Edgar Filing: INDEPENDENCE HOLDING CO

INDEPENDENCE HOLDING COMPANY - Form 10-Q SEC filing

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

__________________________________________

FORM 10-Q

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

For the quarterly period ended March 31, 2017.

[ ] 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		581407235
(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 June 15, 2017
Common stock, $ 1.00 par value	16,377,756 Shares

INDEPENDENCE HOLDING COMPANY

INDEX

PART I – FINANCIAL INFORMATION				PAGE
					NO.

		Item 1. Financial Statements

			Condensed Consolidated Balance Sheets	4

			Condensed Consolidated Statements of Income	5

			Condensed Consolidated Statements of Comprehensive Income (Loss)	6

			Condensed Consolidated Statement of Changes in Equity	7

			Condensed Consolidated Statements of Cash Flows	8

			Notes to Condensed Consolidated Financial Statements	9

		Item 2. Management's Discussion and Analysis of Financial Condition
			and Results of Operations	29

		Item 3. Quantitative and Qualitative Disclosures about Market Risk		39

		Item 4. Controls and Procedures		39

PART II - OTHER INFORMATION

		Item 1. Legal Proceedings		40

		Item 1A. Risk Factors		41

		Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		41

		Item 3. Defaults Upon Senior Securities		41

		Item 4. Mine Safety Disclosures		41

		Item 5. Other Information		41

		Item 6. Exhibits		42

	Signatures			44

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

Forward-Looking Statements

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

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

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

PART I - FINANCIAL INFORMATION

Item 1.Financial Statements

INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

		March 31, 2017		December 31, 2016
		(Unaudited)
ASSETS:
Investments:
Short-term investments	$	`804`	$	`6,912`
Securities purchased under agreements to resell		`18,221`		`28,962`
Trading securities		`567`		`592`
Fixed maturities, available-for-sale		`415,712`		`449,487`
Equity securities, available-for-sale		`5,360`		`5,333`
Other investments		`23,060`		`23,534`
Total investments		`463,724`		`514,820`

Cash and cash equivalents		`51,160`		`22,010`
Due and unpaid premiums		`25,422`		`42,896`
Due from reinsurers		`409,806`		`440,285`
Premium and claim funds		`8,735`		`17,952`
Goodwill		`50,691`		`41,573`
Other assets		`55,728`		`54,928`

TOTAL ASSETS	$	`1,065,266`	$	`1,134,464`

LIABILITIES AND EQUITY:
LIABILITIES:
Policy benefits and claims	$	`182,292`	$	`219,113`
Future policy benefits		`219,105`		`219,450`
Funds on deposit		`146,723`		`145,749`
Unearned premiums		`10,663`		`9,786`
Other policyholders' funds		`9,781`		`9,769`
Due to reinsurers		`10,789`		`35,796`
Accounts payable, accruals and other liabilities		`51,420`		`55,477`
Liabilities attributable to discontinued operations		`38`		`68`

TOTAL LIABILITIES		`630,811`		`695,208`

Commitments and contingencies (Note 14)
Redeemable noncontrolling interest		`2,008`		`-`

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;
18,620,508 shares issued; and 16,377,756 and
17,102,525 shares outstanding		`18,620`		`18,620`
Paid-in capital		`126,534`		`126,468`
Accumulated other comprehensive loss		`(4,443)`		`(6,964)`
Treasury stock, at cost; 2,242,752 and 1,517,983 shares		`(31,885)`		`(17,483)`
Retained earnings		`320,854`		`315,918`

TOTAL IHC STOCKHOLDERS’ EQUITY		`429,680`		`436,559`
NONCONTROLLING INTERESTS IN SUBSIDIARIES		`2,767`		`2,697`

TOTAL EQUITY		`432,447`		`439,256`

TOTAL LIABILITIES AND EQUITY	$	`1,065,266`	$	`1,134,464`

See the accompanying Notes to Condensed Consolidated Financial Statements.

INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share data)

		Three Months Ended
		March 31,
		2017		2016
REVENUES:
Premiums earned	$	`62,941`	$	`62,562`
Net investment income		`3,911`		`4,436`
Fee income		`3,225`		`5,079`
Other income		`1,591`		`3,258`
Net realized investment gains		`172`		`560`

		`71,840`		`75,895`
EXPENSES:
Insurance benefits, claims and reserves		`32,211`		`30,743`
Selling, general and administrative expenses		`32,082`		`35,227`
Interest expense on debt		`-`		`453`

		`64,293`		`66,423`

Income from continuing operations, before income taxes		`7,547`		`9,472`
Income taxes		`2,538`		`3,576`

Income from continuing operations, net of tax		`5,009`		`5,896`

Discontinued operations:
Income from discontinued operations, before income taxes		`-`		`117,636`
Income taxes on discontinued operations		`-`		`7,866`
Income from discontinued operations, net of tax		`-`		`109,770`

Net income		`5,009`		`115,666`
Less: Income from noncontrolling interests in subsidiaries		`(73)`		`(9,656)`

NET INCOME ATTRIBUTABLE TO IHC	$	`4,936`	$	`106,010`

Basic income per common share:
Income from continuing operations	$	`0.30`	$	`0.34`
Income from discontinued operations		`-`		`5.81`
Basic income per common share	$	`0.30`	$	`6.15`

WEIGHTED AVERAGE SHARES OUTSTANDING		`16,701`		`17,243`

Diluted income per common share:
Income from continuing operations	$	`0.29`	$	`0.33`
Income from discontinued operations		`-`		`5.75`
Diluted income per common share	$	`0.29`	$	`6.08`

WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING		`16,978`		`17,449`

See the accompanying Notes to Condensed Consolidated Financial Statements.

INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In thousands)

		Three Months Ended
		March 31,
		2017		2016

Net income	$	`5,009`	$	`115,666`
Other comprehensive income:
Available-for-sale securities:
Unrealized gains on available-for-sale securities, pre-tax		`3,981`		`4,703`
Tax expense on unrealized gains on available-for-sale securities		`1,460`		`1,685`
Unrealized gains on available-for-sale securities, net of taxes		`2,521`		`3,018`

Other comprehensive income, net of tax		`2,521`		`3,018`

COMPREHENSIVE INCOME, NET OF TAX		`7,530`		`118,684`

Comprehensive income, net of tax, attributable to noncontrolling interests:
Income from noncontrolling interests in subsidiaries		`(73)`		`(9,656)`
Other comprehensive income, net of tax, attributable to noncontrolling interests:
Unrealized gains on available-for-sale securities, net of tax		`-`		`(57)`
Other comprehensive income, net of tax, attributable to
noncontrolling interests		`-`		`(57)`

COMPREHENSIVE INCOME, NET OF TAX,
ATTRIBUTABLE TO NONCONTROLLING INTERESTS		`(73)`		`(9,713)`

COMPREHENSIVE INCOME, NET OF TAX,
ATTRIBUTABLE TO IHC	$	`7,457`	$	`108,971`

See the accompanying Notes to Condensed Consolidated Financial Statements.

INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Unaudited) (In thousands)

ACCUMULATED

NON-

OTHER

TREASURY

TOTAL IHC

CONTROLLING

COMMON

PAID-IN

COMPREHENSIVE

STOCK,

RETAINED

STOCKHOLDERS'

INTERESTS IN

TOTAL

STOCK

CAPITAL

INCOME

AT COST

EARNINGS

EQUITY

SUBSIDIARIES

EQUITY

BALANCE AT

DECEMBER 31, 2016

18,620

126,468

(6,964)

(17,483)

315,918

436,559

2,697

439,256

Net income

4,936

70

5,006

Other comprehensive

income, net of tax

2,521

-

2,521

Repurchases of common stock

(14,402)

-

(14,402)

Share-based compensation

expenses

66

-

66

BALANCE AT

MARCH 31, 2017

18,620

126,534

(4,443)

(31,885)

320,854

429,680

2,767

432,447

See the accompanying Notes to Condensed Consolidated Financial Statements.

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

		Three Months Ended March 31,
		2017	2016
CASH FLOWS PROVIDED BY (USED BY) OPERATING ACTIVITIES:
Net income	$	`5,009`	`115,666`
Adjustments to reconcile net income to net change in cash from
operating activities:
Gain on disposal of discontinued operations, net of tax		`-`	`(109,304)`
Amortization of deferred acquisition costs		`91`	`86`
Net realized investment gains		`(172)`	`(560)`
Equity (income) loss from equity method investments		`(201)`	`30`
Depreciation and amortization		`299`	`472`
Deferred tax expense (benefit)		`889`	`(901)`
Other		`1,285`	`3,105`
Changes in assets and liabilities:
Net (purchases) sales of trading securities		`-`	`3,180`
Change in insurance liabilities		`(59,880)`	`(31,725)`
Change in amounts due from reinsurers		`30,479`	`20,985`
Change in premium and claim funds		`17,474`	`(19,562)`
Change in current income tax liability		`1,087`	`(1,428)`
Change in due and unpaid premiums		`9,217`	`4,430`
Other operating activities		`(5,666)`	`(6,057)`

Net change in cash from operating activities		`(89)`	`(21,583)`

CASH FLOWS PROVIDED BY (USED BY) INVESTING ACTIVITIES:
Net sales and maturities of short-term investments		`6,099`	`-`
Net (purchases) sales of securities under resale agreements		`10,741`	`7,089`
Sales of fixed maturities		`78,313`	`32,447`
Maturities and other repayments of fixed maturities		`4,132`	`10,342`
Purchases of fixed maturities		`(41,741)`	`(30,723)`
Proceeds on sales of subsidiaries, net of cash divested		`-`	`134,625`
Payments to acquire business, net of cash acquired		`(12,287)`	`-`
Other investing activities		`(157)`	`(1,107)`

Net change in cash from investing activities		`45,100`	`152,673`

CASH FLOWS PROVIDED BY (USED BY) FINANCING ACTIVITIES:
Repurchases of common stock		`(14,402)`	`(821)`
Withdrawals of investment-type insurance contracts		`(433)`	`(500)`
Repayments of debt		`-`	`(939)`
Dividends paid		`(1,026)`	`(779)`
Other financing activities		`-`	`145`

Net change in cash from financing activities		`(15,861)`	`(2,894)`

Net change in cash and cash equivalents		`29,150`	`128,196`
Cash and cash equivalents, beginning of year		`22,010`	`17,500`

Cash and cash equivalents, end of period	$	`51,160`	`145,696`

See the accompanying Notes to Condensed Consolidated Financial Statements.

INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1. Organization, Consolidation, Basis of Presentation and Accounting Policies

(A) Business and Organization

Independence Holding Company, a Delaware corporation (“IHC”), is a holding company principally engaged in the life and health insurance business through: (i) its insurance companies, Standard Security Life Insurance Company of New York ("Standard Security Life"), Madison National Life Insurance Company, Inc. ("Madison National Life"), 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 56% of IHC's outstanding common stock at March 31, 2017.

(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

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

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

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 4% of our consolidated revenues for the three months ended March 31, 2017. Management is still in the process of evaluating the impact that the adoption of this guidance will have on the Company’s consolidated financial statements and the method of adoption that we will ultimately choose.

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 277,000 and 206,000 shares for the three months ended March 31, 2017 and 2016.

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	$	`5,009`	$	`5,896`
Less: Income from continuing operations attributable to
noncontrolling interests		`(73)`		`(106)`

Income from continuing operations attributable to IHC
common shareholders	$	`4,936`	$	`5,790`

Income from discontinued operations, net of tax	$	`-`	$	`109,770`
Less: Income from discontinued operations attributable to
noncontrolling interests		`-`		`(9,550)`

Income from discontinued operations attributable to IHC
common shareholders	$	`-`	$	`100,220`

Net income attributable to IHC	$	`4,936`	$	`106,010`

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. In the three months ended March 31, 2016, the Company recorded a gain of $99,793,000, 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 represented a strategic shift that has had a major effect on the Company’s operations and financial results. The disposal transaction qualified for reporting as a discontinued operation 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 has been no further involvement with the discontinued operation.

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	$	`6,406`
Selling, general and administrative expenses		`5,689`

Pretax profit of discontinued operations		`717`
Gain on disposal of discontinued operations, pretax		`116,919`

Income from discontinued operations, before income taxes		`117,636`
Income taxes on discontinued operations		`7,866`

Income from discontinued operations	$	`109,770`

Liabilities attributable to discontinued operations at March 31, 2017 and December 31, 2016 consist of $38,000 and $68,000, respectively, of accounts payable and accrued liabilities.

Total operating cash flows from discontinued operations for the three months ended March 31, 2016 amounted to $339,000. The Company elected to classify the proceeds received from the sale of discontinued operations in the investing activities section of Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2016.

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 $7,866,000 for the three months ended March 31, 2016, consisting of $5,799,000 of state taxes and $2,067,000 of Federal taxes, net of a $38,565,000 decrease in AMIC’s valuation allowance.

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	$	`162,187`	$	`974`	$	`(3,970)`	$	`159,191`
CMOs - residential (1)		`7,377`		`-`		`(142)`		`7,235`
U.S. Government obligations		`37,632`		`117`		`(382)`		`37,367`
Agency MBS - residential (2)		`20`		`-`		`-`		`20`
GSEs (3)		`10,229`		`1`		`(233)`		`9,997`
States and political subdivisions		`190,883`		`764`		`(4,078)`		`187,569`
Foreign government obligations		`4,372`		`17`		`(107)`		`4,282`
Redeemable preferred stocks		`10,006`		`125`		`(80)`		`10,051`

Total fixed maturities	$	`422,706`	$	`1,998`	$	`(8,992)`	$	`415,712`

EQUITY SECURITIES
AVAILABLE-FOR-SALE:
Common stocks	$	`1,612`	$	`154`	$	`-`	$	`1,766`
Nonredeemable preferred stocks		`3,588`		`49`		`(43)`		`3,594`

Total equity securities	$	`5,200`	$	`203`	$	`(43)`	$	`5,360`

		December 31, 2016
			GROSS	GROSS
		AMORTIZED	UNREALIZED	UNREALIZED	FAIR
		COST	GAINS	LOSSES	VALUE

FIXED MATURITIES
AVAILABLE-FOR-SALE:
Corporate securities	$	`192,976`	`209`	`(5,490)`	`187,695`
CMOs - residential (1)		`6,021`	`8`	`(116)`	`5,913`
U.S. Government obligations		`43,417`	`133`	`(441)`	`43,109`
Agency MBS - residential (2)		`22`	`1`	`-`	`23`
GSEs (3)		`10,301`	`1`	`(422)`	`9,880`
States and political subdivisions		`191,146`	`780`	`(5,115)`	`186,811`
Foreign government obligations		`5,098`	`13`	`(157)`	`4,954`
Redeemable preferred stocks		`11,454`	`96`	`(448)`	`11,102`

Total fixed maturities	$	`460,435`	`1,241`	`(12,189)`	`449,487`

EQUITY SECURITIES
AVAILABLE-FOR-SALE:
Common stocks	$	`1,612`	`178`	`-`	`1,790`
Nonredeemable preferred stocks		`3,588`	`30`	`(75)`	`3,543`

Total equity securities	$	`5,200`	`208`	`(75)`	`5,333`

(1) Collateralized mortgage obligations (“CMOs”).

(2) Mortgage-backed securities (“MBS”).

(3) Government-sponsored enterprises (“GSEs”) are private enterprises established and chartered by the Federal Government or its various insurance and lease programs which carry the full faith and credit obligation of the U.S. Government.

The amortized cost and fair value of fixed maturities available-for-sale at March 31, 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	$	8,303	$	8,319
Due after one year through five years		125,951		124,869
Due after five years through ten years		129,017		126,441
Due after ten years		141,809		138,830
CMOs and MBSs		17,626		17,253

	$	422,706	$	415,712

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	$	110,148	$	`2,557`	$	14,565	$	`1,413`	$	124,713	$	`3,970`
CMOs - residential		7,138		`142`		-		`-`		7,138		`142`
U.S. Government obligations		24,076		`382`		-		`-`		24,076		`382`
GSEs		-		`-`		9,980		`233`		9,980		`233`
States and political subdivisions		119,213		`3,194`		29,118		`884`		148,331		`4,078`
Foreign government obligations		3,067		`107`		-		`-`		3,067		`107`
Redeemable preferred stocks		-		`-`		3,683		`80`		3,683		`80`
Total fixed maturities		263,642		`6,382`		57,346		`2,610`		320,988		`8,992`

Nonredeemable preferred stocks		833		`18`		1,301		`25`		2,134		`43`
Total equity securities		833		`18`		1,301		`25`		2,134		`43`

Total temporarily impaired
securities	$	264,475	$	`6,400`	$	58,647	$	`2,635`	$	323,122	$	`9,035`

Number of securities in an
unrealized loss position		109				25				134

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

145,205

3,818

19,841

1,672

165,046

5,490

CMO’s - residential

5,038

116

-

5,038

116

U.S. Government obligations

28,406

441

-

28,406

441

GSEs

3,640

166

6,220

256

9,860

422

States and political subdivisions

144,357

4,561

18,132

554

162,489

5,115

Foreign government obligations

3,738

157

-

3,738

157

Redeemable preferred stocks

-

3,315

448

3,315

448

Total fixed maturities

330,384

9,259

47,508

2,930

377,892

12,189

Nonredeemable preferred stocks

826

25

1,277

50

2,103

75

Total equity securities

826

25

1,277

50

2,103

75

Total temporarily impaired

securities

331,210

9,284

48,785

2,980

379,995

12,264

Number of securities in an

unrealized loss position

156

179

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	$	`197`	$	`628`
Total sales of available-for-sale securities		`197`		`628`

Trading securities		`-`		`-`
Total realized gains		`197`		`628`

Unrealized gains (losses) on trading securities:
Change in unrealized gains (losses) on trading securities		`(25)`		`(70)`
Total unrealized gains (losses) on trading securities		`(25)`		`(70)`

Gains (losses) on other investments		`-`		`2`

Net realized investment gains	$	`172`	$	`560`

For the three months ended March 31, 2017 and 2016, proceeds from sales of available-for-sale securities were $77,456,000 and $31,494,000, respectively, and the Company realized gross gains of $956,000 and $615,000, respectively, and gross losses of $724,000 and $17,000, respectively, on those sales.

Other-Than-Temporary Impairment Evaluations

We recognize other-than-temporary impairment losses in earnings in the period that we determine: 1) we intend to sell the security; 2) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis; or 3) the security has a credit loss. Any non-credit portion of the other-than-temporary impairment loss is recognized in other comprehensive income (loss). See Note 1G(iv) to the Consolidated Financial Statements in the 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	$	`-`	$	`473`
Securities sold		`-`		`(473)`

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.

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	$	`-`	$	`159,191`	$	`-`	$	`159,191`
CMOs - residential		`-`		`7,235`		`-`		`7,235`
US Government obligations		`-`		`37,367`		`-`		`37,367`
Agency MBS - residential		`-`		`20`		`-`		`20`
GSEs		`-`		`9,997`		`-`		`9,997`
States and political subdivisions		`-`		`185,574`		`1,995`		`187,569`
Foreign government obligations		`-`		`4,282`		`-`		`4,282`
Redeemable preferred stocks		`10,051`		`-`		`-`		`10,051`
Total fixed maturities		`10,051`		`403,666`		`1,995`		`415,712`

Equity securities available-for-sale:
Common stocks		`1,766`		`-`		`-`		`1,766`
Nonredeemable preferred stocks		`3,594`		`-`		`-`		`3,594`
Total equity securities		`5,360`		`-`		`-`		`5,360`

Trading securities - equities		`567`		`-`		`-`		`567`
Total trading securities		`567`		`-`		`-`		`567`

Total Financial Assets	$	`15,978`	$	`403,666`	$	`1,995`	$	`421,639`

		December 31, 2016
		Level 1		Level 2		Level 3		Total

FINANCIAL ASSETS:
Fixed maturities available-for-sale:
Corporate securities	$	-	$	187,695	$	-	$	187,695
CMOs - residential		-		5,913		-		5,913
US Government obligations		-		43,109		-		43,109
Agency MBS - residential		-		23		-		23
GSEs		-		9,880		-		9,880
States and political subdivisions		-		184,778		2,033		186,811
Foreign government obligations		-		4,954		-		4,954
Redeemable preferred stocks		11,102		-		-		11,102
Total fixed maturities		11,102		436,352		2,033		449,487

Equity securities available-for-sale:
Common stocks		1,790		-		-		1,790
Nonredeemable preferred stocks		3,543		-		-		3,543
Total equity securities		5,333		-		-		5,333

Trading securities - equities		592		-		-		592
Total trading securities		592		-		-		592

Total Financial Assets	$	17,027	$	436,352	$	2,033	$	455,412

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		Level 3
		Subdivisions		Assets		Commercial		Subdivisions		Assets

Beginning balance	$	`2,033`	$	`2,033`	$	`1,195`	$	`2,179`	$	`3,374`

Increases (decreases) recognized in earnings:
Net realized investment gains		`-`		`-`		`141`		`-`		`141`

Gains (losses) included in other
comprehensive income (loss):
Net unrealized gains (losses)		`(9)`		`(9)`		`(296)`		`(11)`		`(307)`

Repayments and amortization of
fixed maturities		`(29)`		`(29)`		`(74)`		`(25)`		`(99)`
Sales		`-`		`-`		`(966)`		`-`		`(966)`

Balance at end of period	$	`1,995`	$	`1,995`	$	`-`	$	`2,143`	$	`2,143`

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):

		Three Months Ended
		March 31, 2016
				Total
		Contingent		Level 3
		Liabilities		Liabilities

Beginning balance	$	`1,650`	$	`1,650`

Gains (losses) included in earnings:
Net investment income		`(633)`		`(633)`
Other income		`538`		`538`

Balance at end of period	$	`1,555`	$	`1,555`

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):

March 31, 2017

December 31, 2016

Level 1

Level 2

Level 1

Level 2

Fair

Carrying

Fair

Carrying

Value

FINANCIAL ASSETS:

Short-term investments

804

-

804

6,912

-

6,912

FINANCIAL LIABILITIES:

Funds on deposit

-

147,049

146,723

-

146,098

145,749

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.

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 $9,255,000 carrying value in these equity investments that are included in other investments in the Condensed Consolidated Balance Sheet as of March 31, 2017.

Note 7. Acquisition of PetPartners, Inc.

On March 24, 2017 (the "Acquisition Date"), the Company acquired 85% of the stock of PetPartners, Inc. (“PetPartners”), a pet insurance marketing and administration company, for a purchase price of $12,677,000, including and subject to certain post-closing and working capital adjustments. The Company acquired PetPartners for the purpose of owning additional distribution and administration sources for its pet insurance. Any time after March 24, 2019, shares owned by the noncontrolling interest are puttable to the Company at fair value and are therefore presented on the balance sheet as redeemable noncontrolling interest.

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	$	`390`
Intangible assets		`5,880`
Other assets		`567`

Total identifiable assets		`6,837`

Other liabilities		`174`
Deferred tax liability		`1,099`

Total liabilities		`1,273`

Net identifiable assets acquired	$	`5,564`

Redeemable noncontrolling interest	$	`2,005`

In connection with the acquisition, the Company recorded $9,118,000 of goodwill and $5,880,000 of intangible assets (see Note 8). Goodwill reflects the synergies between PetPartners and Independence American as PetPartners will provide Independence American with increased distribution sources for its pet insurance business through its marketing relationship with the American Kennel Club. Goodwill was calculated as the excess of the sum of: (i) the acquisition date fair value of total cash consideration transferred of $12,677,000; and (ii) the fair value of the redeemable noncontrolling interest in PetPartners of $2,005,000 on the acquisition date; over (iii) the net identifiable assets of $5,564,000 that were acquired. The enterprise value of PetPartners was determined by an independent appraisal using a discounted cash flow model based upon the projected future earnings of PetPartners including a control premium. The fair value of the redeemable noncontrolling interest was determined based upon their percentage of the PetPartners enterprise value discounted for a lack of control. The fair value of the acquired identifiable intangible assets

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 $114,000 and $15,000, respectively, from PetPartners.

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 $50,691,000 and $41,573,000 at March 31, 2017 and December 31, 2016, respectively.

The Company has net other intangible assets of $15,848,000 and $10,122,000 at March 31, 2017 and December 31, 2016, respectively, which are included in other assets in the Condensed Consolidated Balance Sheets. These intangible assets consist of: (i) finite-lived intangible assets, principally the fair value of acquired agent and broker relationships, which are subject to amortization; and (ii) indefinite-lived intangible assets which consist of the estimated fair value of insurance licenses that are not subject to amortization.

The gross carrying amounts of these other intangible assets are as follows for the periods indicated (in thousands):

		March 31, 2017				December 31, 2016
		Gross				Gross
		Carrying		Accumulated		Carrying		Accumulated
		Amount		Amortization		Amount		Amortization

Finite-lived Intangible Assets:
Agent and broker relationships	$	`18,153`	$	`12,012`	$	`13,052`	$	`11,882`
Domain		`1,000`		`50`		`1,000`		`25`
Software systems		`780`		`-`		`-`		`-`
Total finite-lived		`19,933`	$	`12,062`	$	`14,052`	$	`11,907`

		March 31,		December 31,
		2017		2016
Indefinite-lived Intangible Assets:
Insurance licenses	$	`7,977`	$	`7,977`
Total indefinite-lived	$	`7,977`	$	`7,977`

In connection with the acquisition of PetPartners in the first quarter of 2017 discussed in Note 7, the Company recorded $9,118,000 of goodwill and $5,880,000 of intangible assets associated with the Specialty Health segment. None of the goodwill is deductible for income tax purposes. The intangible assets primarily represent the fair value of customer relationships and are being amortized over a weighted average period of 9.6 years.

Amortization expense was $154,000 and $340,000 for the three months ended March 31, 2017 and 2016, respectively.

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 35% and the Company’s effective income tax rate resulted principally from the dividends received deduction and tax exempt interest income, state and local income taxes, and health insurer specific tax provisions.

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).

		Three Months Ended
		March 31,
		2017		2016

Balance at beginning of year	$	`219,113`	$	`245,443`
Less: reinsurance recoverable		`88,853`		`65,362`
Net balance at beginning of year		`130,260`		`180,081`

Amount incurred, related to:
Current year		`38,882`		`36,425`
Prior years		`(5,756)`		`(6,231)`

Total incurred		`33,126`		`30,194`

Amount paid, related to:
Current year		`7,258`		`7,238`
Prior years		`30,081`		`64,105`

Total paid		`37,339`		`71,343`

Net balance at end of year		`126,047`		`138,932`
Plus: reinsurance recoverable		`56,245`		`108,968`
Balance at end of year	$	`182,292`	$	`247,900`

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 $