UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________________________
FORM
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the quarterly period ended
[ ] 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
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (
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 [ ] | |
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 June 15, 2017 |
Common stock, $ |
INDEPENDENCE HOLDING COMPANY
INDEX
PART I – FINANCIAL INFORMATION | PAGE | ||||
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| Item 1. Financial Statements |
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| Condensed Consolidated Balance Sheets | 4 | |||
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| Condensed Consolidated Statements of Income | 5 | |||
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| Condensed Consolidated Statements of Comprehensive Income (Loss) | 6 | |||
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| Condensed Consolidated Statement of Changes in Equity | 7 | |||
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| Condensed Consolidated Statements of Cash Flows | 8 | |||
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| Notes to Condensed Consolidated Financial Statements | 9 | |||
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| Item 2. Management's Discussion and Analysis of Financial Condition |
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| and Results of Operations | 29 | |||
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| Item 3. Quantitative and Qualitative Disclosures about Market Risk | 39 | |||
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| Item 4. Controls and Procedures | 39 | |||
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PART II - OTHER INFORMATION |
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| Item 1. Legal Proceedings | 40 | |||
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| Item 1A. Risk Factors | 41 | |||
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| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 41 | |||
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| Item 3. Defaults Upon Senior Securities | 41 | |||
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| Item 4. Mine Safety Disclosures | 41 | |||
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| Item 5. Other Information | 41 | |||
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| Item 6. Exhibits | 42 | |||
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| Signatures | 44 | |||
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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 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.
3
PART I - FINANCIAL INFORMATION
Item 1.Financial Statements
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES | ||||||
CONDENSED CONSOLIDATED BALANCE SHEETS | ||||||
(In thousands, except share data) | ||||||
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| March 31, 2017 |
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| December 31, 2016 | |
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ASSETS: |
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Investments: |
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Short-term investments |
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Securities purchased under agreements to resell |
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Trading securities |
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Fixed maturities, available-for-sale |
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Equity securities, available-for-sale |
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Other investments |
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Total investments |
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Cash and cash equivalents |
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Due and unpaid premiums |
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Due from reinsurers |
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Premium and claim funds |
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Goodwill |
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Other assets |
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TOTAL ASSETS |
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LIABILITIES AND EQUITY: |
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LIABILITIES: |
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Policy benefits and claims |
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Future policy benefits |
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Funds on deposit |
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Unearned premiums |
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Other policyholders' funds |
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Due to reinsurers |
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Accounts payable, accruals and other liabilities |
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Liabilities attributable to discontinued operations |
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TOTAL LIABILITIES |
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Commitments and contingencies (Note 14) |
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Redeemable noncontrolling interest |
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STOCKHOLDERS’ EQUITY: |
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Preferred stock $ |
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Common stock $ |
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Paid-in capital |
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Accumulated other comprehensive loss |
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Treasury stock, at cost; |
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Retained earnings |
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TOTAL IHC STOCKHOLDERS’ EQUITY |
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NONCONTROLLING INTERESTS IN SUBSIDIARIES |
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TOTAL EQUITY |
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TOTAL LIABILITIES AND EQUITY |
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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) | |||||
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REVENUES: |
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Premiums earned | $ | $ | |||
Net investment income |
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Fee income |
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Other income |
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Net realized investment gains |
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EXPENSES: |
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Insurance benefits, claims and reserves |
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Selling, general and administrative expenses |
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Interest expense on debt |
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Income from continuing operations, before income taxes |
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Income taxes |
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Income from continuing operations, net of tax |
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Discontinued operations: |
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Income from discontinued operations, before income taxes |
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Income taxes on discontinued operations |
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Income from discontinued operations, net of tax |
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Net income |
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Less: Income from noncontrolling interests in subsidiaries |
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NET INCOME ATTRIBUTABLE TO IHC | $ | $ | |||
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Basic income per common share: |
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Income from continuing operations | $ | $ | |||
Income from discontinued operations |
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Basic income per common share | $ | $ | |||
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WEIGHTED AVERAGE SHARES OUTSTANDING |
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Diluted income per common share: |
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Income from continuing operations | $ | $ | |||
Income from discontinued operations |
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Diluted income per common share | $ | $ | |||
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WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING |
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See the accompanying Notes to Condensed Consolidated Financial Statements.
5
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES | ||||
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) | ||||
(In thousands) | ||||
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| Three Months Ended | ||
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Net income | $ | $ | ||
Other comprehensive income: |
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Available-for-sale securities: |
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Unrealized gains on available-for-sale securities, pre-tax |
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Tax expense on unrealized gains on available-for-sale securities |
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Unrealized gains on available-for-sale securities, net of taxes |
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Other comprehensive income, net of tax |
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COMPREHENSIVE INCOME, NET OF TAX |
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Comprehensive income, net of tax, attributable to noncontrolling interests: |
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Income from noncontrolling interests in subsidiaries |
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Other comprehensive income, net of tax, attributable to noncontrolling interests: |
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Unrealized gains on available-for-sale securities, net of tax |
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Other comprehensive income, net of tax, attributable to |
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noncontrolling interests |
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COMPREHENSIVE INCOME, NET OF TAX, |
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ATTRIBUTABLE TO NONCONTROLLING INTERESTS |
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COMPREHENSIVE INCOME, NET OF TAX, |
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ATTRIBUTABLE TO IHC | $ | $ |
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) | ||||||||||||||||
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| ACCUMULATED |
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| OTHER |
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| TOTAL IHC |
| CONTROLLING |
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| COMPREHENSIVE |
| STOCK, |
| RETAINED |
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| INTERESTS IN |
| TOTAL |
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| INCOME |
| AT COST |
| EARNINGS |
| EQUITY |
| SUBSIDIARIES |
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BALANCE AT |
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DECEMBER 31, 2016 | $ | $ | $ | ( | $ | ( | $ | $ | $ | $ | ||||||
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Net income |
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Other comprehensive |
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income, net of tax |
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Repurchases of common stock |
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Share-based compensation |
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expenses |
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BALANCE AT |
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MARCH 31, 2017 | $ | $ | $ | ( | $ | ( | $ | $ | $ | $ | ||||||
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See the accompanying Notes to Condensed Consolidated Financial Statements.
7
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES | |||||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) | |||||
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| Three Months Ended March 31, | |||
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CASH FLOWS PROVIDED BY (USED BY) OPERATING ACTIVITIES: |
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Net income | $ |
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Adjustments to reconcile net income to net change in cash from |
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operating activities: |
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Gain on disposal of discontinued operations, net of tax |
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Amortization of deferred acquisition costs |
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Net realized investment gains |
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Equity (income) loss from equity method investments |
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Depreciation and amortization |
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Deferred tax expense (benefit) |
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Other |
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Changes in assets and liabilities: |
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Net (purchases) sales of trading securities |
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Change in insurance liabilities |
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Change in amounts due from reinsurers |
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Change in premium and claim funds |
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Change in current income tax liability |
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Change in due and unpaid premiums |
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Other operating activities |
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Net change in cash from operating activities |
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CASH FLOWS PROVIDED BY (USED BY) INVESTING ACTIVITIES: |
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Net sales and maturities of short-term investments |
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Net (purchases) sales of securities under resale agreements |
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Sales of fixed maturities |
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Maturities and other repayments of fixed maturities |
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Purchases of fixed maturities |
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Proceeds on sales of subsidiaries, net of cash divested |
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Payments to acquire business, net of cash acquired |
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Other investing activities |
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Net change in cash from investing activities |
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CASH FLOWS PROVIDED BY (USED BY) FINANCING ACTIVITIES: |
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Repurchases of common stock |
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Withdrawals of investment-type insurance contracts |
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Repayments of debt |
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Dividends paid |
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Other financing activities |
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Net change in cash from financing activities |
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Net change in cash and cash equivalents |
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Cash and cash equivalents, beginning of year |
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Cash and cash equivalents, end of period | $ |
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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"), and Independence American Insurance Company (“Independence American”); and (ii) its marketing and administrative companies, including IHC Specialty Benefits Inc., IHC Carrier Solutions, Inc. and PetPartners, Inc. IHC also owns a significant equity interest in Ebix Health Exchange Holdings, LLC (“Ebix Health Exchange”), an administration exchange for health insurance. 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
(B) 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 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.
In the opinion of management, all adjustments (consisting only of normal recurring accruals) that are necessary for a fair presentation of the consolidated financial position and results of operations for the interim periods have been included. The condensed consolidated results of operations for the three months ended March 31, 2017 are not necessarily indicative of the results to be anticipated for the entire year.
(C) Reclassifications
Certain amounts in prior year’s consolidated financial statements and Notes thereto have been reclassified to conform to the 2017 presentation.
(D) Recent Accounting Pronouncements
Recently Adopted Accounting Standards
In October 2016, the Financial Accounting Standards Board (“FASB”) issued guidance that amends the consolidation analysis for a reporting entity that is the single decision maker of a variable interest entity. The amendments in this guidance require the decision maker’s evaluation of its interests held through related
9
parties that are under common control on a proportionate basis rather than in their entirety when determining whether it is the primary beneficiary of that variable interest entity. The adoption of this guidance did not have a material effect 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. New guidance related to the classifications in the statement of cash flows were applied on a prospective transition basis. The adoption of this guidance did not 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 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 May 2017, the FASB issued guidance to provide clarity and reduce both (i) diversity in practice; and (ii) cost and complexity when accounting for a change in the terms or conditions of a share-based payment award. The amendments in this guidance should be applied prospectively in annual periods beginning after December 15, 2017, including interim periods within those periods, with early adoption permitted. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.
In March 2017, the FASB issued guidance requiring premium amortization on callable debt securities to be amortized to the earliest call date to more closely align the amortization period with expectations incorporated in market pricing of the underlying securities. The amendments in this guidance should be applied using a modified retrospective approach for annual periods beginning after December 15, 2018, including interim periods within those periods. Additional disclosures are required in the period of adoption. Early adoption is permitted. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.
In February 2017, the FASB issued guidance to simplify the accounting for sales of nonfinancial assets by clarifying the definition of nonfinancial assets and adding guidance pertaining to partial sales of nonfinancial assets. The amendments in this guidance can be applied using either a retrospective approach or a modified retrospective approach in annual periods beginning after December 15, 2017, including interim periods within those periods. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.
In January 2017, the FASB issued guidance to simplify the test for goodwill impairment by eliminating Step 2 in the goodwill impairment test. Instead, under the amendments in this Update, an entity should perform its annual or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Additionally, an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The amendments in this guidance are effective for public business entities for annual, or any interim, goodwill impairment tests in fiscal years beginning after December 15, 2019. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.
In January 2017, the FASB issued guidance that clarifies the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. The amendments in this guidance should be applied prospectively in annual periods beginning after December 15, 2017, including interim periods within those periods, with early adoption permitted. The adoption of this guidance is not expected to
10
have a material effect on the Company’s consolidated financial statements.
In November 2016, the FASB issued guidance requiring entities to show the changes in the total cash, cash equivalents, restricted cash and restricted cash equivalent in the statement of cash flows. The amendments in this guidance should be applied retrospectively and is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.
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 guidance 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 the currently applied U.S. GAAP method of taking a permanent impairment of the security, 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 guidance 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 is evaluating the requirements and potential impact that the adoption of this guidance will have 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 guidance 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.
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, other than those that result in consolidation or are accounted for under the equity method, (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
11
requirements) should be applied prospectively to equity investments that exist as of the date of adoption of the guidance. 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 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 and technical corrections were 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. The Company anticipates that any impact will only relate to contracts with customers outside the scope of Accounting Standards Codification Topic 944, Financial Services - Insurance. Our administrative and other service contracts that will be subject to the amendments in this Update are recorded in the Fee Income line item of the Condensed Consolidated Statement of Income and represents approximately
Note 2. Income Per Common Share
Diluted income 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
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 | ||
|
| March 31 | ||
| 2017 |
| 2016 | |
|
|
| ||
Income from continuing operations, net of tax | $ | $ | ||
Less: Income from continuing operations attributable to |
|
|
|
|
noncontrolling interests |
| ( |
| ( |
|
|
|
|
|
Income from continuing operations attributable to IHC |
|
|
|
|
common shareholders | $ | $ | ||
|
|
|
|
|
Income from discontinued operations, net of tax | $ | $ | ||
Less: Income from discontinued operations attributable to |
|
|
|
|
noncontrolling interests |
|
| ( | |
|
|
|
|
|
Income from discontinued operations attributable to IHC |
|
|
|
|
common shareholders | $ | $ | ||
|
|
|
|
|
Net income attributable to IHC | $ | $ | ||
|
|
|
|
|
12
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 $
The following is a reconciliation of the major line items constituting the pretax profit of discontinued operations included in the Condensed Consolidated Statement of Income for the three months ended March 31, 2016 (in thousands):
| 2016 | |
Revenue | $ | |
Selling, general and administrative expenses |
| |
|
|
|
Pretax profit of discontinued operations |
| |
Gain on disposal of discontinued operations, pretax |
| |
|
|
|
Income from discontinued operations, before income taxes |
| |
Income taxes on discontinued operations |
| |
|
|
|
Income from discontinued operations | $ |
Liabilities attributable to discontinued operations at March 31, 2017 and December 31, 2016 consist of $
Total operating cash flows from discontinued operations for the three months ended March 31, 2016 amounted to $
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. On a consolidated basis, the Company recorded income taxes on discontinued operations of $
13
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):
| March 31, 2017 | |||||||
|
|
|
| GROSS |
| GROSS |
|
|
|
| AMORTIZED |
| UNREALIZED |
| UNREALIZED |
| FAIR |
| COST |
| GAINS |
| LOSSES |
| VALUE | |
|
|
|
| |||||
FIXED MATURITIES |
|
|
|
|
|
|
|
|
AVAILABLE-FOR-SALE: |
|
|
|
|
|
|
|
|
Corporate securities | $ | $ | $ | ( | $ | |||
CMOs - residential (1) |
|
|
| ( |
| |||
U.S. Government obligations |
|
|
| ( |
| |||
Agency MBS - residential (2) |
|
|
|
| ||||
GSEs (3) |
|
|
| ( |
| |||
States and political subdivisions |
|
|
| ( |
| |||
Foreign government obligations |
|
|
| ( |
| |||
Redeemable preferred stocks |
|
|
| ( |
| |||
|
|
|
|
|
|
|
|
|
Total fixed maturities | $ | $ | $ | ( | $ |
EQUITY SECURITIES |
|
|
|
| ||||
AVAILABLE-FOR-SALE: |
|
|
|
| ||||
Common stocks | $ | $ | $ | $ | ||||
Nonredeemable preferred stocks |
|
|
| ( |
| |||
|
|
|
|
|
|
|
|
|
Total equity securities | $ | $ | $ | ( | $ |
| December 31, 2016 | |||||||
|
|
|
| GROSS |
| GROSS |
|
|
|
| AMORTIZED |
| UNREALIZED |
| UNREALIZED |
| FAIR |
| COST |
| GAINS |
| LOSSES |
| VALUE | |
|
|
|
| |||||
FIXED MATURITIES |
|
|
|
|
|
|
|
|
AVAILABLE-FOR-SALE: |
|
|
|
|
|
|
|
|
Corporate securities | $ |
|
| ( |
| |||
CMOs - residential (1) |
|
|
| ( |
| |||
U.S. Government obligations |
|
|
| ( |
| |||
Agency MBS - residential (2) |
|
|
|
| ||||
GSEs (3) |
|
|
| ( |
| |||
States and political subdivisions |
|
|
| ( |
| |||
Foreign government obligations |
|
|
| ( |
| |||
Redeemable preferred stocks |
|
|
| ( |
| |||
|
|
|
|
|
|
|
|
|
Total fixed maturities | $ |
|
| ( |
|
EQUITY SECURITIES |
|
|
|
| ||||
AVAILABLE-FOR-SALE: |
|
|
|
| ||||
Common stocks | $ |
|
|
| ||||
Nonredeemable preferred stocks |
|
|
| ( |
| |||
|
|
|
|
|
|
|
|
|
Total equity securities | $ |
|
| ( |
|
(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.
14
The amortized cost and fair value of fixed maturities available-for-sale at March 31, 2017, 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 |
| $ |
| $ | ||
Due after one year through five years |
|
|
|
| ||
Due after five years through ten years |
|
|
|
| ||
Due after ten years |
|
|
|
| ||
CMOs and MBSs |
|
|
|
| ||
|
|
|
|
|
|
|
|
| $ |
| $ |
The following tables summarize, for all available-for-sale securities in an unrealized loss position, the aggregate fair value and gross unrealized loss by length of time those securities that have continuously been in an unrealized loss position for the periods indicated (in thousands):
| March 31, 2017 | |||||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
|
| Less than 12 Months |
|
| 12 Months or Longer |
|
| Total | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair |
|
| Unrealized |
|
| Fair |
|
| Unrealized |
|
| Fair |
| Unrealized |
|
| Value |
|
| Losses |
|
| Value |
|
| Losses |
|
| Value |
| Losses |
|
|
|
|
|
|
|
|
|
| |||||||
Corporate securities | $ |
| $ |
| $ |
| $ |
| $ | $ | ||||||
CMOs - residential |
|
|
|
|
|
|
|
|
|
| ||||||
U.S. Government obligations |
|
|
|
|
|
|
|
|
|
| ||||||
GSEs |
|
|
|
|
|
|
|
|
|
| ||||||
States and political subdivisions |
|
|
|
|
|
|
|
|
|
| ||||||
Foreign government obligations |
|
|
|
|
|
|
|
|
|
| ||||||
Redeemable preferred stocks |
|
|
|
|
|
|
|
|
|
| ||||||
Total fixed maturities |
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonredeemable preferred stocks |
|
|
|
|
|
|
|
|
|
| ||||||
Total equity securities |
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities | $ |
| $ |
| $ |
| $ |
| $ | $ | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities in an |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unrealized loss position |
|
|
|
|
|
|
|
|
|
|
|
|
|
15
| December 31, 2016 | |||||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
|
| Less than 12 Months |
|
| 12 Months or Longer |
|
| Total | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair |
|
| Unrealized |
|
| Fair |
|
| Unrealized |
|
| Fair |
| Unrealized |
|
| Value |
|
| Losses |
|
| Value |
|
| Losses |
|
| Value |
| Losses |
|
|
|
|
|
|
|
|
|
| |||||||
Corporate securities | $ |
|
|
|
|
|
|
|
|
| ||||||
CMO’s - residential |
|
|
|
|
|
|
|
|
|
| ||||||
U.S. Government obligations |
|
|
|
|
|
|
|
|
|
| ||||||
GSEs |
|
|
|
|
|
|
|
|
|
| ||||||
States and political subdivisions |
|
|
|
|
|
|
|
|
|
| ||||||
Foreign government obligations |
|
|
|
|
|
|
|
|
|
| ||||||
Redeemable preferred stocks |
|
|
|
|
|
|
|
|
|
| ||||||
Total fixed maturities |
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonredeemable preferred stocks |
|
|
|
|
|
|
|
|
|
| ||||||
Total equity securities |
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities | $ |
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities in an |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unrealized loss position |
|
|
|
|
|
|
|
|
|
|
|
|
|
Substantially all of the unrealized losses on fixed maturities available-for-sale at March 31, 2017 and December 31, 2016 relate to investment grade securities and are attributable to changes in market interest rates. Because the Company does not intend to sell, nor is it more likely than not that the Company will have to sell such investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2017.
Net realized investment gains are as follows for periods indicated (in thousands):
|
| Three Months Ended | ||
|
| March 31, | ||
|
| 2017 |
| 2016 |
|
| |||
Available-for-sale securities: |
|
|
|
|
Fixed maturities | $ | $ | ||
Total sales of available-for-sale securities |
|
| ||
|
|
|
|
|
Trading securities |
|
| ||
Total realized gains |
|
| ||
|
|
|
|
|
Unrealized gains (losses) on trading securities: |
|
|
|
|
Change in unrealized gains (losses) on trading securities |
| ( |
| ( |
Total unrealized gains (losses) on trading securities |
| ( |
| ( |
|
|
|
|
|
Gains (losses) on other investments |
|
| ||
|
|
|
|
|
Net realized investment gains | $ | $ |
For the three months ended March 31, 2017 and 2016, proceeds from sales of available-for-sale securities were $
16
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 2016 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 the first three months of 2017 or 2016.
Credit losses were recognized on certain fixed maturities for which each security also had an impairment loss recognized in other comprehensive income (loss). The rollforward of these credit losses were as follows for the periods indicated (in thousands):
|
| Three Months Ended | ||
|
| March 31, | ||
|
| 2017 |
| 2016 |
|
| |||
Balance at beginning of year | $ | $ | ||
Securities sold |
|
| ( | |
|
|
|
|
|
Balance at end of period | $ | $ |
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 of municipal tax credit strips. The valuation method used to determine the fair value of municipal tax credit strips is the present value of the remaining future tax credits (at the original issue discount rate) as presented in the redemption tables in the Municipal Prospectuses. This original issue discount is accreted into income on a constant yield basis over the term of the debt instrument. Further we retain independent pricing vendors to assist in valuing certain instruments.
17
Trading securities:
Trading securities included in Level 1 are equity securities with quoted market prices.
The following tables present our financial assets measured at fair value on a recurring basis for the periods indicated (in thousands):
|
| March 31, 2017 | |||||||
|
| Level 1 |
|
| Level 2 |
| Level 3 |
| Total |
|
|
|
|
| |||||
FINANCIAL ASSETS: |
|
|
|
|
|
|
|
|
|
Fixed maturities available-for-sale: |
|
|
|
|
|
|
|
|
|
Corporate securities | $ |
| $ | $ | $ | ||||
CMOs - residential |
|
|
|
|
| ||||
US Government obligations |
|
|
|
|
| ||||
Agency MBS - residential |
|
|
|
|
| ||||
GSEs |
|
|
|
|
| ||||
States and political subdivisions |
|
|
|
|
| ||||
Foreign government obligations |
|
|
|
|
| ||||
Redeemable preferred stocks |
|
|
|
|
| ||||
Total fixed maturities |
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
Equity securities available-for-sale: |
|
|
|
|
|
|
|
|
|
Common stocks |
|
|
|
|
| ||||
Nonredeemable preferred stocks |
|
|
|
|
| ||||
Total equity securities |
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
Trading securities - equities |
|
|
|
|
| ||||
Total trading securities |
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
Total Financial Assets | $ |
| $ | $ | $ |
18
|
| December 31, 2016 | |||||||
|
| Level 1 |
|
| Level 2 |
| Level 3 |
| Total |
|
|
|
|
| |||||
FINANCIAL ASSETS: |
|
|
|
|
|
|
|
|
|
Fixed maturities available-for-sale: |
|
|
|
|
|
|
|
|
|
Corporate securities | $ |
| $ | $ | $ | ||||
CMOs - residential |
|
|
|
|
| ||||
US Government obligations |
|
|
|
|
| ||||
Agency MBS - residential |
|
|
|
|
| ||||
GSEs |
|
|
|
|
| ||||
States and political subdivisions |
|
|
|
|
| ||||
Foreign government obligations |
|
|
|
|
| ||||
Redeemable preferred stocks |
|
|
|
|
| ||||
Total fixed maturities |
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
Equity securities available-for-sale: |
|
|
|
|
|
|
|
|
|
Common stocks |
|
|
|
|
| ||||
Nonredeemable preferred stocks |
|
|
|
|
| ||||
Total equity securities |
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
Trading securities - equities |
|
|
|
|
| ||||
Total trading securities |
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
Total Financial Assets | $ |
| $ | $ | $ |
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 2017 or 2016.
The following table presents the changes in fair value of our Level 3 financial assets for the periods indicated (in thousands):
|
| Three Months Ended March 31, | |||||||||
|
| 2017 |
|
| 2016 | ||||||
|
| States and |
| Total |
|
|
|
| States and |
| Total |
|
| Political |
| Level 3 |
|
| CMOs |
| Political |
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| Subdivisions |
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Beginning balance | $ | $ |
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Increases (decreases) recognized in earnings: |
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Gains (losses) included in other |
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comprehensive income (loss): |
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Net unrealized gains (losses) |
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Repayments and amortization of |
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fixed maturities |
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Sales |
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Balance at end of period | $ | $ |
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During 2016, the Company had contingent liabilities classified in Level 3 of the fair value hierarchy. These liabilities were paid out by December 31, 2016; there were no comparable amounts in 2017. The following table presents the changes in fair value of our Level 3 financial liabilities for the periods indicated (in thousands):
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| Total |
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| Level 3 |
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Beginning balance |
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Gains (losses) included in earnings: |
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Balance at end of period |
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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):
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| March 31, 2017 |
| December 31, 2016 | ||||||||
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| Level 2 |
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| Level 2 |
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| Fair |
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| Carrying |
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| Value |
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FINANCIAL ASSETS: |
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Short-term investments | $ | $ | $ | $ | $ | $ | ||||||
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FINANCIAL LIABILITIES: |
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Funds on deposit | $ | $ | $ | $ | $ | $ |
The following methods and assumptions were used to estimate the fair value of the financial instruments that are not carried at fair value in the Condensed Consolidated Financial Statements:
Short-term Investments
Investments with original maturities of 91 days to one year are considered short-term investments and are carried at cost, which approximates fair value.
Funds on Deposit
The Company has two types of funds on deposit. The first type is credited with a current market interest rate, resulting in a fair value which approximates the carrying amount. The second type carries fixed interest rates which are higher than current market interest rates. The fair value of these deposits was estimated by discounting the payments using current market interest rates. The Company's universal life policies are also credited with current market interest rates, resulting in a fair value which approximates the carrying amount. Both types of funds on deposit are included in Level 2 of the fair value hierarchy.
20
Note 6. Variable Interest Entities
The Company has a minority interest in certain limited partnerships that we have determined to be Variable Interest Entities (“VIEs”). The aforementioned VIEs are not required to be consolidated in the Company’s condensed consolidated financial statements as we are not the primary beneficiary since we do not have the power to direct the activities that most significantly impact the VIEs’ economic performance.
The Company will periodically reassess whether we are the primary beneficiary in any of these investments. The reassessment process will consider whether we have acquired the power to direct the most significant activities of the VIE through changes in governing documents or other circumstances. Our maximum loss exposure is limited to our combined $
Note 7. Acquisition of PetPartners, Inc.
On March 24, 2017 (the "Acquisition Date"), the Company acquired
Upon the acquisition, the Company consolidated the assets and liabilities of PetPartners. The following table presents the identifiable assets acquired and liabilities assumed in the acquisition of PetPartners on the Acquisition Date based on their respective fair values (in thousands):
Cash |
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Intangible assets |
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Other assets |
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Total identifiable assets |
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Other liabilities |
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Deferred tax liability |
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Total liabilities |
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Net identifiable assets acquired |
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Redeemable noncontrolling interest |
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In connection with the acquisition, the Company recorded $
21
and deferred taxes are provisional pending receipt of the final valuations for those assets and liabilities. The Company expects to finalize the preliminary estimates of the fair value of the intangible assets and deferred taxes by the end of this year. Acquisition-related costs, primarily legal and consulting fees, were expensed and are included in selling, general and administrative expenses in the Condensed Consolidated Statement of Income.
For the period from the Acquisition Date to March 31, 2017, the Company’s Condensed Consolidated Statement of Income includes revenues and net income of $
Pro forma adjustments to present the Company’s consolidated revenues and net income as if the acquisition date was January 1, 2016 are not material.
Note 8. Goodwill and Other Intangible Assets
The carrying amount of goodwill was $
The Company has net other intangible assets of $
The gross carrying amounts of these other intangible assets are as follows for the periods indicated (in thousands):
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| March 31, 2017 |
| December 31, 2016 | ||||
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| Gross |
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Finite-lived Intangible Assets: |
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Agent and broker relationships | $ | $ | $ | $ | ||||
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Indefinite-lived Intangible Assets: |
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Insurance licenses |
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Total indefinite-lived |
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In connection with the acquisition of PetPartners in the first quarter of 2017 discussed in Note 7, the Company recorded $
Amortization expense was $
22
Note 9. Income Taxes
The provisions for income taxes shown in the Condensed Consolidated Statements of Income were computed based on the Company's actual results, which approximate the effective tax rate expected to be applicable for the balance of the current fiscal year in accordance with consolidated life/non-life group income tax regulations. Such regulations adopt a subgroup method in determining consolidated taxable income, whereby taxable income is determined separately for the life insurance company group and the non-life insurance company group. The differences between the Federal statutory income tax rate of
Note 10. Policy Benefits and Claims
Policy benefits and claims is the liability for unpaid loss and loss adjustment expenses. It is comprised of unpaid claims and estimated IBNR reserves. Summarized below are the changes in the total liability for policy benefits and claims for the periods indicated (in thousands).
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| Three Months Ended | |||
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| March 31, | |||
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| 2017 |
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| 2016 |
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Balance at beginning of year | $ |
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Less: reinsurance recoverable |
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Net balance at beginning of year |
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Amount incurred, related to: |
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Current year |
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Prior years |
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Total incurred |
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Amount paid, related to: |
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Total paid |
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Net balance at end of year |
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Plus: reinsurance recoverable |
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Balance at end of year | $ |
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Since unpaid loss and loss adjustment expenses are estimates, actual losses incurred may be more or less than the Company’s previously developed estimates and is referred to as either unfavorable or favorable development, respectively. The overall net favorable development of $