UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

______________________________________

~~WASHINGTON, D.C. 20549~~FORM

~~FORM~~ 10-Q

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

For the quarterly period ended ~~September~~June 30, ~~2017.~~2019.

~~[ ]~~☐ 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~~58-1407235
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

96 CUMMINGS POINT ROAD, STAMFORD ~~CONNECTICUT~~, CT 06902

~~(Address~~(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: ~~(203)~~ (203) 358-8000

NOT APPLICABLE

Former name, former address and former fiscal year, if changed since last report.

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $1.00 par value	IHC	NYSE

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 ]~~[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 or an emerging growth company. See definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and ~~"smaller reporting~~"emerging growth company" in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer [ ]	Accelerated Filer ~~[ X ]~~[X]
Non-Accelerated Filer [ ]	Smaller Reporting Company ☒
Emerging Growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

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~~

As of August 5, 2019, the registrant had 14,892,668 shares of Common Stock outstanding.

~~Outstanding at November 3, 2017~~

~~Common stock, $ 1.00 par value~~

~~14,862,346 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	89

			Notes to Condensed Consolidated Financial Statements	910

		Item 2. Management's Discussion and Analysis of Financial Condition
			and Results of Operations	3129

		Item 3. Quantitative and Qualitative Disclosures about Market Risk		4441

		Item 4. Controls and Procedures		4441

PART II - OTHER INFORMATION

		Item 1. Legal Proceedings		4541

		Item 1A. Risk Factors		4643

		Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		4643

		Item 3. Defaults Upon Senior Securities		4643

		Item 4. Mine Safety Disclosures		4643

		Item 5. Other Information		4643

		Item 6. Exhibits		4744

	Signatures			4946

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~~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)


		~~September~~June 30, ~~2017~~2019		December 31, ~~2016~~2018
		(Unaudited)
ASSETS:
Investments:
Short-term investments	$	`50`	$	`6,9121,050`
Securities purchased under agreements to resell		`20,59738,864`		`28,962`
~~Trading securities~~		`516`		`59212,063`
Fixed maturities, available-for-sale		`426,000461,426`		`449,487453,464`
Equity securities ~~available-for-sale~~		`5,4605,543`		`5,3335,166`
Other investments		`18,33813,328`		`23,53413,192`
Total investments		`470,961519,211`		`514,820484,935`

Cash and cash equivalents		`26,56514,982`		`22,01026,173`
Due and unpaid premiums		`32,67825,014`		`42,89624,412`
Due from reinsurers		`383,192367,241`		`440,285`
~~Premium and claim funds~~		`13,665`		`17,952368,731`
Goodwill		`50,69760,205`		`41,57350,697`
Other assets		`61,47284,272`		`54,92882,568`

TOTAL ASSETS	$	`1,039,2301,070,925`	$	`1,134,4641,037,516`

LIABILITIES AND EQUITY:
LIABILITIES:
Policy benefits and claims	$	`169,547168,984`	$	`219,113160,115`
Future policy benefits		`217,415205,355`		`219,450208,910`
Funds on deposit		`143,637141,523`		`145,749141,635`
Unearned premiums		`7,99314,636`		`9,7865,557`
Other policyholders' funds		`10,24911,757`		`9,76910,939`
Due to reinsurers		`5,7153,837`		`35,7963,613`
Accounts payable, accruals and other liabilities		`59,74754,420`		`55,477`
~~Liabilities attributable to discontinued operations~~		`-`		`6853,133`

TOTAL LIABILITIES		`614,303600,512`		`695,208583,902`

Commitments and contingencies (Note ~~14)~~15)
Redeemable noncontrolling interest		`2,0352,271`		`-2,183`

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 18,620,508~~ shares issued; and ~~14,908,517~~14,909,765 and
~~17,102,525~~14,878,248 shares outstanding		`18,625`		`18,62018,625`
Paid-in capital		`126,135121,586`		`126,468124,395`
Accumulated other comprehensive ~~loss~~income (loss)		`(2,344)2,298`		`(6,964)(8,310)`
Treasury stock, at cost; ~~3,716,941~~3,715,693 and ~~1,517,983~~3,747,210 shares		`(61,712)(67,428)`		`(17,483)(66,392)`
Retained earnings		`339,512393,018`		`315,918380,431`

TOTAL IHC STOCKHOLDERS’ EQUITY		`420,216468,099`		`436,559448,749`
NONREDEEMABLE NONCONTROLLING INTERESTS		`2,67643`		`2,6972,682`

TOTAL EQUITY		`422,892468,142`		`439,256451,431`

TOTAL LIABILITIES AND EQUITY	$	`1,039,2301,070,925`	$	`1,134,4641,037,516`

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

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016
REVENUES:

Premiums earned
$
75,639
$
67,335
$
210,507
$
195,524
Net investment income

4,403

4,004

12,414

12,700
Fee income

2,634

4,050

11,556

12,541
Other income

361

2,261

2,365

8,898
Net realized investment gains

715

2,367

987

3,945
Other-than-temporary impairment losses:

Total other-than-temporary impairment losses

-

(1,475)

-

(1,475)
Portion of losses recognized in other comprehensive income (loss)

-

-

-

-
Net impairment losses recognized in earnings

-

(1,475)

-

(1,475)

83,752

78,542

237,829

232,133
EXPENSES:

Insurance benefits, claims and reserves

33,536

38,277

103,071

109,497
Selling, general and administrative expenses

42,337

32,823

115,404

97,947
Interest expense on debt

-

440

-

1,366

75,873

71,540

218,475

208,810

Income from continuing operations, before income taxes

7,879

7,002

19,354

23,323
Income taxes (benefits)

2,666

2,636

(5,175)

8,566

Income from continuing operations, net of tax

5,213

4,366

24,529

14,757

Discontinued operations:

Income from discontinued operations, before income taxes

-

-

-

117,636
Income taxes on discontinued operations

-

-

-

7,724
Income from discontinued operations, net of tax

-

-

-

109,912

Net income

5,213

4,366

24,529

124,669
(Income) loss from nonredeemable noncontrolling interests

32

(43)

(4)

(9,900)
(Income) loss from redeemable noncontrolling interests

(16)

-

(29)

-

NET INCOME ATTRIBUTABLE TO IHC
$
5,229
$
4,323
$
24,496
$
114,769

Basic income per common share:

Income from continuing operations
$
0.35
$
0.25
$
1.53
$
0.84
Income from discontinued operations

-

-

-

5.84
Basic income per common share
$
0.35
$
0.25
$
1.53
$
6.68

WEIGHTED AVERAGE SHARES OUTSTANDING

14,965

17,120

15,999

17,189

Diluted income per common share:

Income from continuing operations
$
0.34
$
0.25
$
1.50
$
0.83
Income from discontinued operations

-

-

-

5.77
Diluted income per common share
$
0.34
$
0.25
$
1.50
$
6.60

WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING

15,274

17,340

16,287

17,402

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,

2019

2018

2019

2018
REVENUES:

Premiums earned
$
84,947
$
77,334
$
167,736
$
156,826
Net investment income

4,134

3,687

8,130

7,368
Fee income

3,707

4,585

7,895

9,796
Other income (loss)

879

(295)

4,563

(446)
Net investment gains (losses)

1,455

(423)

1,626

(352)
Other-than-temporary impairment losses, available-for-sale securities:

Total other-than-temporary impairment losses

-

-

(646)

-
Portion of losses recognized in other comprehensive income (loss)

-

-

-

-
Net impairment losses recognized in earnings

-

-

(646)

-

95,122

84,888

189,304

173,192

EXPENSES:

Insurance benefits, claims and reserves

44,410

33,701

87,529

69,608
Selling, general and administrative expenses

42,206

41,693

82,735

85,036

86,616

75,394

170,264

154,644

Income before income taxes

8,506

9,494

19,040

18,548
Income taxes

1,590

2,652

3,234

4,658

Net income

6,916

6,842

15,806

13,890
(Income) from nonredeemable noncontrolling interests

(27)

(24)

(144)

(40)
(Income) from redeemable noncontrolling interests

(42)

(61)

(88)

(132)

NET INCOME ATTRIBUTABLE TO IHC
$
6,847
$
6,757
$
15,574
$
13,718

Basic income per common share
$
0.46
$
0.46
$
1.04
$
0.93

WEIGHTED AVERAGE SHARES OUTSTANDING

14,929

14,799

14,939

14,815

Diluted income per common share
$
0.46
$
0.45
$
1.04
$
0.91

WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING

14,948

15,128

15,007

15,101

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

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016

Net income
$
5,213
$
4,366
$
24,529
$
124,669
Other comprehensive income:

Available-for-sale securities:

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

250

(1,173)

7,219

10,734
Tax expense (benefit) on unrealized gains on available-for-sale securities

90

(418)

2,599

3,830
Unrealized gains (losses) on available-for-sale securities, net of taxes

160

(755)

4,620

6,904

Other comprehensive income (loss), net of tax

160

(755)

4,620

6,904

COMPREHENSIVE INCOME, NET OF TAX

5,373

3,611

29,149

131,573

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

noncontrolling interests:

(Income) loss from noncontrolling interests in subsidiaries

16

(43)

(33)

(9,900)
Other comprehensive income, net of tax, attributable to

noncontrolling interests:

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

-

47

-

(118)
Other comprehensive (income) loss, net of tax, attributable to

   noncontrolling interests

-

47

-

(118)

COMPREHENSIVE (INCOME) LOSS, NET OF TAX,

   ATTRIBUTABLE TO NONCONTROLLING INTERESTS

16

4

(33)

(10,018)

COMPREHENSIVE INCOME, NET OF TAX,

   ATTRIBUTABLE TO IHC
$
5,389
$
3,615
$
29,116
$
121,555
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In thousands)

Three Months Ended

Six Months Ended

June 30,

June 30,

2019

2018

2019

2018

Net income
$
6,916
$
6,842
$
15,806
$
13,890
Other comprehensive income (loss):

Available-for-sale securities:

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

6,250

(2,855)

13,444

(7,983)
Tax expense (benefit) on unrealized gains on available-for-sale securities

1,311

(603)

2,836

(1,694)
Unrealized gains (losses) on available-for-sale securities, net of taxes

4,939

(2,252)

10,608

(6,289)

Other comprehensive income (loss), net of tax

4,939

(2,252)

10,608

(6,289)

COMPREHENSIVE INCOME, NET OF TAX

11,855

4,590

26,414

7,601

Comprehensive income, net of tax, attributable to noncontrolling interests:

(Income) from noncontrolling interests in subsidiaries

(69)

(85)

(232)

(172)
Other comprehensive income, net of tax, attributable to

noncontrolling interests

-

-

-

-

COMPREHENSIVE INCOME, NET OF TAX,

   ATTRIBUTABLE TO NONCONTROLLING INTERESTS

(69)

(85)

(232)

(172)

COMPREHENSIVE INCOME, NET OF TAX,

   ATTRIBUTABLE TO IHC
$
11,786
$
4,505
$
26,182
$
7,429

See the accompanying Notes to Condensed Consolidated Financial Statements.
6

INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

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

Three Months Ended June 30, 2019 and 2018

ACCUMULATED

OTHER

TREASURY

TOTAL IHC

NONREDEEMABLE

COMMON

PAID-IN

COMPREHENSIVE

STOCK,

RETAINED

STOCKHOLDERS'

NONCONTROLLING

TOTAL

STOCK

CAPITAL

LOSS

AT COST

EARNINGS

EQUITY

INTERESTS

EQUITY

BALANCE AT

MARCH 31, 2019

18,625

122,055

(2,641)

(65,926)

386,164

458,277

2,799

461,076

Net income

6,847

27

6,874

Other comprehensive

income, net of tax

4,939

-

4,939

Repurchases of common stock

(1,508)

-

(1,508)

Purchase noncontrolling interests

(1,012)

(2,380)

(3,392)

Distributions to noncontrolling

interests

-

(403)

Common stock dividend

7

-

7

Share-based compensation

543

6

549

-

549

BALANCE AT

JUNE 30, 2019

18,625

121,586

2,298

(67,428)

393,018

468,099

43

468,142

~~NON-~~

BALANCE AT

MARCH 31, 2018

18,625

124,774

(8,985)

(65,996)

363,378

431,796

2,618

434,414

Net income

6,757

24

6,781

Other comprehensive

loss, net of tax

(2,252)

-

(2,252)

Repurchases of common stock

(505)

-

(505)

Distributions to noncontrolling

interests

-

(25)

Common stock

dividend ($0.15 per share)

(2,222)

-

(2,222)

Share-based compensation

244

61

305

-

305

BALANCE AT

JUNE 30, 2018

18,625

125,018

(11,237)

(66,440)

367,913

433,879

2,617

436,496

INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

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

Six Months Ended June 30, 2019 and 2018

ACCUMULATED

~~REDEEMABLE~~

OTHER

TREASURY

TOTAL IHC

~~NON-~~NONREDEEMABLE

COMMON

PAID-IN

COMPREHENSIVE

STOCK,

RETAINED

STOCKHOLDERS'

~~CONTROLLING~~NONCONTROLLING

TOTAL

STOCK

CAPITAL

INCOME (LOSS)

AT COST

EARNINGS

EQUITY

INTERESTS

EQUITY

BALANCE AT

DECEMBER 31, ~~2016~~2018

18,62018,625

126,468124,395

(6,964)(8,310)

(17,483)(66,392)

315,918380,431

436,559448,749

2,6972,682

439,256451,431

Net income

24,49615,574

4144

24,50015,718

Other comprehensive

income, net of tax

4,62010,608

-

4,62010,608

Repurchases of common stock

(44,442)(1,599)

-

(44,442)(1,599)

~~Common stock dividend ($0.06 per share)~~Purchase noncontrolling interests

(1,012)

(902)(1,012)

(902)(2,380)

(902)(3,392)

Distributions to noncontrolling ~~interests~~

(25)

~~Share-based compensation~~interests

5

(333)

213-

(403)

Common stock dividend

($0.20 per share)

(115) (2,987)

(2,987)

-

(115) (2,987)

Share-based compensation

(1,797)

563

(1,234)

-

(1,234)

BALANCE AT

~~September~~JUNE 30, 2019

18,625

121,586

2,298

(67,428)

393,018

468,099

43

468,142

BALANCE AT

DECEMBER 31, 2017

18,625

126,135124,538

(2,344)(4,598)

(61,712)(63,404)

339,512 356,383

420,216431,544

2,6762,699

422,892434,243

Cumulative effects of new

accounting principles

(350)

34

(316)

(97)

(413)

Net income

13,718

40

13,758

Other comprehensive

loss, net of tax

(6,289)

-

(6,289)

Repurchases of common stock

(3,147)

-

(3,147)

Distributions to noncontrolling

interests

-

(25)

Common stock dividend

($0.15 per share)

(2,222)

-

(2,222)

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.

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

		Nine Months Ended September 30,				Six Months Ended June 30,
		2017		2016		2019		2018
CASH FLOWS PROVIDED BY (USED BY) OPERATING ACTIVITIES:
Net income	$	`24,529`	$	`124,669`	$	`15,806`	$	`13,890`
Adjustments to reconcile net income to net change in cash from
operating activities:
Gain on disposal of discontinued operations, net of tax		`-`		`(109,447)`
Amortization of deferred acquisition costs		`269`		`245`		`682`		`271`
Net realized investment gains		`(987)`		`(3,945)`
Other-than-temporary impairment losses		`-`		`1,475`
Net investment (gains) losses						`(1,626)`		`352`
(Gain) on sale of investment						`(3,589)`		`-`
Other than-temporary-impairment losses, net						`646`		`-`
Equity (income) loss from equity method investments		`(1,412)`		`7`		`(515)`		`765`
Depreciation and amortization		`1,379`		`1,482`		`1,598`		`1,271`
Deferred tax expense		`1,853`		`2,565`
Other		`4,852`		`6,683`		`6,271`		`3,974`
Changes in assets and liabilities:
Net sales of trading securities		`-`		`3,180`
Change in insurance liabilities		`(83,750)`		`(41,713)`		`16,474`		`(6,954)`
Change in amounts due from reinsurers		`57,094`		`4,227`		`1,490`		`6,277`
Change in premium and claim funds		`4,287`		`(4,835)`
Change in current income tax liability		`(8,604)`		`(6,550)`
Change in claim fund balances						`1,788`		`411`
Change in due and unpaid premiums		`10,218`		`11,621`		`(602)`		`(3,665)`
Other operating activities		`6,302`		`(6,417)`		`(8,684)`		`(10,156)`

Net change in cash from operating activities		`16,030`		`(16,753)`		`29,739`		`6,436`

CASH FLOWS PROVIDED BY (USED BY) INVESTING ACTIVITIES:
Net (purchases) sales and maturities of short-term investments		`6,849`		`(8,104)`
Net sales of securities under resale agreements		`8,365`		`17,003`
Net sales and maturities of short-term investments						`1,000`		`-`
Net (purchases) sales of securities under resale agreements						`(26,801)`		`1,627`
Sales of equity securities		`-`		`2,429`		`-`		`698`
Sales of fixed maturities		`158,062`		`335,562`		`68,459`		`42,217`
Maturities and other repayments of fixed maturities		`16,841`		`35,505`		`43,034`		`8,727`
Purchases of fixed maturities		`(145,444)`		`(406,348)`		`(108,934)`		`(57,525)`
Proceeds on sales of subsidiaries, net of cash divested		`-`		`137,115`
Payments to acquire business, net of cash acquired		`(12,323)`		`-`		`(7,952)`		`-`
Distributions from other investments		`5,246`		`-`
Proceeds on sales of other investments		`-`		`2,064`
Purchases of other investments		`(602)`		`(3,371)`
Proceeds from sales, distributions and returns of capital from investments						`5,117`		`-`
Payments to acquire other investments						`(3,000)`		`-`
Other investing activities		`(565)`		`(3,433)`		`(1,084)`		`(502)`

Net change in cash from investing activities		`36,429`		`108,422`		`(30,161)`		`(4,758)`

CASH FLOWS PROVIDED BY (USED BY) FINANCING ACTIVITIES:
Repurchases of common stock		`(44,290)`		`(3,522)`		`(1,560)`		`(3,056)`
Cash paid in acquisitions of noncontrolling interests		`-`		`(18,141)`
Withdrawals of investment-type insurance contracts		`(1,359)`		`(1,447)`		`(1,151)`		`(725)`
Repayments of debt		`-`		`(4,789)`
Dividends paid		`(1,927)`		`(1,588)`		`(2,242)`		`(3,710)`
Purchase of noncontrolling interest						`(4,400)`		`-`
Proceeds from stock options exercised						`44`		`134`
Payments related to tax withholdings for sharebased compensation						`(2,397)`		`-`
Other financing activities		`(328)`		`(474)`		`(403)`		`(25)`

Net change in cash from financing activities		`(47,904)`		`(29,961)`		`(12,109)`		`(7,382)`

Net change in cash and cash equivalents		`4,555`		`61,708`
Cash and cash equivalents, beginning of year		`22,010`		`17,500`
Net change in cash, cash equivalents and restricted cash						`(12,531)`		`(5,704)`
Cash, cash equivalents and restricted cash, beginning of year						`30,807`		`32,197`

Cash and cash equivalents, end of period	$	`26,565`	$	`79,208`
Cash, cash equivalents and restricted cash, end of period					$	`18,276`	$	`26,493`

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., My1HR, Inc. (“My1HR”) 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 61% of IHC's outstanding common stock at ~~September~~June 30, ~~2017.~~2019.

(B)(B) Consolidation

~~On August 31, 2016,~~In May 2019, IHC ~~took AMIC Holdings, Inc. (“AMIC”) private by way of a statutory “short-form” merger. The company paid $18,141,000 for~~purchased the remaining ~~shares~~issued and outstanding units of ~~AMIC common stock owned by~~HealthInsurance.org, LLC (“HIO”) from noncontrolling interests ~~and as~~for total consideration valued at $4,700,000 making HIO a wholly owned subsidiary. The carrying value of the noncontrolling interest on the transaction date was $2,380,000. As a result ~~the Company now owns all~~ of the ~~outstanding common stock of AMIC. In connection with the~~equity transaction, ~~$2,230,000~~$1,012,000 was charged to paid-in capital ~~representing: (i)~~representing the difference between the fair value of the consideration paid ~~for the shares~~ and the carrying amount of noncontrolling ~~interests; plus (ii) specific, direct costs~~interest on the transaction date, net of ~~the transaction.~~ a deferred tax benefit.

(C)(C) Basis of Presentation

The unaudited Condensed Consolidated Financial Statements have been prepared in conformity with U.S. generally accepted accounting principles ("GAAP") for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited Condensed Consolidated Financial Statements include the accounts of IHC and its consolidated subsidiaries. All significant intercompany transactions have been eliminated in consolidation. The preparation of 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~~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 nine~~six months ended ~~September~~June 30, ~~2017~~2019 are not necessarily indicative of the results to be anticipated for the entire year.

10

9

(D)(D)Reclassifications
Certain amounts in prior year’s consolidated financial statements and Notes thereto have been reclassified to conform to the 2019 presentation.
(E)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 2018 Annual Report on Form 10-K as filed with 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, 2019. 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.
(F) Recent Accounting Pronouncements

Recently Adopted Accounting Standards

In ~~October 2016,~~July 2018, the ~~Financial Accounting Standards Board (“FASB”)~~FASB issued guidance ~~that amends the consolidation analysis~~to simplify several aspects of accounting 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.nonemployee share-based compensation. 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 adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.
In February 2016, the FASB issued guidance that requires lessees to recognize the assets and liabilities that arise from leases, including operating leases, on the statement of financial position. The Company elected the following practical expedients permitted within the new standard:
an accounting policy election to recognize the lease payments for short-term leases in profit or loss on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred;
practical expedients for leases that commenced before the effective date to not reassess: (i) whether any expired or existing contracts are or contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases;
a practical expedient to use hindsight in determining the lease term and in assessing impairment of the entity’s right-of-use assets.
an accounting policy election to not separate non-lease components from lease components and instead to account for them together as a single lease component.
The Company selected the new transition method by applying the new lease requirements on January 1, 2019, without adjustment to the financial statements for periods prior to adoption. As a result, on January 1, 2019, the Company recognized right-of-use assets of $7,010,000 for operating leases, reduced other liabilities by $687,000 to reclassify the unamortized balances of previously deferred operating lease incentives, and recognized operating lease liabilities of $7,697,000 in its Condensed Consolidated Balance Sheet. The adoption of this guidance did not have a material effect on the Company’s consolidated results of operations or cash flows.
11
Recently Issued Accounting Standards Not Yet Adopted
In October 2018, the FASB issued guidance for determining whether a decision making fee is a variable interest and requires reporting entities to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest. The amendments in this guidance are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments in this guidance should be applied ~~using~~retrospectively through a ~~modified retrospective approach for annual periods~~cumulative effect adjustment to retained earnings at the beginning ~~after December 15, 2018, including interim periods within those periods. Additional disclosures are required in~~of the earliest period ~~of adoption. Early adoption is permitted.~~presented. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.

In ~~February 2017,~~August 2018, the FASB issued guidance to ~~simplify the accounting~~improve existing measurements, presentation and disclosure requirements for ~~sales of nonfinancial assets~~long-duration contracts issued by ~~clarifying the definition of nonfinancial assets and adding guidance pertaining to partial sales of nonfinancial assets.~~insurance entities. The amendments in this guidance ~~can be applied using either~~requires an entity to (1) review and update assumptions used to measure cash flows at least annually as well as update the discount rate assumption at each reporting date; (2) measure market risk benefits associated with deposit contracts at fair value; (3) disclose liability rollforwards and information about significant inputs, judgements assumptions, and methods used in measurement. Additionally, it simplifies the amortization of deferred acquisition costs and other balances on a ~~retrospective approach or a modified retrospective approach~~constant level basis over the expected term of the related contracts. The amendments in ~~annual periods~~this guidance are effective for public business entities for fiscal years beginning after December 15, ~~2017,~~2020, including interim periods within ~~those periods.~~that fiscal year. Upon adoption, the amendments in this guidance should be applied to contracts in-force as of the beginning of the earliest period presented with a cumulative adjustment to beginning retained earnings. Management is evaluating the requirements and potential impact that the adoption of this guidance will have on the Company’s consolidated financial statements.
In August 2018, the FASB issued guidance to improve the effectiveness of disclosures in the notes to financial statements regarding fair value measurements. The amendments in this guidance are effective for all entities for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. Certain amendments should be applied prospectively for the most recent interim or annual period presented in the initial fiscal year of adoption while other amendments should be applied retrospectively to all periods presented upon the effective date. 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,~~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~~

10

~~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. In 2019, the FASB provided transition relief by providing entities with an option to irrevocably elect the fair value option on an instrument-by-instrument basis for eligible instruments upon adoption. For public entities that are SEC filers, the amendments in this ~~Update~~guidance are effective for fiscal years beginning after December
12
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

11

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 represent approximately 5% of our consolidated revenues for the nine months ended September 30, 2017. The guidance will be applied retrospectively with a cumulative effect adjustment on the date of initial application. 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 does not anticipate any significant changes in internal controls over financial reporting as a result of its implementation.

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 ~~309,000~~19,000 and ~~288,000~~68,000 shares for the three ~~months~~ and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, respectively, and ~~220,000~~329,000 and ~~213,000~~286,000 shares for the three ~~months~~ and ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2018, respectively.

12Note 3.Cash, Cash Equivalents and Restricted Cash

The following istable provides a reconciliation of ~~income available~~cash, cash equivalents and restricted cash reported within the Condensed Consolidated Balance Sheets to ~~common shareholders used to calculate income per share~~the amounts shown in the Condensed Consolidated Statements of Cash Flows for the periods indicated (in thousands):

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016

Income from continuing operations, net of tax
$
5,213
$
4,366
$
24,529
$
14,757
Less: (Income) loss from continuing operations attributable to

     noncontrolling interests

16

(43)

(33)

(348)

   Income from continuing operations attributable to IHC

     common shareholders
$
5,229
$
4,323
$
24,496
$
14,409

Income from discontinued operations, net of tax
$
-
$
-
$
-
$
109,912
Less: Income from discontinued operations attributable to

     noncontrolling interests

-

-

-

(9,552)

   Income from discontinued operations attributable to IHC

     common shareholders
$
-
$
-
$
-
$
100,360

  Net income attributable to IHC
$
5,229
$
4,323
$
24,496
$
114,769

June 30,

2019

2018

Cash and cash equivalents
$
14,982
$
21,252
Restricted cash included in other assets

3,294

5,241

Total cash, cash equivalents and restricted cash
$
18,276
$
26,493

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.

Note 3. 4.~~Discontinued Operations~~
On March 31, 2016, IHC and a subsidiary of AMIC, sold the stock of IHC Risk Solutions, LLC (“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, prior to closing adjustments, was $152,500,000 in cash. Approximately 89% of the purchase price was allocated to AMIC, with the balance being paid to Standard Security Life and other IHC subsidiaries. The Company recorded a gain of $99,934,000, net of taxes and amounts attributable to noncontrolling interests, as a result of the transaction. The aforementioned transaction, which includes the sale of Risk Solutions and the corresponding coinsurance agreement, is collectively referred to as the “Risk Solutions Sale and Coinsurance Transaction”. IHC’s block of Medical Stop-Loss business is in run-off. The sale of Risk Solutions and exit from the medical stop-loss business 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.

13

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 periods indicated (in thousands):

Three Months Ended

Nine Months Ended

September 30,

September 30,

2016

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 (benefits) on discontinued operations

-

7,724

      Income from discontinued operations
$
-
$
109,912

~~Liabilities attributable to discontinued operations at September 30, 2017 and December 31, 2016 consist of $0 and $68,000, respectively, of accounts payable and accrued liabilities.~~

Total operating cash flows from discontinued operations for the three months and nine months ended September 30, 2016 were $0 and $339,000, respectively. 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 nine months ended September 30, 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 $7,724,000 for the nine months ended September 30, 2016, consisting of $5,777,000 of state taxes and $1,947,000 of Federal taxes, net of a $38,419,000 decrease in AMIC’s valuation allowance.

14

Note 4. Investment Securities

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

		~~September~~June 30, ~~2017~~2019
				GROSS		GROSS
		AMORTIZED		UNREALIZED		UNREALIZED		FAIR
		COST		GAINS		LOSSES		VALUE

FIXED MATURITIES
AVAILABLE-FOR-SALE:
Corporate securities	$	`159,753234,938`	$	`8943,223`	$	`(2,471)(1,361)`	$	`158,176236,800`
CMOs -– residential (1)		`7,0115,745`		`10`		`(3)`		`5,752`
U.S. Government obligations		`31,829`		`253`		`(103)`		`31,979`
GSEs (3)		`6,414`		`-`		`(106)(111)`		`6,905`
~~U.S. Government obligations~~		`44,077`		`57`		`(257)`		`43,877`
~~Agency MBS - residential(2)~~		`16`		`-`		`-`		`16`
~~GSEs(3)~~		`9,992`		`1`		`(211)`		`9,7826,303`
States and political subdivisions		`194,724166,727`		`1,1431,785`		`(2,828)(1,083)`		`193,039167,429`
Foreign government obligations		`4,2766,880`		`22153`		`(85)(6)`		`4,2137,027`
Redeemable preferred stocks		`10,0085,970`		`116166`		`(132)-`		`9,9926,136`

Total fixed maturities	$	`429,857458,503`	$	`2,2335,590`	$	`(6,090)(2,667)`	$	`426,000461,426`

13 ~~EQUITY SECURITIES~~
~~AVAILABLE-FOR-SALE:~~
~~Common stocks~~	$	`1,612`	$	`191`	$	`(18)`	$	`1,785`
~~Nonredeemable preferred stocks~~		`3,587`		`88`		`-`		`3,675`

~~Total equity securities~~	$	`5,199`	$	`279`	$	`(18)`	$	`5,460`

		December 31, ~~2016~~2018
				GROSS		GROSS
		AMORTIZED		UNREALIZED		UNREALIZED		FAIR
		COST		GAINS		LOSSES		VALUE

FIXED MATURITIES
AVAILABLE-FOR-SALE:
Corporate securities	$	`192,976202,194`	$	`209701`	$	`(5,490)(5,406)`	$	`187,695197,489`
CMOs - residential (1)		`6,0216,092`		`8-`		`(116)(252)`		`5,9135,840`
U.S. Government obligations		`43,41763,231`		`1331`		`(441)(423)`		`43,10962,809`
Agency MBS - residential (2)		`223`		`1-`		`-`		`233`
GSEs (3)		`10,3016,596`		`1-`		`(422)(110)`		`9,8806,486`
States and political subdivisions		`191,146172,860`		`780302`		`(5,115)(5,228)`		`186,811167,934`
Foreign government obligations		`5,0987,039`		`1351`		`(157)(46)`		`4,9547,044`
Redeemable preferred stocks		`11,4545,970`		`96-`		`(448)(111)`		`11,1025,859`

Total fixed maturities	$	`460,435463,985`	$	`1,2411,055`	$	`(12,189)(11,576)`	$	`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)`	$	`5,333453,464`

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

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

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

15

The amortized cost and fair value of fixed maturities available-for-sale at ~~September~~June 30, ~~2017,~~2019, 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

AMORTIZED

FAIR

COST

VALUE

COST

VALUE

Due in one year or less

$
29,686

$
29,631

$
39,315

$
39,331
Due after one year through five years

113,190

112,572

168,512

170,281
Due after five years through ten years

145,877

145,322

162,244

164,144
Due after ten years

124,085

121,772

76,273

75,615
Fixed maturities with no single maturity date

17,019

16,703

12,159

12,055

$
429,857

$
426,000

$
458,503

$
461,426

14

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

		September 30, 2017												June 30, 2019

		Less than 12 Months				12 Months or Longer				Total				Less than 12 Months				12 Months or Longer				Total

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

Corporate securities	$	84,636	$	`1,087`	$	25,563	$	`1,384`	$	110,199	$	`2,471`	$	7,307	$	`20`	$	57,300	$	`1,341`	$	64,607	$	`1,361`
CMOs - residential		4,730		`101`		2,105		`5`		6,835		`106`		-		`-`		4,095		`3`		4,095		`3`
U.S. Government obligations		18,021		`80`		12,619		`177`		30,640		`257`		5,433		`69`		18,135		`34`		23,568		`103`
GSEs		3,286		`65`		6,480		`146`		9,766		`211`		-		`-`		6,297		`111`		6,297		`111`
States and political subdivisions		88,326		`1,413`		35,771		`1,415`		124,097		`2,828`		10,769		`30`		51,116		`1,053`		61,885		`1,083`
Foreign government obligations		-		`-`		3,006		`85`		3,006		`85`		-		`-`		1,659		`6`		1,659		`6`
Redeemable preferred stocks		-		`-`		3,631		`132`		3,631		`132`
Total fixed maturities		198,999		`2,746`		89,175		`3,344`		288,174		`6,090`

Common stocks		485		`18`		`-`		`-`		`485`		`18`
Total equity securities		485		`18`		`-`		`-`		`485`		`18`
Fixed maturities in an
unrealized loss position													$	23,509	$	`119`	$	138,602	$	`2,548`	$	162,111	$	`2,667`

Total temporarily impaired
securities	$	199,484	$	`2,764`	$	89,175	$	`3,344`	$	288,659	$	`6,108`

Number of securities in an
Number of fixed maturities in an
unrealized loss position		107				44				151				6				81				87

December 31, 2016

December 31, 2018

Less than 12 Months

12 Months or Longer

Total

Less than 12 Months

12 Months or Longer

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Value

Losses

Value

Losses

Value

Losses

Value

Losses

Value

Losses

Value

Losses

Corporate securities

145,205

3,818

19,841

1,672

165,046

5,490

46,988

1,045

108,738

4,361

155,726

5,406

CMO’s - residential

5,038

116

-

5,038

116

CMOs - residential

847

37

4,993

215

5,840

252

U.S. Government obligations

28,406

441

-

28,406

441

6,138

15

31,693

408

37,831

423

GSEs

3,640

166

6,220

256

9,860

422

-

6,478

110

6,478

110

States and political subdivisions

144,357

4,561

18,132

554

162,489

5,115

33,021

522

113,297

4,706

146,318

5,228

Foreign government obligations

3,738

157

-

3,738

157

-

2,835

46

2,835

46

Redeemable preferred stocks

-

3,315

448

3,315

448

5,859

111

-

5,859

111

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

Fixed maturities in an

unrealized loss position

92,853

1,730

268,034

9,846

360,887

11,576

Total temporarily impaired

securities

331,210

9,284

48,785

2,980

379,995

12,264

Number of securities in an

Number of fixed maturities in an

unrealized loss position

156

179

115

162

Substantially all of the unrealized losses on fixed maturities available-for-sale at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 relate to investment grade securities and are attributable to changes in market interest rates. Because the Company does not intend to sell, nor is it more likely than not that the Company will have to sell such investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at ~~September~~June 30, ~~2017~~2019.

15

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

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016

Available-for-sale securities:

  Fixed maturities
$
719
$
2,226
$
1,062
$
3,847
  Common stocks

-

220

-

220
     Total available-for-sale securities

719

2,446

1,062

4,067

Trading securities

-

-

-

-
     Total realized gains

719

2,446

1,062

4,067

Unrealized gains (losses) on trading securities:

  Change in unrealized gains (losses) on trading securities

(4)

(80)

(76)

(124)
     Total unrealized gains (losses) on trading securities

(4)

(80)

(76)

(124)

Gains (losses) on other investments

-

1

1

2

Net realized investment gains
$
715
$
2,367
$
987
$
3,945

Three Months Ended

Six Months Ended

June 30,

June 30,

2019

2018

2019

2018

Realized gains (losses):

  Fixed maturities available-for-sale
$
1,271
$
(366)
$
1,249
$
(195)
  Equity securities

-

(5)

-

(5)

     Total realized gains (losses) on debt and equity securities

1,271

(371)

1,249

(200)
Unrealized gains (losses) on equity securities

184

(52)

377

(152)

Gains (losses) on debt and equity securities

1,455

(423)

1,626

(352)
Gains (losses) on other investments

-

-

-

-

Net investment gains (losses)
$
1,455
$
(423)
$
1,626
$
(352)

For the three ~~months~~ and ~~nine~~six months ended ~~September~~June 30, ~~2017, proceeds from sales of available-for-sale securities, excluding paydowns and maturities, were $29,564,000 and $157,541,000, respectively, and~~2019, the Company realized gross gains of ~~$747,000~~$1,855,000 and ~~$2,052,000,~~$1,892,000, respectively, and gross losses of $0$584,000 and ~~$844,000,~~$643,000, respectively, ~~on those sales.~~from sales, maturities and prepayments of fixed maturities available-for-sale. For the three months and ~~nine~~six months ended ~~September~~June 30, ~~2016, proceeds from sales of available-for-sale securities, excluding paydowns and maturities, were $179,735,000~~

17

~~and $339,171,000, respectively, and~~2018, the ~~Company~~company realized gross gains of ~~$2,668,000~~$73,000 and ~~$4,521,000,~~$319,000, respectively, and gross losses of ~~$94,000~~$439,000 and ~~$275,000,~~$514,000, respectively, ~~on those sales.~~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 ~~1G(iv)~~1F(v) to the Consolidated Financial Statements in the ~~2016~~2018 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 recognized other-than-temporary impairment losses of $0 and $646,000 on certain fixed maturities available-for-sale ~~securities.~~securities in the three months and six months ended June 30, 2019, respectively. The Company determined that it was more likely than not that we would sell the securities before the recovery of their amortized cost basis. The Company did not recognize any other-than-temporary impairments on ~~available-for-sale~~available for sale securities in the first ~~nine~~six months of 2017. In the three months and nine months ended September 30, 2016, the Company recognized an other-than-temporary impairment loss of $1,475,000 on certain fixed maturities available-for-sale due to credit losses. The Company determined it was more likely than not that the securities would be sold before the recovery of their amortized cost basis.
Credit losses were recognized on certain fixed maturities for which each security also had an impairment loss recognized in other comprehensive income (loss). The rollforward of these credit losses were as follows for the periods indicated (in thousands):

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016

Balance at beginning of year
$
-
$
-
$
-
$
473
Securities sold

-

-

-

(473)

Balance at end of period
$
-
$
-
$
-
$
-
2018.

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.
16

The following section describes the valuation methodologies we use to measure different assets at fair value.

~~Investments in fixed~~Fixed maturities ~~and equity securities:~~available-for-sale:

~~Available-for-sale securities~~Fixed maturities available-for-sale included in Level 12 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 debt securities consist of municipal tax credit strips.

18

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~~Equity securities:

~~Trading~~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):

~~September~~June 30, ~~2017~~2019

Level 1

Level 2

Level 3

Total

FINANCIAL ASSETS:

Fixed maturities available-for-sale:

  Corporate securities
$
-

$
158,176236,800
$
-
$
158,176236,800
  CMOs - residential

-

6,9055,752

-

6,9055,752
  US Government obligations

-

43,87731,979

-

43,877
  ~~Agency MBS - residential~~
-
16
-
1631,979
  GSEs

-

9,7826,303

-

9,7826,303
  States and political subdivisions

-

191,124165,809

1,9171,620

193,041167,429
  Foreign government obligations

-

4,2137,027

-

4,2137,027
  Redeemable preferred stocks

9,9906,136

-

-

9,9906,136
     Total fixed maturities

9,9906,136

414,093453,670

1,9171,620

426,000461,426

Equity ~~securities available-for-sale:~~securities:

  Common stocks

1,7852,649

-

-

1,7852,649
  Nonredeemable preferred stocks

3,6752,894

-

-

3,6752,894
     Total equity securities

5,4605,543

-

-

5,460
~~Trading securities - equities~~
516
-
-
516
      ~~Total trading securities~~
516
-
-
5165,543

Total Financial Assets
$
15,96611,679

$
414,093453,670
$
1,9171,620
$
431,976466,969

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
1917
December 31, 2018
Level 1
Level 2
Level 3
Total
FINANCIAL ASSETS:
Fixed maturities available-for-sale:
  Corporate securities
$
-
$
197,489
$
-
$
197,489
  CMOs - residential
-
5,840
-
5,840
  US Government obligations
-
62,809
-
62,809
  Agency MBS - residential
-
3
-
3
  GSEs
-
6,486
-
6,486
  States and political subdivisions
-
166,225
1,709
167,934
  Foreign government obligations
-
7,044
-
7,044
  Redeemable preferred stocks
5,859
-
-
5,859
     Total fixed maturities
5,859
445,896
1,709
453,464
Equity securities:
  Common stocks
2,366
-
-
2,366
  Nonredeemable preferred stocks
2,800
-
-
2,800
     Total equity securities
5,166
-
-
5,166
Total Financial Assets
$
11,025
$
445,896
$
1,709
$
458,630

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~~2019 or ~~2016.~~2018.

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

Three Months Ended September 30,

Three Months Ended June 30,

2017

2016

2019

2018

States and

Total

States and

Total

States and

Total

States and

Total

Political

Level 3

Political

Level 3

Political

Level 3

Political

Level 3

Subdivisions

Assets

Subdivisions

Assets

Subdivisions

Assets

Subdivisions

Assets

Beginning balance
$
1,956
$
1,956

$
2,107
$
2,107
$
1,664
$
1,664

$
1,836
$
1,836

Increases (decreases) recognized in earnings:

Net realized investment gains

-

-

-

-
Net investment gains

-

-

-

-

Gains (losses) included in other

comprehensive income (loss):

Net unrealized gains (losses)

(8)

(8)

(10)

(10)

(6)

(6)

(8)

(8)

Repayments and amortization of

fixed maturities

(31)

(31)

(27)

(27)

(38)

(38)

(34)

(34)
Sales

-

-

-

-

-

-

-

-

Balance at end of period
$
1,917
$
1,917

$
2,070
$
2,070
$
1,620
$
1,620

$
1,794
$
1,794

Nine Months Ended September 30,

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

Gains (losses) included in earnings:

   Net realized investment gains

-

-

141

-

141

Gains (losses) included in other

  comprehensive income (loss):

    Net unrealized gains (losses)

(26)

(26)

(296)

(31)

(327)

Repayments and amortization of

   fixed maturities

(90)

(90)

(74)

(78)

(152)
Sales

-

-

(966)

-

(966)

Balance at end of period
$
1,917
$
1,917
$
-
$
2,070
$
2,070
18

20

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~~
~~Nine Months Ended~~
~~September 30, 2016~~
~~September 30, 2016~~
~~Total~~
~~Total~~
~~Contingent~~
~~Level 3~~
~~Contingent~~
~~Level 3~~
~~Liabilities~~
~~Liabilities~~
~~Liabilities~~
~~Liabilities~~
~~Beginning balance~~
$
1,445
$
1,445
$
1,650
$
1,650
~~Gains (losses) included in earnings:~~
   ~~Net investment income~~
(204)
(204)
(947)
(947)
   ~~Other income~~
(185)
(185)
353
353
~~Payment of contingent liability~~
(700)
(700)
(700)
(700)
~~Balance at end of period~~
$
356
$
356
$
356
$
356

Six Months Ended June 30,

2019

2018

States and

Total

States and

Total

Political

Level 3

Political

Level 3

Subdivisions

Assets

Subdivisions

Assets

Beginning balance
$
1,709
$
1,709

$
1,876
$
1,876

Increases (decreases) recognized in earnings:

   Net investment gains

-

-

-

-

Gains (losses) included in other

  comprehensive income (loss):

    Net unrealized gains (losses)

(14)

(14)

(15)

(15)

Repayments and amortization of

   fixed maturities

(75)

(75)

(67)

(67)
Sales

-

-

-

-

Balance at end of period
$
1,620
$
1,620

$
1,794
$
1,794

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):

~~September~~June 30, ~~2017~~2019

December 31, ~~2016~~2018

Level 1

Level 2

Level 1

Level 2

Fair

Carrying

Fair

Carrying

Value

FINANCIAL ASSETS:

Short-term investments

50

-

50

6,9121,050

-

6,9121,050

FINANCIAL LIABILITIES:

Funds on deposit

-

143,911141,539

143,637141,523

-

146,098141,662

145,749141,635

Other policyholders’ funds

-

11,757

-

10,939

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.

Other Policyholders’ Funds

Other policyholders’ funds are primarily credited with current market interest rates resulting in a fair

2119

value which approximates the carrying amount.

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 $4,762,000 and $6,425,000 at June 30, 2019 and December 31, 2018, respectively, and the Company recorded $(1,121,000) and $(1,663,000), respectively, of equity income (loss) from its investment for the three and six months ended June 30, 2019 and $(255,000) and $(771,000), respectively, of equity income (loss) from its investment for the same periods of 2018.

At June 30, 2019 and December 31, 2018, the Company’s Condensed Consolidated Balance Sheets include $1,817,000 and $1,842,000, respectively, of notes and other amounts receivable from Ebix Health Exchange, and include $253,000 and $910,000, 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 Condensed Consolidated Statements of Income include administrative fee expenses to Ebix Health Exchange, which are included in selling, general and administrative expenses of $525,000 and $987,000, for the three and six months ended June 30, 2019, respectively, and $1,926,000 and $4,473,000, respectively, for the same periods of 2018.

In June 2019, the Company paid $3,000,000 for an equity interest in a lead generation company that will be accounted for as an equity method investment.

In March 2019, the Company’s equity investment in Pets Best, that was carried at a cost of $500,000, was acquired by an unaffiliated entity and the Company realized a gain of $3,589,000 on the sale, which is included in Other Income in the Condensed Consolidated Statement of Income for the six months ended June 30, 2019.

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 ~~VIEs~~VIE through changes in governing documents or other circumstances. Our maximum loss exposure is limited to our combined ~~$4,141,000~~$6,524,000 carrying value in these equity investments ~~that are~~which is included in other investments in the Condensed Consolidated Balance Sheet as of ~~September~~June 30, ~~2017.~~2019.

Note 7.~~Acquisition of PetPartners, Inc.~~Acquisitions

~~On March 24, 2017 (the "Acquisition Date"),~~In 2019 the Company made several business acquisitions as follows:

In January 2019, the Company acquired ~~85%~~all of the stock of ~~PetPartners, Inc. (“PetPartners”),~~My1HR, a ~~pet~~web-based entity with a state-of-the-art insurance ~~marketing~~quoting and ~~administration company, for a purchase price of $12,713,000, subject~~cloud-based enrollment platform. In general, companies that provide insurance through user-centric platforms, or create efficiencies in the insurance industry through technological advances, are referred to ~~certain post-closing adjustments.~~as “insuretech” companies. The Company acquired ~~PetPartners for the purpose of owning additional distribution and administration sources~~My1HR for its ~~pet insurance. Any time after March 24,~~quoting and cloud-based enrollment platforms as part of an effort to expand our “insuretech” footprint through our agencies, which generate leads and sell our products through our owned call center and career advisors.

In April 2019, ~~shares owned by the noncontrolling interest are putable to~~ the Company ~~at fair value and are therefore presented on the balance sheet as a redeemable noncontrolling interest.~~

~~Upon the acquisition, the Company consolidated~~purchased substantially all of the assets and liabilities of ~~PetPartners.~~a sales and customer service call center. The Company acquired the call center in order to capitalize on technology-driven

20
trends in the purchase of health insurance directly by consumers. Prior to the purchase, the Company owned an equity interest in the call center. Immediately preceding the transaction, the Company determined the fair value of its equity interest to be $720,000 using a market approach and, as a result, recorded a loss of $237,000 which is included in other income on the Condensed Consolidated Statement of Income.
The aggregate fair value of consideration transferred for these acquisitions was $8,534,000 cash. The following table presents the aggregate acquisition-date fair values of the identifiable assets acquired and liabilities assumed in ~~the acquisition of PetPartners on the Acquisition Date based on their respective fair values~~these transactions (in thousands):

Cash	$	`390582`
Intangible assets		`5,8801,500`
Other assets		`5671,301`

Total identifiable assets		`6,8373,383`

Other liabilities		`174`
~~Deferred tax liability~~		`1,0693,637`

Total liabilities		`1,2433,637`

Net identifiable assets (liabilities) acquired	$	`5,594(254)`

~~Redeemable noncontrolling interest~~	$	`2,005`

In connection with ~~the acquisition,~~these acquisitions, the Company recorded ~~$9,124,000~~$9,508,000 of goodwill and ~~$5,880,000~~$1,500,000 of intangible assets (see Note 8). The fair value of the acquired identifiable intangible assets is provisional pending receipt of the final valuations for those assets and liabilities. The amount of goodwill and intangibles entitled to an amortization deduction for income tax purposes will be determined upon a mutually agreeable asset allocation of the acquisition consideration with the respective acquirees.

Goodwill reflects the synergies ~~between PetPartners~~with our insurance carriers. My1HR has an existing distribution network and ~~Independence American as PetPartners will provide Independence American with~~offers increased distribution sources for ~~its pet insurance business~~IHC carrier products through its ~~marketing relationship with~~quoting and cloud based enrollment platforms designed specifically for producers in the ~~American Kennel Club.~~small group employer marketand individual Affordable Care Act (“ACA”) and ancillary market.This new quoting and enrollment system will support group and individual products for all IHC carriers as well as select group ACA and level funded health coverages from leading national health plans. The acquisition of the call center is expected to expand our existing call center reach and increase sales of IHC-underwritten health insurance. Goodwill was calculated as the ~~excess~~sum of ~~the sum of:~~ (i) the ~~acquisition date~~aggregate acquisition-date fair value of total cash consideration transferred of ~~$12,713,000; and~~$8,534,000 , (ii) the aggregate acquisition-date fair value of ~~the redeemable noncontrolling interest in PetPartners of $2,005,000 on~~equity interests immediately before the acquisition ~~date; over~~of $720,000; and (iii) the net identifiable ~~assets~~liabilities of ~~$5,594,000 that~~$254,000 assumed. Enterprise values were ~~acquired. The enterprise value of PetPartners was~~ determined either by an independent appraisal using a discounted cash flow model based upon the projected future earnings or by a market approach net of ~~PetPartners including a~~any 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 Companypremiums.

22

~~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~~not material and are included in selling, general and administrative expenses in the ~~Condensed~~ Consolidated Statement of Income.

For the ~~period from~~three months ended June 30, 2019, the ~~Acquisition Date to September 30, 2017, the~~ Company’s ~~Condensed~~ Consolidated Statement of Income includes revenues ~~of $1,416,000 and $2,869,000, respectively, for the three months and nine months ended September 30, 2017,~~ and net income of ~~$112,000~~$916,000 and ~~$199,000,~~$(406,000), respectively, ~~for~~from these acquisitions. For the ~~three months~~period from the acquisition dates to June 30, 2019, the Company’s Consolidated Statement of Income includes revenues and ~~nine months ended September 30, 2017~~net income of $1,424,000 and $(383,000), respectively, from ~~PetPartners.~~these acquisitions.

Pro forma adjustments to present the Company’s consolidated revenues and net income as if the acquisition ~~date was~~dates were January 1, ~~2016~~2018 are not material and accordingly are omitted.
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Note 8.Goodwill and Other Intangible Assets

The carrying amount of goodwill ~~was~~is $60,205,000 and $50,697,000 ~~and $41,573,000~~ at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016, respectively. Goodwill~~2018, respectively, all of which is reviewed for impairment annually at December 31, and evaluated for triggering events that may indicate a potential impairment quarterly. As of September 30, 2017, no impairment indicators were identified.attributable to the Specialty Health segment.

The Company has net other intangible assets of ~~$15,062,000~~$13,995,000 and ~~$10,122,000~~$13,163,000 at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, 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):

~~September~~June 30, ~~2017~~2019

December 31, ~~2016~~2018

Gross

Carrying

Accumulated

Carrying

Accumulated

Amount

Amortization

Amount

Amortization

Finite-lived Intangible Assets:

Agent and broker relationships

18,753

13,971

17,253

11,797

13,052

11,88213,419

Domain

1,000

100275

1,000

25225

Software systems

780

51269

-780

-203

Total finite-lived

20,533

14,515

19,033

11,948

14,052

11,90713,847

		September 30,		December 31,		June 30,		December 31,
		2017		2016		2019		2018
Indefinite-lived Intangible Assets:
Insurance licenses	$	`7,977`	$	`7,977`	$	`7,977`	$	`7,977`
Total indefinite-lived	$	`7,977`	$	`7,977`	$	`7,977`	$	`7,977`

~~In connection with the acquisition of PetPartners in the first quarter of 2017~~As discussed in Note 7, in connection with business acquisitions in 2019, the Company recorded ~~$9,124,000~~$9,508,000 of goodwill and ~~$5,880,000~~$1,500,000 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~~17 years.

Amortization expense was ~~$393,000~~$309,000 and ~~$941,000~~$668,000 for the three ~~months~~ and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, respectively, and ~~was $366,000~~$382,000 and ~~$1,057,000~~$743,000 for the three and six months ~~and nine months~~

23

ended ~~September~~June 30, ~~2016,~~2018, 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~~by applying the effective tax rate expected to be applicable for the ~~balance of~~reporting periods. In 2017, the ~~current fiscal year in accordance with consolidated life/non-life group~~Tax Cuts and Jobs Act (the “Tax Act”) was enacted. 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 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.
rate to 21% effective January 1, 2018. As a result of IHC’s June 30 fiscal tax year, the ~~winding down~~Tax Act subjects IHC to a blended tax rate of ~~operations and dissolution of IHC Administrative Services, Inc. (“IHC AS”), a subsidiary of IHC, in the quarter~~28% for its fiscal tax year ended June 30, 2017, the Company recognized an estimated $11,589,000 income tax benefit on a worthless stock deduction of $33,110,000 representing the Company’s tax basis related to its unrecovered investment in IHC AS. Management believes that it is more likely than not that the Company will realize the income tax benefit of this worthless stock deduction. Excluding this tax benefit, the2018. Other differences between the Federal statutory income tax rate ~~of 35%~~ and the Company’s effective income tax rate ~~resulted~~are principally from the dividends received deduction and tax exempt interest income, state and local income taxes, and ~~health insurer specific~~compensation related tax provisions.
The Internal Revenue Service has completed its review of the Company’s 2015 consolidated income tax return with no changes in the Company’s reported tax, however, the New York State Department of Taxation and Finance has recently selected the Company’s 2015 and 2016 income tax returns for audit.
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Note 10. Leases
Certain subsidiaries of the Company are obligated under operating lease agreements for office space and office equipment.
The Company had right-of-use assets amounting to $6,791,000 and corresponding lease liabilities of $7,417,000 related to its operating leases, which are included in other assets and other liabilities, respectively, in the Condensed Consolidated Balance Sheet on June 30, 2019. The weighted average discount rate used to measure lease liabilities was 6.78%. The leases have remaining lease terms of 1 to 8 years, some of which include options to extend the leases for up to 5 years. The weighted average remaining lease term is 5 years. Variable lease costs consist primarily of the Company’s proportionate share of real estate taxes and operating expenses related to leased premises. The following table summarizes information pertaining to our lease obligations for the periods indicated (in thousands):
Three Months
Six Months
Ended
Ended
June 30, 2019
June 30, 2019
Operating lease costs
$
575
$
1,111
Short-term lease costs
50
74
Variable lease costs
132
206
Total lease costs
$
757
$
1,391
Other information:
Operating cash flows from operating leases
$
(568)
$
(1,173)
Right-of-use assets obtained for operating leases
$
583
$
639
The Company assumed $435,000 of right-of-use assets in connection with acquisitions in 2019, as discussed in Note 7.
Maturities of operating lease liabilities at June 30, 2019 were as follows:

Due in the next year	$	`2,339`
Due in two years		`1,845`
Due in three years		`1,608`
Due in four years		`1,113`
Due in five years		`486`
Due in remaining years		`1,321`
Total payments due		`8,712`

Present value discount		`(1,295)`
Operating lease liability	$	`7,417`

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Note 11.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 incurred but not reported (“IBNR”) reserves. Summarized below are the changes in the total liability for policy benefits and claims for the periods indicated (in thousands).

Nine Months Ended

September 30,

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

114,795

111,526
  Prior years

(9,236)

(7,048)

  Total incurred

105,559

104,478

Amount paid, related to:

  Current year

52,822

46,997
  Prior years

56,452

109,819

  Total paid

109,274

156,816

Net balance at end of period

126,545

127,743
Plus: reinsurance recoverable

43,002

115,076
Balance at end of period
$
169,547
$
242,819

Six Months Ended

June 30,

2019

2018

Balance at beginning of year
$
160,115

$
168,683
Less: reinsurance recoverable

38,122

42,136
Net balance at beginning of year

121,993

126,547

Amount incurred, related to:

  Current year

96,736

84,871
  Prior years

(8,141)

(13,189)

  Total incurred

88,595

71,682

Amount paid, related to:

  Current year

41,644

35,956
  Prior years

37,242

42,108

  Total paid

78,886

78,064

Net balance at end of year

131,702

120,165
Plus: reinsurance recoverable

37,282

39,513
Balance at end of year
$
168,984

$
159,678

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 ~~$9,236,000~~$8,141,000 in ~~2017~~2019 related to prior years consists of favorable developments of ~~$2,420,000~~$3,158,000 in Specialty Health reserves, $4,230,000 in the ~~Medical Stop-Loss reserves, $5,406,000 in the~~ group

24

disability reserves, ~~and $2,714,000~~$594,000 in the other individual life, annuities and other reserves, ~~partially offset by an unfavorable development of $1,304,000~~and $159,000 in Medical Stop-Loss reserves. Specialty Health ~~reserves.~~net favorable development occurred primarily in the pets, fixed indemnity limited benefit, short-term medical and occupational accident lines of business. Group Disability net favorable development was primarily due to favorable claim experience in the DBL and LTD lines of business. The overall net favorable development of ~~$7,048,000~~$13,189,000 in ~~2016~~2018 related to prior years primarily consists of favorable developments of ~~$2,916,000~~$8,398,000 in the Specialty Health reserves, $3,345,000 in the group disability reserves, ~~$494,000~~$998,000 in the other individual life, annuities and other reserves, and $448,000 in Medical Stop-Loss ~~reserves, and $3,769,000 in Specialty health~~ reserves.
24

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).

Specialty Health Segment

Health Insurance Claims

Nine Months Ended

September 30,

2017

2016

Balance at beginning of year
$
27,183
$
23,425
Less: reinsurance recoverable

1,179

1,362
Net balance at beginning of year

26,004

22,063

Amount incurred, related to:

  Current year

40,836

34,598
  Prior years

1,144

(6,845)

  Total incurred

41,980

27,753

Amount paid, related to:

  Current year

13,528

9,541
  Prior years

23,797

13,105

  Total paid

37,325

22,646

Net balance at end of period

30,659

27,170
Plus: reinsurance recoverable

814

848
Balance at end of period
$
31,473
$
28,018

Specialty Health Segment

Health Insurance Claims

Six Months Ended

June 30,

2019

2018

Balance at beginning of year
$
26,068

$
32,904
Less: reinsurance recoverable

851

762
Net balance at beginning of year

25,217

32,142

Amount incurred, related to:

  Current year

25,855

26,747
  Prior years

(1,622)

(7,174)

  Total incurred

24,233

19,573

Amount paid, related to:

  Current year

7,838

7,336
  Prior years

13,157

16,662

  Total paid

20,995

23,998

Net balance at end of year

28,455

27,717
Plus: reinsurance recoverable

445

683
Balance at end of year
$
28,900

$
28,400

The liability for the IBNR plus expected development on reported claims associated with the Company’s health insurance claims ~~was $30,659,000~~is $28,455,000 at ~~September~~June 30, ~~2017.~~2019.

Note 11. 12.Stockholders’ Equity

~~Treasury Stock~~

In 2017, the Company repurchased 2,211,629 shares of its common stock for an aggregate cost of $44,442,000. Of that amount, 703,000 shares were repurchased in private transactions for an aggregate cost of $13,975,000; 1,385,118 shares were repurchased for an aggregate cost of $27,702,000 pursuant to the terms of a tender offer; and the remaining shares were repurchased in the open market.

~~In 2017, the Company reissued 12,671 shares previously held in treasury to satisfy the net-share settlement of option exercises during the period.~~

25

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.
25
Changes in the balances of accumulated other comprehensive income, shown net of taxes, for the periods indicated ~~were~~are as follows (in thousands):

		Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
		September 30,				September 30,				June 30,				June 30,
		2017		2016		2017		2016		2019		2018		2019		2018

Beginning balance	$	(2,504)	$	`4,054`	$	(6,964)	$	(3,440)	$	`(2,641)`	$	`(8,985)`	$	`(8,310)`	$	`(4,598)`

Cumulative-effect of new accounting principles										`-`		`-`		`-`		`(350)`

Other comprehensive income (loss):
Other comprehensive income (loss) before reclassifications		627		`(182)`		5,305		8,522		`5,935`		`(2,541)`		`11,077`		`(6,442)`
Amounts reclassified from accumulated OCI		(467)		`(573)`		(685)		(1,618)		`(996)`		`289`		`(469)`		`153`
Net other comprehensive income		160		`(755)`		4,620		6,904		`4,939`		`(2,252)`		`10,608`		`(6,289)`

Less: Other comprehensive income attributable
to noncontrolling interests		-		`47`		-		(118)
Acquired from noncontrolling interests		-		`102`		-		102

Ending balance	$	(2,344)	$	`3,448`	$	(2,344)	$	3,448	$	`2,298`	$	`(11,237)`	$	`2,298`	$	`(11,237)`

Presented below are the amounts reclassified out of accumulated other comprehensive income (loss) and recognized in earnings for each of the periods indicated (in thousands):

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016

Unrealized gains (losses) on available-for-sale securities

  reclassified during the period to the following income

  statement line items:

     Net realized investment gains
$
719
$
2,446
$
1,062
$
4,067
     Net impairment losses recognized in earnings

-

(1,475)

-

(1,475)

     Income before income tax

719

971

1,062

2,592
     Tax effect

252

398

377

974

     Net income
$
467
$
573
$
685
$
1,618

Three Months Ended

Six Months Ended

June 30,

June 30,

2019

2018

2019

2018

Unrealized gains (losses) on available-for-sale securities

  reclassified during the period to the following income

  statement line items:

     Net investment gains (losses)
$
1,271
$
(366)
$
1,249
$
(195)
     Net impairment losses recognized in earnings

-

-

(646)

-

     Income (loss) before income tax

1,271

(366)

603

(195)
     Tax effect

275

(77)

134

(42)

     Net income (loss)
$
996
$
(289)
$
469
$
(153)

Note 12.   13.Share-Based Compensation

IHC ~~has a share-based compensation plan. AMIC had a plan, which has now been terminated. The following is a summary of the activity pertaining to each of these plans.~~
~~A) IHC Share-Based Compensation Plans~~
Under the terms of IHC’s share-based compensation plans: (i) the exercise price of an option may not be less than the fair market value of an IHC share on the grant date and the terms of an option may not exceed 10 years from the grant date; and (ii) the exercise price of a SAR may not be less than the fair market value of an IHC share on the grant date and SAR terms may not exceed 10 years from the date of grant.

26

The fair value of an option award is estimated on the date of grant using the Black-Scholes option valuation model. In general, the vesting period for an option grant is 3years. Restricted share units are valued at the quoted market price of the shares at the date of grant and generally vest over 3years. Compensation costs for options and restricted share units are recognized over the stated vesting periods on a straight-line basis. The fair value of a SAR is calculated using the Black-Scholes valuation model at the grant date and each subsequent reporting period until settlement. Compensation cost is based on the proportionate amount of the requisite service that has been rendered to date. Once fully vested, changes in the fair value of a SAR continue to be recognized as compensation expense in the period of the change until settlement. The Company accounts for forfeitures of share-based compensation awards in the period that they occur.
At September 30, 2017, there were 1,099,100 shares available for future stock-based compensation grants under IHC’s stock incentive plan. The following table summarizes share-based compensation expense, which is included in selling, general and administrative expenses on the Condensed Consolidated Statements of Income, applicable to the IHC plans, by award type for each of the periods indicated (in thousands):

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016
IHC’s Share-based Compensation Plan:

Stock options
$
36
$
-
$
106
$
170
Restricted stock units

23

16

81

60
SARs

305

(57)

359

410

Share-based compensation expense, pre-tax

364

(41)

546

640
Tax benefits

145

16

218

255

Share-based compensation expense, net
$
219
$
(25)
$
328
$
385
~~Stock Options~~
~~The IHC’s~~ stock option activity during ~~2017~~the first six months of 2019 was as follows:

	Shares	Weighted- Average		Shares	Weighted- Average
	Under Option	Exercise Price		Under Option	Exercise Price

December 31, 2016	`697,180`	$	11.75
December 31, 2018				`567,384`	$	19.40
Granted	`34,000`		22.20	`424,380`		37.38
Exercised	`(38,800)`		9.09	`(192,050)`		9.34
September 30, 2017	`692,380`	$	12.41
Forfeited				`(4,000)`		22.20
June 30, 2019				`795,714`	$	31.40

The weighted average grant date fair value of options granted during the ~~period~~six months ended ~~September~~June 30, ~~2017~~2019 was ~~$7.01. No options were granted in the comparable period of 2016. The assumptions set forth in the table below were used to value the stock options granted during the period indicated:~~ $8.31.

	~~2017~~

~~Weighted-average risk-free interest rate~~	`1.71%`
~~Expected annual dividend rate per share~~	`0.79%`
~~Expected volatility factor of the Company's common stock~~	`37.57%`
~~Weighted-average expected term of options~~	~~4.5 years~~

In ~~2017,~~2019, IHC received ~~no cash from the exercise of stock options, as option exercises were net settled~~

27

in IHC shares. As part of the net-share settlements in 2017, cash outflows to satisfy employees’ income tax withholding obligations amounted to $303,000. Stock options exercised in 2017 had an aggregate intrinsic value of $621,000 and IHC realized $180,000 of tax benefits. In 2016, option agreements affecting 13 employees were modified to extend the expirations of their terms from 2017 to 2019 and, as a result, the Company recorded incremental compensation costs of $170,000. In 2016, IHC received $84,000$44,000 in cash from the exercise of stock options with an aggregate intrinsic value of ~~$67,000~~$5,002,000 and ~~realized $15,000~~recognized $737,000 of tax benefits.
~~The following table summarizes information regarding IHC’s outstanding and exercisable options:~~

September 30, 2017

Outstanding

Exercisable

Number of options

692,380

501,380
Weighted average exercise price per share
$
12.41
$
9.39
Aggregate intrinsic value for all options (in thousands)
$
8,889
$
7,953
Weighted average contractual term remaining

1.9 years

1.0 years

~~At September 30, 2017, the total unrecognized compensation cost related~~ Cash outflows in 2019 to ~~IHC’s non-vested stock options was $537,000 and it is expected~~satisfy employees’ income tax withholding obligations amounted to ~~be recognized as compensation expense over a weighted average period of 2.3 years.~~

~~Restricted Stock~~$2,397,000.

~~The following table summarizes restricted stock activity for the nine months ended September 30, 2017:~~

No. of

Weighted-Average

Non-vested

  Grant-Date

Shares

Fair Value

December 31, 2016

17,325

$
16.20

Vested

(4,950)

12.53

September 30, 2017

12,375

$
17.68

The total fair value of restricted stock units that vested during the first nine months of 2017 and 2016 was $94,000 and $120,000, respectively. IHC granted no restricted stock awards during the nine months ended September 30, 2017 and 2016.

At September 30, 2017, the total unrecognized compensation cost related to non-vested restricted stock unit awards was $153,000 which is expected to be recognized as compensation expense over a weighted average period of 1.8 years.

~~SARs~~

IHC had 30,800 and 71,500 of SAR awards outstanding at September 30, 2017 and December 31, 2016, respectively. In the first nine months of 2017, 40,700 SARs were exercised with an aggregate intrinsic value of $676,000. Included in Other Liabilities in the Company’s Condensed Consolidated Balance Sheets at September 30, 2017 and December 31, 2016 are liabilities of $559,000 and $876,000, respectively, pertaining to SARs.

2826

~~B) AMIC Share-Based Compensation Plan~~

~~AMIC’s share-based compensation plan was terminated in 2016~~. AMIC recorded $7,000 and $14,000 of share-based compensation expense net of tax benefits of $4,000, and $7,000, respectively, for the three months and nine months ended September 30, 2016. Additionally,

~~AMIC received $262,000 in cash from the exercise of stock options with an intrinsic value of $212,000.~~

Note 13. 14.Supplemental Disclosures of Cash Flow Information

Net cash payments for income taxes were ~~$292,000~~$388,000 and ~~$11,312,000~~$1,104,000 during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016.~~

~~Cash payments for interest were $0 and $1,422,000 during the nine months ended September 30, 2017 and 2016,~~2018, respectively.

Note 14. 15.Contingencies

Third Party Administrator

A third party administrator with whom we formerly did business (“Plaintiff” or “TPA”)) filed a Complaint dated May 17, 2017 in the United States District Court, Northern District of Texas, Dallas Division, naming IHC, Madison National Life, Standard Security Life, and IHC Carrier Solutions, Inc. (collectively referred to as “Defendants”). “Plaintiff” and “Defendants” are collectively referred to herein as the “Parties”. The Complaint concerns agreements entered into by Standard Security Life and Madison National Life with Plaintiff, as well as other allegations made by Plaintiff against ~~the~~ Defendants. The Complaint seeks injunctive relief and damages in an amount exceeding $50,000,000, ~~profit share~~ payments allegedly owed to Plaintiff under the agreements totaling at least $3,082,000 through 2014, plus additional amounts for 2015 and 2016, and exemplary and punitive damages as allowed by law and fees and costs. ~~The~~Defendants believe these claims to be without merit. Defendants moved to Compel Arbitration and Dismiss or Stay the original Complaint. ~~The~~ Plaintiff filed an Amended Complaint on August 18, 2017. ~~The~~ Defendants filed a Motion to Compel Arbitration or Stay the Amended ~~Complaint, which is still pending. In~~Complaint. The Parties agreed to enter into an Order staying the ~~fourth quarter of 2017,~~action filed in Texas. The Parties’ disputed claims moved in part to arbitration.

Standard Security Life and Madison National Life ~~agreed~~demanded arbitration against this TPA. The Arbitration Panel issued an Order splitting the hearing into two phases. Standard Security Life and Madison National Life successfully presented their claims in Phase I on September 25 through September 28, 2018. The TPA’s counterclaims were heard during Phase II held on February 11, 2019 through February 15, 2019. Standard Security Life and Madison National Life successfully opposed the counterclaims asserted by the TPA as the Arbitration Panel denied all claims against Standard Security Life and Madison National Life.Standard Security Life and Madison National Life filed the Petition to ~~pay fines~~Confirm the Arbitration Award. The TPA opposed this Motion. On June 17, 2019, the Court entered its Final Judgment and Order Confirming the Arbitration Award. On July 15, 2019, FCE filed a Notice of Appeal to the United States Court of Appeals for the Seventh Circuit from the judgment entered on June 17, 2019.

Since the arbitration is complete, the stay in the ~~state of~~ Texas ~~primarily~~litigation has been lifted. Defendants filed a Motion to Dismiss.

Multistate Market Conduct Examination

As previously disclosed, our subsidiaries, Standard Security Life, Madison National Life and Independence American, have been selected for a multistate market conduct exam ("MCE") related to our short term medical, limited medical and fixed indemnity health insurance products for the ~~claims payment practices~~period of January 1, 2014 through September 30, 2017. The insurance departments of five jurisdictions (Delaware, Wisconsin, District of Columbia, Kansas and South Dakota) are serving as leads, and the District of Columbia Department of Insurance, Securities and Banking and the Delaware Department of Insurance are serving as the managing lead states of the ~~Plaintiff.~~MCE. In addition to these five, 36 other states are participating in the exam. Each of our subsidiaries separately responded to inquiries and document production requests in this matter, and has proactively communicated and cooperated with all applicable regulatory agencies. Each of our subsidiaries has also provided a detailed action plan to regulators that summarizes its newly developed and enhanced compliance and control mechanisms.

On July 18, 2019, each of our subsidiaries received a proposed Regulatory Settlement Agreement ("RSA") to resolve the MCE with respect to such company. The proposed RSAs provide for monetary penalties as well as requirements related to our subsidiaries' marketing activities and periodic reporting to

27
regulators. Standard Security Life, Madison National Life and Independence American are in the process of evaluating the proposed RSAs and anticipate entering into confidential discussions with the insurance departments of the lead jurisdictions in the coming weeks. At this time, the Company is not able to reasonably estimate any settlement amount or range of settlement amounts that may result from such discussions.

Note 15.   16.Segment Reporting

The Insurance Group principally engages in the life and health insurance business. Interest expense, taxes, and general expenses associated with parent company activities are included in Corporate. Identifiable assets by segment are those assets that are utilized in each segment and are allocated based upon the mean reserves and liabilities of each such segment. Corporate assets are composed principally of cash equivalents, resale agreements, fixed maturities, equity securities, partnership interests and certain other investments.

29

Information by business segment is presented below for the periods indicated (in thousands):

~~Three Months Ended~~
~~Nine Months Ended~~
~~September 30,~~
~~September 30,~~
2017
2016
2017
2016
~~Revenues:~~
~~Specialty Health~~
$
55,502
$
44,684
$
152,292
$
126,454
~~Group disability; life and DBL~~
26,112
26,196
78,985
77,409
~~Individual life, annuities and other~~ ~~(A)~~
455
717
1,494
2,053
~~Medical Stop-Loss~~ ~~(A)~~
576
5,433
2,549
21,397
~~Corporate~~
392
620
1,522
2,350
83,037
77,650
236,842
229,663
~~Net realized investment gains~~
715
2,367
987
3,945
~~Net impairment losses recognized in earnings~~
-
(1,475)
-
(1,475)
   ~~Total revenues~~
$
83,752
$
78,542
$
237,829
$
232,133
~~Income from continuing operations~~
  ~~before income taxes:~~
~~Specialty Health~~ ~~(B)~~
$
5,238
$
1,369
$
9,412
$
3,754
~~Group disability; life and DBL~~
5,144
5,323
12,777
13,533
~~Individual life, annuities and other~~ ~~(A) (C)~~
(385)
(410)
(532)
(1,888)
~~Medical Stop-Loss~~ ~~(A)~~
(538)
2,176
2,752
13,926
~~Corporate~~
(2,295)
(1,908)
(6,042)
(7,106)
7,164
6,550
18,367
22,219
~~Net realized investment gains~~
715
2,367
987
3,945
~~Net impairment losses recognized in earnings~~
-
(1,475)
-
(1,475)
~~Interest expense~~
-
(440)
-
(1,366)
   ~~Income from continuing operations~~
      ~~before income taxes~~
$
7,879
$
7,002
$
19,354
$
23,323

Three Months Ended

Six Months Ended

June 30,

June 30,

2019

2018

2019

2018
Revenues:

Specialty Health
$
47,743
$
49,087
$
101,182
$
99,851
Group disability, life, DBL and PFL

42,914

35,222

83,043

71,681
Individual life, annuities and other (A)

404

445

822

912
Medical Stop-Loss (A)

2

11

4

23
Corporate

2,604

546

3,273

1,077

93,667

85,311

188,324

173,544
Net investment gains (losses)

1,455

(423)

1,626

(352)
Net impairment losses recognized in earnings

-

-

(646)

-
   Total revenues
$
95,122
$
84,888
$
189,304
$
173,192

Income before income taxes

Specialty Health (B)
$
2,823
$
7,255
$
12,481
$
12,724
Group disability, life, DBL and PFL

5,038

4,699

9,202

10,645
Individual life, annuities and other (A) (C)

(314)

(126)

(767)

(294)
Medical Stop-Loss (A)

213

70

285

164
Corporate

(709)

(1,981)

(3,141)

(4,339)

7,051

9,917

18,060

18,900
Net investment gains (losses)

1,455

(423)

1,626

(352)
Net impairment losses recognized in earnings

-

-

(646)

-
   Income before income taxes
$
8,506
$
9,494
$
19,040
$
18,548

(A)Substantially all of the business in the segment is coinsured. Activity in this segment primarily reflects income or expenses related to the coinsurance and the run-off of any remaining blocks that were not coinsured.

(B)The Specialty Health segment includes amortization of intangible assets. Total amortization expense was ~~$393,000~~$309,000 and ~~$366,000~~$382,000 for the three months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, respectively, and was ~~$941,000~~$668,000 and ~~$1,057,000, respectively,~~$743,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016.~~2018, respectively.

(C)The Individual life, annuities and other segment includes amortization of deferred charges in connection with the assumptions of certain ceded life and annuity policies ~~amounting to $368,000~~of $197,000 and ~~$296,000~~$219,000 for the three months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, respectively, and ~~$937,000~~$402,000 and ~~$1,949,000~~$456,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018 , respectively.

3028
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The following discussion of the financial condition and results of operations of Independence Holding Company ("IHC") and its subsidiaries (collectively, the "Company") should be read in conjunction with, and is qualified in its entirety by reference to, the Consolidated Financial Statements of the Company and the related Notes thereto appearing in our ~~annual report~~Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016,~~2018, as filed with the Securities and Exchange Commission, and our unaudited Condensed Consolidated Financial Statements and related Notes thereto appearing elsewhere in this quarterly report.

Overview

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., My1HR, Inc. (“My1HR”) and a majority interest in PetPartners, Inc. (“PetPartners”). 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”.

While management considers a wide range of factors in its strategic planning and decision-making, underwriting profit is consistently emphasized as the primary goal in all decisions as to whether or not to increase our retention in a core line, expand into new products, acquire an entity or a block of business, or otherwise change our business model. Management's assessment of trends in healthcare and morbidity, with respect to specialty ~~medical,~~health, disability, ~~and~~ New York short-term disability (“DBL”); and Paid Family Leave (“PFL”), mortality rates with respect to life ~~insurance;~~insurance, and changes in market conditions in general play a significant role in determining the rates charged, deductibles and attachment points quoted, and the percentage of business retained. IHC also seeks transactions that permit it to leverage its vertically integrated organizational structure by generating fee income from production and administrative operating companies as well as risk income for its carriers.Management has always focused on managing the costs of its operations.
3129
The following is a summary of key performance information and events:

Results of operations are summarized as follows for the periods indicated (in thousands):

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016

Revenues
$
83,752
$
78,542
$
237,829
$
232,133
Expenses

75,873

71,540

218,475

208,810

Income from continuing operations before income taxes

7,879

7,002

19,354

23,323
Income taxes (benefits)

2,666

2,636

(5,175)

8,566

  Income from continuing operations, net of tax

5,213

4,366

24,529

14,757

  Income from discontinued operations

-

-

-

109,912

  Net income

5,213

4,366

24,529

124,669

  Less: (Income) loss from noncontrolling interests in subsidiaries

16

(43)

(33)

(9,900)

Net income attributable to IHC
$
5,229
$
4,323
$
24,496
$
114,769

Three Months Ended

Six Months Ended

June 30,

June 30,

2019

2018

2019

2018

Revenues
$
95,122
$
84,888
$
189,304
$
173,192
Expenses

86,616

75,394

170,264

154,644

Income before income taxes

8,506

9,494

19,040

18,548
Income taxes

1,590

2,652

3,234

4,658

  Net income

6,916

6,842

15,806

13,890

  (Income) from noncontrolling interests

(69)

(85)

(232)

(172)

Net income attributable to IHC
$
6,847
$
6,757
$
15,574
$
13,718

Income from ~~continuing~~ operations of ~~$.34~~$.46 per share, diluted, for the three months ended ~~September~~June 30, ~~2017~~2019 compared to ~~$.25~~$.45 per share, diluted, for the same period in ~~2016.~~2018. Income from ~~continuing~~ operations of ~~$1.50~~$1.04 per share, diluted, for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 compared to ~~$.83~~$.91 per share, diluted for the same period in ~~2016.~~2018.

o~~Income taxes~~Net income for the ~~nine~~six months ended ~~September~~June 30, ~~2017, include~~2019 includes $2.6 million of gain, net of tax, related to the sale of an ~~income tax benefit of $11.6 million on the tax basis in an unrecovered investment in a subsidiary.~~equity investment.

Consolidated investment yields (on an annualized basis) of ~~3.6% and~~ 3.2% for the three ~~months~~ and ~~nine~~six months ended ~~September~~June 30, ~~2017, respectively,~~2019, compared to ~~2.5%~~2.7% and ~~2.7%~~2.6% for the comparable ~~three and nine month~~ periods in ~~2016,~~2018, respectively;

Book value of ~~$28.19~~$31.40 per common share at ~~September~~June 30, ~~2017~~2019 compared to ~~$25.53~~$30.16 at December 31, ~~2016.~~2018.

The following is a summary of key performance information by segment:

The Specialty Health segment reported ~~$5.2~~$2.8 million of income before taxes for the three months ended ~~September~~June 30, ~~2017~~2019 as compared to ~~$1.4~~$7.3 million for the comparable period in ~~2016;~~2018; and reported ~~$9.4~~$12.5 million of income before taxes for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 compared to ~~$3.8~~$12.7 million for the same period in ~~2016.~~

o~~Premiums earned~~2018. The decrease in the second quarter of 2019 when compared to 2018 was primarily due to increased ~~$11.1 million~~loss reserves in the short-term medical, fixed indemnity limited benefit and ~~$23.5 million~~group gap lines of business. Results for ~~the three and nine months ended September 30, 2017, respectively, over the~~ comparable 2018 periods ~~in 2016. For the three months and nine months ended September 30, 2017,~~included more favorable development from prior periods mostly on short term medical ~~premiums increased $3.6 million and $11.3 million, respectively,~~ and fixed indemnity limited benefit premiums increased $14.3 million and $23.1 million, respectively, as a result of the growing demand for these products and new significant distribution relationships. Premium increases in these lines were partially offset by reduced premium volume in occupational accident business following

32

~~the sale of Accident Insurance Services, Inc., our primary producer of occupational accident business, in 2016, other lines in run-off, and dental business.~~business;

oPremiums earned increased $.2 million in both the three and six months ended June 30, 2019 compared with the same periods in 2018. Increased premiums from the pet, group gap, and certain occupational accident lines of business were partially offset primarily by decreased premiums in fixed indemnity limited benefit business.
oUnderwriting experience, as indicated by its U.S. GAAP Combined Ratios, for the Specialty Health segment are as follows for the periods indicated (in thousands):
30

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016

Premiums Earned
$
51,390
$
40,275
$
136,539
$
112,981
Insurance Benefits, Claims & Reserves

22,162

21,849

64,935

60,497
Expenses

25,354

17,629

67,134

50,159

Loss Ratio (A)

43.1%

54.2%

47.6%

53.5%
Expense Ratio (B)

49.3%

43.8%

49.2%

44.4%
Combined Ratio (C)

92.4%

98.0%

96.8%

97.9%

Three Months Ended

Six Months Ended

June 30,

June 30,

2019

2018

2019

2018

Premiums Earned
$
44,173
$
43,993
$
89,005
$
88,849
Insurance Benefits, Claims & Reserves

18,084

13,691

36,749

29,593
Expenses

20,833

23,423

41,453

47,760

Loss Ratio (A)

40.9%

31.1%

41.3%

33.3%
Expense Ratio (B)

47.2%

53.2%

46.6%

53.8%
Combined Ratio (C)

88.1%

84.3%

87.9%

87.1%

(A)Loss ratio represents insurance benefits, claims and reserves divided by premiums earned.

(B)Expense ratio represents commissions, administrative fees, premium taxes and other underwriting expenses divided by premiums earned.

(C)The combined ratio is equal to the sum of the loss ratio and the expense ratio.

o~~Although the~~The higher loss ratios ~~for the three months and nine months~~ in ~~2017 are lower~~2019 were as a result of less favorable prior period development than in ~~the comparable periods~~2018. The lower expense ratio in ~~2016, the expense ratios are higher in 2017 because of~~2019 is primarily due to changes in the mix of products ~~within~~in the Specialty Health segment and as a result of the reallocation of certain fixed costs from the Medical Stop-Loss segment to the Specialty Health segment as the premium volume of one segment shrinks and the other one grows. In addition, the Company continues to experience poor performance on the runout business underwritten by its occupational accident agency sold in the third quarter of 2016. Excluding this business, the Company would have reported a Combined Ratio of 91.6% and 95.3% for the three months and nine months ended September 30, 2017, respectively.segment.

o~~Specialty Health earned premiums increased 27.6% and 20.9% for the three months and nine months in 2017, respectively, as compared with the same periods in 2016.~~

Income before taxes from the Group disability, life, ~~annuities~~DBL and ~~DBL~~PFL segment ~~decreased $0.2~~was $5.0 million and $9.2 million for the three months and six months ended ~~September~~June 30, ~~2017~~2019, respectively, compared to $4.7 million and ~~$0.7~~$10.6 million for ~~the nine months ended September 30, 2017 compared to~~ the same periods in ~~2016.~~2018, respectively. The decrease in the ~~in the three and nine-month~~first six months results is primarily ~~reflects a decrease in the group term life lines~~ due to higher ~~claims~~loss ratios in ~~2017~~the LTD lines of business and ~~lower income from the international line due to run-off of that line of business.~~higher commission expenses on increased premiums;

The Individual life, annuities and other segment reported losses before income taxes of ~~$0.4~~$.3 million and $.8 million for the three months and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, respectively, compared with losses of ~~$0.4~~$.1 million and ~~$1.9~~$.3 million for the ~~comparable periods~~three months and the six months ended ~~September~~June 30, 2016. The losses in 2016 were related to the accelerated amortization of deferred costs in connection with the assumption of certain ceded life and annuity policies for which there are no comparable amounts in 2017.2018 respectively.

The Medical Stop-Loss segment reported ~~a loss~~an insignificant amount of income before taxes ~~of $0.5 million~~ for the three and six months ended ~~and income of $2.8 million for the nine months ended September~~June 30, ~~2017 as compared to income of $2.2 million~~2019 and ~~$13.9 million for~~ the comparable periods ~~in 2016. The reduction in~~of 2018. Amounts recorded for investment income, ~~in 2017~~

33

~~in the Medical Stop-loss segment is principally due to the sale of Risk Solutions~~ and ~~exit from the medical stop-loss business. Premiums earned and amounts recorded for~~ benefits, claims and reserves in the Medical Stop-Loss segment represent the activity of the remaining blocks of medical stop-loss business in ~~run-off.~~run-off;

~~Losses before tax from the~~The Corporate segment ~~increased $0.4~~reported losses before taxes of $.7 million and $3.1 million for the three and six months ended June 30, 2019, respectively, compared with losses of $2.0 million in the three months and ~~decreased $1.1~~$4.3 million in the ~~nine~~six months ended ~~September 30, 2017 over the comparable periods of 2016~~2018, primarily due to ~~changes~~higher income from equity investments in ~~share-based compensation, consulting, legal~~2019; and ~~accounting expenses; and~~
31

Premiums by principal product for the periods indicated are as follows (in thousands):

Three Months Ended

Nine Months Ended

September 30,

September 30,
Gross Direct and Assumed

Earned Premiums:

2017

2016

2017

2016

Specialty Health
$
52,888
$
42,629
$
141,730
$
120,318
Group disability, life and DBL

31,299

31,057

95,211

91,760
Individual, life, annuities and other

6,306

3,898

19,911

12,605
Medical Stop-Loss

371

64,684

10,683

223,609

$
90,864
$
142,268
$
267,535
$
448,292

Three Months Ended

Six Months Ended

June 30,

June 30,
Gross Direct and Assumed

Earned Premiums:

2019

2018

2019

2018

Specialty Health
$
45,732
$
44,518
$
91,273
$
89,911
Group disability, life, DBL and PFL

48,090

41,652

93,144

84,252
Individual life, annuities and other

5,781

5,756

11,122

12,013

$
99,603
$
91,926
$
195,539
$
186,176

Three Months Ended

Nine Months Ended

September 30,

September 30,
Net Direct and Assumed

Earned Premiums:

2017

2016

2017

2016

Specialty Health
$
51,390
$
40,275
$
136,539
$
112,981
Group disability, life and DBL

24,296

24,373

73,713

71,842
Individual, life, annuities and other

(45)

19

8

30
Medical Stop-Loss

(2)

2,668

247

10,671

$
75,639
$
67,335
$
210,507
$
195,524

Three Months Ended

Six Months Ended

June 30,

June 30,
Net Direct and Assumed

Earned Premiums:

2019

2018

2019

2018

Specialty Health
$
44,173
$
43,993
$
89,005
$
88,849
Group disability, life, DBL and PFL

40,763

33,350

78,706

67,974
Individual life, annuities and other

11

(9)

25

3

$
84,947
$
77,334
$
167,736
$
156,826

CRITICAL ACCOUNTING POLICIES

The accounting and reporting policies of the Company conform to U.S. generally accepted accounting principles ("GAAP"). The preparation of the Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires the Company's management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. A summary of the Company's significant accounting policies and practices is provided in Note 1 of the Notes to the Consolidated Financial Statements included in Item 8 of the Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016.~~2018. Management has identified the accounting policies related to Insurance Premium Revenue Recognition and Policy Charges, Insurance Liabilities, Investments, Goodwill and Other Intangible Assets, and Deferred Income Taxes as those that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of the Company's Consolidated Financial Statements and this Management's Discussion and Analysis. A full discussion of these policies is included under the heading, “Critical Accounting Policies” in Item 7 of the Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016.~~2018. During the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, there were no additions to or changes in the critical accounting policies disclosed in the ~~2016~~2018 Form 10-K except for the recently adopted accounting

34

standards discussed in Note 1(E) of the Notes to Condensed Consolidated Financial Statements.
32

Results of Operations for the Three Months Ended ~~September~~June 30, ~~2017~~2019 Compared to the Three Months Ended ~~September~~June 30, ~~2016~~2018

Information by business segment for the periods indicated is as follows:

Benefits,
Selling,

Net
Fee and
Claims
General

~~September~~June 30, ~~2017~~2019
Premiums
Investment
Other
and
and

(In thousands)
Earned
Income
Income
Reserves
Administrative
Total

Specialty Health
$
51,390 44,173
1,2991,162
2,8132,408
22,16218,084
28,10226,836
$
5,2382,823
Group disability,

   life, DBL and ~~DBL~~PFL

24,296 40,763
1,7292,011
87140
11,24926,026
9,71911,850

5,1445,038
Individual life,

   annuities and other

(45)11
405317
9576
(149)301
989417

(385)(314)
Medical Stop-Loss

(2)-
5782
-
274 (1)
840(210)

(538)213
Corporate

-
392642
-1,962
-
2,6873,313

(2,295)(709)
Sub total
$
75,63984,947
$
4,4034,134
$
2,9954,586
$
33,53644,410
$
42,33742,206

7,1647,051

Net ~~realized~~ investment gains

7151,455
Net impairment losses recognized in earnings
-
Income ~~from continuing operations~~ before income taxes

7,8798,506
Income taxes

2,6661,590
Net Income ~~from continuing operations, net of tax~~
$
5,2136,916

Benefits,
Selling,

Net
Fee and
Claims
General

June 30, 2018
Premiums
Investment
Other
and
and

(In thousands)
Earned
Income
Income
Reserves
Administrative
Total

Specialty Health
$
43,993
1,060
4,034
13,691
28,141
$
7,255
Group disability,

   life, DBL and PFL

33,350
1,741
131
19,967
10,556

4,699
Individual life,

   annuities and other

(9)
367
87
171
400

(126)
Medical Stop-Loss

-
11
-
(128)
69

70
Corporate

-
508
38
-
2,527

(1,981)
Sub total
$
77,334
$
3,687
$
4,290
$
33,701
$
41,693

9,917

Net investment losses

(423)
Income before income taxes

9,494
Income taxes

2,652
Net Income
$
6,842
Premiums Earned
In the second quarter of 2019, premiums earned increased $7.6 million over the comparable period of 2018. The increase is primarily due to: (i) an $7.4 million increase in earned premiums from the Group disability, life, DBL and PFL segment as a result of $4.8 million in increased PFL and DBL premiums, $1.5 million in increased LTD business and $1.0 million in increased group term and other life business; and (ii) a $.2 million increase in Specialty Health segment premiums as increased premiums of $2.2 million from pet lines, $1.3 million in group gap lines, $.4 million in increased occupational accident business and $.2 million in ancillary business were partially offset by decreased premiums of $3.0 million in the fixed indemnity limited benefit business line, $.4 million in short term medical and $.5 million in dental lines.
Net Investment Income
Total net investment income increased $.4 million. The overall annualized investment yields were 3.2% and 2.7% in the second quarter of 2019 and 2018, respectively.
The annualized investment yields on bonds, equities and short-term investments were 3.1% in the second quarter of 2019 and 3.0% for the comparable 2018 period.
33
Net Investment Gains and Net Impairment Losses Recognized in Earnings
The Company had net investment gains of $1.5 million in 2019 compared to $.4 million in investment losses in 2018. These amounts include gains and losses from sales of fixed maturities available-for-sale, equity securities and other investments. Decisions to sell securities are based on management's ongoing evaluation of investment opportunities and economic and market conditions, thus creating fluctuations in gains and losses from period to period.
Fee Income and Other Income
Fee income decreased $.9 million for the three-month period ended June 30, 2019 compared to the three-month period ended June 30, 2018. The decrease is primarily due to more business being written on IHC carrier paper in 2019.
Other income increased $1.2 million for the three months ended June 30, 2019 from the comparable period in 2018 due to higher income from equity partnerships in 2019.
Insurance Benefits, Claims and Reserves
In the second quarter of 2019, insurance benefits, claims and reserves increased $10.7 million over the comparable period in 2018. The increase is primarily attributable to: (i) an increase of $6.1 million in benefits, claims and reserves in the Group disability, life, DBL and PFL segment, primarily as a result of an increase of $5.5 million in the PFL line due to increased premiums, $1.0 million in the LTD and STD lines combined due to higher LTD loss ratios, partially offset by decreased claims of $.5 million in DBL business on lower premium volume; (ii) an increase of $4.4 million in the Specialty Health segment, primarily from an increase of $1.5 million in the short term medical line due to higher loss ratios, partially from less favorable prior year loss development in 2019, an increase of $1.2 million in pet and $1.7 million in group gap businesses both due to increased premium volume, an increase of $1.0 million in the fixed indemnity limited benefit line partly due to less favorable prior year loss development in 2019 than in the prior year, partially offset by a decrease of $.3 million in the dental line on lower loss ratios and $.6 million in occupational accident business.
Selling, General and Administrative Expenses
Total selling, general and administrative expenses increased $.5 million over the comparable period in 2018. The increase is primarily as a result of: (i) an increase of $1.3 million in the Group disability, life, DBL and PFL segment primarily due to increased commission expense and other general expenses on PFL, LTD and group term life lines of business primarily on increased premium volume, partially offset by decreased commission and other general expenses on DBL business on lower premium volume; and (ii) an increase of $.8 million in the Corporate segment due to compensation associated expenses; partially offset by (iii) a decrease of $1.3 million in the Specialty Health line of business due to a decrease in commission and administrative expenses related to decreased premium volume in fixed indemnity limited benefit and lower administrative fees and loss adjustment expenses in the short term medical line, partially offset by an increase in commissions and administrative fees and other general expenses in the pets and group gap lines on increased premium volume as well as increased lead generation, compensation and system development related expenses in our marketing and administrative companies.
Income Taxes
The effective tax rate for the three months ended June 30, 2019 was 18.7% compared to 27.9% for the three months ended 2018. The lower tax rate is primarily due to the Tax Act’s reduction in the federal corporate tax rate from January 1, 2018 which resulted in a blended 28% tax rate in 2018 compared to a 21% tax rate in 2019.
34
Results of Operations for the Six Months Ended June 30, 2019 Compared to the Six Months Ended June 30, 2018
Information by business segment for the periods indicated is as follows:

Benefits,
Selling,

Net
Fee and
Claims
General

~~September~~June 30, ~~2016~~2019
Premiums
Investment
Other
and
and

(In thousands)
Earned
Income
Income
Reserves
Administrative
Total

Specialty Health
$
40,275 89,005
1,1901,984
3,21910,193
21,84936,749
21,46651,952
$
1,36912,481
Group disability,

   life, DBL and ~~DBL~~PFL

24,373 78,706
1,6804,030
143307
12,65250,268
8,22123,573

5,3239,202
Individual life,

   annuities and other

1925
810635
(112)162
268521
8591,068

(410) (767)
Medical Stop-Loss

2,668 -
(296)4
3,061-
3,508(9)
(251)(272)

2,176285
Corporate

-
6201,477
1,796
-
-
2,5286,414

(1,908)(3,141)
Sub total
$
67,335167,736
$
4,0048,130
$
6,31112,458
$
38,27787,529
$
32,82382,735

6,55018,060

Net ~~realized~~ investment ~~gains~~losses

2,3671,626
Net impairment losses recognized in earnings

(1,475)
~~Interest expense on debt~~
(440)(646)
Income ~~from continuing operations~~ before income taxes

7,00219,040
Income taxes

2,6363,234
Net Income ~~from continuing operations, net of tax~~
$
4,36615,806
~~Premiums Earned~~
In the third quarter of 2017, premiums earned increased $8.3 million over the comparable period of 2016. The increase is primarily due to: (i) an increase of $11.1 million in the Specialty Health segment principally as a result of a $14.3 million increase in the fixed indemnity limited benefit, a $3.6 million increase in premiums from the short-term medical line of business, partially offset by a $3.2 million decrease in occupational accident premiums due to the run-off of this line following the sale of our primary producer of this business in the third quarter of 2016, a decrease of $1.3 million in the dental line of business and $2.1 million in lower international premiums; partially offset by (ii) a $2.7 million decrease in the Medical Stop-Loss segment as a result of the sale of Risk Solutions and exit from the medical stop-loss business, as further described in Note 3.
~~Net Investment Income~~
Total net investment income increased $0.4 million over the comparable period in 2016. The overall annualized investment yields were 3.6% and 2.5% in the third quarter of 2017 and 2016, respectively. The increase in 2017 is primarily due to higher returns on partnership investment partially offset by a decrease in

35

~~net investment income from bonds, equities and short-term investments as a result of lower average invested assets in 2017 largely due to the retirement of debt in the fourth quarter of 2016.~~
The annualized investment yields on bonds, equities and short-term investments were 3.2% and 2.7% in the third quarter of 2017 and 2016, respectively. IHC has approximately $152.3 million in highly rated shorter duration securities earning on average 1.7%. A portfolio that is shorter in duration enables us, if we deem prudent, the flexibility to reinvest in much higher yielding longer-term securities, which would significantly increase investment income.
~~Net Realized Investment Gains and Net Impairment Losses~~
The Company had net realized investment gains of $0.7 million in 2017 compared to $2.4 million in 2016. These amounts include gains and losses from sales of fixed maturities and equity securities available-for-sale and other investments. Decisions to sell securities are based on management's ongoing evaluation of investment opportunities and economic and market conditions, thus creating fluctuations in gains and losses from period to period.
The Company recognized $1.5 million of other-than-temporary impairment losses on certain fixed maturities available-for-sale during the nine months ended September 30, 2016 due to credit losses. The Company determined that it was more likely than not that the securities would be sold before the recovery of their amortized cost basis.
~~Fee Income and Other Income~~
Fee income decreased $1.4 million for the three-month period ended September 30, 2017 compared to the three-month period ended September 30, 2016 primarily due to the lack of agency fees in 2017 from Accident Insurance Services, Inc., our primary producer of the Occupational Accident line of business, which was sold in the third quarter of 2016; partially offset by fee income earned by PetPartners, our recently acquired subsidiary, with no comparable amounts in 2016, and increased fee income as a result of higher premium volume in certain lines of the specialty health business.
Other income in the third quarter of 2017 decreased $1.9 million from the same period in 2016 primarily due to the run-off of fees received in conjunction with the diminished administration of the Medical Stop-Loss segment.
~~Insurance Benefits, Claims and Reserves~~
In the third quarter of 2017, insurance benefits, claims and reserves decreased $4.8 million over the comparable period in 2016. The decrease is primarily attributable to: (i) a decrease of $3.2 million in the Medical Stop-Loss segment primarily as a result of the sale of Risk Solutions and exit from the medical stop-loss business, further described in Note 3; and (ii) decreased benefits, claims and reserves of $1.5 million in the Group disability, life, annuities and DBL segment, primarily due to lower loss ratios on group term life and LTD lines, and (iii) a decrease of $0.4 million in the Individual life, annuity and other segment; partially offset by (iv) an increase of $.3 million in the Specialty Health segment, primarily due to increases of $3.9 million and $2.0 million in claims from the fixed indemnity limited benefit and short term medical products as a result of increased volume, partially offset by decreases of $2.6 million in dental on reduced premium volume, $1.4 million in Occupational Accident lines sold in the third quarter of 2016, $1.3 million in international and $.3 million in small group major medical business.
~~Selling, General and Administrative Expenses~~
Total selling, general and administrative expenses increased $9.5 million over the comparable period in 2016. The increase is primarily attributable to: (i) a $6.6 million increase in the Specialty Health segment primarily due to administrative and commission expenses associated with the increased premium volume in

36

the short term medical and fixed indemnity limited benefit lines, and agency expenses from PetPartners with no comparable expenses in the prior year; (ii) an increase of $1.1 million in the Medical Stop-Loss segment primarily due to a credit in premium taxes in 2016 with no comparable amount for 2017; (iii) an increase of $1.5 million in the Group disability, life, annuities and DBL segment and (iii) an increase of $0.2 million in Corporate due to an increase in audit, legal, share-based compensation and consulting fees.
~~Income Taxes~~
The effective tax rate for the three months ended September 30, 2017 was 33.8% compared to 37.6% for the three months ended 2016. The lower tax rate is primarily due to: (i) an increase in benefits from tax-advantaged securities as a percentage of income in 2017; (ii) a decrease in state taxes as a percentage of income; and (iii) a decrease in non-deductible expenses.
~~Results of Operations for the Nine Months Ended September 30, 2017 Compared to the Nine Months Ended September 30, 2016~~
~~Information by business segment for the periods indicated is as follows:~~

Benefits,
Selling,

Net
Fee and
Claims
General

~~September~~June 30, ~~2017~~2018
Premiums
Investment
Other
and
and

(In thousands)
Earned
Income
Income
Reserves
Administrative
Total

Specialty Health
$
136,53988,849
3,7252,181
12,0288,821
64,93529,593
77,94557,534
$
9,41212,724
Group disability,

   life, DBL and ~~DBL~~PFL

73,71367,974
4,9213,415
351292
40,14640,062
26,06220,974

12,77710,645
Individual life,

   annuities and other

83
1,188728
298181
172399
1,854807

(532)(294)
Medical Stop-Loss

247-
1,05823
1,244-
(2,182)(446)
1,979305

2,752164
Corporate

-
1,5221,021
-56
-
7,5645,416

(6,042)(4,339)
Sub total
$
210,507156,826
$
12,4147,368
$
13,9219,350
$
103,07169,608
$
115,40485,036

18,36718,900

Net ~~realized~~ investment ~~gains~~losses

987 (352)
Income ~~from continuing operations~~ before income taxes

19,35418,548
Income tax benefits

(5,175)4,658
Net Income ~~from continuing operations, net of tax~~
$
24,529
~~Benefits,~~
~~Selling,~~
~~Net~~
~~Fee and~~
~~Claims~~
~~General~~
~~September 30, 2016~~
~~Premiums~~
~~Investment~~
~~Other~~
~~and~~
~~and~~
~~(In thousands)~~
~~Earned~~
~~Income~~
~~Income~~
~~Reserves~~
~~Administrative~~
~~Total~~
~~Specialty Health~~
$
112,981
2,253
11,220
60,497
62,203
$
3,754
~~Group disability,~~
   ~~life and DBL~~
71,842
4,926
641
38,203
25,673
13,533
~~Individual life,~~
   ~~annuities and other~~
30
1,677
346
922
3,019
(1,888)
~~Medical Stop-Loss~~
10,671
1,544
9,182
9,875
(2,404)
13,926
~~Corporate~~
-
2,300
50
-
9,456
(7,106)
~~Sub total~~
$
195,524
$
12,700
$
21,439
$
109,497
$
97,947
22,219
~~Net realized investment gains~~
3,945
~~Net impairment losses recognized in earnings~~
(1,475)
~~Interest expense on debt~~
(1,366)
~~Income from continuing operations before income taxes~~
23,323
~~Income taxes~~
8,566
~~Income from continuing operations, net of tax~~
$
14,75713,890

Premiums Earned

In the first ~~nine~~six months of ~~2017,~~2019, premiums earned increased ~~$15.0~~$10.9 million over the comparable period of ~~2016.~~2018. The increase is primarily due to: (i) ~~an increase of $23.5 million in the Specialty Health segment principally as~~ a ~~result of a $23.1 million increase in the fixed indemnity limited benefit line, a $11.3 million~~

37

increase in premiums from the short term medical line of business, and a $1.5 million increase in the pet line of business, partially offset by a decrease of $6.1 million in occupational accident business premiums due to the run-off of this line following the sale of our primary producer of this business, in the third quarter of 2016, a decrease of $3.5 million in the dental line of business and a $2.9 million decline in international premiums; and (ii) a $1.9$10.7 million increase in earned premiums from the Group disability, life, ~~annuities and DBL segment primarily due to increased volume in the LTD,~~ DBL and ~~group term life lines, partially offset by (iii) a decrease of $10.4 million in the Medical Stop-Loss~~PFL segment as a result of $5.8 million in increased PFL premiums, $2.6 million primarily in new STD business, $1.9 million and $.4 million in increased group term life other group life business, respectively; and (ii) an $.2 million increase in Specialty Health segment premiums, principally due to increased premium volume of $3.9 million from pet lines, $2.4 million in group gap lines, and $1.1 million in occupational accident business partially offset by decreased premiums of $6.4 million in fixed indemnity limited benefit business and $.9 million in the ~~sale of Risk Solutions and exit from the medical stop-loss business, further described in Note 3.~~dental line.

Net Investment Income

Total net investment income ~~decreased $0.3 million over the comparable period in 2016.~~increased $.8 million. The overall annualized investment yields were 3.2% and ~~2.7% in~~2.6% for the first ~~nine~~six months of ~~2017~~2019 and ~~2016,~~2018, respectively. The overall decrease was primarily the result of lower average invested assets in 2017 largely due to the retirement of debt in the fourth quarter of 2016 partially offset by higher returns on partnership investment.

The annualized investment yields on bonds, equities and short-term investments were ~~3.1% and 2.8%~~3.2% in the first ~~nine months~~half of ~~2017~~2019 and ~~2016, respectively. IHC has approximately $152.3 million in highly rated shorter duration securities earning on average 1.7%. A portfolio that is shorter in duration enables us, if we deem prudent,~~3.1% for the ~~flexibility to reinvest in much higher yielding longer-term securities, which would significantly increase investment income.~~comparable 2018 period.
35

Net ~~Realized~~ Investment Gains and Net Impairment Losses Recognized in Earnings

The Company had net ~~realized~~ investment gains of ~~$1.0~~$1.6 million in ~~the first nine months of 2017~~2019 compared to ~~$3.9~~$.4 million in ~~2016.~~investment losses in 2018. These amounts include gains and losses from sales of fixed maturities ~~and~~available-for-sale, equity securities ~~available-for-sale~~ and other investments. Decisions to sell securities are based on management's ongoing evaluation of investment opportunities and economic and market conditions, thus creating fluctuations in gains and losses from period to period.

The Company recognized ~~$1.5~~$.6 million of other-than-temporary impairment losses on ~~certain~~ fixed maturities available-for-sale ~~during~~securities in the ~~nine~~first six months ~~ended September 30, 2016 due to credit losses. The~~of 2019, as the Company determined that it was more likely than not that we would sell the securities ~~would be sold~~ before the recovery of their amortized cost basis.

Fee Income and Other Income

Fee income decreased ~~$1.0~~$1.9 million for the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2017~~2019 compared to the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2016~~2018. The decrease is primarily due to ~~the lack of agency fees~~more business being written on IHC carrier paper in 2017 from Accident Insurance Services, Inc., our primary producer of the Occupational Accident line of business, which was sold in the third quarter of 2016; partially offset by fee income earned by PetPartners, our recently acquired subsidiary, with no comparable amounts in 2016, and increased fee income as a result of higher premium volume in certain lines of the specialty health business.2019.

Other income inincreased $5.0 million for the ~~first nine~~six months ~~of 2017 decreased $6.5 million~~ended June 30, 2019 from the ~~same~~comparable period in ~~2016~~2018 primarily due to $3.6 million in pretax gain on the ~~run-off~~sale of ~~fees received~~an equity investment in ~~conjunction with the diminished administration of the Medical Stop-Loss segment.~~Pets Best.

Insurance Benefits, Claims and Reserves

In the first ~~nine months~~half of ~~2017,~~2019, insurance benefits, claims and reserves ~~decreased $6.4~~increased $17.9 million over the comparable period in ~~2016.~~2018. The ~~decrease~~increase is primarily attributable to: (i) a decrease of $12.0 million in the Medical Stop-Loss segment primarily as a result of the sale of Risk Solutions and exit from the medical stop-loss business, further described in Note 3; (ii) a decrease of $0.7 million in the Individual life, annuity and

38

~~other segment; partially offset by (iii)~~ an increase of $4.4 million in the Specialty Health segment, primarily due to an increase of $3.3 million in the small group major medical line of business due to favorable development of this line in 2016 with no comparable amount in 2017, and increases of $6.2 million, $4.6 million and $1.3 million in the benefits and claims of short term medical, fixed indemnity limited benefit and pet lines of business, respectively, due to increases in volume, partially offset by a $6.3 million decrease in benefits, claims and reserves related to the run-off of the occupational accident line of business and decreases of $3.5 million and $0.9 million in the dental and international lines, respectively, due to lower premiums; and (iv) an increase of $1.9$10.2 million in benefits, claims and reserves in the Group disability, life, ~~annuities~~DBL and ~~DBL~~PFL segment, ~~primarily~~as a result of an increase of $5.5 in PFL business on increased premium volume, $3.2 million in the combined LTD/STD line due to ~~growth in this line and increased~~higher loss ratios on certain LTD and STD business and increased retention on STD, an increase of $1.2 million in group term life business due to higher premiums and ~~LTD~~increased retention and an increase of $.4 million in other group term life lines due to new business; and (ii) an increase of ~~business.~~$7.2 million in the Specialty Health segment, primarily from an increase of $4.1 million in the short term medical line due to higher loss ratios on less favorable prior year loss development, an increase of $2.0 million in pet and $2.2 million in group gap businesses both due to increased premium volume, partially offset by a decrease of $.4 million in the fixed indemnity limited benefit line on lower premium volume, and $.6 million in dental on lower loss ratios; and (iii) an increase of $.4 million in the Medical Stop Loss segment as a result of lower positive reserve run-off volume when compared to the same period in 2018.

Selling, General and Administrative Expenses

Total selling, general and administrative expenses ~~increased $17.5~~decreased $2.3 million over the comparable period in ~~2016.~~2018. The ~~increase~~decrease is ~~primarily attributable~~principally due to: (i) a ~~$15.7~~decrease of $6.1 million ~~increase~~ in the Specialty Health ~~segment primarily~~line of business due to a decrease in commission and administrative ~~and commission~~ expenses ~~associated with the increased~~related to decreased premium volume in fixed indemnity limited benefit and lower administrative fees and loss adjustment expenses in the short term medical line, partially offset by an increase in commissions and ~~fixed indemnity limited benefit lines,~~administrative fees and ~~agency expenses from PetPartners with no comparable~~other general expenses in the ~~prior year,~~pets and group gap lines on increased premium volume as well as increased lead generation, compensation and system development related expenses in our marketing and administrative companies.; partially offset by ~~a decrease in administrative expenses in 2017 from Accident Insurance Services, Inc., our primary producer of Occupational Accident line of business, which was sold in the third quarter of 2016;~~ (ii) an increase of ~~$4.4~~$2.6 million in the ~~Medical Stop-Loss~~Group disability, life, DBL and PFL segment primarily due to ~~a credit in~~increased commission expense and other general expenses on PFL and group term life lines of business primarily on increased premium ~~taxes in 2016 with no comparable amount for 2017; partially offset by~~volume; and (iii) ~~a decrease of $1.2~~an $1.0 million increase in the ~~Individual life, annuity and other~~Corporate segment ~~largely~~ due to ~~lower amortization of deferred costs and general expenses from business in run-off; and (v) a decrease of $1.8 million in Corporate due to a decrease in audit and consulting fees.~~ compensation associated expenses.
36

Income Taxes

In 2017, the Company wound down the operations and dissolved a subsidiary recognizing an estimated $11.6 million income tax benefit on a worthless stock deduction of $33.1 million, representing the Company’s tax basis related to its unrecovered investment in that subsidiary. Excluding these tax benefits, theThe effective tax rate for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 was ~~33.1%~~17.0% compared to ~~36.7%~~25.1% for the ~~nine~~six months ended ~~2016.~~2018. The lower tax rate is primarily due ~~to: (i) an increase~~to the Tax Act’s reduction in the federal corporate tax rate from January 1, 2018 which resulted in a blended 28% tax rate in 2018 compared to a 21% tax rate in 2019 combined with tax benefits ~~from tax-advantaged securities as a percentage~~related to exercises of ~~income in 2017; (ii) a decrease in state taxes as a percentage of income; and (iii) a decrease in non-deductible expenses.~~certain shared based compensation.

LIQUIDITY

Insurance Group

The Insurance Group normally provides cash flow from: (i) operations; (ii) the receipt of scheduled principal payments on its portfolio of fixed maturities; and (iii) earnings on investments. Such cash flow is partially used to fund liabilities for insurance policy benefits. These liabilities represent long-term and short-term obligations.

Corporate

Corporate derives its funds principally from: (i) dividends from the Insurance Group; (ii) management fees from its subsidiaries; and (iii) investment income from Corporate liquidity. Regulatory constraints historically have not affected the Company's consolidated liquidity, although state insurance laws have provisions relating to the ability of the parent company to use cash generated by the Insurance Group. ~~The~~No dividends were declared or paid by the Insurance Group ~~declared and paid $7.0 million and $17.8 million of dividends~~ during the ~~nine~~six months ended ~~September~~June 30, ~~2017 and 2016, respectively.~~2019 or 2018.

39

Cash Flows

The Company had ~~$26.6~~$18.3 million and ~~$22.0~~$30.8 million of cash, ~~and~~ cash equivalents and restricted cash as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively.

For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, operating activities provided $29.7 million of cash and investment activities ~~provided $36.4~~utilized $30.2 million of cash, primarily the result of ~~sales~~purchases of investment securities ~~partially offset by $12.3~~and, $8.0 million ~~net cash outflow to acquire PetPartners.~~utilized for business acquisitions. Financing activities utilized ~~$47.9~~$12.1 million of cash, of which ~~$44.3~~$4.4 million was utilized to acquire noncontrolling interests in subsidiaries, $2.4 million related to payments for tax withholdings on sharebased compensation, $1.6 million was utilized for treasury share ~~purchases.~~
On May 26, 2017, IHC commenced a tender offer to purchase up to 2,000,000 shares of its common stock at a price per share of $20.00, net, to the seller in cash. On June 26, 2017, at the close of business, the offer expiredpurchases and ~~the Company accepted~~$2.2 million was utilized for ~~purchase 1,385,118 shares of its common stock at $20.00 per share, for an aggregate purchase price of $27.7 million. The tender offer was fully funded through corporate liquidity.~~dividend payments.

The Company ~~has $387.0~~had $374.3 million of liabilities for future policy benefits and policy benefits and claims as of June 30, 2019 that it expects to ultimately pay out of current assets and cash flows from future business. If necessary, the Company could utilize the cash received from maturities and repayments of its fixed maturity investments if the timing of claim payments associated with the Company's insurance resources does not coincide with future cash flows. For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, cash received from the maturities and other repayments of fixed maturities was ~~$16.8~~$43.0 million.

The Company believes it has sufficient cash to meet its currently anticipated business requirements over the next twelve months including working capital requirements and capital investments.

BALANCE SHEET

The Company had receivables due from reinsurers of ~~$383.2~~$367.2 million at ~~September~~June 30, ~~2017~~2019 compared to ~~$440.3~~$368.7 million at December 31, ~~2016. The decrease is primarily attributable to the decrease in medical stop-loss reserves that are 100% coinsured.~~2018. All of such reinsurance receivables are from highly rated companies or are adequately secured. No allowance for doubtful accounts was necessary at ~~September~~June 30, ~~2017.~~2019.

37
The Company's liability for policy benefits and claims by segment are as follows (in thousands):

Policy Benefits and Claims

Policy Benefits and Claims

September 30,

December 31,

June 30,

December 31,

2017

2016

2019

2018

Specialty Health
$
52,157
$
50,237
$
39,228
$
38,114
Group Disability

103,933

104,428

120,508

112,616
Individual A&H and Other

8,527

9,688

8,937

8,954
Medical Stop-Loss

4,930

54,760

311

431

$
169,547
$
219,113
$
168,984
$
160,115

For the Specialty Health business, IBNR claims liabilities plus expected development on reported claims are calculated using standard actuarial methods and practices. The ~~primary~~“primary” assumption in the determination of Specialty Health reserves is that historical ~~claim development patterns~~Claim Development Patterns are representative of future ~~claim development patterns.~~Claim Development Patterns. Factors that may affect this assumption include changes in claim payment processing times and procedures, changes in time delay in submission of claims, and the incidence of unusually large claims. Liabilities for policy benefits and claims for specialty health medical and disability coverage are computed using completion factors and expected Net Loss Ratios derived from actual historical premium and claim data. The reserving analysis includes a review of claim processing statistical measures and large claim early notifications; the potential impacts of any changes in these factors are not material. The Company has business that is serviced by third-party administrators.

40

From time to time, there are changes in the timing of claims processing due to any number of factors including, but not limited to, system conversions and staffing changes during the year. These changes are monitored by the Company and the effects of these changes are taken into consideration during the claim reserving process. Other than these considerations, there have been no significant changes to methodologies and assumptions from the prior year.
While these calculations are based on standard methodologies, they are estimates based on historical patterns. To the extent that actual claim payment patterns differ from historical patterns, such estimated reserves may be redundant or inadequate. The effects of such deviations are evaluated by considering claim backlog statistics and reviewing the reasonableness of projected claim ratios. Other factors which may affect the accuracy of policy benefits and claim estimates include the proportion of large claims which may take longer to adjudicate, changes in billing patterns by providers and changes in claim management practices such as hospital bill audits.
Since our analysis considered a variety of outcomes related to these factors, the Company does not believe that any reasonably likely change in these factors will have a ~~material effect on the Company’s financial condition, results of operations, or liquidity.~~Material Effect.

The Company’s disability business is comprised of group disability, DBL and ~~DBL.~~PFL. The two “primary” assumptions on which disability policy benefits and claims are based are: (i) morbidity levels; and (ii) recovery rates. If morbidity levels increase, for example due to an epidemic or a recessionary environment, the Company would increase reserves because there would be more new claims than expected. In regard to the assumed recovery rate, if disabled lives recover more quickly than anticipated then the existing claims reserves would be reduced; if less quickly, the existing claims reserves would be increased. Advancements in medical treatments could affect future recovery, termination, and mortality rates. The Company does not believe that reasonably likely changes in its “primary” assumptions would have a material effect on the Company’s financial condition, results of operations, or liquidity.

The ~~$16.4~~$19.4 million ~~decrease~~increase in IHC’s stockholders' equity in the first ~~nine~~six months of ~~2017~~2019 is primarily due to ~~$44.4 million of treasury stock purchases and $0.9 in common stock dividends, partially offset by $24.5~~$15.6 million of net income attributable to IHC ~~and $4.6~~increased by $10.6 million of other comprehensive income attributable to ~~IHC.~~IHC and reduced by $3.0 million of common stock dividends declared and $1.6 million in treasury stock purchases.
38

Asset Quality and Investment Impairments

The nature and quality of insurance company investments must comply with all applicable statutes and regulations, which have been promulgated primarily for the protection of policyholders. Although the Company's gross unrealized losses on fixed maturities available-for-sale securities totaled ~~$6.1~~$2.7 million at ~~September~~June 30, ~~2017, 100%~~2019, All of the Company’s fixed maturities were investment grade and continue to be rated on average AA. The Company marks all of its fixed maturities available-for-sale ~~securities~~ to fair value through accumulated other comprehensive income or loss. These investments tend to carry less default risk and, therefore, lower interest rates than other types of fixed maturity investments. The Company ~~does~~did not have any non-performing fixed maturities at ~~September~~June 30, ~~2017.~~2019.

The Company reviews its investments regularly and monitors its investments continually for impairments. The Company ~~did not record any other-than-temporary impairment losses in the nine months ended September 30, 2017. The Company~~ recognized ~~$1.5~~$.6 million of other-than-temporary impairment losses on certain fixed maturities ~~available-for-sale~~available for sale during the ~~nine~~six months ended ~~September~~June 30, ~~2016 due to credit losses. The~~2019, as the Company determined that it iswas more likely than not that wethe company would sell the securities before the recovery of their amortized cost basis.

The ~~following table summarizes~~Company did not record any other-than-temporary impairment losses in the ~~carrying value of~~six months ended June 30, 2018. There were no securities with fair values less than 80% of their amortized cost at ~~September~~June 30, ~~2017 by the length of time the fair values of those securities were below 80% of their amortized cost (in thousands):~~2019.

Greater than

Greater than

3 months,

6 months,

Less than

less than

less than

Greater than

3 months

6 months

12 months

12 months

Total

Fixed maturities
$
4,345
$
-
$
-
$
-
$
4,345

The unrealized losses on ~~all~~fixed maturities available-for-sale ~~securities have been~~were evaluated in accordance with the Company's impairment policy and were determined to be temporary in nature at ~~September~~June 30, ~~2017. In 2017, the Company recorded $8.3 million of net unrealized gains on available-for sale securities, pre-tax, in other~~

41

~~comprehensive income (loss) prior to reclassification adjustments.~~2019. From time to time, as warranted, the Company may employ investment strategies to mitigate interest rate and other market exposures. Further deterioration in credit quality of the companies backing the securities, further deterioration in the condition of the financial services industry, ~~a continuation of the current~~ imbalances in liquidity that exist in the marketplace, a ~~continuation or~~ worsening of the current economic recession, or ~~additional~~ declines in real estate values may further affect the fair value of these securities and increase the potential that certain unrealized losses be designated as other-than-temporary in future periods ~~and~~which may cause the Company ~~may~~to incur additional write-downs.

CAPITAL RESOURCES

Due to its strong capital ratios, broad licensing and excellent asset quality and credit-worthiness, the Insurance Group remains well positioned to increase or diversify its current activities. It is anticipated that future acquisitions or other expansion of operations will be funded internally from existing capital and surplus and parent company liquidity. In the event additional funds are required, it is expected that they would be borrowed or raised in the public or private capital markets to the extent determined to be necessary or desirable.

IHC enters into a variety of contractual obligations with third parties in the ordinary course of its operations, including liabilities for insurance reserves, funds on deposit, debt and operating lease obligations. However, IHC does not believe that its cash flow requirements can be fully assessed based solely upon an analysis of these obligations. Future cash outflows, whether they are contractual obligations or not, also will vary based upon IHC’s future needs. Although some outflows are fixed, others depend on future events. The maturity distribution of the Company’s obligations, as of September 30, 2017, is not materially different from that reported in the schedule of such obligations at December 31, 2016 which was included in Item 7~~of the Company’s Annual Report on Form 10-K.~~

OUTLOOK

For the ~~balance~~remainder of ~~2017 and 2018,~~2019, the Company anticipates that weit will:

Continue to ~~show significant increases~~expand our owned call center and career agent channels. As a result of a recent acquisition, our call center now employs over 100 sales representatives in ~~specialty health premiums (including hospital indemnity, group limited medical~~four locations, which is significantly larger than last year. This is a highly scalable model subject to continuing to generate quality leads at an affordable price. One of our call center’s key relationships is supporting inquiries received from members of USAA, an insurance, banking, and ~~group gap~~investment services provider serving millions of military members and other supplemental health products, such as accident medical, gap and critical illness products). IHC has begun to package its hospital indemnity, accident and critical illness plans in order to provide affordable ways for insureds to finance high deductibles and co-pays. These packages are largely purchased in conjunction with STM for qualified purchasers who do not receive subsidies for ACA plans, and purchased together with Bronze plans for those who receive subsidies but cannot afford to finance the high Bronze deductibles through savings.their families. We are also ~~very~~ramping up our organic lead generation capabilities and sources of paid leads, and making inroads into large affinity groups that will make our products available to their members. In each case, our call center agents are able to offer a number of quality health insurance choices, including STM, hospital indemnity (“HIP”), dental and gap plans underwritten by IHC’s carriers as well ~~positioned for~~as Affordable Care Act (“ACA”) and other products available through nationally recognized insurance companies. Greater access to leads has also made it possible to expand our network of career agents, which we have now begun to grow.

Enter the senior market, which covers approximately 60 million people, and is estimated to be growing by

39
10,000 people per day, and by 2040 is expected ~~increase~~to cover 87 million people. Given the expansion of call center representatives and career agents, we will expand our offerings to serve the rapidly expanding senior market. Initially, we will import Medicare Supplement, Medicare Advantage, term life and final expense products from other carriers to supplement dental, vision and HIP products underwritten by IHC’s insurance companies. During the first quarter of 2020, we anticipate being in the ~~duration~~market with a portfolio of ~~short-term medical~~timely and competitive Medicare Supplement plans in light of regulatory changes taking effect January 1, 2020
Incorporate our new cloud-based technology platforms and quoting and enrollment tools into our various distribution channels. In January 2019, we acquired My1HR, a state-of-the-art quoting and cloud-based enrollment platform utilized by approximately 4,000 active users to manage the health insurance needs of their clients. As a web-based entity, this includes quoting and enrolling individuals in ACA plans as well as ancillary coverages. In addition, My1HR is in the final stage of launching a cloud-based quoting and enrollment tool that is specifically designed for producers in the small group employer market. This new quoting and enrollment system will support group products for all IHC carriers as well as select group ACA and level funded health coverages from leading national health plans. It also positions us to take advantage of the expansion of Health Reimbursement Arrangements (HRAs) effective January 1, 2020 as a result of ~~the Trump Administration’s executive order directing~~new federal agencies to extend the duration of these products to 364 days, subject to state law. In anticipation of this growth we have begun to make material enhancements to our systems and infrastructure and will contribute additional capital to the insurance companies if needed. For all the preceding reasons, we believe that we will continue the solid sales growth we have been experiencing for the balance of 2017, and will report significantly higher earned premiums and income in this segment in 2018.regulations.

Continue to ~~increase IHC’s emphasis on lead generation~~diversify our sources of pet insurance premium through (i) the expansion of marketing efforts by our subsidiary, PetPartners, (ii) increased white-label distribution opportunities (such as our arrangement with the American Kennel Club) where PetPartners acts as administrator and Independence American is the risk taker, and (iii) increased premium for ~~its direct-to-consumer and career advisor distribution initiatives, as well as expanding our controlled sales~~Independence American through our ~~call center, career model~~relationships as an underwriter for PetFirst, a company focused on shelters, rescues and ~~transactional websites as a result of~~animal welfare marketing space, Pets Best, which excels on affiliate and veterinarian sales channels, and Figo, which is an insuretech brand in the ~~acquisition of PetPlace.com, IHC’s ownership of HealtheDeals.com,~~pet insurance space in the direct to consumer, referral partners, and ~~AspiraAmas and its investment in HealthInsurance.org.~~employer benefits channels.

~~Expand~~By the end of 2019, IHC will be uniquely situated, through its vertically integrated structure, to better serve the growing demand for health insurance options by delivering an end-to-end experience to the consumer, including a broad base of products across the entire spectrum of age groups and needs. We will provide state-of-the-art on-line and mobile tools linking individuals and families in need of insurance coverage to highly rated insurance companies. Our enterprise will include: (i) digital marketing and website domains that will drive exclusive lead traffic for ancillary health and pet insurance, (ii) exchanges that will permit individuals to perform side-by-side comparisons of various employee benefit and pet insurance coverages, (iii) sales and customer service centers with licensed employee agents available to respond to consumer questions; (iv) a wholly owned insurance company, licensed in all 50 states, which will have the broadest mix of ~~our specialty~~ancillary health ~~products as a result of private-label~~ and ~~white-label distribution arrangements with large national partners~~pet insurance in the country, and ~~our equity investments last year in two call center agencies~~

42

(v) access to other highly rated insurers for life, senior and ~~a worksite marketing company. We recently announced at partnership with eHealth to sell packages of specialty health~~P&C products.

~~Diversify the distribution and administration of our pet insurance as a result of the acquisition of Pet Partners Inc.~~
~~Experience increases in short-term disability premiums in 2018 generated from a relatively new distribution partnership, which will expand long-term disability opportunities for growth.~~
Continue to ~~evaluate strategic transactions. We plan to continue to deploy some of~~increase our ~~cash to make additional investments and acquisitions that will continue to bolster existing or new lines of business.~~
~~Continue to focus on administrative efficiencies.~~
~~Sell~~DBL/PFL premiums. Effective January 1, 2018, Standard Security Life began selling a new rider (“Paid Family Leave” or “PFL”) as part of our New York DBL ~~policies in 2018. Effective January 1, 2018,~~policies. This is a result of New York State ~~will require~~requiring employers to provide PFL, which would cover job-protected paid leave to care for a new child or sick family member or to assist when someone is called to active military service. ~~Standard Security Life anticipates that the implementation of this coverage is expected to~~This has more than ~~double~~doubled our ~~current $30 million~~ DBL block. The ~~rates for~~ PFL ~~are~~product rate is set by ~~New York State~~the NYSDFS and ~~as this is~~provides for a ~~new product~~potential risk adjustment payment in the ~~underwriting profitability is unclear at this point.~~event the company has better experience than the industry.

~~On March 31, 2016, IHC~~Achieve increases in both long-term and a subsidiary of AMIC sold the stock of Risk Solutions. 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 was co-insured by Westport as of January 1, 2016. The aggregate purchase price was $152.5 millionshort-term disability premiums in cash, subject to adjustments and settlements. This transaction resulted in a gain of $100.8 million for the year ended December 31, 2016, net of taxes and amounts attributable to noncontrolling interests.2019 generated from new distribution relationships.

~~As a result of the sale of Risk Solutions, IHC remains highly liquid with excess capital; however, we have used~~Accomplish increases in life and disability premium by developing additional strategic functional and distribution partnerships, broaden worksite portfolio, and enhance Business to Business and Business to Consumer website functionality.
40
Continue to evaluate strategic transactions. We plan to deploy some of ~~this capital~~our cash to make ~~equity~~additional investments ~~retire debt~~ and ~~purchase IHC stock. If the Specialty Health business were to grow exponentially as a result of the turmoil in the major medical markets, IHC may need to contribute additional capital to one~~acquisitions that will bolster existing or ~~more of its carriers. While the run-off of the Medical Stop-Loss line of business has had a negative impact on future earnings, the growth in our other~~new lines of ~~business are expected~~business.
Continue to ~~offset this reduction in earnings.~~focus on administrative efficiencies.

Subject to making additional repurchases, acquisitions ~~investments~~ and ~~capital contributions to support growth,~~investments, the Company will remain highly liquid in ~~2017~~2019 as a result of the continuing shorter duration of the portfolio. ~~IHC has approximately $152.3 million in highly rated shorter duration securities earning on average 1.7%; our portfolio as a whole is rated, on average, AA.~~ The low duration of our portfolio enables us, if we deem prudent, the flexibility to reinvest in much higher yielding longer-term securities, which would significantly increase investment income in the future. A low duration portfolio such as ours also mitigates the adverse impact of potential inflation. IHC will continue to monitor the financial markets and invest accordingly.

On June 26, 2017, IHC purchased 1,385,118 shares pursuant to a tender offer to purchase up to 2,000,000 shares of its common stock at a price per share of $20.00, net, to the seller in cash. The number of shares purchased in the tender offer represented approximately 8.5% of the 16,377,756 shares of IHC common stock outstanding prior to the commencement of the tender offer and a gross aggregate purchase price of $27.7 million. The tender offer was fully funded out of corporate liquidity.
Our results depend on the adequacy of our product pricing, our underwriting, the accuracy of our reserving methodology, returns on our invested assets, and our ability to manage expenses. We will also need to be diligent with increased rate review scrutiny to effect timely rate changes and will need to stay focused

43

on the management of medical cost drivers asin the event medical trend levels cause margin pressures. Factors affecting these items, as well as unemployment and global financial markets, may have a material adverse effect on our results of operations and financial condition.

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company manages interest rate risk by seeking to maintain an investment portfolio with a duration and average life that falls within the band of the duration and average life of the applicable liabilities. Options and other derivatives may be utilized to modify the duration and average life of such assets.Not required for smaller reporting companies.

The Company monitors its investment portfolio on a continuous basis and believes that the liquidity of the Insurance Group will not be adversely affected by its current investments. This monitoring includes the maintenance of an asset-liability model that matches current insurance liability cash flows with current investment cash flows. This is accomplished by first creating an insurance model of the Company's in-force policies using current assumptions on mortality, lapses and expenses. Then, current investments are assigned to specific insurance blocks in the model using appropriate prepayment schedules and future reinvestment patterns.
The results of the model specify whether the investments and their related cash flows can support the related current insurance cash flows. Additionally, various scenarios are developed changing interest rates and other related assumptions. These scenarios help evaluate the market risk due to changing interest rates in relation to the business of the Insurance Group.
The expected change in fair value as a percentage of the Company's fixed income portfolio at September 30, 2017 given a 100 to 200 basis point rise or decline in interest rates is not materially different than the expected change at December 31, 2016 included in Item 7A of the Company’s Annual Report on Form 10-K.
In the Company's analysis of the asset-liability model, a 100 to 200 basis point change in interest rates on the Insurance Group's liabilities would not be expected to have a material adverse effect on the Company. With respect to its liabilities, if interest rates were to increase, the risk to the Company is that policies would be surrendered and assets would need to be sold. This is not a material exposure to the Company since a large portion of the Insurance Group's interest sensitive policies are burial policies that are not subject to the typical surrender patterns of other interest sensitive policies, and many of the Insurance Group's universal life and annuity policies were acquired from liquidated companies which tend to exhibit lower surrender rates than such policies of continuing companies. Additionally, there are charges to help offset the benefits being surrendered. If interest rates were to decrease substantially, the risk to the Company is that some of its investment assets would be subject to early redemption. This is not a material exposure because the Company would have additional unrealized gains in its investment portfolio to help offset the future reduction of investment income. With respect to its investments, the Company employs (from time to time as warranted) investment strategies to mitigate interest rate and other market exposures.

ITEM 4.   CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and procedures

IHC’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) supervised and participated in IHC’s evaluation of its disclosure controls and procedures as of the end of the period covered by this report. Disclosure controls and procedures are controls and procedures designed to ensure that information required to be disclosed in IHC’s periodic reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

44

~~As previously disclosed in Item 9A of our Form 10-K for the year ended December 31, 2016, management~~Based upon that evaluation, IHC’S CEO and CFO concluded that ~~there~~IHC’s disclosure controls and procedures were material weaknesses in internal control over financial reporting for income taxes. Management determined that we did not maintain effective controls over the accounting for and disclosures of technical accounting matters as they relate to income taxes.effective.

A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
~~Remediation of Material Weakness~~
The Company has made significant progress in remediating its material weaknesses in internal control over financial reporting for income taxes, specifically (i) strengthening existing tax staff with consulting tax accounting resources. Additionally, financial reporting staff attended training related to the design and operation of tax related financial reporting and corresponding internal controls; (ii) implementing enhanced risk assessment processes over accounting for income taxes, with a focus on tax accounting and disclosure for unusual and complex transactions; and (iii) improving existing or establishing new processes and controls to measure and record transactions related to tax accounting to enhance the effectiveness of the design and operation of those controls.
While the Company has made significant progress in implementing the remediation efforts described above; until those actions are fully implemented and the operational effectiveness of related internal controls validated through testing, the material weaknesses described above will continue to exist. Management anticipates that all remediation efforts will be fully implemented and validated by the fourth quarter of 2017.
~~Changes in Internal Control Over Financial Reporting~~
~~Except as noted above, our~~ Management, including the CEO and CFO, identified no change in our internal control over financial reporting that occurred during our fiscal quarter ended ~~September~~June 30, ~~2017,~~2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

We are involved in legal proceedings and claims that arise in the ordinary course of our businesses. We have established reserves that we believe are sufficient given information presently available related to our outstanding legal proceedings and claims. We do not anticipate that the result of any pending legal proceeding or claim will have a material adverse effect on our financial condition or cash flows, although there could be such an effect on our results of operations for any particular period.
41
Third Party Administrator

A third party administrator with whom we formerly did business (“Plaintiff” or “TPA”) filed a Complaint dated May 17, 2017 in the United States District Court, Northern District of Texas, Dallas Division, naming IHC, Madison National Life, Standard Security Life, and IHC Carrier Solutions, Inc. (collectively referred to as “Defendants”). “Plaintiff” and “Defendants” are collectively referred to herein as the “Parties”. The Complaint concerns agreements entered into by Standard Security Life and Madison National Life with Plaintiff, as well as other allegations made by Plaintiff against ~~the~~ Defendants. The Complaint seeks injunctive relief and damages in an amount exceeding ~~$50.0 million, profit share~~$50,000,000, payments allegedly owed to Plaintiff under the agreements totaling at least ~~$3.1 million~~$3,082,000 through 2014, plus additional amounts for 2015 and 2016, and exemplary and punitive damages as allowed by law and fees and costs. ~~The~~Defendants believe these claims to be without merit Defendants moved to Compel Arbitration and Dismiss or Stay the original Complaint. ~~The~~ Plaintiff filed an Amended Complaint on August 18, 2017. ~~The~~ Defendants filed a Motion to Compel Arbitration or Stay the Amended ~~Complaint, which is still pending. In~~Complaint. The Parties agreed to enter into an Order staying the ~~fourth quarter of 2017,~~action filed in Texas. The Parties’ disputed claims moved in part to arbitration.
Standard Security Life and Madison National Life ~~agreed~~demanded arbitration against this TPA. The Arbitration Panel issued an Order splitting the hearing into two phases. Standard Security Life and Madison National Life successfully presented their claims in Phase I on September 25 through September 28, 2018. The TPA’s counterclaims were heard during Phase II held on February 11, 2019 through February 15, 2019. Standard Security Life and Madison National Life successfully opposed the counterclaims asserted by the TPA as the Arbitration Panel denied all claims against Standard Security Life and Madison National Life.Standard Security Life and Madison National Life filed the Petition to ~~pay fines~~Confirm the Arbitration Award. The TPA opposed this Motion. On June 17, 2019, the Court entered its Final Judgment and Order Confirming the Arbitration Award. On July 15, 2019, FCE filed a Notice of Appeal to the United States Court of Appeals for the Seventh Circuit from the judgment entered on June 17, 2019.
Since the arbitration is complete, the stay in the ~~state of~~ Texas ~~primarily~~litigation has been lifted. Defendants filed a Motion to Dismiss.
Multistate Market Conduct Examination
As previously disclosed, our subsidiaries, Standard Security Life, Madison National Life and Independence American, have been selected for a multistate market conduct exam ("MCE") related to our short term medical, limited medical and fixed indemnity health insurance products for the ~~claims payment practices~~period of January 1, 2014 through September 30, 2017. The insurance departments of five jurisdictions (Delaware, Wisconsin, District of Columbia, Kansas and South Dakota) are serving as leads, and the District of Columbia Department of Insurance, Securities and Banking and the Delaware Department of Insurance are serving as the managing lead states of the ~~Plaintiff.~~MCE. In addition to these five, 36 other states are participating in the exam. Each of our subsidiaries separately responded to inquiries and document production requests in this matter, and has proactively communicated and cooperated with all applicable regulatory agencies. Each of our subsidiaries has also provided a detailed action plan to regulators that summarizes its newly developed and enhanced compliance and control mechanisms.
On July 18, 2019, each of our subsidiaries received a proposed Regulatory Settlement Agreement ("RSA") to resolve the MCE with respect to such company. The proposed RSAs provide for monetary penalties as well as requirements related to our subsidiaries' marketing activities and periodic reporting to regulators. Standard Security Life, Madison National Life and Independence American are in the process of evaluating the proposed RSAs and anticipate entering into confidential discussions with the insurance departments of the lead jurisdictions in the coming weeks. At this time, the Company is not able to reasonably estimate any settlement amount or range of settlement amounts that may result from such discussions.
4542
ITEM 1A.   RISK FACTORS

There were no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016~~2018 in Item 1A to Part 1 of Form 10-K.

ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
~~Tender Offer~~
On May 26, 2017, IHC commenced a tender offer to purchase up to 2,000,000 shares of its common stock at a price per share of $20.00, net, to the seller in cash. On June 26, 2017, at the close of business, the offer expired and the Company accepted for purchase 1,385,118 shares of its common stock at $20.00 per share, for an aggregate purchase price of $27.7 million.

Share Repurchase Program

IHC has a program, initiated in 1991, under which it repurchases shares of its common stock. In August 2016, the Board of Directors increased the number of shares that can be repurchased to 3,000,000 shares of IHC common ~~stock, excluding the shares under the aforementioned tender offer.~~stock. As of ~~September~~June 30, ~~2017, 2,068,931~~2019, 1,812,492 shares were still authorized to be repurchased.

Share repurchases during the ~~third~~second quarter of ~~2017~~2019 are summarized as follows:

2017

Maximum Number

Average Price
of Shares which
Month of
Shares
of Repurchased
can be
Repurchase
Repurchased
Shares
Repurchased

July
16,327
$
21.42
2,154,346
August
27,704
$
21.61
2,126,642
September
57,711
$
24.06
2,068,931

2019

Maximum Number

Average Price
of Shares Which
Month of
Shares
of Repurchased
Can be
Repurchase

Repurchased

Shares

Repurchased

April
13,878
$
36.47
1,839,270
May
12,030
$
37.09
1,827,240
June

14,748
$
37.65
1,812,492

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4.   MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.   OTHER INFORMATION

Not applicable.
4643
ITEM 6.   EXHIBITS

Exhibit Number

3.1 Restated Certificate of Incorporation of Independence Holding Company (Filed as Exhibit 3(i) to our Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 and incorporated herein by reference).

3.2 Certificate of Amendment of Restated Certificate of Incorporation of Independence Holding Company (Filed as Exhibit 3.1 to our Current Report on Form 8-K filed with the SEC on July 29, 2004 and incorporated herein by reference).

3.3 By-Laws of Independence Holding Company (Filed as Exhibit 3.3 to our Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference), as amended by Amendment to By-Laws of Independence Holding Company (Filed as Exhibit 3.2 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 and incorporated herein by reference).

10.1 Officer Employment Agreement, made as of April 18, 2011, by and among Independence Holding Company, Standard Security Life Insurance Company of New York and Mr. David T. Kettig (Filed as Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on April 22, 2011 and incorporated herein by reference).

10.2 Officer Employment Agreement, made as of April 18, 2011, by and among Independence Holding Company, Madison National Life Insurance Company, Inc. and Mr. Larry R. Graber (Filed as Exhibit 10.2 to our Current Report on Form 8-K filed with the SEC on April 22, 2011 and incorporated herein by reference).

10.3 Officer Employment Agreement, made as of April 18, 2011, by and between Independence Holding Company and Ms. Teresa A. Herbert (Filed as Exhibit 10.5 to our Current Report on Form 8-K filed with the SEC on April 22, 2011 and incorporated herein by reference).

10.4 Officer Employment Agreement, made as of May 11, 2011, by and between Independence Holding Company and Mr. Roy T.K. Thung (Filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q for the period ended March 31, 2011 ~~that was~~ filed with the SEC on May 12, 2011, and incorporated herein by reference).

10.5 Officer Employment Agreement, by and among Independence Holding Company, IHC Risk Solutions, LLC and Mr. Michael A. Kemp, dated as of May 22, 2012 (Filed as Exhibit 10.3 to our Current Report on Form 8-K filed with the SEC on May 29, 2012, and incorporated herein by reference).

10.6 Retirement Benefit Agreement, dated as of September 30, 1991, between Independence Holding Company and Mr. Roy T.K. Thung, as amended. (Filed as an Exhibit to our Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference; Amendment No. 1 filed as Exhibit 10(iii)(A)(4a) to our Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated herein by ~~reference;~~ reference; Amendment No. 2 filed as Exhibit 10(iii)(4)(b) to our Current Report on Form 8-K filed with the SEC on June 22, 2005 and incorporated herein by ~~reference;~~ reference; Amendment No. 3 filed as Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on January 7, 2009 and incorporated herein by reference.)

10.710.6 Purchase Agreement, made and entered into on June 15, 2015, by and among Madison National Life Insurance Company, Inc., Standard Security Life Insurance Company of New York and National Guardian Life Insurance Company (Filed as Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on June 16, 2015, and incorporated herein by reference).

47

10.810.7 Sale Bonus Agreement, dated November 7, 2016, by and between Independence American Holdings Corp. and David T. Kettig (Filed as Exhibit 10.8 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 and incorporated herein by reference).
44
10.910.8 Officer Employment Agreement, made as of May 25, 2011, by and among Independence Holding Company, Standard Security Life and Mr. Gary J. ~~Balzofiore.~~Balzofiore (Filed as Exhibit 10.9 to our Annual Report on Form 10-K for the year ended December 31, 2016 and incorporated herein by reference).
10.9Officer Employment Agreement, made as of June 22, 2015, by and among Independence Holding Company, Standard Security Life and Mr. Vincent Furfaro, as amended by the Assignment and Assumption with Novation and Amendment of Officer Employment Agreement dated January 1, 2017 by and among Standard Security Life, AMIC Holdings, Inc. and Mr. Vincent Furfaro (Filed as Exhibit 10.9 to our Annual Report on Form 10-K for the year ended December 31, 2018 and incorporated herein by reference).
10.10Sale Bonus Agreement, dated July 25, 2018, by and between Independence American Holdings Corp. and Vincent Furfaro (Filed as Exhibit 10.10 to our Annual Report on Form 10-K for the year ended December 31, 2018 and incorporated herein by reference).
10.11Assignment and Assumption with Novation and Amendment of Officer Employment Agreement dated January 1, 2017 by and among Standard Security Life, AMIC Holdings, Inc. and Mr. David T. Kettig (Filed as Exhibit 10.11 to our Annual Report on Form 10-K for the year ended December 31, 2018 and incorporated herein by reference).

31.1 Certification of the Chief Executive Officer and President Pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002.~~2002. *

31.2 Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

32.1 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *

32.2 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *

101.INS   XBRL Instance Document. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH   XBRL Taxonomy Extension Schema Document. *

101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document. *

101.LAB   XBRL Taxonomy Extension Label Linkbase Document. *

101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document. *

101.DEF   XBRL Taxonomy Extension Definition Linkbase Document. *

* Filed herewith.
4845
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

INDEPENDENCE HOLDING COMPANY
(REGISTRANT)

By: /s/Roy T. K. Thung                                    Date:~~November 9, 2017~~August 8, 2019
Roy T.K. Thung
Chief Executive Officer, and Chairman
of the Board of Directors

By:/s/Teresa A. Herbert                                    Date:~~November 9, 2017~~August 8, 2019
            Teresa A. Herbert
Senior Vice President and
  Chief Financial Officer
4946

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

		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2017		2016		2017		2016
REVENUES:
Premiums earned	$	`75,639`	$	`67,335`	$	`210,507`	$	`195,524`
Net investment income		`4,403`		`4,004`		`12,414`		`12,700`
Fee income		`2,634`		`4,050`		`11,556`		`12,541`
Other income		`361`		`2,261`		`2,365`		`8,898`
Net realized investment gains		`715`		`2,367`		`987`		`3,945`
Other-than-temporary impairment losses:
Total other-than-temporary impairment losses		`-`		`(1,475)`		`-`		`(1,475)`
Portion of losses recognized in other comprehensive income (loss)		`-`		`-`		`-`		`-`
Net impairment losses recognized in earnings		`-`		`(1,475)`		`-`		`(1,475)`

		`83,752`		`78,542`		`237,829`		`232,133`
EXPENSES:
Insurance benefits, claims and reserves		`33,536`		`38,277`		`103,071`		`109,497`
Selling, general and administrative expenses		`42,337`		`32,823`		`115,404`		`97,947`
Interest expense on debt		`-`		`440`		`-`		`1,366`

		`75,873`		`71,540`		`218,475`		`208,810`

Income from continuing operations, before income taxes		`7,879`		`7,002`		`19,354`		`23,323`
Income taxes (benefits)		`2,666`		`2,636`		`(5,175)`		`8,566`

Income from continuing operations, net of tax		`5,213`		`4,366`		`24,529`		`14,757`

Discontinued operations:
Income from discontinued operations, before income taxes		`-`		`-`		`-`		`117,636`
Income taxes on discontinued operations		`-`		`-`		`-`		`7,724`
Income from discontinued operations, net of tax		`-`		`-`		`-`		`109,912`

Net income		`5,213`		`4,366`		`24,529`		`124,669`
(Income) loss from nonredeemable noncontrolling interests		`32`		`(43)`		`(4)`		`(9,900)`
(Income) loss from redeemable noncontrolling interests		`(16)`		`-`		`(29)`		`-`

NET INCOME ATTRIBUTABLE TO IHC	$	`5,229`	$	`4,323`	$	`24,496`	$	`114,769`

Basic income per common share:
Income from continuing operations	$	`0.35`	$	`0.25`	$	`1.53`	$	`0.84`
Income from discontinued operations		`-`		`-`		`-`		`5.84`
Basic income per common share	$	`0.35`	$	`0.25`	$	`1.53`	$	`6.68`

WEIGHTED AVERAGE SHARES OUTSTANDING		`14,965`		`17,120`		`15,999`		`17,189`

Diluted income per common share:
Income from continuing operations	$	`0.34`	$	`0.25`	$	`1.50`	$	`0.83`
Income from discontinued operations		`-`		`-`		`-`		`5.77`
Diluted income per common share	$	`0.34`	$	`0.25`	$	`1.50`	$	`6.60`

WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING		`15,274`		`17,340`		`16,287`		`17,402`

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,
		2019		2018		2019		2018
REVENUES:
Premiums earned	$	`84,947`	$	`77,334`	$	`167,736`	$	`156,826`
Net investment income		`4,134`		`3,687`		`8,130`		`7,368`
Fee income		`3,707`		`4,585`		`7,895`		`9,796`
Other income (loss)		`879`		`(295)`		`4,563`		`(446)`
Net investment gains (losses)		`1,455`		`(423)`		`1,626`		`(352)`
Other-than-temporary impairment losses, available-for-sale securities:
Total other-than-temporary impairment losses		`-`		`-`		`(646)`		`-`
Portion of losses recognized in other comprehensive income (loss)		`-`		`-`		`-`		`-`
Net impairment losses recognized in earnings		`-`		`-`		`(646)`		`-`

		`95,122`		`84,888`		`189,304`		`173,192`

EXPENSES:
Insurance benefits, claims and reserves		`44,410`		`33,701`		`87,529`		`69,608`
Selling, general and administrative expenses		`42,206`		`41,693`		`82,735`		`85,036`

		`86,616`		`75,394`		`170,264`		`154,644`

Income before income taxes		`8,506`		`9,494`		`19,040`		`18,548`
Income taxes		`1,590`		`2,652`		`3,234`		`4,658`

Net income		`6,916`		`6,842`		`15,806`		`13,890`
(Income) from nonredeemable noncontrolling interests		`(27)`		`(24)`		`(144)`		`(40)`
(Income) from redeemable noncontrolling interests		`(42)`		`(61)`		`(88)`		`(132)`

NET INCOME ATTRIBUTABLE TO IHC	$	`6,847`	$	`6,757`	$	`15,574`	$	`13,718`

Basic income per common share	$	`0.46`	$	`0.46`	$	`1.04`	$	`0.93`

WEIGHTED AVERAGE SHARES OUTSTANDING		`14,929`		`14,799`		`14,939`		`14,815`

Diluted income per common share	$	`0.46`	$	`0.45`	$	`1.04`	$	`0.91`

WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING		`14,948`		`15,128`		`15,007`		`15,101`

		Three Months Ended		Nine Months Ended
		September 30,		September 30,
		2016		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 (benefits) on discontinued operations		`-`		`7,724`

Income from discontinued operations	$	`-`	$	`109,912`

		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

		~~Three Months Ended~~				~~Nine Months Ended~~
		~~September 30, 2016~~				~~September 30, 2016~~
				~~Total~~				~~Total~~
		~~Contingent~~		~~Level 3~~		~~Contingent~~		~~Level 3~~
		~~Liabilities~~		~~Liabilities~~		~~Liabilities~~		~~Liabilities~~

~~Beginning balance~~	$	`1,445`	$	`1,445`	$	`1,650`	$	`1,650`

~~Gains (losses) included in earnings:~~
~~Net investment income~~		`(204)`		`(204)`		`(947)`		`(947)`
~~Other income~~		`(185)`		`(185)`		`353`		`353`

~~Payment of contingent liability~~		`(700)`		`(700)`		`(700)`		`(700)`

~~Balance at end of period~~	$	`356`	$	`356`	$	`356`	$	`356`

		Three Months		Six Months
		Ended		Ended
		June 30, 2019		June 30, 2019

Operating lease costs	$	`575`	$	`1,111`
Short-term lease costs		`50`		`74`
Variable lease costs		`132`		`206`

Total lease costs	$	`757`	$	`1,391`

Other information:
Operating cash flows from operating leases	$	`(568)`	$	`(1,173)`
Right-of-use assets obtained for operating leases	$	`583`	$	`639`

		Specialty Health Segment
		Health Insurance Claims
		Nine Months Ended
		September 30,
		2017		2016

Balance at beginning of year	$	`27,183`	$	`23,425`
Less: reinsurance recoverable		`1,179`		`1,362`
Net balance at beginning of year		`26,004`		`22,063`

Amount incurred, related to:
Current year		`40,836`		`34,598`
Prior years		`1,144`		`(6,845)`

Total incurred		`41,980`		`27,753`

Amount paid, related to:
Current year		`13,528`		`9,541`
Prior years		`23,797`		`13,105`

Total paid		`37,325`		`22,646`

Net balance at end of period		`30,659`		`27,170`
Plus: reinsurance recoverable		`814`		`848`
Balance at end of period	$	`31,473`	$	`28,018`

		September 30, 2017
		Outstanding		Exercisable

Number of options		692,380		501,380
Weighted average exercise price per share	$	12.41	$	9.39
Aggregate intrinsic value for all options (in thousands)	$	8,889	$	7,953
Weighted average contractual term remaining		1.9 years		1.0 years

	No. of	Weighted-Average
	Non-vested	Grant-Date
	Shares	Fair Value

December 31, 2016	`17,325`	$	16.20
Vested	`(4,950)`		12.53

September 30, 2017	`12,375`	$	17.68

		~~Three Months Ended~~				~~Nine Months Ended~~
		~~September 30,~~				~~September 30,~~
		`2017`		`2016`		`2017`		`2016`
~~Revenues:~~
~~Specialty Health~~	$	`55,502`	$	`44,684`	$	`152,292`	$	`126,454`
~~Group disability; life and DBL~~		`26,112`		`26,196`		`78,985`		`77,409`
~~Individual life, annuities and other~~ ~~(A)~~		`455`		`717`		`1,494`		`2,053`
~~Medical Stop-Loss~~ ~~(A)~~		`576`		`5,433`		`2,549`		`21,397`
~~Corporate~~		`392`		`620`		`1,522`		`2,350`
		`83,037`		`77,650`		`236,842`		`229,663`
~~Net realized investment gains~~		`715`		`2,367`		`987`		`3,945`
~~Net impairment losses recognized in earnings~~		`-`		`(1,475)`		`-`		`(1,475)`
~~Total revenues~~	$	`83,752`	$	`78,542`	$	`237,829`	$	`232,133`

~~Income from continuing operations~~
~~before income taxes:~~
~~Specialty Health~~ ~~(B)~~	$	`5,238`	$	`1,369`	$	`9,412`	$	`3,754`
~~Group disability; life and DBL~~		`5,144`		`5,323`		`12,777`		`13,533`
~~Individual life, annuities and other~~ ~~(A) (C)~~		`(385)`		`(410)`		`(532)`		`(1,888)`
~~Medical Stop-Loss~~ ~~(A)~~		`(538)`		`2,176`		`2,752`		`13,926`
~~Corporate~~		`(2,295)`		`(1,908)`		`(6,042)`		`(7,106)`
		`7,164`		`6,550`		`18,367`		`22,219`
~~Net realized investment gains~~		`715`		`2,367`		`987`		`3,945`
~~Net impairment losses recognized in earnings~~		`-`		`(1,475)`		`-`		`(1,475)`
~~Interest expense~~		`-`		`(440)`		`-`		`(1,366)`
~~Income from continuing operations~~
~~before income taxes~~	$	`7,879`	$	`7,002`	$	`19,354`	$	`23,323`

				Greater than		Greater than
				3 months,		6 months,
		Less than		less than		less than		Greater than
		3 months		6 months		12 months		12 months		Total

Fixed maturities	$	4,345	$	-	$	-	$	-	$	4,345

2017
				Maximum Number
		Average Price		of Shares which
Month of	Shares	of Repurchased		can be
Repurchase	Repurchased	Shares		Repurchased

July	16,327	$	21.42	2,154,346
August	27,704	$	21.61	2,126,642
September	57,711	$	24.06	2,068,931