium and claim funds

 

 

25,881 

 

 

22,015 

 

Goodwill

 

 

41,573 

 

 

47,276 

 

Other assets

 

 

47,065 

 

 

57,934 

 

Assets attributable to discontinued operations (Note 3)

 

 

 

 

12,931 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

1,250,805 

 

$

1,197,963 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

Policy benefits and claims

 

$

242,819 

 

$

245,443 

 

Future policy benefits

 

 

233,261 

 

 

270,624 

 

Funds on deposit

 

 

150,651 

 

 

173,350 

 

Unearned premiums

 

 

11,567 

 

 

10,236 

 

Other policyholders' funds

 

 

9,797 

 

 

11,822 

 

Due to reinsurers

 

 

66,577 

 

 

46,355 

 

Accounts payable, accruals and other liabilities

 

 

55,930 

 

 

64,109 

 

Liabilities attributable to discontinued operations (Note 3)

 

 

408 

 

 

(15)

 

Debt

 

 

 

 

5,189 

 

Junior subordinated debt securities

 

 

38,146 

 

 

38,146 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

 

809,156 

 

 

865,259 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

IHC STOCKHOLDERS' EQUITY:

 

 

 

 

 

 

 

Preferred stock $1.00 par value, 100,000 shares authorized;

 

 

 

 

 

 

 

none issued or outstanding

 

 

 

 

 

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

 

 

 

 

 

 

 

18,585,858 and 18,569,183 shares issued; 17,067,875 and

 

 

 

 

 

 

 

17,265,758 shares outstanding

 

 

18,586 

 

 

18,569 

 

Paid-in capital

 

 

126,001 

 

 

127,733 

 

Accumulated other comprehensive income (loss)

 

 

3,448 

 

 

(3,440)

 

Treasury stock, at cost; 1,517,983 and 1,303,425 shares

 

 

(17,483)

 

 

(13,961)

 

Retained earnings

 

 

308,415 

 

 

194,450 

 

 

 

 

 

 

 

TOTAL IHC STOCKHOLDERS’ EQUITY

 

 

438,967 

 

 

323,351 

NONCONTROLLING INTERESTS IN SUBSIDIARIES

 

 

2,682 

 

 

9,353 

 

 

 

 

 

 

 

 

 

TOTAL EQUITY

 

 

441,649 

 

 

332,704 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND EQUITY

 

$

1,250,805 

 

$

1,197,963 



See the accompanying Notes to Condensed Consolidated Financial Statements.



4



INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(In thousands, except per share data)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2016

 

2015

 

2016

 

2015

REVENUES:

 

 

 

 

 

 

 

 

 

Premiums earned

$

67,335 

$

119,038 

$

195,524 

$

361,595 

 

Net investment income

 

4,004 

 

3,920 

 

12,700 

 

13,830 

 

Fee income

 

4,050 

 

2,201 

 

12,541 

 

9,195 

 

Other income

 

2,261 

 

5,790 

 

8,898 

 

8,349 

 

Gain on sale of subsidiary to joint venture

 

 

10,161 

 

 

10,161 

 

Net realized investment gains (losses)

 

2,367 

 

(1,109)

 

3,945 

 

2,991 

 

Other-than-temporary impairment losses:

 

 

 

 

 

 

 

 

 

     Total other-than-temporary impairment losses

 

(1,475)

 

(228)

 

(1,475)

 

(228)

 

     Portion of losses recognized in other comprehensive income (loss)

 

 

 

 

 

          Net impairment losses recognized in earnings

 

(1,475)

 

(228)

 

(1,475)

 

(228)

 

 

 

 

 

 

 

 

 

 

 

78,542 

 

139,773 

 

232,133 

 

405,893 

EXPENSES:

 

 

 

 

 

 

 

 

 

Insurance benefits, claims and reserves

 

38,277 

 

74,218 

 

109,497 

 

233,218 

 

Selling, general and administrative expenses

 

32,823 

 

43,202 

 

97,947 

 

133,640 

 

Interest expense on debt

 

440 

 

444 

 

1,366 

 

1,354 

 

 

 

 

 

 

 

 

 

 

 

71,540 

 

117,864 

 

208,810 

 

368,212 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes

 

7,002 

 

21,909 

 

23,323 

 

37,681 

 

Income taxes

 

2,636 

 

7,750 

 

8,566 

 

13,599 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

4,366 

 

14,159 

 

14,757 

 

24,082 

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations: (Note 3)

 

 

 

 

 

 

 

 

 

  Income from discontinued operations, before income taxes

 

 

1,305 

 

117,636 

 

2,254 

 

  Income taxes on discontinued operations

 

 

576 

 

7,724 

 

961 

 

  Income from discontinued operations

 

 

729 

 

109,912 

 

1,293 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

4,366 

 

14,888 

 

124,669 

 

25,375 

 

Less: Income from noncontrolling interests in subsidiaries

 

(43)

 

(128)

 

(9,900)

 

(364)

 

 

 

 

 

 

 

 

 

 

 

NET INCOME ATTRIBUTABLE TO IHC

$

4,323 

$

14,760 

$

114,769 

$

25,011 

 

 

 

 

 

 

 

 

 

Basic income per common share: (Note 2)

 

 

 

 

 

 

 

 

 

Income from continuing operations

$

.25 

$

.81 

$

.84 

$

1.37 

 

Income from discontinued operations

 

.00 

 

.04 

 

5.84 

 

.07 

 

Basic income per common share

$

.25 

$

.85 

$

6.68 

$

1.44 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING

 

17,120 

 

17,292 

 

17,189 

 

17,331 

 

 

 

 

 

 

 

 

 

Diluted income per common share: (Note 2)

 

 

 

 

 

 

 

 

 

Income from continuing operations

$

.25 

$

.81 

$

.83 

$

1.36 

 

Income from discontinued operations

 

.00 

 

.04 

 

5.77 

 

.07 

 

Diluted income per common share

$

.25 

$

.85 

$

6.60 

$

1.43 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING

 

17,340 

 

17,457

 

17,402 

 

17,496 









See the accompanying Notes to Condensed Consolidated Financial Statements.



5




INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(In thousands)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September  30,

 

September  30,

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

Net income

$

4,366 

$

14,888 

$

124,669 

$

25,375

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

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

 

(1,173)

 

2,982 

 

10,734 

 

(2,130)

 

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

 

(418)

 

1,060 

 

3,830 

 

(818)

 

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

 

(755)

 

1,922 

 

6,904 

 

(1,312)

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax

 

(755)

 

1,922 

 

6,904 

 

(1,312)

 

 

 

 

 

 

 

 

 

 

    COMPREHENSIVE INCOME, NET OF TAX

 

3,611 

 

16,810 

 

131,573 

 

24,063

 

 

 

 

 

 

 

 

 

Comprehensive (income) loss, net of tax, attributable to noncontrolling interests:

 

 

 

 

 

 

 

 

Income from noncontrolling interests in subsidiaries

 

(43)

 

(128)

 

(9,900)

 

(364)

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

 

 

 

 

 

 

 

 

 

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

 

47 

 

(51)

 

(118)

 

(61)

 

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

 

 

 

 

 

 

 

 

 

    noncontrolling interests

 

47 

 

(51)

 

(118)

 

(61)

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE (INCOME) LOSS, NET OF TAX,

 

 

 

 

 

 

 

 

 

    ATTRIBUTABLE TO NONCONTROLLING INTERESTS

 

 

(179)

 

(10,018)

 

(425)

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME, NET OF TAX,

 

 

 

 

 

 

 

 

 

    ATTRIBUTABLE TO IHC

$

3,615 

$

16,631 

$

121,555 

$

23,638















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 (LOSS)

 

AT COST

 

EARNINGS

 

EQUITY

 

SUBSIDIARIES

 

EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DECEMBER 31, 2015

$

18,569

$

127,733 

$

(3,440)

$

(13,961)

$

194,450 

$

323,351 

$

9,353 

$

332,704 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

114,769 

 

114,769 

 

9,900 

 

124,669 

Other comprehensive

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

income, net of tax

 

 

 

 

 

6,786 

 

 

 

 

 

6,786 

 

118 

 

6,904 

Repurchases of common stock

 

 

 

 

 

 

 

(3,522)

 

 

 

(3,522)

 

 

(3,522)

Purchases of noncontrolling

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

interests

 

 

 

(2,332)

 

102 

 

 

 

 

 

(2,230) 

 

(15,911)

 

(18,141) 

Common stock dividend

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($.045 per share)

 

 

 

 

 

 

 

 

 

(773)

 

(773)

 

 

(773)

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

expenses and related

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

tax benefits

 

17

 

322 

 

 

 

 

 

 

 

339 

 

 

339 

Distributions to noncontrolling

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

interests

 

 

 

 

 

 

 

 

 

 

 

 

(847)

 

(847)

Other capital transactions

 

 

 

278 

 

 

 

 

 

(31)

 

247 

 

69 

 

316 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SEPTEMBER 30, 2016

$

18,586

$

126,001 

$

3,448 

$

(17,483)

$

308,415 

$

438,967 

$

2,682 

$

441,649 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 













See the accompanying Notes to Condensed Consolidated Financial Statements.



7




INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 (In thousands)

 

 

 

Nine Months Ended September 30,

 

 

2016

 

 

2015

CASH FLOWS PROVIDED BY (USED BY) OPERATING ACTIVITIES:

 

 

 

 

 

 

Net income

$

124,669 

 

$

25,375 

 

Adjustments to reconcile net income to net change in cash from

 

 

 

 

 

 

 operating  activities:

 

 

 

 

 

 

Gain on disposal of discontinued operations, net of tax

 

(109,447)

 

 

 

Gain on sale of subsidiary to joint venture

 

 

 

(10,161)

 

Gain on disposition of assets

 

 

 

(5,053)

 

Amortization of deferred acquisition costs

 

245 

 

 

3,446 

 

Net realized investment gains

 

(3,945)

 

 

(2,991)

 

Other-than-temporary impairment losses

 

1,475 

 

 

228 

 

Equity (income) loss from equity method investments

 

 

 

(579)

 

Depreciation and amortization

 

1,482 

 

 

1,740 

 

Deferred tax  expense

 

2,565 

 

 

(7,070)

 

Other

 

6,683 

 

 

4,988 

  Changes in assets and liabilities:

 

 

 

 

 

 

Net (purchases) sales of trading securities

 

3,180 

 

 

160 

 

Change in insurance liabilities

 

(41,713)

 

 

(17,627)

 

Change in deferred acquisition costs

 

(217)

 

 

26,827 

 

Change in  amounts due from reinsurers

 

4,227 

 

 

(203,570)

 

Change in premium and claim funds

 

(4,835)

 

 

(3,556)

 

Change in current income tax liability

 

(6,550)

 

 

17,376 

 

Change in due and unpaid premiums

 

11,621 

 

 

(6,360)

 

Other operating activities

 

(6,200)

 

 

656 

 

 

 

 

 

 

 

 

Net change in cash from operating activities

 

(16,753)

 

 

(176,171)

 

 

 

 

 

 

CASH FLOWS PROVIDED BY (USED BY) INVESTING ACTIVITIES:

 

 

 

 

 

 

Net (purchases) sales of short-term investments

 

(8,104)

 

 

 

Net (purchases) sales of securities under resale agreements

 

17,003 

 

 

5,708 

 

Sales of equity securities

 

2,429 

 

 

9,187 

 

Purchases of equity securities

 

 

 

(4,423)

 

Sales of fixed maturities

 

335,562 

 

 

601,187 

 

Maturities and other repayments of fixed maturities

 

35,505 

 

 

36,505 

 

Purchases of fixed maturities

 

(406,348)

 

 

(491,069)

 

Acquisition of subsidiary, net of cash acquired

 

 

 

511 

 

Proceeds on sales/deconsolidation of subsidiaries, net of cash divested

 

137,115 

 

 

3,524 

 

Proceeds from sale of assets

 

 

 

8,000 

 

Change in policy loans

 

 

 

10,629 

 

Proceeds on sales of other investments

 

2,064 

 

 

 

Purchases of other investments

 

(3,371)

 

 

 

Other investing activities

 

(3,433)

 

 

(1,035)

 

 

 

 

 

 

 

Net change in cash from investing activities

 

108,422 

 

 

178,724 

 

 

 

 

 

 

CASH FLOWS PROVIDED BY (USED BY)  FINANCING ACTIVITIES:

 

 

 

 

 

 

Repurchases of common stock

 

(3,522)

 

 

(1,722)

 

Cash paid in acquisitions of noncontrolling interests

 

(18,141)

 

 

(1,734)

 

Withdrawals of investment-type insurance contracts

 

(1,447)

 

 

(1,756)

 

Repayments of debt

 

(4,789)

 

 

(2,137)

 

Dividends paid

 

(1,588)

 

 

(1,392)

 

Other financing activities

 

(474)

 

 

220 

 

 

 

 

 

 

 

Net change in cash from financing activities

 

(29,961)

 

 

(8,521)

 

 

 

 

 

 

Net change in cash and cash equivalents

 

61,708 

 

 

(5,968)

Cash and cash equivalents, beginning of year

 

17,500 

 

 

23,408 

 

 

 

 

 

 

Cash and cash equivalents, end of period

$

79,208 

 

$

17,440 



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 Specialty Benefits Inc. and IHC Carrier Solutions, Inc. IHC also owns a significant equity interest in: (i) Ebix Health Exchange Holdings, LLC (“Ebix Health Exchange”), an administration exchange for health and pet insurance; and (ii) a managing general underwriter (“MGU”) that writes medical stop-loss. On March 31, 2016, the Company sold IHC Risk Solutions, LLC (“Risk Solutions”), its managing general underwriter of excess or stop-loss insurance. In addition, all of the in-force stop-loss business of Standard Security Life and Independence American produced by Risk Solutions is 100% co-insured as of January 1, 2016 and IHC’s block of Medical Stop-Loss business is in run-off.  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 approximately 54% of IHC's outstanding common stock at September 30, 2016.

 

(B)

Consolidation


AMIC Holdings, Inc.


AMIC Holdings, Inc., formerly known as American Independence Corp., (“AMIC”) is an insurance holding company engaged in the insurance and reinsurance business. At December 31, 2015, the Company owned approximately 92% of its outstanding common stock. On August 31, 2016, IHC took AMIC private by way of a statutory “short-form" merger. The Company paid $18,141,000 for the remaining shares of AMIC common stock owned by noncontrolling interests and as a result, the Company now owns all of the outstanding common stock of AMIC. In connection with the transaction, $2,230,000 was charged to paid-in capital representing: (i) the difference between the fair value of the consideration paid for the shares and the carrying amount of noncontrolling interests; plus (ii) specific, direct costs of the transaction.


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 the periods indicated (in thousands):



 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

Changes in IHC’s paid-in capital:

 

 

 

 

 

 

 

 

 

 

 

    Purchase of AMIC shares

$

(2,230)

 

$

-

 

$

(2,230)

 

$

(199)

    Purchase remaining IPA Family, LLC interests

 

 

 

-

 

 

 

 

311 

 

 

 

 

 

 

 

 

 

 

 

 

    Net transfers from noncontrolling interests

$

(2,230)

 

$

-

 

$

(2,230)

 

$

112 





9


 (C)

Basis of Presentation




The unaudited 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 unaudited 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 consolidated 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 unaudited Condensed Consolidated Financial Statements.


On March 31, 2016, the Company sold Risk Solutions, its managing general underwriter of excess or stop-loss insurance for self-insured employer groups that desire to manage the risk of large medical claims (“Medical Stop-Loss”). In addition, under the purchase and sale agreement, all of the in-force stop-loss business of Standard Security Life and Independence American produced by Risk Solutions is 100% co-insured as of January 1, 2016. IHC’s block of medical stop-loss business is in run-off. The sale of Risk Solutions and exit from the medical stop-loss business represents a strategic shift that will have a major effect on the Company’s operations and financial results. The disposal transaction qualified for reporting as discontinued operations in the first quarter of 2016 as a result of the Board of Directors commitment to a plan for its disposal in January 2016. The assets, liabilities, and related income and expenses associated with the disposal group are presented as discontinued operations in the accompanying condensed consolidated financial statements and Notes thereto. The results of discontinued operations reflect the operations of the disposed MGUs. See Note 3 for more information. The run-off of IHC’s remaining block of medical stop-loss business is in continuing operations.


In the opinion of management, all adjustments (consisting only of normal recurring accruals) that are necessary for a fair presentation of the consolidated financial position and results of operations for the interim periods have been included. The condensed consolidated results of operations for the three months and nine months ended September 30, 2016 are not necessarily indicative of the results to be anticipated for the entire year.



(D)

Reclassifications




Certain amounts in prior year’s consolidated financial statements and Notes thereto have been reclassified to conform to the 2016 presentation, primarily for the effects of discontinued operations.



(E)

Recent Accounting Pronouncements




Recently Adopted Accounting Standards


In September 2015, the FASB issued guidance to simplify the accounting for adjustments made to provisional amounts recognized in a business combination and eliminate the requirement to retrospectively account for those adjustments. The adoption of this guidance did not have a material 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. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.




10


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.  The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.


Recently Issued Accounting Standards Not Yet Adopted


In October 2016, the FASB issued guidance requiring an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments in this Update should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption and are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.


In August 2016, the FASB issued guidance that changes how certain cash receipts and cash payments are presented and classified in the cash flows statement. The amendments in this Update are effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.


In June 2016, the FASB issued guidance requiring financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. An allowance for credit losses will be deducted from the amortized cost basis to present the net carrying value at the amount expected to be collected with changes in the allowance recorded in earnings. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses rather than a write-down, which would be limited to the amount by which fair value is below the amortized cost. Certain existing requirements used to evaluate credit losses have been removed. For public entities that are SEC filers, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, including interim periods within those years. Early adoption is permitted for fiscal years beginning after December 15, 2018. The amendments in this Update should be applied through a cumulative effect adjustment to retained earnings upon adoption as of the beginning of the first reporting period in which the guidance is effective. Management has not yet determined the impact the adoption of this guidance will have on the Company’s consolidated financial statements.


In March 2016, the FASB issued guidance that simplify several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification in the statement of cash flows. The amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.


In March 2016, the FASB issued guidance that eliminates the requirement for retroactive adjustments on the date that a previously held investment qualifies for the equity method of accounting as a result of an increase in ownership interest or degree of influence. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016 and should be applied prospectively upon their effective date. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.


In February 2016, the FASB issued guidance that requires lessees to recognize the assets and liabilities that arise from leases, including operating leases, on the statement of financial position. The amendments in this Update are effective for fiscal years beginning after December 31, 2018, including interim periods within those fiscal years, using a modified retrospective approach. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.



11



In January 2016, the FASB issued guidance that eliminates the requirement to classify equity securities with readily determinable fair values as trading or available-for-sale. The guidance requires equity securities (including other ownership interests, such as partnerships, unincorporated joint ventures, and limited liability companies) to be measured at fair value with changes in the fair value recognized through net income, simplifies the impairment assessment of equity securities without readily determinable fair values and requires changes in disclosure requirements. For public entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted in certain circumstances. The amendments in this Update should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption of the Update. The adoption of this guidance is not expected to have a material effect on the Company’s Consolidated Balance Sheet or IHC’s stockholders’ equity.


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 Company is evaluating the impact the disclosures will have 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. In 2016, additional guidance was issued to clarify certain aspects of the implementation guidance and to clarify the identification of performance obligations. In August 2015, the effective date of this guidance has been deferred. For public entities, this guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and requires one of two specified retrospective methods of application. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. 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 220,000 and 213,000 shares for the three months and nine months ended September 30, 2016, respectively; and 165,000 shares for both the three months and nine months ended September 30, 2015, respectively.





12


The following is a reconciliation of income available to common shareholders used to calculate income per share for the periods indicated (in thousands):




 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30

 

September 30

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

Income from continuing operations

$

4,366 

$

14,159 

$

14,757 

$

24,082 

Less:  Income from continuing operations attributable to

 

 

 

 

 

 

 

 

      noncontrolling interests

 

(43)

 

(82)

 

(348)

 

(277)

 

 

 

 

 

 

 

 

 

    Income from continuing operations attributable to IHC

 

 

 

 

 

 

 

 

      common shareholders

$

4,323 

$

14,077 

$

14,409 

$

23,805 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations

$

-

$

729

$

109,912 

$

1,293 

Less:  (Income) loss from discontinued operations attributable to

 

 

 

 

 

 

 

 

      noncontrolling interests

 

-

 

(46) 

 

(9,552)

 

(87)

 

 

 

 

 

 

 

 

 

    Income (loss) from discontinued operations attributable to

 

 

 

 

 

 

 

 

      IHC common shareholders

$

-

$

683

$

100,360 

$

1,206 

 

 

 

 

 

 

 

 

 







Note 3.

Discontinued Operations


On March 31, 2016, IHC and its subsidiary Independence American sold the stock of Risk Solutions to Swiss Re Corporate Solutions, a division of Swiss Re (“Swiss Re”).  In addition, under the purchase and sale agreement, all of the in-force stop-loss business of Standard Security Life and Independence American produced by Risk Solutions is co-insured by Westport Insurance Corporation (“Westport”), Swiss Re’s largest US carrier, as of January 1, 2016.  The aggregate purchase price was $152,500,000 in cash, subject to adjustments and settlements. Approximately 89% of the purchase price was allocated to AMIC, with the balance being paid to Standard Security Life and other IHC subsidiaries. The Company recorded a gain of $99,934,000, net of taxes and amounts attributable to noncontrolling interests, as a result of the transaction. The aforementioned transaction, which includes the sale of Risk Solutions and the corresponding coinsurance agreement, is collectively referred to as the “Risk Solutions Sale and Coinsurance Transaction”.  IHC’s block of Medical Stop-Loss business is in run-off. The sale of Risk Solutions and exit from the medical stop-loss business represents a strategic shift that will have a major effect on the Company’s operations and financial results. The disposal transaction qualifies for reporting as discontinued operations in the first quarter of 2016 as a result of the Board of Directors commitment to a plan for its disposal in January 2016. Aside from reinsurance and marketing of Westport small group stop-loss, there will be no further involvement with the discontinued operation.



13





The following is a reconciliation of the major line items constituting the pretax profit of discontinued operations for the periods indicated (in thousands):


 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

Revenue

$

$

645 

$

6,406

$

1,895 

Selling, general and administrative expenses

 

 

(660)

 

5,689

 

(359)

 

 

 

 

 

 

 

 

 

Pretax profit (loss) of discontinued operations

 

 

1,305 

 

717

 

2,254 

Gain on disposal of discontinued

 

 

 

 

 

 

 

 

   operations, pretax

 

 

 

116,919

 

 

 

 

 

 

 

 

 

 

     Income (loss) from discontinued operations,

 

 

 

 

 

 

 

 

          before income taxes

 

 

1,305 

 

117,636

 

2,254 

      Income taxes (benefits) on discontinued operations

 

 

576 

 

7,724

 

961 

 

 

 

 

 

 

 

 

 

       Income (loss) from discontinued operations

$

$

729 

$

109,912

$

1,293 

 

 

 

 

 

 

 

 

 


The following is a reconciliation of the carrying amounts of major classes of assets and liabilities for discontinued operations for the periods indicated (in thousands):


 

 

September 30, 2016

 

December 31, 2015

 

 

 

 

 

Major classes of assets included in discontinued operations:

 

 

 

 

   Cash

$

-

$

1,671 

   Goodwill

 

-

 

5,664 

   Intangible assets

 

-

 

919 

   Other assets

 

-

 

4,677 

 

 

 

 

 

Assets attributable to discontinued operations

$

-

$

12,931 

 

 

 

 

 

Major classes of liabilities included in discontinued operations:

 

 

 

 

   Accounts payable and accrued liabilities

$

408

$

(15)

 

 

 

 

 

   Liabilities attributable to discontinued operations

$

408

$

(15)

 

 

 

 

 




Total operating cash flows from discontinued operations for the three months and nine months ended September 30, 2016 were $0 and $339,000, respectively, and were $677,000 and $(385,000) for the three months and nine months ended September 30, 2015, respectively. The Company elected to classify the proceeds received from the sale of discontinued operations in the investing activities section of the Condensed Consolidated Statement of Cash Flows.  


In connection with the Risk Solutions Sale and Coinsurance Transaction in March 2016, AMIC utilized a significant amount of its Federal NOL carryforwards and made a corresponding adjustment to its valuation allowance (see Note 10). On a consolidated basis, the Company recorded income taxes on discontinued operations of $7,724,000 for the nine months ended September 30, 2016, consisting of $5,777,000 of state taxes and $1,947,000 of Federal taxes, net of a $38,419,000 decrease in AMIC’s valuation allowance.





14




Note  4.

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):




 

 

September 30, 2016

 

 

 

 

GROSS

 

GROSS

 

 

 

 

AMORTIZED

 

UNREALIZED

 

UNREALIZED

 

FAIR

 

 

COST

 

GAINS

 

LOSSES

 

VALUE

 

 

 

 

 

 

 

 

 

FIXED MATURITIES

 

 

 

 

 

 

 

 

AVAILABLE-FOR-SALE:

 

 

 

 

 

 

 

 

Corporate securities

$

200,741

$

2,307

$

(1,431)

$

201,617

CMOs - residential (1)

 

6,295

 

68

 

 

6,363

U.S. Government obligations

 

33,819

 

292

 

(26)

 

34,085

Agency MBS - residential (2)

 

25

 

1

 

 

26

GSEs (3)

 

10,401

 

1

 

(222)

 

10,180

States and political subdivisions

 

199,031

 

4,932

 

(984)

 

202,979

Foreign government obligations

 

5,618

 

93

 

(58)

 

5,653

Redeemable preferred stocks

 

11,454

 

92

 

(101)

 

11,445

 

 

 

 

 

 

 

 

 

Total fixed maturities

$

467,384

$

7,786

$

(2,822)

$

472,348


EQUITY SECURITIES

 

 

 

 

 

 

 

 

AVAILABLE-FOR-SALE:

 

 

 

 

 

 

 

 

Common stocks

$

2,717

$

301

$

$

3,018

Nonredeemable preferred stocks

 

3,588

 

98

 

(19)

 

3,667

 

 

 

 

 

 

 

 

 

Total equity securities

$

6,305

$

399

$

(19)

$

6,685


 

 

December 31, 2015

 

 

 

 

GROSS

 

GROSS

 

 

 

 

AMORTIZED

 

UNREALIZED

 

UNREALIZED

 

FAIR

 

 

COST

 

GAINS

 

LOSSES

 

VALUE

 

 

 

 

 

 

 

 

 

FIXED MATURITIES

 

 

 

 

 

 

 

 

AVAILABLE-FOR-SALE:

 

 

 

 

 

 

 

 

Corporate securities

$

172,621

$

93

$

(5,868)

$

166,846

CMOs - residential (1)

 

3,068

 

2

 

(14)

 

3,056

CMOs - commercial

 

899

 

296

 

 

1,195

U.S. Government obligations

 

44,738

 

120

 

(64)

 

44,794

Agency MBS - residential (2)

 

34

 

1

 

 

35

GSEs (3)

 

11,814

 

2

 

(254)

 

11,562

States and political subdivisions

 

194,364

 

2,159

 

(1,857)

 

194,666

Foreign government obligations

 

2,318

 

12

 

(6)

 

2,324

Redeemable preferred stocks

 

4,036

 

101

 

(14)

 

4,123

 

 

 

 

 

 

 

 

 

Total fixed maturities

$

433,892

$

2,786

$

(8,077)

$

428,601


EQUITY SECURITIES

 

 

 

 

 

 

 

 

AVAILABLE-FOR-SALE:

 

 

 

 

 

 

 

 

Common stocks

$

4,926

$

$

(142)

$

4,784

Nonredeemable preferred stocks

 

3,588

 

56

 

(2)

 

3,642

 

 

 

 

 

 

 

 

 

Total equity securities

$

8,514

$

56

$

(144)

$

8,426


(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.



15





The amortized cost and fair value of fixed maturities available-for-sale at September 30, 2016, 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

 

$

11,684

 

$

11,681

Due after one year through five years

 

 

112,394

 

 

112,991

Due after five years through ten years

 

 

154,702

 

 

157,923

Due after ten years

 

 

171,883

 

 

173,184

CMOs and MBSs

 

 

16,721

 

 

16,569

 

 

 

 

 

 

 

 

 

$

467,384

 

$

472,348




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):




 

 

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

Less than 12 Months

 

 

12 Months or Longer

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

Unrealized

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate securities

$

24,023

 

$

225

 

$

30,032

 

$

1,206

 

$

54,055

$

1,431

U.S. Government obligations

 

18,229

 

 

26

 

 

-

 

 

-

 

 

18,229

 

26

GSEs

 

-

 

 

-

 

 

10,160

 

 

222

 

 

10,160

 

222

States and political subdivisions

 

38,919

 

 

363

 

 

24,875

 

 

621

 

 

63,794

 

984

Foreign government obligations

 

3,666

 

 

58

 

 

-

 

 

-

 

 

3,666

 

58

Redeemable preferred stocks

 

-

 

 

-

 

 

3,662

 

 

101

 

 

3,662

 

101

   Total fixed maturities

 

84,837

 

 

672

 

 

68,729

 

 

2,150

 

 

153,566

 

2,822

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonredeemable preferred stocks

 

1,308

 

 

19

 

 

-

 

 

-

 

 

1,308

 

19

   Total equity securities

 

1,308

 

 

19

 

 

-

 

 

-

 

 

1,308

 

19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

       securities

$

86,145

 

$

691

 

$

68,729

 

$

2,150

 

$

154,874

$

2,841

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of securities in an

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   unrealized loss position

 

39

 

 

 

 

 

28

 

 

 

 

 

67

 

 




16



 

 

December 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

$

101,903

 

$

2,559

 

$

55,217

 

$

3,309

 

$

157,120

$

5,868

CMO’s - residential

 

2,867

 

 

14

 

 

-

 

 

-

 

 

2,867

 

14

U.S. Government obligations

 

19,809

 

 

64

 

 

-

 

 

-

 

 

19,809

 

64

GSEs

 

6,539

 

 

128

 

 

4,997

 

 

126

 

 

11,536

 

254

States and political subdivisions

 

68,898

 

 

780

 

 

31,351

 

 

1,077

 

 

100,249

 

1,857

Foreign government obligations

 

484

 

 

6

 

 

-

 

 

-

 

 

484

 

6

Redeemable preferred stocks

 

3,749

 

 

14

 

 

-

 

 

-

 

 

3,749

 

14

   Total fixed maturities

 

204,249

 

 

3,565

 

 

91,565

 

 

4,512

 

 

295,814

 

8,077

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stocks

 

4,784

 

 

142

 

 

-

 

 

-

 

 

4,784

 

142

Nonredeemable preferred stocks

 

1,324

 

 

2

 

 

-

 

 

-

 

 

1,324

 

2

   Total equity securities

 

6,108

 

 

144

 

 

-

 

 

-

 

 

6,108

 

144

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

       securities

$

210,357

 

$

3,709

 

$

91,565

 

$

4,512

 

$

301,922

$

8,221

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of securities in an

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   unrealized loss position

 

99

 

 

 

 

 

31

 

 

 

 

 

130

 

 




Substantially all of the unrealized losses on fixed maturities available-for-sale at September 30, 2016 and December 31, 2015 relate to investment grade securities and are attributable to changes in market interest rates. Because the Company does not intend to sell, nor is it more likely than not that the Company will have to sell such investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2016.


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




 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

   Fixed maturities

$

2,226 

$

122 

$

3,847 

$

3,536 

   Common stocks

 

220 

 

 

220 

 

1,465 

      Total sales of available-for-sale securities

 

2,446 

 

122 

 

4,067 

 

5,001 

 

 

 

 

 

 

 

 

 

Trading securities

 

 

(703)

 

 

(1,124)

      Total realized gains

 

2,446 

 

(581)

 

4,067 

 

3,877 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on trading securities:

 

 

 

 

 

 

 

 

   Change in unrealized gains (losses) on trading securities

 

(80)

 

(530)

 

(124)

 

(882)

      Total unrealized gains (losses)  on trading securities

 

(80)

 

(530)

 

(124)

 

(882)

 

 

 

 

 

 

 

 

 

Gains (losses) on other investments

 

 

 

 

(4)

 

 

 

 

 

 

 

 

 

Net realized investment gains

$

2,367 

$

(1,109)

$

3,945 

$

2,991 






17


For the three months and nine months ended September 30, 2016, proceeds from sales of available-for-sale securities were $179,735,000 and $339,171,000, respectively, and the Company realized gross gains of $2,668,000 and $4,521,000, respectively, and gross losses of $94,000 and $275,000, respectively, on those sales. For the three months and nine months ended September 30, 2015, proceeds from sales of available-for-sale securities were $226,350,000 and $612,363,000, respectively, and the Company realized gross gains of $301,000 and $6,074,000, respectively, and gross losses of $148,000 and $790,000, 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 1H(iv) to the Consolidated Financial Statements in the 2015 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. In the three months and nine months ended September 30, 2016, the Company recognized an other-than-temporary impairment loss of $1,475,000 on certain fixed maturities available-for-sale due to credit losses. The Company determined it is more likely than not that we will sell the securities before recovery of their amortized cost basis. The Company recognized $228,000 of other-than-temporary impairment losses in earnings on equity securities available-for-sale during the three months and nine months ended September 30, 2015 due to the length of time and extent an equity security was below cost.  


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




 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

Balance at beginning of year

$

-

$

 473

$

473 

$

 473

Securities sold

 

-

 

-

 

(473)

 

-

 

 

 

 

 

 

 

 

 

Balance at end of period

$

-

$

 473

$

$

 473








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:




18


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.


Contingent liabilities:


Contingent liabilities classified in Level 3 include; (i) a contingent liability assumed in connection with an acquisition related to an earn-out agreement whereby significant unobservable inputs are based on projected income; and (ii) a contingent liability recognized in connection with the deconsolidation of a former subsidiary and a newly formed joint venture transaction whereby significant unobservable inputs are based on projected cash flows.




19


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




 

 

September 30, 2016

 

 

Level 1

 

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

FINANCIAL ASSETS:

 

 

 

 

 

 

 

 

 

Fixed maturities available-for-sale:

 

 

 

 

 

 

 

 

 

   Corporate securities

$

-

 

$

201,617

$

-

$

201,617

   CMOs - residential

 

-

 

 

6,363

 

-

 

6,363

   US Government obligations

 

-

 

 

34,085

 

-

 

34,085

   Agency MBS - residential

 

-

 

 

26

 

-

 

26

   GSEs

 

-

 

 

10,180

 

-

 

10,180

   States and political subdivisions

 

-

 

 

200,909

 

2,070

 

202,979

   Foreign government obligations

 

-

 

 

5,653

 

-

 

5,653

   Redeemable preferred stocks

 

11,445

 

 

-

 

-

 

11,445

      Total fixed maturities

 

11,445

 

 

458,833

 

2,070

 

472,348

 

 

 

 

 

 

 

 

 

 

Equity securities available-for-sale:

 

 

 

 

 

 

 

 

 

   Common stocks

 

3,018

 

 

-

 

-

 

3,018

   Nonredeemable preferred stocks

 

3,667

 

 

-

 

-

 

3,667

      Total equity securities

 

6,685

 

 

-

 

-

 

6,685

 

 

 

 

 

 

 

 

 

 

Trading securities - equities

 

1,135

 

 

-

 

-

 

1,135

       Total trading securities

 

1,135

 

 

-

 

-

 

1,135

 

 

 

 

 

 

 

 

 

 

Total Financial Assets

$

19,265

 

$

458,833

$

2,070

$

480,168

 

 

 

 

 

 

 

 

 

 

FINANCIAL LIABILITIES:

 

 

 

 

 

 

 

 

 

Contingent liabilities

$

-

 

$

-

$

356

$

356

 

 

 

 

 

 

 

 

 

 

Total Financial Liabilities

$

-

 

$

-

$

356

$

356




20



 

 

December 31, 2015

 

 

Level 1

 

 

Level 2

 

Level 3

 

Total