INDEPENDENCE HOLDING COMPANY - Form 10-Q SEC filing
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

__________________________________________

 

FORM 10-Q

 

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

For the quarterly period ended June 30, 2018.

 

[   ]   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 August 3, 2018

Common stock, $ 1.00  par value

14,788,559 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

26

 

 

 

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

40

 

 

 

 

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

40

 

 

 

 

Item 3.   Defaults Upon Senior Securities

41

 

 

 

 

Item 4.    Mine Safety Disclosures

41

 

 

 

 

Item 5.    Other Information

41

 

 

 

Item 6.    Exhibits

41

 

 

 

Signatures

43

 

 

 

 

 

 

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)

 

 

 

 

 

June 30, 2018

 

 

December 31, 2017

 

 

 

(Unaudited)

 

 

 

ASSETS:

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

Short-term investments

 

$

50  

 

$

50 

Securities purchased under agreements to resell

 

 

8,642  

 

 

10,269 

Fixed maturities, available-for-sale

 

 

440,077  

 

 

441,912 

Equity securities

 

 

5,262  

 

 

6,120 

Other investments

 

 

17,729  

 

 

18,547 

Total investments

 

 

471,760  

 

 

476,898 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

21,252  

 

 

26,465 

Due and unpaid premiums

 

 

25,615  

 

 

21,950 

Due from reinsurers

 

 

374,316  

 

 

380,593 

Goodwill

 

 

50,697  

 

 

50,697 

Other assets

 

 

86,251  

 

 

84,020 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

1,029,891  

 

$

1,040,623 

 

 

 

 

 

 

 

LIABILITIES AND  EQUITY:

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

Policy benefits and claims

 

$

159,678  

 

$

168,683  

Future policy benefits

 

 

210,592  

 

 

214,766  

Funds on deposit

 

 

142,564  

 

 

143,537  

Unearned premiums

 

 

12,579  

 

 

6,666  

Other policyholders' funds

 

 

10,959  

 

 

10,402  

Due to reinsurers

 

 

3,812  

 

 

3,808  

Accounts payable, accruals and other liabilities

 

 

51,002  

 

 

56,453  

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

 

591,186  

 

 

604,315  

 

 

 

 

 

 

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

Redeemable noncontrolling interest

 

 

2,209  

 

 

2,065  

 

 

 

 

 

 

 

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;

 

 

 

 

 

 

18,625,458 and 18,625,458 shares issued; and 14,794,730 and

 

 

 

 

 

 

14,890,285 shares outstanding

 

 

18,625  

 

 

18,625  

Paid-in capital

 

 

125,018  

 

 

124,538  

Accumulated other comprehensive loss

 

 

(11,237) 

 

 

(4,598) 

Treasury stock, at cost; 3,830,728 and 3,735,173 shares

 

 

(66,440) 

 

 

(63,404) 

Retained earnings

 

 

367,913  

 

 

356,383  

 

 

 

 

 

 

 

TOTAL IHC STOCKHOLDERS’ EQUITY

 

 

433,879  

 

 

431,544  

NONREDEEMABLE NONCONTROLLING INTERESTS

 

 

2,617  

 

 

2,699  

 

 

 

 

 

 

 

TOTAL EQUITY

 

 

436,496  

 

 

434,243  

 

 

 

 

 

 

 

TOTAL LIABILITIES AND EQUITY

 

$

1,029,891  

 

$

1,040,623  

 

 

 

See the accompanying Notes to Condensed Consolidated Financial Statements.


4


INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(In thousands, except per share data)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2018

 

2017

 

2018

 

2017

REVENUES:

 

 

 

 

 

 

 

 

Premiums earned

$

77,334  

$

71,927  

$

156,826  

$

134,868  

Net investment income

 

3,417  

 

4,100  

 

6,603  

 

8,011  

Fee income

 

4,585  

 

5,697  

 

9,796  

 

8,922  

Other income (loss)

 

(25) 

 

413  

 

319  

 

2,004  

Net investment gains (losses)

 

(423) 

 

100  

 

(352) 

 

272  

 

 

 

 

 

 

 

 

 

 

 

84,888  

 

82,237  

 

173,192  

 

154,077  

EXPENSES:

 

 

 

 

 

 

 

 

Insurance benefits, claims and reserves

 

33,701  

 

37,324  

 

69,608  

 

69,535  

Selling, general and administrative expenses

 

41,693  

 

40,985  

 

85,036  

 

73,067  

 

 

 

 

 

 

 

 

 

 

 

75,394  

 

78,309  

 

154,644  

 

142,602  

 

 

 

 

 

 

 

 

 

Income before income taxes

 

9,494  

 

3,928  

 

18,548  

 

11,475  

Income taxes (benefits)

 

2,652  

 

(10,379) 

 

4,658  

 

(7,841) 

 

 

 

 

 

 

 

 

 

Net income

 

6,842  

 

14,307  

 

13,890  

 

19,316  

(Income) loss from nonredeemable noncontrolling interests

 

(24) 

 

26  

 

(40) 

 

(36) 

(Income) from redeemable noncontrolling interests

 

(61) 

 

(2) 

 

(132) 

 

(13) 

 

 

 

 

 

 

 

 

 

NET INCOME ATTRIBUTABLE TO IHC

$

6,757  

$

14,331  

$

13,718  

$

19,267  

 

 

 

 

 

 

 

 

 

Basic income per common share

$

0.46  

$

0.88  

$

0.93 

$

1.17  

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING

 

14,799  

 

16,349  

 

14,815 

 

16,524  

 

 

 

 

 

 

 

 

 

Diluted income per common share

$

0.45  

$

0.86  

$

0.91 

$

1.15  

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING

 

15,128  

 

16,628  

 

15,101 

 

16,802  

 

 

 

 

 

 

 

 

 

See the accompanying Notes to Condensed Consolidated Financial Statements.


5


INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(In thousands)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

Net income

$

6,842  

$

14,307 

$

13,890  

$

19,316  

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

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

 

(2,855) 

 

2,988 

 

(7,983) 

 

6,969  

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

 

(603) 

 

1,049 

 

(1,694) 

 

2,509  

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

 

(2,252) 

 

1,939 

 

(6,289) 

 

4,460  

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax

 

(2,252) 

 

1,939 

 

(6,289) 

 

4,460  

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME, NET OF TAX

 

4,590  

 

16,246 

 

7,601  

 

23,776  

 

 

 

 

 

 

 

 

 

Comprehensive (income) loss, net of tax, attributable to

 

 

 

 

 

 

 

 

noncontrolling interests:

 

 

 

 

 

 

 

 

(Income) loss from noncontrolling interests in subsidiaries

 

(85) 

 

24 

 

(172) 

 

(49) 

Other comprehensive income, net of tax, attributable to

 

 

 

 

 

 

 

 

noncontrolling interests

 

 

 

- 

 

 

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE (INCOME) LOSS, NET OF TAX,

 

 

 

 

 

 

 

 

   ATTRIBUTABLE TO NONCONTROLLING INTERESTS

 

(85) 

 

24 

 

(172) 

 

(49) 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME, NET OF TAX,

 

 

 

 

 

 

 

 

   ATTRIBUTABLE TO IHC

$

4,505  

$

16,270 

$

7,429  

$

23,727  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See the accompanying Notes to Condensed Consolidated Financial Statements.


6


 

 

INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ACCUMULATED

 

 

 

 

 

 

 

NONREDEEMABLE

 

 

 

 

 

 

 

 

OTHER

 

TREASURY

 

 

 

TOTAL IHC

 

NON-

 

 

 

 

COMMON

 

PAID-IN

 

COMPREHENSIVE

 

STOCK,

 

RETAINED

 

STOCKHOLDERS'

 

CONTROLLING

 

TOTAL

 

 

STOCK

 

CAPITAL

 

LOSS

 

AT COST

 

EARNINGS

 

EQUITY

 

INTERESTS

 

EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DECEMBER 31, 2017

$

18,625 

$

124,538 

$

(4,598) 

$

(63,404) 

$

356,383  

$

431,544  

$

2,699  

$

434,243  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative effects of new

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

accounting principles

 

 

 

 

 

(350) 

 

 

 

34  

 

(316) 

 

(97) 

 

(413) 

Net income

 

 

 

 

 

 

 

 

 

13,718  

 

13,718  

 

40  

 

13,758  

Other comprehensive

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

income (loss), net of tax

 

 

 

 

 

(6,289) 

 

 

 

 

 

(6,289) 

 

-  

 

(6,289) 

Repurchases of common stock

 

 

 

 

 

 

 

(3,147) 

 

 

 

(3,147) 

 

-  

 

(3,147) 

Common stock dividend ( $0.15 per share)

 

 

 

 

 

 

 

 

 

(2,222) 

 

(2,222) 

 

-  

 

(2,222) 

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

-  

 

(25) 

 

(25) 

Share-based compensation

 

 

 

480 

 

 

 

111  

 

 

 

591  

 

-  

 

591  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

JUNE 30, 2018

$

18,625 

$

125,018 

$

(11,237) 

$

(66,440) 

$

367,913  

$

433,879  

$

2,617  

$

436,496  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See the accompanying Notes to Condensed Consolidated Financial Statements.


7


 

 

INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

 

 

 

Six Months Ended June 30,

 

 

2018

 

 

2017

CASH FLOWS PROVIDED BY (USED BY) OPERATING ACTIVITIES:

 

 

 

 

 

Net income

$

13,890  

 

$

19,316  

Adjustments to reconcile net income to net change in cash from

 

 

 

 

 

operating  activities:

 

 

 

 

 

Amortization of deferred acquisition costs

 

271  

 

 

177  

Net investment (gains) losses

 

352  

 

 

(272) 

Equity (income) loss from equity method investments

 

765  

 

 

(679) 

Depreciation and amortization

 

1,271  

 

 

841  

Deferred tax expense

 

855  

 

 

2,079  

Other

 

3,119  

 

 

3,167  

 Changes in assets and liabilities:

 

 

 

 

 

Change in insurance liabilities

 

(6,954) 

 

 

(66,013) 

Change in  amounts due from reinsurers

 

6,277  

 

 

44,506  

Change in claim fund balances

 

411  

 

 

7,743  

Change in current income tax liability

 

1,573  

 

 

(10,756) 

Change in due and unpaid premiums

 

(3,665) 

 

 

9,066  

Other operating activities

 

(11,729) 

 

 

(4,491) 

 

 

 

 

 

 

Net change in cash from operating activities

 

6,436  

 

 

4,684  

 

 

 

 

 

 

CASH FLOWS PROVIDED BY (USED BY) INVESTING ACTIVITIES:

 

 

 

 

 

Net sales and maturities of short-term investments

 

-  

 

 

6,849  

Net sales of securities under resale agreements

 

1,627  

 

 

14,483  

Sales of equity securities

 

698  

 

 

-  

Sales of fixed maturities

 

42,217  

 

 

129,327  

Maturities and other repayments of fixed maturities

 

8,727  

 

 

8,651  

Purchases of fixed maturities

 

(57,525) 

 

 

(112,733) 

Payments to acquire business, net of cash acquired

 

-  

 

 

(12,324) 

Distributions from other investments

 

-  

 

 

5,246  

Purchases of other investments

 

-  

 

 

(602) 

Other investing activities

 

(502) 

 

 

434  

 

 

 

 

 

 

Net change in cash from investing activities

 

(4,758) 

 

 

39,331  

 

 

 

 

 

 

CASH FLOWS PROVIDED BY (USED BY) FINANCING ACTIVITIES:

 

 

 

 

 

Repurchases of common stock

 

(3,056) 

 

 

(42,105) 

Withdrawals of investment-type insurance contracts

 

(725) 

 

 

(972) 

Dividends paid

 

(3,710) 

 

 

(1,027) 

Other financing activities

 

109  

 

 

(25) 

 

 

 

 

 

 

Net change in cash from financing activities

 

(7,382) 

 

 

(44,129) 

 

 

 

 

 

 

Net change in cash, cash equivalents and restricted cash

 

(5,704) 

 

 

(114) 

Cash, cash equivalents and restricted cash, beginning of year

 

32,197  

 

 

23,718  

 

 

 

 

 

 

Cash, cash equivalents and restricted cash, end of period

$

26,493  

 

$

23,604  

 

 

 

 

 

 

 

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 a majority interest in 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 62% of IHC's outstanding common stock at June 30, 2018.  

 

(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 and six months ended June 30, 2018 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 2018 presentation primarily as a result of new accounting principles adopted in the current year.

 

(D)   Revenue Recognition 

 

Insurance premiums are recognized as revenue over the period insurance protection is provided. For additional information about our policies regarding the recognition of premium revenues, see Note 1 of the Notes to Consolidated Financial Statements included in our 2017 Annual Report on Form 10-K as filed with


9


the Securities and Exchange Commission.

 

Fee income includes fees and commissions for various sales, marketing and administrative services provided by our marketing and administrative companies. Revenue is recognized as these services are performed. For these administrative service and other contracts, we have no material contract assets or contract liabilities on our consolidated balance sheet at June 30, 2018. Revenue recognized from performance obligations related to prior periods, and revenue expected to be recognized in future periods related to unfulfilled contractual performance obligations and contracts with variable consideration, is not material.

 

 

(E)   Recent Accounting Pronouncements 

 

Recently Adopted Accounting Standards

 

In May 2017, the Financial Accounting Standards Board (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 will be applied prospectively. The adoption of this guidance did not 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 will be applied prospectively. The adoption of this guidance did not 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 equivalents in the statement of cash flows. The amendments in this guidance were applied retrospectively. The adoption of this guidance did not have a material effect on the Company’s Statements of Cash Flows and had no effect on the Company’s consolidated financial position or results of operations.

 

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 were applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the January 1, 2018. The adoption of this guidance did not 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 Company has elected to classify distributions received from equity method investees using the cumulative earnings approach. The adoption of this guidance did not 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. The amendments in this guidance were applied by means of a cumulative-effect adjustment of $340,000 credit to retained earnings as of January 1, 2018. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) will be applied prospectively to equity investments that existed as of January 1, 2018. The adoption of this guidance did not 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


10


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. Substantially all of the Company’s revenue sources are excluded from the scope of the standard. For those revenue sources within the scope of the standard (included in the Fee income line of the Condensed Consolidated Statement of Income), there were no material changes in the timing or measurement of revenues. The amendments in this guidance were applied retrospectively with a cumulative effect adjustment on January 1, 2018, and as such, the Company recorded $552,000 of contract assets and $1,094,000 of deferred revenues, which are included on the Condensed Consolidated Balance Sheet in other assets and accounts payable, accruals and other liabilities. The overall net impact on retained earnings was a charge of $306,000, after the effects of taxes and noncontrolling interests.

 

Recently Issued Accounting Standards Not Yet Adopted 

 

In July 2018, the FASB issued guidance to simplify several aspects of accounting for nonemployee share-based compensation. The amendments in this guidance are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. 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 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 guidance, 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 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 guidance 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.

 


11


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. In July 2018, the FASB issued additional guidance that allows entities the option to either recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption or to use a modified retrospective approach. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.

 

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 329,000 and 286,000 shares for the three and six months ended June 30, 2018, respectively, and 279,000 and 278,000 shares for the three months and six months ended June 30, 2017.

 

Note 3.Cash, Cash Equivalents and Restricted Cash 

 

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Condensed Consolidated Balance Sheets to the amounts shown in the Condensed Consolidated Statements of Cash Flows for the periods indicated (in thousands): 

 

 

 

June 30,

 

 

2018

 

2017

 

 

 

 

 

Cash and cash equivalents

$

21,252 

$

22,070 

Restricted cash included in other assets

 

5,241 

 

1,534 

 

 

 

 

 

Total cash, cash equivalents and restricted cash

$

26,493 

$

23,604 

 

 

 

 

 

 

Restricted cash includes insurance premiums collected from insureds that are pending remittance to insurance carriers and/or payment of insurance claims and commissions to third party administrators. These amounts are required to be set aside by contractual agreements with the insurance carriers and are included in other assets on the Condensed Consolidated Balance Sheets.


12


Note 4.Investment Securities 

 

The cost (amortized cost with respect to certain fixed maturities), gross unrealized gains, gross unrealized losses and fair value of fixed maturities available-for-sale are as follows for the periods indicated (in thousands):

 

 

 

June 30, 2018 

 

 

 

 

GROSS 

 

GROSS 

 

 

 

 

AMORTIZED

 

UNREALIZED

 

UNREALIZED

 

FAIR 

 

 

COST 

 

GAINS 

 

LOSSES 

 

VALUE 

 

 

 

 

 

 

 

 

 

FIXED MATURITIES

 

 

 

 

 

 

 

 

AVAILABLE-FOR-SALE:

 

 

 

 

 

 

 

 

Corporate securities

$

188,640 

$

12 

$

(6,688) 

$

181,964 

CMOs – residential (1)

 

6,464 

 

- 

 

(337) 

 

6,127 

U.S. Government obligations

 

56,158 

 

- 

 

(706) 

 

55,452 

Agency MBS – residential (2)

 

8 

 

- 

 

- 

 

8 

GSEs (3)

 

9,673 

 

- 

 

(238) 

 

9,435 

States and political subdivisions

 

179,230 

 

170 

 

(6,373) 

 

173,027 

Foreign government obligations

 

4,130 

 

- 

 

(103) 

 

4,027 

Redeemable preferred stocks

 

10,006 

 

142 

 

(111) 

 

10,037 

 

 

 

 

 

 

 

 

 

Total fixed maturities

$

454,309 

$

324 

$

(14,556) 

$

440,077 

 

 

 

December 31, 2017 

 

 

 

 

GROSS 

 

GROSS 

 

 

 

 

AMORTIZED

 

UNREALIZED

 

UNREALIZED

 

FAIR 

 

 

COST 

 

GAINS 

 

LOSSES 

 

VALUE 

 

 

 

 

 

 

 

 

 

FIXED MATURITIES

 

 

 

 

 

 

 

 

AVAILABLE-FOR-SALE:

 

 

 

 

 

 

 

 

Corporate securities

$

148,996 

$

298 

$

(2,847) 

$

146,447 

CMOs - residential (1)

 

6,857 

 

- 

 

(180) 

 

6,677 

U.S. Government obligations

 

85,510 

 

- 

 

(396) 

 

85,114 

Agency MBS - residential (2)

 

14 

 

- 

 

-  

 

14 

GSEs (3)

 

9,887 

 

- 

 

(205) 

 

9,682 

States and political subdivisions

 

182,664 

 

598 

 

(3,619) 

 

179,643 

Foreign government obligations

 

4,227 

 

13 

 

(90) 

 

4,150 

Redeemable preferred stocks

 

10,006 

 

179 

 

- 

 

10,185 

 

 

 

 

 

 

 

 

 

Total fixed maturities

$

448,161 

$

1,088 

$

(7,337) 

$

441,912 

 

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

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

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

 

 

The amortized cost and fair value of fixed maturities available-for-sale at June 30, 2018, 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.

 

 

 

 

 

AMORTIZED

 

 

FAIR

 

 

 

COST

 

 

VALUE

 

 

 

 

 

 

 

Due in one year or less

 

$

35,513

 

$

35,334

Due after one year through five years

 

 

163,610

 

 

160,024

Due after five years through ten years

 

 

139,524

 

 

134,911

Due after ten years

 

 

99,516

 

 

94,237

Fixed maturities with no single maturity date

 

 

16,146

 

 

15,571

 

 

 

 

 

 

 

 

 

$

454,309

 

$

440,077


13


 

 

 

The following tables summarize, for all fixed maturities available-for-sale in an unrealized loss position, the aggregate fair value and gross unrealized loss by length of time those securities that have continuously been in an unrealized loss position for the periods indicated (in thousands):

 

 

 

 

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

Less than 12 Months

 

 

12 Months or Longer

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

Unrealized

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate securities

$

98,849

 

$

2,692 

 

$

76,271

 

$

3,996 

 

$

175,120

$

6,688 

CMOs - residential

 

-

 

 

- 

 

 

6,089

 

 

337 

 

 

6,089

 

337 

U.S. Government obligations

 

43,284

 

 

314 

 

 

12,168

 

 

392 

 

 

55,452

 

706 

GSEs

 

-

 

 

- 

 

 

9,426

 

 

238 

 

 

9,426

 

238 

States and political subdivisions

 

72,880

 

 

1,651 

 

 

86,243

 

 

4,722 

 

 

159,123

 

6,373 

Foreign government obligations

 

1,162

 

 

2 

 

 

2,865

 

 

101 

 

 

4,027

 

103 

Redeemable preferred stocks

 

5,859

 

 

111 

 

 

-

 

 

- 

 

 

5,859

 

111 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Fixed maturities in an

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      unrealized loss position

$

222,034

 

$

4,770 

 

$

193,062

 

$

9,786 

 

$

415,096

$

14,556 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of fixed maturities in an

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  unrealized loss position

 

110

 

 

 

 

 

81

 

 

 

 

 

191

 

 

 

 

 

 

December 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

$

85,642

 

$

1,250 

 

$

44,640

 

$

1,597 

 

$

130,282

$

2,847 

CMOs - residential

 

1,381

 

 

45 

 

 

5,237

 

 

135 

 

 

6,618

 

180 

U.S. Government obligations

 

75,811

 

 

198 

 

 

9,302

 

 

198 

 

 

85,113

 

396 

GSEs

 

-

 

 

- 

 

 

9,669

 

 

205 

 

 

9,669

 

205 

States and political subdivisions

 

83,682

 

 

1,348 

 

 

66,617

 

 

2,271 

 

 

150,299

 

3,619 

Foreign government obligations

 

2,959

 

 

90 

 

 

-

 

 

- 

 

 

2,959

 

90 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Fixed maturities in an

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      unrealized loss position

$

249,475

 

$

2,931 

 

$

135,465

 

$

4,406 

 

$

384,940

$

7,337 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of fixed maturities in an

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  unrealized loss position

 

60

 

 

 

 

 

76

 

 

 

 

 

136

 

 

 

Substantially all of the unrealized losses on fixed maturities available-for-sale at June 30, 2018 and December 31, 2017 relate to investment grade securities and are attributable to changes in market interest rates. Because the Company does not intend to sell, nor is it more likely than not that the Company will have to sell such investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2018.

 


14


 

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

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

Realized gains (losses):

 

 

 

 

 

 

 

 

  Fixed maturities available-for-sale

$

(366) 

$

146  

$

(195) 

$

343  

  Equity securities

 

(5) 

 

-  

 

(5) 

 

-  

 

 

 

 

 

 

 

 

 

     Total realized gains (losses) on debt and equity securities

 

(371) 

 

146  

 

(200) 

 

343  

Unrealized gains (losses) on equity securities

 

(52) 

 

(47) 

 

(152) 

 

(72) 

 

 

 

 

 

 

 

 

 

Gains (losses) on debt and equity securities

 

(423) 

 

99  

 

(352) 

 

271  

Gains (losses) on other investments

 

-  

 

1  

 

-  

 

1  

 

 

 

 

 

 

 

 

 

Net investment gains (losses)

$

(423) 

$

100  

$

(352) 

$

272  

 

 

For the three months and six months ended June 30, 2018, the Company realized gross gains of $73,000 and $319,000, respectively, and gross losses of $439,000 and $514,000, respectively, from sales, maturities and prepayments of fixed maturities available-for-sale. For the three months and six months ended June 30, 2017, the company realized gross gains of $365,000 and $1,339,000, respectively, and gross losses of $219,000 and $996,000, respectively, from sales, maturities and prepayments of fixed maturities available for sale.

 

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 1F(iv) to the Consolidated Financial Statements in the 2017 Annual Report on Form 10-K for further discussion of the factors considered by management in its regular review to identify and recognize other-than-temporary impairments on fixed maturities available-for-sale. The Company did not recognize any other-than-temporary impairments on fixed maturities available-for-sale securities in the first six months of 2018 or 2017.

 

 

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.

 


15


Fixed maturities available-for-sale:

 

Fixed maturities available-for-sale included in Level 2 are 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 debt 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.

 

Equity securities:

 

Equity 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):

 

 

 

June 30, 2018

 

 

Level 1

 

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

FINANCIAL ASSETS:

 

 

 

 

 

 

 

 

 

Fixed maturities available-for-sale:

 

 

 

 

 

 

 

 

 

  Corporate securities

$

- 

 

$

181,964 

$

- 

$

181,964 

  CMOs - residential

 

- 

 

 

6,127 

 

- 

 

6,127 

  US Government obligations

 

- 

 

 

55,452 

 

- 

 

55,452 

  Agency MBS - residential

 

- 

 

 

8 

 

- 

 

8 

  GSEs

 

- 

 

 

9,435 

 

- 

 

9,435 

  States and political subdivisions

 

- 

 

 

171,233 

 

1,794 

 

173,027 

  Foreign government obligations

 

- 

 

 

4,027 

 

- 

 

4,027 

  Redeemable preferred stocks

 

10,037 

 

 

- 

 

- 

 

10,037 

     Total fixed maturities

 

10,037 

 

 

428,246 

 

1,794 

 

440,077 

 

 

 

 

 

 

 

 

 

 

Equity securities:

 

 

 

 

 

 

 

 

 

  Common stocks

 

4,749 

 

 

- 

 

- 

 

4,749 

  Nonredeemable preferred stocks

 

513 

 

 

- 

 

- 

 

513 

     Total equity securities

 

5,262 

 

 

- 

 

- 

 

5,262 

 

 

 

 

 

 

 

 

 

 

Total Financial Assets

$

15,299 

 

$

428,246 

$

1,794 

$

445,339 

 

 

 

December 31, 2017

 

 

Level 1

 

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

FINANCIAL ASSETS:

 

 

 

 

 

 

 

 

 

Fixed maturities available-for-sale:

 

 

 

 

 

 

 

 

 

  Corporate securities

$

- 

 

$

146,447 

$

- 

$

146,447 

  CMOs - residential

 

- 

 

 

6,677 

 

- 

 

6,677 

  US Government obligations

 

- 

 

 

85,114 

 

- 

 

85,114 

  Agency MBS - residential

 

- 

 

 

14 

 

- 

 

14 

  GSEs

 

- 

 

 

9,682 

 

- 

 

9,682 

  States and political subdivisions

 

- 

 

 

177,767 

 

1,876 

 

179,643 

  Foreign government obligations

 

- 

 

 

4,150 

 

- 

 

4,150 

  Redeemable preferred stocks

 

10,185 

 

 

- 

 

- 

 

10,185 

     Total fixed maturities

 

10,185 

 

 

429,851 

 

1,876 

 

441,912 

 

 

 

 

 

 

 

 

 

 

Equity securities:

 

 

 

 

 

 

 

 

 

  Common stocks

 

2,490 

 

 

- 

 

- 

 

2,490 

  Nonredeemable preferred stocks

 

3,630 

 

 

- 

 

- 

 

3,630 

     Total equity securities

 

6,120 

 

 

- 

 

- 

 

6,120 

 

 

 

 

 

 

 

 

 

 

Total Financial Assets

$

16,305 

 

$

429,851 

$

1,876 

$

448,032 


16


 

 

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 2018 or 2017.

 

The following table presents the changes in fair value of our Level 3 financial assets for the periods indicated (in thousands):

 

 

 

Three Months Ended June 30,

 

 

2018

 

2017

 

 

States and

 

Total

 

States and

 

Total

 

 

Political

 

Level 3

 

Political

 

Level 3

 

 

Subdivisions

 

Assets

 

Subdivisions

 

Assets

 

 

 

 

 

 

 

 

 

Beginning balance

$

1,836  

$

1,836  

$

1,995  

$

1,995  

 

 

 

 

 

 

 

 

 

Increases (decreases) recognized in earnings:

 

 

 

 

 

 

 

 

   Net investment gains

 

-  

 

-  

 

-  

 

-  

 

 

 

 

 

 

 

 

 

Gains (losses) included in other

 

 

 

 

 

 

 

 

  comprehensive income (loss):

 

 

 

 

 

 

 

 

    Net unrealized gains (losses)

 

(8) 

 

(8) 

 

(9) 

 

(9) 

 

 

 

 

 

 

 

 

 

Repayments and amortization of

 

 

 

 

 

 

 

 

fixed maturities

 

(34) 

 

(34) 

 

(30) 

 

(30) 

Sales

 

-  

 

-  

 

-  

 

-  

 

 

 

 

 

 

 

 

 

Balance at end of period

$

1,794  

$

1,794  

$

1,956  

$

1,956  

 

 

Six Months Ended June 30,

 

 

2018

 

2017

 

 

States and

 

Total

 

States and

 

Total

 

 

Political

 

Level 3

 

Political

 

Level 3

 

 

Subdivisions

 

Assets

 

Subdivisions

 

Assets

 

 

 

 

 

 

 

 

 

Beginning balance

$

1,876  

$

1,876  

$

2,033  

$

2,033  

 

 

 

 

 

 

 

 

 

Increases (decreases) recognized in earnings:

 

 

 

 

 

 

 

 

   Net investment gains

 

-  

 

-  

 

-  

 

-  

 

 

 

 

 

 

 

 

 

Gains (losses) included in other

 

 

 

 

 

 

 

 

comprehensive income (loss):

 

 

 

 

 

 

 

 

    Net unrealized gains (losses)

 

(15) 

 

(15) 

 

(18) 

 

(18) 

 

 

 

 

 

 

 

 

 

Repayments and amortization of

 

 

 

 

 

 

 

 

fixed maturities

 

(67) 

 

(67) 

 

(59) 

 

(59) 

Sales

 

-  

 

-  

 

-  

 

-  

 

 

 

 

 

 

 

 

 

Balance at end of period

$

1,794  

$

1,794  

$

1,956  

$

1,956  

 

 


17


 

The following table provides carrying values, fair values and classification in the fair value hierarchy of the Company’s financial instruments, that are not carried at fair value but are subject to fair value disclosure requirements, for the periods indicated (in thousands):

 

 

 

June 30, 2018

 

December 31, 2017

 

 

Level 1

 

Level 2

 

 

 

Level 1

 

Level 2

 

 

 

 

Fair

 

Fair

 

Carrying

 

Fair

 

Fair

 

Carrying

 

 

Value

 

Value

 

Value

 

Value

 

Value

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

FINANCIAL ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

  Short-term investments

$

50 

$

- 

$

50 

$

50 

$

- 

$

50 

 

 

 

 

 

 

 

 

 

 

 

 

 

FINANCIAL LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

  Funds on deposit

$

- 

$

142,703 

$

142,564 

$

- 

$

143,702 

$

143,537 

 

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.Other Investments, Including Variable Interest Entities 

 

Included in other investments is our investment in Ebix Health Exchange which administers various lines of health insurance for IHC’s insurance subsidiaries. The carrying value of the Company’s equity investment in Ebix Health Exchange is $7,417,000 and $8,188,000 at June 30, 2018 and December 31, 2017, respectively. The Company recorded $(255,000) and $(771,000), respectively, of equity income (loss) from its investment for the three months and six months ended June 30, 2018 and $343,000 and $247,000, respectively, of equity income (loss) for the same periods ended June 30, 2017.

 

At June 30, 2018 and December 31, 2017, the Company’s Consolidated Balance Sheets include $1,905,000 and $1,859,000, respectively, of notes and other amounts receivable from Ebix Health Exchange and include $1,693,000 and $1,139,000, respectively, of administrative fees and other expenses payable to Ebix Health Exchange, which are included in other assets and accounts payable, accruals and other liabilities, respectively.  The Company’s Consolidated Statements of Income include administrative fee expenses to Ebix Health Exchange which are included in selling, general and administrative expenses of $1,926,000 and $4,473,000 for the three and six months ended June 30, 2018, respectively, and $3,036,000 and $5,404,000, respectively, for the same periods of 2017.

 

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


18


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 $3,936,000 carrying value in these equity investments which is included in other investments in the Condensed Consolidated Balance Sheet as of June 30, 2018.

 

Note 7.Goodwill and Other Intangible Assets 

 

The carrying amount of goodwill is $50,697,000 at both June 30, 2018 and December 31, 2017.

 

The Company has net other intangible assets of $13,926,000 and $14,669,000 at June 30, 2018 and December 31, 2017, 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):

 

 

 

 

June 30, 2018

 

December 31, 2017

 

 

Gross

 

 

 

Gross

 

 

 

 

Carrying

 

Accumulated

 

Carrying

 

Accumulated

 

 

Amount

 

Amortization

 

Amount

 

Amortization

 

 

 

 

 

 

 

 

 

Finite-lived Intangible Assets:

 

 

 

 

 

 

 

 

  Agent and broker relationships

$

17,253 

$

12,773 

$

17,253 

$

12,140 

  Domain

 

1,000 

 

175 

 

1,000 

 

125 

  Software systems

 

780 

 

136 

 

780 

 

76 

     Total finite-lived

$

19,033 

$

13,084 

$

19,033 

$

12,341 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

 

 

 

 

2018

 

2017

Indefinite-lived Intangible Assets:

 

 

 

 

 

 

 

 

   Insurance licenses

 

 

 

 

$

7,977 

$

7,977 

     Total indefinite-lived

 

 

 

 

$

7,977 

$

7,977 

 

Amortization expense was $382,000 and $743,000 for the three and six months ended June 30, 2018, respectively, and was $394,000 and $548,000 for the three months and six months ended June 30, 2017, respectively. 

 

Note 8.Income Taxes 

 

The provisions for income taxes shown in the Condensed Consolidated Statements of Income were computed by applying the effective tax rate expected to be applicable for the reporting periods. In 2017, President Trump enacted tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, reducing the Federal corporate income tax rate to 21%. As a result of IHC’s June 30 fiscal tax year, the Tax Act subjects IHC to a blended tax rate of 28% for its fiscal tax year ended June 30, 2018. Other differences between the Federal statutory income tax rate and the Company’s effective income tax rate are principally from the dividends received deduction and tax exempt interest income, state and local income taxes, and compensation related tax provisions.


19


Note 9.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).

 

 

 

Six Months Ended

 

 

June 30,

 

 

2018

 

 

2017

 

 

 

 

 

 

Balance at beginning of year

$

168,683  

 

$

219,113  

Less: reinsurance recoverable

 

42,136  

 

 

88,853  

Net balance at beginning of year

 

126,547  

 

 

130,260  

 

 

 

 

 

 

Amount incurred, related to:

 

 

 

 

 

  Current year

 

84,871  

 

 

78,482  

  Prior years

 

(13,189) 

 

 

(7,669) 

 

 

 

 

 

 

  Total incurred

 

71,682  

 

 

70,813  

 

 

 

 

 

 

Amount paid, related to:

 

 

 

 

 

  Current year

 

35,956  

 

 

24,034  

  Prior years

 

42,108  

 

 

44,419  

 

 

 

 

 

 

  Total paid

 

78,064  

 

 

68,453  

 

 

 

 

 

 

Net balance at end of year

 

120,165  

 

 

132,620  

Plus:  reinsurance recoverable

 

39,513  

 

 

48,945  

Balance at end of year

$

159,678  

 

$

181,565  

 

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 $13,189,000 in 2018 related to prior years consists of favorable developments of $8,398,000 in the Specialty Health reserves, $3,345,000 in the group disability reserves, $998,000 in the other individual life, annuities and other reserves, and $448,000 in Medical Stop-Loss reserves. Specialty Health had net favorable development primarily from: (i) the release of reserves due to emerging favorable experience on hospital indemnity plan business written in 2017 on increased sales volume of this product; (ii) short-term medical business as inventory levels decreased during 2018 and paid claim activity was below the levels anticipated; and, (iii) the reinsured international line in run out, which experienced favorable development during the quarter as reported by the carrier. The overall net favorable development of $7,669,000 in 2017 related to prior years primarily consists of favorable developments of $2,679,000 in the Medical Stop-Loss reserves, $2,793,000 in the group disability reserves, and $2,262,000 in the other individual life, annuities and other reserves, partially offset by an unfavorable development of $65,000 in Specialty Health reserves.

 

Included in the preceding rollforward of the Company’s liability for policy benefits and claims are the policy benefits and claims activity associated with the Company’s health insurance lines. These are embedded within the Specialty Health segment. The table below summarizes the components of the change in the liability for policy benefits and claims that are specific to health insurance claims for the periods indicated (in thousands).

 


20


 

 

 

 

 

Specialty Health Segment

 

 

Health Insurance Claims

 

 

Six Months Ended

 

 

June 30,

 

 

2018

 

 

2017

 

 

 

 

 

 

Balance at beginning of year

$

32,904  

 

$

27,183  

Less: reinsurance recoverable

 

762  

 

 

1,179  

Net balance at beginning of year

 

32,142  

 

 

26,004  

 

 

 

 

 

 

Amount incurred, related to:

 

 

 

 

 

  Current year

 

26,747  

 

 

25,514  

  Prior years

 

(7,174) 

 

 

343 

 

 

 

 

 

 

  Total incurred

 

19,573  

 

 

25,857  

 

 

 

 

 

 

Amount paid, related to:

 

 

 

 

 

  Current year

 

7,336  

 

 

2,927  

  Prior years

 

16,662  

 

 

17,355  

 

 

 

 

 

 

  Total paid

 

23,998  

 

 

20,282  

 

 

 

 

 

 

Net balance at end of year

 

27,717  

 

 

31,579  

Plus:  reinsurance recoverable

 

683  

 

 

666  

Balance at end of year

$

28,400  

 

$

32,245  

 

 

The liability for the IBNR plus expected development on reported claims associated with the Company’s health insurance claims is $28,400,000 at June 30, 2018.

 

Note 10.Stockholders’ Equity 

 

Accumulated Other Comprehensive Income (Loss)

 

Other comprehensive income (loss) includes the after-tax net unrealized gains and losses on investment securities available-for-sale, including the subsequent increases and decreases in fair value of available-for-sale securities previously impaired and the non-credit related component of other-than-temporary impairments of fixed maturities. In 2018, investment securities available-for-sale consist of only fixed maturities. Prior to January 1, 2018, the Company classified certain equity securities as available-for-sale. Changes to the fair value of those equity securities classified as available-for-sale were recorded in other comprehensive income (loss) for the corresponding periods in 2017 and prior. Upon the adoption of new accounting guidance on January 1, 2018, the Company: (i) recorded a cumulative-effect adjustment to reclassify the existing amounts reported in accumulated other comprehensive income on that date for equity securities previously classified as available-for-sale, to retained earnings; and (ii) recorded the subsequent changes in the fair value of those equity securities in net income.

 


21


Changes in the balances of accumulated other comprehensive loss, shown net of taxes, for the periods indicated are as follows (in thousands):

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

Beginning balance

$

(8,985) 

$

(4,443) 

$

(4,598)

$

(6,964) 

 

 

 

 

 

 

 

 

 

Cumulative-effect of new accounting principles

 

-  

 

-  

 

(350)

 

-  

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

  Other comprehensive income (loss) before reclassifications

 

(2,541)