UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________________________
WASHINGTON, D.C. 20549FORM
FORM 10-Q
[X]☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the quarterly period ended September 30, 2017.2021.
[ ]☐ 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 |
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(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 |
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]
As of November 9, 2021, the registrant had 14,674,936 shares of Common Stock outstanding.
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INDEPENDENCE HOLDING COMPANY
INDEX
PART I – FINANCIAL INFORMATION | PAGE | ||||
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| Item 1. Financial Statements |
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| Condensed Consolidated Balance Sheets | 4 | |||
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| Condensed Consolidated Statements of Income | 5 | |||
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| Condensed Consolidated Statements of Comprehensive Income (Loss) | 6 | |||
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| Condensed Consolidated | 7 | |||
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| Condensed Consolidated Statements of Cash Flows |
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| Notes to Condensed Consolidated Financial Statements |
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| Item 2. Management's Discussion and Analysis of Financial Condition |
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| and Results of Operations | 31 | |||
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| Item 3. Quantitative and Qualitative Disclosures about Market Risk |
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| Item 4. Controls and Procedures |
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PART II - OTHER INFORMATION |
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| Item 1. Legal Proceedings |
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| Item 1A. Risk Factors |
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| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
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| Item 3. Defaults Upon Senior Securities |
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| Item 4. Mine Safety Disclosures |
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| Item 5. Other Information |
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| Item 6. Exhibits |
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| Signatures |
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Copies of the Company’s SEC filings can be found on its website at www.ihcgroup.com.
2
Forward-Looking Statements
This report on Form 10−Q contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created by those laws. We have based our forward-looking statements on our current expectations and projections about future events. Our forward-looking statements include information about possible or assumed future results of our operations. All statements, other than statements of historical facts, included or incorporated by reference in this report that address activities, events or developments that we expect or anticipate may occur in the future, including such things as the growth of our business and operations, our business strategy, competitive strengths, goals, plans, future capital expenditures and references to future successes may be considered forward-looking statements. Also, when we use words such as “anticipate,” “project”, “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 FactorsFactors, of IHC’s annual reportAnnual Report on Form 10-K as filed with Securities and Exchange Commission.
Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of these assumptions, and, therefore, also the forward-looking statements based on these assumptions, could themselves prove to be inaccurate. In light of the significant uncertainties inherent in the forward-looking statements that are included in this report, our inclusion of this information is not a representation by us or any other person that our objectives and plans will be achieved. Our forward-looking statements speak only as of the date made, and we will not update these forward-looking statements unless the securities laws require us to do so. In light of these risks, uncertainties and assumptions, any forward-looking event discussed in this report may not occur.
3
PART I - FINANCIAL INFORMATION
Item 1.Financial Statements
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES | ||||||
CONDENSED CONSOLIDATED BALANCE SHEETS | ||||||
(In thousands, except share data) | ||||||
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| September 30, |
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| December 31, |
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ASSETS: |
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Investments: |
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Securities purchased under agreements to resell |
| $ |
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Fixed maturities, available-for-sale |
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Other investments |
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Total investments |
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Cash and cash equivalents |
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Other assets |
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Assets attributable to discontinued operations (Note 2) | 995,383 | 946,573 | ||||
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TOTAL ASSETS |
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LIABILITIES AND EQUITY: |
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LIABILITIES: |
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Accounts payable, accruals and other liabilities |
| $ |
| $ | 28,387 | |
Liabilities attributable to discontinued operations (Note 2) | 601,253 |
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TOTAL LIABILITIES |
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Commitments and contingencies (Note |
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Redeemable noncontrolling interest |
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STOCKHOLDERS’ EQUITY: |
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Preferred stock $1.00 par value, 100,000 shares authorized; |
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none issued or outstanding |
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Common stock $1.00 par value, 23,000,000 shares authorized; |
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18,625,458 |
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| 18,625 |
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Paid-in capital |
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Accumulated other comprehensive |
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Treasury stock, at cost; |
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Retained earnings |
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TOTAL IHC STOCKHOLDERS’ EQUITY |
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NONREDEEMABLE NONCONTROLLING INTERESTS |
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TOTAL EQUITY |
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TOTAL LIABILITIES AND EQUITY |
| $ |
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See the accompanying Notes to Condensed Consolidated Financial Statements.
4
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES | ||||||||
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) | ||||||||
(In thousands, except per share data) | ||||||||
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| Three Months Ended |
| Nine Months Ended | ||||
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| September 30, |
| September 30, | ||||
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| 2017 |
| 2016 |
| 2017 |
| 2016 |
REVENUES: |
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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: |
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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) |
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| 83,752 |
| 78,542 |
| 237,829 |
| 232,133 |
EXPENSES: |
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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 |
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| 75,873 |
| 71,540 |
| 218,475 |
| 208,810 |
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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 |
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Income from continuing operations, net of tax |
| 5,213 |
| 4,366 |
| 24,529 |
| 14,757 |
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Discontinued operations: |
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Income from discontinued operations, before income taxes |
| - |
| - |
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| 117,636 |
Income taxes on discontinued operations |
| - |
| - |
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| 7,724 |
Income from discontinued operations, net of tax |
| - |
| - |
| - |
| 109,912 |
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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) |
| - |
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NET INCOME ATTRIBUTABLE TO IHC | $ | 5,229 | $ | 4,323 | $ | 24,496 | $ | 114,769 |
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Basic income per common share: |
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Income from continuing operations | $ | 0.35 | $ | 0.25 | $ | 1.53 | $ | 0.84 |
Income from discontinued operations |
| - |
| - |
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| 5.84 |
Basic income per common share | $ | 0.35 | $ | 0.25 | $ | 1.53 | $ | 6.68 |
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WEIGHTED AVERAGE SHARES OUTSTANDING |
| 14,965 |
| 17,120 |
| 15,999 |
| 17,189 |
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Diluted income per common share: |
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Income from continuing operations | $ | 0.34 | $ | 0.25 | $ | 1.50 | $ | 0.83 |
Income from discontinued operations |
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| 5.77 |
Diluted income per common share | $ | 0.34 | $ | 0.25 | $ | 1.50 | $ | 6.60 |
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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) | ||||||||
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| Three Months Ended |
| Nine Months Ended | ||||
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| September 30, |
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| 2021 |
| 2020 |
| 2021 |
| 2020 | |
REVENUES: |
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Net investment income | $ | 119 | $ | 170 | $ | 430 | $ | 916 |
Fee income |
| 5,569 |
| 6,113 |
| 20,291 |
| 18,465 |
Other income |
| 873 |
| 615 |
| 1,660 |
| 1,739 |
Net investment gains (losses) |
| (48) |
| (53) |
| 105 |
| 122 |
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| 6,513 |
| 6,845 |
| 22,486 |
| 21,242 | |
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EXPENSES: |
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Selling, general and administrative expenses |
| 21,592 |
| 16,431 |
| 53,028 |
| 43,221 |
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Loss from continuing operations before income taxes |
| (15,079) |
| (9,586) |
| (30,542) |
| (21,979) |
Income tax benefits |
| (3,567) |
| (2,241) |
| (7,026) |
| (5,617) |
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Loss from continuing operations, net of tax |
| (11,512) |
| (7,345) |
| (23,516) |
| (16,362) |
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Discontinued operations (Note 2): |
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Total pretax income from discontinued operations |
| 36,383 |
| 20,295 |
| 150,376 |
| 38,790 |
Income tax expense on discontinued operations |
| 7,512 |
| 4,218 |
| 27,567 |
| 8,836 |
Income from discontinued operations, net of tax |
| 28,871 |
| 16,077 |
| 122,809 |
| 29,954 |
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Net income |
| 17,359 |
| 8,732 |
| 99,293 |
| 13,592 |
(Income) loss from nonredeemable noncontrolling interests |
| - |
| 5 |
| 2 |
| (29) |
(Income) loss from redeemable noncontrolling interests |
| - |
| (49) |
| 156 |
| (176) |
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NET INCOME ATTRIBUTABLE TO IHC | $ | 17,359 | $ | 8,688 | $ | 99,451 | $ | 13,387 |
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Basic income per common share |
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Loss from continuing operations | $ | (0.79) | $ | (0.50) | $ | (1.61) | $ | (1.11) |
Income from discontinued operations |
| 1.97 |
| 1.09 |
| 8.40 |
| 2.02 |
Basic income per common share | $ | 1.18 | $ | 0.59 | $ | 6.79 | $ | 0.91 |
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WEIGHTED AVERAGE SHARES OUTSTANDING |
| 14,654 |
| 14,670 |
| 14,645 |
| 14,763 |
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Diluted income per common share |
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Loss from continuing operations | $ | (0.79) | $ | (0.50) | $ | (1.61) | $ | (1.11) |
Income from discontinued operations |
| 1.97 |
| 1.09 |
| 8.40 |
| 2.02 |
Diluted income per common share | $ | 1.18 | $ | 0.59 | $ | 6.79 | $ | 0.91 |
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WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING |
| 14,654 |
| 14,670 |
| 14,645 |
| 14,763 |
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See the accompanying Notes to Condensed Consolidated Financial Statements.
5
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES | ||||||||
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) | ||||||||
(In thousands) | ||||||||
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| Three Months Ended |
| Nine Months Ended | ||||
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| September 30, |
| September 30, | ||||
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| 2017 |
| 2016 |
| 2017 |
| 2016 |
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Net income | $ | 5,213 | $ | 4,366 | $ | 24,529 | $ | 124,669 |
Other comprehensive income: |
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Available-for-sale securities: |
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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 |
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Other comprehensive income (loss), net of tax |
| 160 |
| (755) |
| 4,620 |
| 6,904 |
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COMPREHENSIVE INCOME, NET OF TAX |
| 5,373 |
| 3,611 |
| 29,149 |
| 131,573 |
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Comprehensive (income) loss, net of tax, attributable to |
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noncontrolling interests: |
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(Income) loss from noncontrolling interests in subsidiaries |
| 16 |
| (43) |
| (33) |
| (9,900) |
Other comprehensive income, net of tax, attributable to |
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noncontrolling interests: |
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Unrealized (gains) losses on available-for-sale securities, net of tax |
| - |
| 47 |
| - |
| (118) |
Other comprehensive (income) loss, net of tax, attributable to |
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noncontrolling interests |
| - |
| 47 |
| - |
| (118) |
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COMPREHENSIVE (INCOME) LOSS, NET OF TAX, |
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ATTRIBUTABLE TO NONCONTROLLING INTERESTS |
| 16 |
| 4 |
| (33) |
| (10,018) |
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COMPREHENSIVE INCOME, NET OF TAX, |
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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) | ||||||||
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| Three Months Ended |
| Nine Months Ended | ||||
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| September 30, |
| September 30, | ||||
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| 2021 |
| 2020 |
| 2021 |
| 2020 |
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Net income | $ | 17,359 | $ | 8,732 | $ | 99,293 | $ | 13,592 |
Other comprehensive income (loss): |
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Available-for-sale securities: |
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Unrealized gains (losses) on available-for-sale securities, pre-tax |
| (1,139) |
| 1,351 |
| (2,387) |
| 3,444 |
Tax expense (benefit) on unrealized gains (losses) on available-for-sale securities |
| (239) |
| 287 |
| (510) |
| 738 |
Unrealized gains (losses) on available-for-sale securities, net of taxes |
| (900) |
| 1,064 |
| (1,877) |
| 2,706 |
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Other comprehensive income (loss), net of tax |
| (900) |
| 1,064 |
| (1,877) |
| 2,706 |
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COMPREHENSIVE INCOME, NET OF TAX |
| 16,459 |
| 9,796 |
| 97,416 |
| 16,298 |
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Comprehensive (income) loss, net of tax, attributable to noncontrolling interests: |
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(Income) loss from noncontrolling interests in subsidiaries |
| - |
| (44) |
| 158 |
| (205) |
Other comprehensive (income) loss, net of tax, attributable to |
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|
|
|
|
|
noncontrolling interests |
| - |
| - |
| - |
| - |
|
|
|
|
|
|
|
|
|
COMPREHENSIVE (INCOME) LOSS, NET OF TAX, |
|
|
|
|
|
|
|
|
ATTRIBUTABLE TO NONCONTROLLING INTERESTS |
| - |
| (44) |
| 158 |
| (205) |
|
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|
|
|
|
|
|
|
COMPREHENSIVE INCOME, NET OF TAX, |
|
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|
|
ATTRIBUTABLE TO IHC | $ | 16,459 | $ | 9,752 | $ | 97,574 | $ | 16,093 |
See the accompanying Notes to Condensed Consolidated Financial Statements.
6
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES | |||||||||||||||||
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Unaudited) (In thousands) | |||||||||||||||||
Three Months Ended September 30, 2021 and 2020 | |||||||||||||||||
ACCUMULATED | |||||||||||||||||
OTHER | TREASURY | TOTAL IHC | NONREDEEMABLE | ||||||||||||||
COMMON | PAID-IN | COMPREHENSIVE | STOCK, | RETAINED | STOCKHOLDERS' | NONCONTROLLING | TOTAL | ||||||||||
STOCK | CAPITAL | INCOME (LOSS) | AT COST | EARNINGS | EQUITY | INTERESTS | EQUITY | ||||||||||
BALANCE AT | |||||||||||||||||
JUNE 30, 2021 | $ | 18,625 | $ | 125,653 | $ | 3,220 | $ | (77,189) | $ | 478,139 | $ | 548,448 | $ | 40 | $ | 548,488 | |
Net income | 17,359 | 17,359 | - | 17,359 | |||||||||||||
Other comprehensive | |||||||||||||||||
loss, net of tax | (900) | (900) | - | (900) | |||||||||||||
Repurchases of common stock | (381) | (381) | - | (381) | |||||||||||||
Share-based compensation | (233) | 323 | 90 | - | 90 | ||||||||||||
Distributions to noncontrolling | |||||||||||||||||
interests | (63) | (63) | (43) | (106) | |||||||||||||
BALANCE AT | |||||||||||||||||
SEPTEMBER 30, 2021 | $ | 18,625 | $ | 125,357 | $ | 2,320 | $ | (77,247) | $ | 495,498 | $ | 564,553 | $ | (3) | $ | 564,550 | |
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| |
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| |||
BALANCE AT | |||||||||||||||||
JUNE 30, 2020 | $ | 18,625 | $ | 123,804 | $ | 2,854 | $ | (74,325) | $ | 388,317 | $ | 459,275 | $ | 49 | $ | 459,324 | |
Net income | 8,688 | 8,688 | (5) | 8,683 | |||||||||||||
Other comprehensive | |||||||||||||||||
income, net of tax | 1,064 | 1,064 | - | 1,064 | |||||||||||||
Repurchases of common stock | (2,452) | (2,452) | - | (2,452) | |||||||||||||
Share-based compensation | 550 | 91 | 641 | - | 641 | ||||||||||||
BALANCE AT | |||||||||||||||||
SEPTEMBER 30, 2020 | $ | 18,625 | $ | 124,354 | $ | 3,918 | $ | (76,686) | $ | 397,005 | $ | 467,216 | $ | 44 | $ | 467,260 | |
See the accompanying Notes to Condensed Consolidated Financial Statements.
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES | |||||||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited) (In thousands) | |||||||||||||||||||
Nine Months Ended September 30, 2021 and 2020 | |||||||||||||||||||
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| ||||||||||||||||||
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| ACCUMULATED |
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| |||
|
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|
| OTHER |
| TREASURY |
|
|
| TOTAL IHC |
|
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| |||
|
| COMMON |
| PAID-IN |
| COMPREHENSIVE |
| STOCK, |
| RETAINED |
| STOCKHOLDERS' |
|
|
| TOTAL | |||
| STOCK |
| CAPITAL |
| INCOME (LOSS) |
| AT COST |
| EARNINGS |
| EQUITY |
|
|
| EQUITY | ||||
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| |||
BALANCE AT |
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| |||
DECEMBER 31, | $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| |||
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| |||
Net income |
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| |||
Other comprehensive |
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|
| |||
|
|
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|
|
|
|
|
|
|
|
|
| - |
|
| |||
Repurchases of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
| - |
|
| |||
Common stock |
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|
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| - |
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| ||||
Share-based compensation | 663 | 362 | 1,025 | - | 1,025 | ||||||||||||||
Distributions to noncontrolling | |||||||||||||||||||
interests | (63) | (63) | (43) | (106) | |||||||||||||||
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BALANCE AT |
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| |||
| $ | 18,625 | $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| |||
BALANCE AT | |||||||||||||||||||
DECEMBER 31, 2019 | $ | 18,625 | $ | 122,717 | $ | 1,212 | $ | (69,724) | $ | 386,864 | $ | 459,694 | $ | 18 | $ | 459,712 | |||
Net income | 13,387 | 13,387 | 29 | 13,416 | |||||||||||||||
Other comprehensive | |||||||||||||||||||
income, net of tax | 2,706 | 2,706 | - | 2,706 | |||||||||||||||
Repurchases of common stock | (7,053) | (7,053) | - | (7,053) | |||||||||||||||
Distributions to noncontrolling | |||||||||||||||||||
interests | - | (3) | (3) | ||||||||||||||||
Common stock dividends | |||||||||||||||||||
($0.22 per share) | (3,246) | (3,246) | - | (3,246) | |||||||||||||||
Share-based compensation | 1,637 | 91 | 1,728 | - | 1,728 | ||||||||||||||
BALANCE AT | |||||||||||||||||||
SEPTEMBER 30, 2020 | $ | 18,625 | $ | 124,354 | $ | 3,918 | $ | (76,686) | $ | 397,005 | $ | 467,216 | $ | 44 | $ | 467,260 | |||
|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
See the accompanying Notes to Condensed Consolidated Financial Statements.
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES | |||||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) | |||||
(In thousands) | |||||
| |||||
|
| Nine Months Ended September 30, | |||
| 2021 |
|
| 2020 | |
CASH FLOWS PROVIDED BY (USED BY) OPERATING ACTIVITIES: |
|
|
|
|
|
Net income | $ | 99,293 |
| $ | 13,592 |
Adjustments to reconcile net income to net change in cash from |
|
|
|
|
|
operating activities: |
|
|
|
|
|
Gain on disposal of discontinued operations |
| (74,008) |
|
| - |
Pretax provision for loss on disposal |
| 1,021 |
|
| - |
Deferred and sharebased compensation |
| 7,001 |
|
| 2,929 |
Net amortization of purchased premium and discount in net investment income |
| 408 |
|
| 481 |
Net investment (gains) |
| (105) |
|
| (122) |
Depreciation and amortization |
| 977 |
|
| 800 |
Other |
| 13,975 |
|
| 4,710 |
Changes in assets and liabilities: |
|
|
|
|
|
Change in insurance liabilities |
| 2,048 |
|
| 14,670 |
Change in amounts due from reinsurers |
| 4,279 |
|
| 5,334 |
Change in claim fund balances |
| (1,133) |
|
| 751 |
Change in due and unpaid premiums |
| (14,577) |
|
| (2,852) |
Change in contract asset |
| (332) |
|
| - |
Other operating activities |
| 2,836 |
|
| (2,508) |
|
|
|
|
|
|
Net change in cash from operating activities |
| 41,683 |
|
| 37,785 |
|
|
|
|
|
|
CASH FLOWS PROVIDED BY (USED BY) INVESTING ACTIVITIES: |
|
|
|
|
|
Net (purchases) sales and maturities of short-term investments |
| 2,560 |
|
| (1,049) |
Net (purchases) sales of securities under resale agreements |
| (145,314) |
|
| 28,844 |
Sales of equity securities |
| 3,494 |
|
| - |
Sales of fixed maturities |
| 10,351 |
|
| 39,388 |
Maturities and other repayments of fixed maturities |
| 56,634 |
|
| 96,964 |
Purchases of fixed maturities |
| (8,343) |
|
| (170,088) |
Cash divested from deconsolidation of subsidiary |
| (4,878) |
|
| - |
Payments to acquire business, net of cash acquired |
| - |
|
| (13,707) |
Payments to acquire other investments |
| (2,500) |
|
| (1,250) |
Other investing activities |
| (2,418) |
|
| (3,998) |
|
|
|
|
|
|
Net change in cash from investing activities |
| (90,414) |
|
| (24,896) |
|
|
|
|
|
|
CASH FLOWS PROVIDED BY (USED BY) FINANCING ACTIVITIES: |
|
|
|
|
|
Repurchases of common stock |
| (521) |
|
| (6,882) |
Withdrawals of investment-type insurance contracts |
| (144) |
|
| (464) |
Dividends paid |
| (6,443) |
|
| (6,215) |
Other financing activities |
| (431) |
|
| 94 |
|
|
|
|
|
|
Net change in cash from financing activities |
| (7,539) |
|
| (13,467) |
|
|
|
|
|
|
Net change in cash, cash equivalents and restricted cash |
| (56,270) |
|
| (578) |
Cash, cash equivalents and restricted cash, beginning of year, including discontinued operations |
| 74,793 |
|
| 24,631 |
|
|
|
|
|
|
Cash, cash equivalents and restricted cash, end of period, including discontinued operations | $ | 18,523 |
| $ | 24,053 |
|
|
|
|
|
|
NON-CASH ACTIVITY: |
|
|
|
|
|
Proceeds from sale of subsidiary – funds held in escrow | $ | 78,263 |
| $ | - |
|
|
|
|
|
|
See the accompanying Notes to Condensed Consolidated Financial Statements.
7
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES | |||||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) | |||||
(In thousands) | |||||
| |||||
|
| Nine Months Ended September 30, | |||
|
| 2017 |
|
| 2016 |
CASH FLOWS PROVIDED BY (USED BY) OPERATING ACTIVITIES: |
|
|
|
|
|
Net income | $ | 24,529 |
| $ | 124,669 |
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 |
Net realized investment gains |
| (987) |
|
| (3,945) |
Other-than-temporary impairment losses |
| - |
|
| 1,475 |
Equity (income) loss from equity method investments |
| (1,412) |
|
| 7 |
Depreciation and amortization |
| 1,379 |
|
| 1,482 |
Deferred tax expense |
| 1,853 |
|
| 2,565 |
Other |
| 4,852 |
|
| 6,683 |
Changes in assets and liabilities: |
|
|
|
|
|
Net sales of trading securities |
| - |
|
| 3,180 |
Change in insurance liabilities |
| (83,750) |
|
| (41,713) |
Change in amounts due from reinsurers |
| 57,094 |
|
| 4,227 |
Change in premium and claim funds |
| 4,287 |
|
| (4,835) |
Change in current income tax liability |
| (8,604) |
|
| (6,550) |
Change in due and unpaid premiums |
| 10,218 |
|
| 11,621 |
Other operating activities |
| 6,302 |
|
| (6,417) |
|
|
|
|
|
|
Net change in cash from operating activities |
| 16,030 |
|
| (16,753) |
|
|
|
|
|
|
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 |
Sales of equity securities |
| - |
|
| 2,429 |
Sales of fixed maturities |
| 158,062 |
|
| 335,562 |
Maturities and other repayments of fixed maturities |
| 16,841 |
|
| 35,505 |
Purchases of fixed maturities |
| (145,444) |
|
| (406,348) |
Proceeds on sales of subsidiaries, net of cash divested |
| - |
|
| 137,115 |
Payments to acquire business, net of cash acquired |
| (12,323) |
|
| - |
Distributions from other investments |
| 5,246 |
|
| - |
Proceeds on sales of other investments |
| - |
|
| 2,064 |
Purchases of other investments |
| (602) |
|
| (3,371) |
Other investing activities |
| (565) |
|
| (3,433) |
|
|
|
|
|
|
Net change in cash from investing activities |
| 36,429 |
|
| 108,422 |
|
|
|
|
|
|
CASH FLOWS PROVIDED BY (USED BY) FINANCING ACTIVITIES: |
|
|
|
|
|
Repurchases of common stock |
| (44,290) |
|
| (3,522) |
Cash paid in acquisitions of noncontrolling interests |
| - |
|
| (18,141) |
Withdrawals of investment-type insurance contracts |
| (1,359) |
|
| (1,447) |
Repayments of debt |
| - |
|
| (4,789) |
Dividends paid |
| (1,927) |
|
| (1,588) |
Other financing activities |
| (328) |
|
| (474) |
|
|
|
|
|
|
Net change in cash from financing activities |
| (47,904) |
|
| (29,961) |
|
|
|
|
|
|
Net change in cash and cash equivalents |
| 4,555 |
|
| 61,708 |
Cash and cash equivalents, beginning of year |
| 22,010 |
|
| 17,500 |
|
|
|
|
|
|
Cash and cash equivalents, end of period | $ | 26,565 |
| $ | 79,208 |
See the accompanying Notes to Condensed Consolidated Financial Statements.
8
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1.Organization, Consolidation, Basis of Presentation and Accounting Policies
(A) Business and Organization
Independence Holding Company, a Delaware corporation (“IHC”), is a holding company principally engaged in theunderwriting, administering and/or distributing group and individual specialty benefit products, including disability, supplemental health, pet, and group 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”);Company; and (ii) its marketing and administrative companies, including IHC Specialty Benefits Inc. (“IHCSB”), IHC Carrier Solutions,Brokerage Group, Inc. (“IBG”), INSXCloud, Inc. (“INSXCloud”) (formerly My1HR, Inc.), collectively the “IHC Agencies” and aits lead generation company, Torchlight Technology Group LLC., (“Torchlight”). On June 30, 2021, the Company sold its majority interest in PetPartners, Inc. IHC also owns(“PetPartners”), a significant equity interest in Ebix Health Exchange Holdings, LLC (“Ebix Health Exchange”),major distributor and administrator of pet insurance underwritten by Independence American Insurance Company and an administration exchange for health insurance.unaffiliated insurer. Standard Security Life, Madison National Life and Independence American Insurance Company 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,Holdings, Inc., a diversified financial holding company, andthrough its affiliated entities,wholly-owned subsidiaries (collectively “Geneve”), held approximately 61%62% of IHC's outstanding common stock atas of September 30, 2017.2021. In August 2021, IHC’s Board of Directors received a preliminary, non-binding proposal from Geneve to acquire all of the outstanding shares of common stock of IHC that are not already beneficially owned by Geneve in a going-private transaction (“Going Private Transaction”). Geneve’s proposed purchase price at that time was $50 per share, payable in cash. The Board of Directors formed a Special Committee of independent and disinterested directors to consider the proposal and to review, evaluate, negotiate and recommend the approval or disapproval of the proposal and consider alternatives. On November 9, 2021, the Special Committee concluded unanimously that a Going Private Transaction with a purchase price of $57 per share on the terms negotiated was fair and in the best interests of IHC’s stockholders other than Geneve. Upon its approval by the Board of Directors, IHC, Geneve Holdings, Inc. and Geneve Acquisition Corp., a wholly owned subsidiary of Geneve Holdings, Inc., entered into a merger agreement (“Merger Agreement”) pursuant to which holders of IHC’s outstanding shares of common stock, excluding shares held by Geneve, will receive $57 per share in cash. The consummation of the Going Private Transaction is subject to certain closing conditions, including approval by the holders of a majority of IHC’s outstanding shares of common stock that are not held by Geneve and its affiliates and the consummation of the pending sales of IHC’s subsidiaries, Independence American Holdings Corp. and Standard Security Life discussed in Note 2. Further information regarding the terms and conditions in the Merger Agreement is contained in the Current Report on Form 8-K filed by IHC with the SEC on November 9, 2021.
(B) Consolidation
On August 31, 2016, IHC took AMIC Holdings, Inc. (“AMIC”) private by way of a statutory “short-form” merger. The company paid $18,141,000 for the remaining shares of AMIC common stock owned by noncontrolling interests and as a result, the Company now owns all of the outstanding common stock of AMIC. In connection with the transaction, $2,230,000 was charged to paid-in capital representing: (i) the difference between the fair value of the consideration paid for the shares and the carrying amount of noncontrolling interests; plus (ii) specific, direct costs of the transaction.
(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 reportAnnual 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.
During the second and third quarters of 2021, the Board of Directors committed to various plans for the disposal of several business operations (see Note 2). Each plan represents a strategic shift that will have a major effect on the Company’s operations and financial results and as such, they each qualify for reporting as discontinued operations in 2021. The assets, liabilities, and related income and expenses associated with each disposal group are presented as discontinued operations in the accompanying condensed consolidated financial statements and Notes thereto for all periods presented.
In March 2020, the World Health Organization declared the outbreak of COVID-19 a global health pandemic and the United States declared a national health emergency. COVID-19 has led to largescale disruption in the global economy, market instability and widespread unemployment in the United States. The COVID-19 outbreak continues to be a fluid situation and as it evolves, the duration of COVID-19 and its potential effects on our business cannot be certain. Regulatory mandates have affected, and we anticipate will continue to impact, the insurance industry. We currently cannot predict if there will be a material impact to our business, results of operations or financial condition in future reporting periods. Consequently, future changes in market conditions may impact estimates used in the preparation of our financial statements associated with evaluations of goodwill and other intangible assets for impairment, estimates associated with the determination of valuation allowances related to net operating loss carryforwards, and estimates of certain losses under insurance contracts. These estimates may all be subject to substantial adjustments in future periods. In addition, volatile market conditions may result in declines in the fair value of our investment portfolio and possible impairments of certain securities.
In the opinion of management, all adjustments (consisting only of normal recurring accruals) that are necessary for a fair presentation of the consolidated financial position and results of operations for the interim periods have been included. The condensed consolidated results of operations for the three months and nine months ended September 30, 20172021 are not necessarily indicative of the results to be anticipated for the entire year.
9(C)Reclassifications
Certain amounts in prior year’s condensed consolidated financial statements and Notes thereto have been reclassified to conform to the 2021 presentation, primarily for the effects of discontinued operations.
(D)Recent Accounting Pronouncements
Recently Adopted Accounting Standards
In October 2016,December 2019, the Financial Accounting StandardsStandard Board (“FASB”) issued guidance to simplify the accounting for income taxes. The guidance eliminates certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities related to changes in ownership of equity method investments and foreign subsidiaries. The guidance also simplifies aspects of accounting for franchise taxes, the requirement to allocate current and deferred tax expense to legal entities not subject to tax in its separate financial statements, enacted changes in tax laws or rates, and clarifies the accounting for transactions that amendsresult in a step-up in the consolidation analysis for a reporting entity that is the single decision makertax basis 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.goodwill. 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,October 2021, the FASB issued guidance to provide clarityimprove comparability after a business combination by providing consistent recognition and reduce both (i) diversity measurement guidance for revenue contracts with customers acquired
in practice;a business combination. The guidance requires an acquirer to recognize and (ii) costmeasure contract assets and complexity when accounting forcontract liabilities acquired in a changebusiness combination in the terms or conditions of a share-based payment award. The amendments in this guidance should be applied prospectively in annual periods beginning after December 15, 2017, including interim periods within those periods, with early adoption permitted. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.
In March 2017, the FASB issued guidance requiring premium amortization on callable debt securities to be amortized to the earliest call date to more closely align the amortization period with expectations incorporated in market pricing of the underlying securities. The amendments in this guidance should be applied using a modified retrospective approach for annual periods beginning after December 15, 2018, including interim periods within those periods. Additional disclosures are requiredsame manner that they were recognized and measured in the period of adoption. Early adoption is permitted. The adoption of this guidance is not expected to have a material effect onacquiree’s financial statements before the Company’s consolidated financial statements.
In February 2017,acquisition. For public companies, the FASB issued guidance to simplify the accounting for sales of nonfinancial assets by clarifying the definition of nonfinancial assets and adding guidance pertaining to partial sales of nonfinancial assets. The amendments in this guidance can be applied using either a retrospective approach or a modified retrospective approach in annual periods beginning after December 15, 2017, including interim periods within those periods. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.
In January 2017, the FASB issued guidance to simplify the test for goodwill impairment by eliminating Step 2 in the goodwill impairment test. Instead, under the amendments in this Update, an entity should perform its annual or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Additionally, an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The amendments in this guidance are effective for public business entities for annual, or any interim, goodwill impairment tests in fiscal years beginning after December 15, 2019.2022, and for interim periods within those fiscal years, with early implementation permitted, and should be applied prospectively to business combinations occurring on or after the effective date of the amendments. The adoption ofamendments in this
10
guidance is not expected to have a material effect on the Company’s consolidated financial statements.
In January 2017,August 2018, the FASB issued guidance that clarifiesto improve existing measurements, presentation and disclosure requirements for long-duration contracts issued by insurance entities. The amendments in this guidance requires an entity to (1) review and update assumptions used to measure cash flows at least annually as well as update the definitiondiscount 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 business to assist entities with evaluating when a setconstant level basis over the expected term of transferred assetsthe related contracts. In 2019, the FASB delayed the original effective dates. For smaller reporting companies, the amendments in this guidance are now effective for fiscal years beginning after December 15, 2023, and activities is a business. Thefor interim periods within fiscal years beginning after December 15, 2024. Upon adoption, 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 earningscontracts in-force as of the beginning of the earliest period of adoptionpresented with a cumulative adjustment to beginning retained earnings. Management is evaluating the requirements and are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. Thepotential impact that the adoption of this guidance is not expected towill 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 and delayed the original effective dates. For public entities that are SEC filers,smaller reporting companies, the amendments in this Updateguidance are now effective for fiscal years beginning after December 15, 2019,2022, including interim periods within those years. Early adoption is permitted for fiscal years beginning after December 15, 2018.permitted. 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.
Note 2.Discontinued Operations
(A)Sale of Standard Security Life
On April 14, 2021, IHC and its wholly owned subsidiary, Independence Capital Corp. (“ICC”), entered into a Stock Purchase Agreement with Reliance Standard Life Insurance Company (“Reliance Standard”) to sell all of the issued and outstanding capital stock of Standard Security Life, a wholly owned subsidiary of ICC, for an aggregate purchase price of $180,000,000 in cash. On July 29, 2021, the stock purchase agreement was amended and restated (the “SSL Amended Purchase Agreement”). In February 2016,accordance with the FASB issued guidance that requires lesseesSSL Amended Purchase Agreement, the Company will receive the excess of aggregate statutory capital and surplus, calculated as of the closing date, over $57,000,000. The closing of the transaction, the closing distribution and certain other items are subject to recognizecustomary closing conditions including applicable regulatory approvals, one of which is the assetsapproval of the New York State Department of Financial Services (”NYSDFS”). Standard Security Life focuses on underwriting 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, usingselling its New York short-term disability (“DBL”) and paid family leave rider (“PFL”) products and ceded a modified retrospective approach. The adoptionportion of this guidancebusiness to Independence American Insurance
Company. We filed notice and received approval to cancel this reinsurance contract in accordance with the terms of the SSL Amended Purchase Agreement effective June 30, 2021. Under the terms of the SSL Amended Purchase Agreement, the sale transaction will include all of Standard Security Life’s DBL and PFL business (including the DBL and PFL business previously ceded to Independence American Insurance Company) in addition to all its other lines of business. The DBL and PFL business being sold was part of the Company’s Group disability, life, DBL and PFL segment. The aforementioned transaction, consisting of the sale of Standard Security Life, the closing distribution and other closing conditions, is not expectedcollectively referred to as the “SSL Sale” transaction or disposal group. DBL and PFL are major product lines for the Company. The sale of Standard Security Life and resulting exit from DBL and PFL business represents a strategic shift that will have a materialmajor effect on the Company’s consolidatedoperations and financial statements.results. The SSL Sale transaction qualified for reporting as discontinued operations in the second quarter of 2021 upon the Board of Director’s commitment to a plan for its disposal in April 2021. Provided that all regulatory approvals and other closing conditions are met, the Company expects to complete the SSL Sale transaction by the end of 2021.
In January 2016,Aside from customary transition services, there will be no continuing involvement with Standard Security Life after its disposal.
(B)Sale of Pet Division and Independence American Insurance Company (“Pets Sale”)
On May 17, 2021, IHC and certain subsidiaries entered into agreements to sell a 70% controlling interest in its pet division, including all of the FASB issued guidance that eliminatesand outstanding capital stock of Independence American Insurance Company to a subsidiary of Iguana Capital, Inc. (“Iguana Capital”), an investment company specifically formed to facilitate this transaction as follows:
(i)IHC and its wholly owned subsidiary, IHC SB Holdings LLC (“SBH”), entered into a Stock Purchase Agreement (the “PPI Purchase Agreement”) with Iguana Capital to sell its 85% interest in PetPartners for $77,000,000 in cash (subject to working capital adjustments);
(ii)IHC and its wholly owned subsidiary, AMIC Holdings, Inc. (“AMIC”), entered into a Stock Purchase Agreement (the “IAHC Purchase Agreement”) with Iguana Capital to sell all of the requirementstock of Independence American Holdings Corp. (“IAHC”), which owns all of the stock of Independence American Insurance Company and other pet assets, for $190,400,000 in cash (subject 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 accountedadjustments for undertargeted statutory capital and surplus): and
(iii)Following each of the equity method, (including other ownership interests, such as partnerships, unincorporated joint ventures, and limited liability companies) to be measured at fair value with changesabove, IHC will retain a 30% interest in the fair value recognized through net income, simplifiesbusiness sold in the impairment
11
assessmentform of an equity securities without readily determinable fair values and requires changesinvestment in disclosure requirements. For public entities,Iguana Capital. IHC’s equity interest in Iguana Capital will become diluted in the amendments in this Updatefuture as a result additional investments made by Iguana Capital unless IHC invests its pro rata share.
Both agreements are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted in certain circumstances.subject to customary closing conditions. The amendments in this Update should be applied by means of a cumulative-effect adjustment to the balance sheet asclosing of the beginningIAHC Purchase Agreement however is also subject to certain regulatory approvals, one of which is the approval of the fiscal yearDelaware Insurance Department. For this reason, the transaction was structured as two agreements such that the sale 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 asPetPartners occurred on June 30, 2021, and the closing of the transactions contemplated in the IAHC Purchase Agreement will follow at a later date upon receipt of adoptionapplicable regulatory approvals. Provided that all regulatory approvals and other closing conditions are met, the Company expects to complete the IAHC sale transaction by the end of 2021.
Under the terms of the guidance.IAHC Purchase Agreement, the transaction includes the sale of all Independence American Insurance Company’s pet business and excludes other business lines. These excluded business lines will be reinsured by Madison National Life prior to closing. The adoptionreinsurance agreement will remain in effect until the underlying business runs out. The aforementioned transaction, consisting of this guidancethe sale of PetPartners, IAHC and Independence American Insurance Company, and other closing conditions, is not expectedcollectively referred to as the “Pets Sale” transaction or disposal group. The pet business being sold was part of the Company’s Specialty Health segment. Because the pet business is a major product line for the Company, and the Company will no longer actively engage in the sales and marketing of pet insurance, the Pets Sale
transaction represents a strategic shift that will have a materialmajor effect on the Company’s Consolidated Balance Sheet or IHC’s stockholders’ equity.operations and financial results. The Pets Sale transaction qualified for reporting as discontinued operations in the second quarter of 2021 as a result of the Board of Directors’ commitment to a plan for the disposal of a controlling interest in its pet business in May 2021, and the execution of both the PPI Purchase Agreement and the IAHC Purchase Agreement on May 17, 2021.
In May 2014,On June 30, 2021, the FASB issued revenue recognition guidance for entities that either enter into contracts with customersCompany completed the sale of its majority interest in PetPartners and, as a result, the Company ceased to transfer goods or services or enter into contracts forhave a controlling financial interest in PetPartners. Upon closing, the transferCompany received proceeds 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$78,263,000 (consisting of the implementation guidancepurchase price and to clarifycertain initial working capital adjustments), recognized an initial equity investment in Iguana Capital valued at $33,762,000, and recorded a $62,229,000 gain on the identificationdisposal, net 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,transaction costs 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 revenuesincome taxes for the nine months ended September 30, 2017.2021. Transaction costs consisting of transaction bonuses, legal expenses and financial advisor expenses amounted to an aggregate of $6,079,000. The guidancePPI Purchase Agreement includes a waiver and consent to offer The American Kennel Club (“AKC”), PetPartners’ minority shareholder, until December 31, 2021, the right to sell their shares at the same price and terms as in the PPI Purchase Agreement. In the event AKC desires to sell such its shares, Iguana Capital and SBH will equally finance the cash payment to AKC. In connection with the PPI Sale transaction, the Company recorded a $6,800,000 contingent liability (the maximum amount required) based on its belief that AKC will exercise this right. If for any reason the IAHC Purchase Agreement is terminated, then at the option of either SBH or an affiliate of Iguana Capital, IAHC may reacquire the Company’s interest in PetPartners (the “PPI Put/Call Option”). The value of the PPI Put/Call Option was deemed to be negligible due to the structure of the put and call features, the short time horizon and the Company’s belief that there is a low probability that the deal would be terminated. The proceeds received from the sale of PetPartners were deposited into an escrow account owned by SBH and treated as a security deposit. The funds will be applied retrospectively with a cumulative effect adjustmentreleased from escrow upon either the consummation of the IAHC sale transaction or upon the exercise of the PPI Put/Call Option. At September 30, 2021, the security deposit is presented as funds held in escrow on the dateCondensed Consolidated Balance Sheet.
Continuing involvement with the Pets Sale disposal group will consist of initial application. Management is stillcustomary transition services, the PPI Put/Call Option and the equity investment in Iguana Capital. At September 30, 2021, the processcarrying value of evaluating the impact that the adoption of this guidance will have on the Company’s consolidated financial statements30% equity interest in Iguana Capital is $33,475,000. The investment is accounted for using the equity method of accounting, and does not anticipate any significant changesfor the three months and nine months ended September 30, 2021, the Company recorded an equity loss of $(287,000) on its investment in internal controls over financial reportingIguana Capital. In the fourth quarter of 2021, the Company committed to invest an additional $3,200,000 to Iguana Capital, but as a result of the magnitude of other investments being made by Iguana Capital, the Company expects its implementation.equity interest in Iguana Capital will be diluted.
(C)Sale of Madison National Life
On July 14, 2021, IHC and its wholly owned subsidiary ICC entered into a stock purchase agreement (the “MNL Purchase Agreement”) with Horace Mann Educators Corporation to sell all of the issued and outstanding capital stock of Madison National Life, which is wholly owned by ICC, for an aggregate purchase price of $172,500,000 in cash; in addition, if Madison National Life reaches specified financial targets in 2023, IHC will receive an additional purchase price of up to $12,500,000. In accordance with the MNL Stock Purchase agreement and prior to closing, Madison National Life will enter into a reinsurance agreement with Independence American Insurance Company to reinsure all of Independence American Insurance Company’s non-pet business, primarily specialty health products, that are excluded from the Pets Sale transaction discussed above. The transaction has been approved by the Board of Directors of IHC, and IHC’s majority stockholders have entered into a voting agreement under which such majority stockholders agreed to approve the transaction. IHC’s majority stockholders approved the transaction by written consent on October 18, 2021. The closing is expected no earlier than January 1, 2022; and the transaction is subject to customary closing conditions, including applicable regulatory approvals, one of which is the approval by the Wisconsin Office of the Commissioner of Insurance. The aforementioned transaction, which includes the reinsured specialty health business of Independence American Insurance Company, is referred to as the “MNL Sale” transaction or disposal group and qualifies for reporting as discontinued operations in the third quarter of 2021 upon the
Board of Director’s commitment to the disposal plan in July 2021.
In addition to customary transition services, there will be some continuing involvement with Madison National Life after its disposal with regards to the runout of the reinsured specialty health lines of business.
The following is a reconciliation, by disposal group, of the carrying amounts of major classes of assets and liabilities included in discontinued operations on the Condensed Consolidated Balance Sheets for the periods indicated (in thousands):
September 30, 2021 | ||||||||
SSL Sale | Pets Sale | MNL Sale | Total | |||||
Major classes of assets: | ||||||||
Investments and cash | $ | 154,902 | $ | 151,036 | $ | 195,993 | $ | 501,931 |
Due from reinsurers | 13,237 | - | 339,689 | 352,926 | ||||
Goodwill | - | 41,716 | 12,486 | 54,202 | ||||
Other assets | 36,431 | 16,663 | 33,230 | 86,324 | ||||
Assets attributable to discontinued operations | $ | 204,570 | $ | 209,415 | $ | 581,398 | $ | 995,383 |
Major classes of liabilities: | ||||||||
Policy benefits and claims | $ | 43,576 | $ | 13,727 | $ | 117,352 | $ | 174,655 |
Future policy benefits | 20,650 | - | 174,534 | 195,184 | ||||
Funds on deposit | 593 | - | 141,935 | 142,528 | ||||
Unearned premiums | 13,956 | 6,497 | 1,791 | 22,244 | ||||
Other liabilities | 19,656 | 2,508 | 44,478 | 66,642 | ||||
Liabilities attributable to discontinued operations | $ | 98,431 | $ | 22,732 | $ | 480,090 | $ | 601,253 |
December 31, 2020 | ||||||||
SSL Sale | Pets Sale | MNL Sale | Total | |||||
Major classes of assets: | ||||||||
Investments and cash | $ | 114,916 | $ | 149,844 | $ | 193,821 | $ | 458,581 |
Due from reinsurers | 13,188 | - | 344,017 | 357,205 | ||||
Goodwill | - | 62,414 | 12,486 | 74,900 | ||||
Other assets | 19,015 | 22,389 | 14,483 | 55,887 | ||||
Assets attributable to discontinued operations | $ | 147,119 | $ | 234,647 | $ | 564,807 | $ | 946,573 |
Major classes of liabilities: | ||||||||
Policy benefits and claims | $ | 39,296 | $ | 11,775 | $ | 128,161 | $ | 179,232 |
Future policy benefits | 21,236 | - | 176,850 | 198,086 | ||||
Funds on deposit | 710 | - | 140,666 | 141,376 | ||||
Unearned premiums | 5,394 | 5,629 | 1,766 | 12,789 | ||||
Other liabilities | 10,382 | 8,012 | 32,774 | 51,168 | ||||
Liabilities attributable to discontinued operations | $ | 77,018 | $ | 25,416 | $ | 480,217 | $ | 582,651 |
The following is a reconciliation, by disposal group, of the major line items constituting the pretax profit of discontinued operations to the income from discontinued operations, net of tax, as shown on the Condensed Consolidated Statements of Income for the periods indicated (in thousands):
For the Three Months Ended September 30, 2021 | ||||||||
SSL Sale | Pets Sale | MNL Sale | Total | |||||
Revenues | $ | 51,274 | $ | 32,138 | $ | 41,838 | $ | 125,250 |
Expenses: | ||||||||
Insurance benefits, claims and reserves | 20,214 | 19,301 | 12,974 | 52,489 | ||||
Selling, general and administrative expenses | 8,166 | 11,466 | 16,011 | 35,643 | ||||
Pretax income of discontinued operations during phase-out | 22,894 | 1,371 | 12,853 | 37,118 | ||||
Pretax provision for loss on disposal | (59) | (86) | (64) | (209) | ||||
Pretax gain (loss) on disposal of discontinued operations | - | (526) | - | (526) | ||||
Total pretax income from discontinued operations | 22,835 | 759 | 12,789 | 36,383 | ||||
Income tax expense on discontinued operations | 4,721 | 103 | 2,688 | 7,512 | ||||
Income from discontinued operations, net of tax | $ | 18,114 | $ | 656 | $ | 10,101 | $ | 28,871 |
For the Three Months Ended September 30, 2020 | ||||||||
SSL Sale | Pets Sale | MNL Sale | Total | |||||
Revenues | $ | 30,222 | $ | 22,117 | $ | 54,036 | $ | 106,375 |
Expenses: | ||||||||
Insurance benefits, claims and reserves | 18,795 | 12,426 | 18,606 | 49,827 | ||||
Selling, general and administrative expenses | 6,398 | 7,766 | 22,089 | 36,253 | ||||
Pretax income of discontinued operations during phase-out | 5,029 | 1,925 | 13,341 | 20,295 | ||||
Pretax provision for loss on disposal | - | - | - | - | ||||
Pretax gain on disposal of discontinued operations | - | - | - | - | ||||
Total pretax income from discontinued operations | 5,029 | 1,925 | 13,341 | 20,295 | ||||
Income tax expense on discontinued operations | 1,031 | 402 | 2,785 | 4,218 | ||||
Income from discontinued operations, net of tax | $ | 3,998 | $ | 1,523 | $ | 10,556 | $ | 16,077 |
For the Nine Months Ended September 30, 2021 | ||||||||
SSL Sale | Pets Sale | MNL Sale | Total | |||||
Revenues | $ | 146,915 | $ | 90,913 | $ | 128,857 | $ | 366,685 |
Expenses: | ||||||||
Insurance benefits, claims and reserves | 74,812 | 53,675 | 51,354 | 179,841 | ||||
Selling, general and administrative expenses | 23,365 | 35,038 | 51,052 | 109,455 | ||||
Pretax income of discontinued operations during phase-out | 48,738 | 2,200 | 26,451 | 77,389 | ||||
Pretax provision for loss on disposal | (461) | (480) | (80) | (1,021) | ||||
Pretax gain on disposal of discontinued operations | - | 74,008 | - | 74,008 | ||||
Total pretax income from discontinued operations | 48,277 | 75,728 | 26,371 | 150,376 | ||||
Income tax expense on discontinued operations | 10,046 | 11,982 | 5,539 | 27,567 | ||||
Income from discontinued operations, net of tax | $ | 38,231 | $ | 63,746 | $ | 20,832 | $ | 122,809 |
For the Nine Months Ended September 30, 2020 | ||||||||
SSL Sale | Pets Sale | MNL Sale | Total | |||||
Revenue | $ | 92,419 | $ | 55,589 | $ | 155,272 | $ | 303,280 |
Expenses: | ||||||||
Insurance benefits, claims and reserves | 59,216 | 32,885 | 66,373 | 158,474 | ||||
Selling, general and administrative expenses | 22,895 | 17,915 | 65,206 | 106,016 | ||||
Pretax income of discontinued operations during phase-out | 10,308 | 4,789 | 23,693 | 38,790 | ||||
Pretax provision for loss on disposal | - | - | - | - | ||||
Pretax gain on disposal of discontinued operations | - | - | - | - | ||||
Total pretax income from discontinued operations | 10,308 | 4,789 | 23,693 | 38,790 | ||||
Income tax expense on discontinued operations | 2,488 | 1,143 | 5,205 | 8,836 | ||||
Income from discontinued operations, net of tax | $ | 7,820 | $ | 3,646 | $ | 18,488 | $ | 29,954 |
The assets and liabilities in discontinued operations are measured at the lower of their carry value or fair value less cost to sell. During the three months and nine months ended September 30, 2021, it was not necessary to write-down any assets or liabilities attributable to the disposal groups in discontinued operations to fair value, less costs to sell. The Company expects to recognize gains from the sales of these disposal groups, therefore, any costs to sell the disposal groups, primarily legal expenses, incurred prior to the actual disposal of the discontinued operation, are expensed when incurred and presented in pretax provision for loss on disposal in the tables above.
Pretax income (loss) from discontinued operations during phase-out attributable to IHC was $37,118,000 and $77,389,000 for the three and nine months ended September 30, 2021, respectively, and was $20,295,000 and $38,790,000 for the three and nine months ended September 30, 2020, respectively.
Total cash flows from operating activities of discontinued operations were $54,693,000 and $52,019,000 for the nine months ended September 30, 2021 and 2020, respectively. Total cash flows from investing activities of discontinued operations were $(100,302,000) and $(44,836,000) for the nine months ended September 30, 2021 and 2020, respectively.
On a consolidated basis, the Company recorded $7,512,000 and $4,218,000 of income taxes related to pretax income from discontinued operations for the three months ended September 30, 2021 and 2020, respectively, and $27,567,000 and $8,836,000 for the nine months ended September 30, 2021 and 2020, respectively. In 2021, the amounts for the nine months period include $11,675,000 of income taxes related to the pretax gain on disposal of discontinued operations. In connection with the sale of PetPartners, AMIC decreased its valuation allowance on existing deferred tax assets by $8,281,000 and utilized approximately $46,116,000 of its outstanding Federal net operating loss carryforwards (See Note 12). Differences between the Federal statutory income tax rate on discontinued operations and the Company’s effective income tax rate on pretax income from discontinued operations are primarily the result of AMIC’s decrease in its valuation allowance, state and local income taxes, nondeductible goodwill and other expenses.
Note 2. 3.Income Per Common Share
Diluted income per share was computed using the treasury stock method and includes incremental common shares, primarilymethod. As a result of losses from the dilutive effect of share-based payment awards, amounting to 309,000 and 288,000 sharescontinuing operations for the three months and nine months ended September 30, 2017, respectively,2021 and 220,000 and 213,0002020, such shares for the three months and nine months ended September 30, 2016, respectively.were deemed anti-dilutive.
12
The following is a reconciliation of income available to common shareholders used to calculate income per share for the periods indicated (in thousands):
|
| Three Months Ended |
| Nine Months Ended | ||||
|
| September 30, |
| September 30, | ||||
|
| 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 |
|
| Three Months Ended |
| Nine Months Ended | ||||
|
| September 30, |
| September 30, | ||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
|
|
|
| |||||
Loss from continuing operations attributable to IHC | $ | (11,512) | $ | (7,340) | $ | (23,514) | $ | (16,391) |
Income from discontinued operations attributable to IHC |
| 28,871 |
| 16,028 |
| 122,965 |
| 29,778 |
|
|
|
|
|
|
|
|
|
Net income attributable to IHC | $ | 17,359 | $ | 8,688 | $ | 99,451 | $ | 13,387 |
|
|
|
|
|
|
|
|
|
Note 3. 4.Discontinued OperationsCash, Cash Equivalents and Restricted Cash
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 istable provides a reconciliation of cash, cash equivalents and restricted cash reported within the major line items constitutingCondensed Consolidated Balance Sheets to the pretax profit of discontinued operations includedamounts shown in the Condensed Consolidated StatementStatements of IncomeCash Flows 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 |
|
| September 30, | ||
|
| 2021 |
| 2020 |
|
| |||
Cash and cash equivalents | $ | 7,946 | $ | 7,750 |
Restricted cash in other assets |
| 362 |
| 681 |
Cash, cash equivalents and restricted cash in discontinued operations |
| 10,215 |
| 15,622 |
|
|
|
|
|
Total cash, cash equivalents and restricted cash including discontinued operations | $ | 18,523 | $ | 24,053 |
|
|
|
|
|
Liabilities attributableRestricted cash includes insurance premiums collected from insureds that are pending remittance to discontinued operations at September 30, 2017insurance carriers and/or payment of insurance claims and December 31, 2016 consist of $0commissions to third party administrators. These amounts are required to be set aside by contractual agreements with the insurance carriers and $68,000, respectively, of accounts payable and accrued liabilities.are included in other assets on the Condensed Consolidated Balance Sheets.
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. 5.Investment Securities
The cost (amortized cost with respect to certain fixed maturities), gross unrealized gains, gross unrealized losses and fair value of investment securitiesfixed maturities available-for-sale are as follows for the periods indicated (in thousands):
|
| September 30, | ||||||||
|
|
|
| GROSS |
| GROSS |
|
| ||
|
| AMORTIZED |
| UNREALIZED |
| UNREALIZED |
| FAIR | ||
|
| COST |
| GAINS |
| LOSSES |
| VALUE | ||
|
|
|
| |||||||
FIXED MATURITIES |
|
|
|
|
|
|
|
| ||
AVAILABLE-FOR-SALE: |
|
|
|
|
|
|
|
| ||
Corporate securities | $ |
| $ |
| $ |
| $ |
| ||
CMOs |
|
| 30 |
| - |
|
|
| ||
U.S. Government obligations |
|
|
|
|
| |||||
|
|
|
| - |
|
| ||||
|
|
|
| |||||||
Agency MBS - residential (2) | 33 |
|
|
|
| 29 | ||||
States and political subdivisions |
|
|
|
|
|
|
|
| ||
Foreign government obligations |
|
|
|
|
|
|
|
| ||
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
| ||
Total fixed maturities | $ |
| $ |
| $ |
| $ |
|
| ||||||||
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
| December 31, | ||||||
|
|
|
| GROSS |
| GROSS |
|
|
|
| AMORTIZED |
| UNREALIZED |
| UNREALIZED |
| FAIR |
|
| COST |
| GAINS |
| LOSSES |
| VALUE |
|
|
|
| |||||
FIXED MATURITIES |
|
|
|
|
|
|
|
|
AVAILABLE-FOR-SALE: |
|
|
|
|
|
|
|
|
Corporate securities | $ |
| $ |
| $ |
| $ |
|
CMOs |
|
|
|
|
|
|
|
|
U.S. Government obligations |
|
|
|
|
|
|
|
|
Agency MBS - residential(2) |
|
|
|
| - |
|
| |
|
|
|
|
|
| |||
States and political subdivisions |
|
|
|
|
|
|
|
|
Foreign government obligations |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
Total fixed maturities | $ |
| $ |
| $ |
| $ |
|
| ||||||||
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
(1)Collateralized mortgage obligations (“CMOs”).
(2)Mortgage-backed securities (“MBS”).
(3)Government-sponsored enterprises (“GSEs”) are private enterprises established and chartered by the Federal Government or its various insurance and lease programs which carry the full faith and credit obligation of the U.S. Government.
15
The amortized cost and fair value of fixed maturities available-for-sale at September 30, 2017,2021, by contractual maturity, are shown below (in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
| AMORTIZED |
|
| FAIR |
|
|
| COST |
|
| VALUE |
|
|
|
|
|
|
|
Due in one year or less |
| $ | 1,111 |
| $ | 1,111 |
Due after one year through five years |
|
| 13,840 |
|
| 13,824 |
Due after five years through ten years |
|
| 1,931 |
|
| 2,015 |
Due after ten years |
|
| 11,451 |
|
| 11,485 |
Fixed maturities with no single maturity date |
|
| 609 |
|
| 635 |
|
|
|
|
|
|
|
|
| $ | 28,942 |
| $ | 29,070 |
|
|
| AMORTIZED |
|
| FAIR |
|
|
| COST |
|
| VALUE |
|
|
|
|
|
|
|
Due in one year or less |
| $ | 29,686 |
| $ | 29,631 |
Due after one year through five years |
|
| 113,190 |
|
| 112,572 |
Due after five years through ten years |
|
| 145,877 |
|
| 145,322 |
Due after ten years |
|
| 124,085 |
|
| 121,772 |
Fixed maturities with no single maturity date |
|
| 17,019 |
|
| 16,703 |
|
|
|
|
|
|
|
|
| $ | 429,857 |
| $ | 426,000 |
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, 2021 | ||||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
|
| Less than 12 Months |
|
| 12 Months or Longer |
|
| Total | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair |
|
| Unrealized |
|
| Fair |
|
| Unrealized |
|
| Fair |
| Unrealized |
|
| Value |
|
| Losses |
|
| Value |
|
| Losses |
|
| Value |
| Losses |
|
|
|
|
|
|
|
|
|
| |||||||
Corporate securities | $ | - |
| $ | - |
| $ | 10,720 |
| $ | 92 |
| $ | 10,720 | $ | 92 |
Agency MBS - residential |
| 29 |
|
| 4 |
|
| - |
|
| - |
|
| 29 |
| 4 |
States and political subdivisions |
| 401 |
|
| 8 |
|
| 1,095 |
|
| 23 |
|
| 1,496 |
| 31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities in an |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unrealized loss position | $ | 430 |
| $ | 12 |
| $ | 11,815 |
| $ | 115 |
| $ | 12,245 | $ | 127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of fixed maturities in an |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unrealized loss position |
| 2 |
|
|
|
|
| 2 |
|
|
|
|
| 4 |
|
|
|
| September 30, 2017 | ||||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
|
| Less than 12 Months |
|
| 12 Months or Longer |
|
| Total | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair |
|
| Unrealized |
|
| Fair |
|
| Unrealized |
|
| Fair |
| Unrealized |
|
| Value |
|
| Losses |
|
| Value |
|
| Losses |
|
| Value |
| Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities | $ | 84,636 |
| $ | 1,087 |
| $ | 25,563 |
| $ | 1,384 |
| $ | 110,199 | $ | 2,471 |
CMOs - residential |
| 4,730 |
|
| 101 |
|
| 2,105 |
|
| 5 |
|
| 6,835 |
| 106 |
U.S. Government obligations |
| 18,021 |
|
| 80 |
|
| 12,619 |
|
| 177 |
|
| 30,640 |
| 257 |
GSEs |
| 3,286 |
|
| 65 |
|
| 6,480 |
|
| 146 |
|
| 9,766 |
| 211 |
States and political subdivisions |
| 88,326 |
|
| 1,413 |
|
| 35,771 |
|
| 1,415 |
|
| 124,097 |
| 2,828 |
Foreign government obligations |
| - |
|
| - |
|
| 3,006 |
|
| 85 |
|
| 3,006 |
| 85 |
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities | $ | 199,484 |
| $ | 2,764 |
| $ | 89,175 |
| $ | 3,344 |
| $ | 288,659 | $ | 6,108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities in an |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unrealized loss position |
| 107 |
|
|
|
|
| 44 |
|
|
|
|
| 151 |
|
|
16
|
| December 31, 2016 | ||||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
|
| Less than 12 Months |
|
| 12 Months or Longer |
|
| Total | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair |
|
| Unrealized |
|
| Fair |
|
| Unrealized |
|
| Fair |
| Unrealized |
|
| Value |
|
| Losses |
|
| Value |
|
| Losses |
|
| Value |
| Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities | $ | 145,205 |
| $ | 3,818 |
| $ | 19,841 |
| $ | 1,672 |
| $ | 165,046 | $ | 5,490 |
CMO’s - residential |
| 5,038 |
|
| 116 |
|
| - |
|
| - |
|
| 5,038 |
| 116 |
U.S. Government obligations |
| 28,406 |
|
| 441 |
|
| - |
|
| - |
|
| 28,406 |
| 441 |
GSEs |
| 3,640 |
|
| 166 |
|
| 6,220 |
|
| 256 |
|
| 9,860 |
| 422 |
States and political subdivisions |
| 144,357 |
|
| 4,561 |
|
| 18,132 |
|
| 554 |
|
| 162,489 |
| 5,115 |
Foreign government obligations |
| 3,738 |
|
| 157 |
|
| - |
|
| - |
|
| 3,738 |
| 157 |
Redeemable preferred stocks |
| - |
|
| - |
|
| 3,315 |
|
| 448 |
|
| 3,315 |
| 448 |
Total fixed maturities |
| 330,384 |
|
| 9,259 |
|
| 47,508 |
|
| 2,930 |
|
| 377,892 |
| 12,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonredeemable preferred stocks |
| 826 |
|
| 25 |
|
| 1,277 |
|
| 50 |
|
| 2,103 |
| 75 |
Total equity securities |
| 826 |
|
| 25 |
|
| 1,277 |
|
| 50 |
|
| 2,103 |
| 75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities | $ | 331,210 |
| $ | 9,284 |
| $ | 48,785 |
| $ | 2,980 |
| $ | 379,995 | $ | 12,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities in an |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unrealized loss position |
| 156 |
|
|
|
|
| 23 |
|
|
|
|
| 179 |
|
|
|
| December 31, 2020 | ||||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
|
| Less than 12 Months |
|
| 12 Months or Longer |
|
| Total | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair |
|
| Unrealized |
|
| Fair |
|
| Unrealized |
|
| Fair |
| Unrealized |
|
| Value |
|
| Losses |
|
| Value |
|
| Losses |
|
| Value |
| Losses |
|
|
|
|
|
|
|
|
|
| |||||||
Corporate securities | $ | 10,998 |
| $ | 96 |
| $ | 4,453 |
| $ | 97 |
| $ | 15,451 | $ | 193 |
Agency MBS - residential |
| 34 |
|
| 5 |
|
| - |
|
| - |
|
| 34 |
| 5 |
States and political subdivisions |
| 4,269 |
|
| 14 |
|
| 1,124 |
|
| 31 |
|
| 5,393 |
| 45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities in an |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unrealized loss position | $ | 15,301 |
| $ | 115 |
| $ | 5,577 |
| $ | 128 |
| $ | 20,878 | $ | 243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of fixed maturities in an |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unrealized loss position |
| 5 |
|
|
|
|
| 2 |
|
|
|
|
| 7 |
|
|
Substantially all of the unrealized losses on fixed maturities available-for-sale at September 30, 20172021 and December 31, 20162020 relate to investment grade securities and are attributable to changes in market interest rates. Because the Companysecurities. Management does not intend to sell, norand it is it more likely thanthat management will not that the Company will havebe required to sell such investments before recoverythese securities prior to their anticipated recovery. The unrealized losses on the Company's fixed maturity securities are related to general market changes in interest rates, and/or the levels of their amortized cost bases, which may becredit spreads largely due to current market conditions relating to the COVID-19 pandemic rather than specific concerns with the issuer's ability to pay interest and repay principal. We have evaluated each corporate security’s credit rating as well as industry risk factors associated with the securities. The fair value of these securities is expected to recover as they approach maturity and therefore the Company does not consider these investments to be other-than-temporarily impaired at September 30, 20172021..
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 |
| Nine Months Ended | ||||
|
| September 30, |
| September 30, | ||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
|
|
|
| |||||
Realized gains (losses): |
|
|
|
|
|
|
|
|
Fixed maturities available-for-sale | $ | (48) | $ | (53) | $ | 105 | $ | 105 |
|
|
|
|
|
|
|
|
|
Total realized gains (losses) on debt and equity securities |
| (48) |
| (53) |
| 105 |
| 105 |
Gains (losses) on other investments |
| - |
| - |
| - |
| 17 |
|
|
|
|
|
|
|
|
|
Net investment gains (losses) | $ | (48) | $ | (53) | $ | 105 | $ | 122 |
For the three months and nine months ended September 30, 2017, proceeds from sales of available-for-sale securities, excluding paydowns and maturities, were $29,564,000 and $157,541,000, respectively, and2021, the Company realized gross gains of $747,000$0 and $2,052,000,$188,000, respectively, and gross losses of $0$48,000 and $844,000,$83,000, respectively, on those sales.from sales, maturities and prepayments of fixed maturities available-for-sale. For the three months and nine months ended September 30, 2016, proceeds from sales of available-for-sale securities, excluding paydowns and maturities, were $179,735,000
17
and $339,171,000, respectively, and2020, the Company realized gross gains of $2,668,000$0 and $4,521,000,$162,000, respectively, and gross losses of $94,000$53,000 and $275,000,$57,000, 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)1G(v) to the Consolidated Financial Statements in the 20162020 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 available-for-sale securities.fixed maturities available-for-sale. The Company did not recognize any other-than-temporary impairments on available-for-sale securities in the first nine 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 | $ | - | $ | - | $ | - | $ | - |
2021 or 2020.
Note 5.6.Fair Value Disclosures
For all financial and non-financial assets and liabilities accounted for at fair value on a recurring basis, the Company utilizes valuation techniques based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market expectations. These two types of inputs create the following fair value hierarchy:
Level 1 - Quoted prices for identical instruments in active markets.
Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 - Instruments where significant value drivers are unobservable.
The following section describes the valuation methodologies we use to measure different assets at fair value.
Investments in fixedFixed maturities and equity securities:available-for-sale:
Available-for-sale securitiesFixed 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 GSEsmunicipals that were priced with observable market
inputs. LevelThe Company does not have any level 3 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.continuing operations at September 30, 2021 or December 31, 2020.
Trading securities:
Trading securities included in Level 1 are equity securities with quoted market prices.
The following tables present our financial assets measured at fair value on a recurring basis for the periods indicated (in thousands):
|
| September 30, | |||||||||
|
| Level 1 |
|
| Level 2 |
| Level 3 |
| Total | ||
|
|
|
|
| |||||||
FINANCIAL ASSETS: |
|
|
|
|
|
|
|
|
| ||
Fixed maturities available-for-sale: |
|
|
|
|
|
|
|
|
| ||
Corporate securities | $ | - |
| $ |
| $ | - | $ |
| ||
CMOs - residential |
| - |
|
|
|
| - |
|
| ||
US Government obligations |
| - |
|
|
|
| - |
|
| ||
Agency MBS - residential |
| - |
|
|
|
| - |
|
| ||
|
|
|
|
| |||||||
States and political subdivisions |
| - |
|
|
|
|
|
|
| ||
Foreign government obligations |
| - |
|
|
|
| - |
|
| ||
|
|
|
|
| |||||||
Total fixed maturities |
|
|
|
|
|
|
| ||||
| |||||||||||
|
|
|
| - |
|
| |||||
|
|
|
|
| |||||||
|
|
|
|
| |||||||
|
|
|
|
| |||||||
|
|
|
|
| |||||||
|
|
|
|
|
|
|
|
|
| ||
Total Financial Assets | $ |
|
| $ |
| $ |
| $ |
|
|
| 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 |
19
It is the Company’s policy to recognize transfers of assets and liabilities between levels of the fair value hierarchy at the end of a reporting period. The Company does not transfer out of Level 3 and into Level 2 until such time as observable inputs become available and reliable or the range of available independent prices narrow. The Company did not transfer any securities between Level 1, Level 2 or Level 3 in either 2017 or 2016.
The following table presents the changes in fair value of our Level 3 financial assets for the periods indicated (in thousands):
|
| Three Months Ended September 30, | |||||||
|
| 2017 |
| 2016 | |||||
|
| States and |
| Total |
|
| States and |
| Total |
|
| Political |
| Level 3 |
|
| Political |
| Level 3 |
|
| Subdivisions |
| Assets |
|
| Subdivisions |
| Assets |
|
|
|
|
|
|
|
|
|
|
Beginning balance | $ | 1,956 | $ | 1,956 |
| $ | 2,107 | $ | 2,107 |
|
|
|
|
|
|
|
|
|
|
Increases (decreases) recognized in earnings: |
|
|
|
|
|
|
|
|
|
Net realized investment gains |
| - |
| - |
|
| - |
| - |
|
|
|
|
|
|
|
|
|
|
Gains (losses) included in other |
|
|
|
|
|
|
|
|
|
comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) |
| (8) |
| (8) |
|
| (10) |
| (10) |
|
|
|
|
|
|
|
|
|
|
Repayments and amortization of |
|
|
|
|
|
|
|
|
|
fixed maturities |
| (31) |
| (31) |
|
| (27) |
| (27) |
Sales |
| - |
| - |
|
| - |
| - |
|
|
|
|
|
|
|
|
|
|
Balance at end of period | $ | 1,917 | $ | 1,917 |
| $ | 2,070 | $ | 2,070 |
|
| 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 |
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):
|
|
|
| ||||||||||
|
|
|
|
| Level 2 | Level 3 | Total | ||||||
FINANCIAL ASSETS: |
|
|
|
|
|
|
|
|
| ||||
Fixed maturities available-for-sale: |
|
|
|
|
|
| |||||||
|
|
|
|
| |||||||||
Corporate securities | $ | - |
|
| 27,099 | $ | - | $ | 27,099 | ||||
CMOs - residential |
|
| 964 | - | 964 | ||||||||
US Government obligations | - | 4,958 | - | 4,958 | |||||||||
Agency MBS - residential | - | 34 | - | 34 | |||||||||
States and political subdivisions | - | 9,865 | - | 9,865 | |||||||||
Foreign government obligations | - | 1,083 | - | 1,083 | |||||||||
Total fixed maturities | - | 44,003 | - | 44,003 | |||||||||
|
|
|
|
|
|
|
|
| |||||
| $ |
| $ | 44,003 | $ |
| $ |
|
|
| |||
| |||||||||||||
|
|
|
|
| |||||||||
|
|
|
|
| |||||||||
|
|
|
|
| |||||||||
|
|
|
|
|
|
|
|
|
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 30, |
| December 31, | ||||||||
|
| Level 1 |
| Level 2 |
|
|
| Level 1 |
| Level 2 |
|
|
|
| Fair |
| Fair |
| Carrying |
| Fair |
| Fair |
| Carrying |
|
| Value |
| Value |
| Value |
| Value |
| Value |
| Value |
|
|
|
|
|
| |||||||
FINANCIAL ASSETS: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
agreements to resell | $ |
| $ | - | $ |
| $ |
| $ | - | $ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
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 InvestmentsSecurities purchased under agreements to resell
Investments with original maturities of 91 daysSecurities purchased under agreements to one year are considered short-term investments andresell are carried at cost,the amounts at which the securities will be subsequently resold, 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.
21
Note 6. 7.Variable Interest Entities
The Company has a minority interest in certaina limited partnershipspartnership that we have determined to be a Variable Interest EntitiesEntity (“VIEs”VIE”). The aforementioned VIEs areVIE is 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’VIE’s economic performance.
The Company will periodically reassess whether we are the primary beneficiary in any of these investments.this investment. The reassessment process will consider whether we have acquired the power to direct the most significant activities of the VIEsVIE through changes in governing documents or other circumstances. Our maximum loss exposure is limited to our combined $4,141,000$2,050,000 carrying value in thesethis equity investments that areinvestment, which is included in other investments in the Condensed Consolidated Balance Sheet as of September 30, 2017.2021.
Note 7. 8.Acquisition of PetPartners, Inc.Related Party Transactions
At September 30, 2021 and December 31, 2020, the Company’s Condensed Consolidated Balance Sheets include $85,000 and $163,000, respectively, of administrative fees and other expenses payable to Ebix Health Exchange Holdings, LLC (“Ebix Health Exchange”), which are included in liabilities attributable to discontinued operations. The Company’s Condensed Consolidated Statements of Income include administrative fee expenses to Ebix Health Exchange, which are included in pretax income from discontinued operations, of $349,000 and $1,111,000, respectively, for the three months and nine months ended September 30, 2021; and include $407,000 and $1,306,000, respectively, for the same periods in 2020.
Selling, general and administrative expense for the three months ended March 31, 2020 includes approximately $1,507,000 of expense related to the purchase of leads from an affiliated lead generation company, Torchlight, which was acquired in April of 2020. Lead costs subsequent to acquisition are eliminated in consolidation.
Note 9.Acquisition
Torchlight Technology Group LLC.
On March 24, 2017April 15, 2020 (the "Acquisition"Torchlight Acquisition Date"), the Company acquired 85%the remaining 77% membership units of the stock of PetPartners, Inc.Torchlight Technology Group LLC, (“PetPartners”Torchlight”), a pet insurance marketing and administration company, for a purchase price of $12,713,000, subject$11,443,000 in cash and other consideration valued at $185,000. In accordance with the purchase and sale agreement, the Company will also make future incentive payments to certain post-closing adjustments.the former owners based on the future market appreciation of IHC. These payments will be accounted for as compensation for post-combination services. The Company acquired PetPartners for the purpose of owning additional distribution and administration sourcespurchased Torchlight for its pet insurance. Any time after March 24, 2019, shares owned by the noncontrolling interest are putablemarketing technology (“MarTech”), artificial data intelligence, and consumer lead generation capabilities. In an effort to further expand our InsureTech division (comprised of Torchlight, our call centers, field and career agents, and web domains), the Company atwants to be able to internally develop and deliver lead traffic opportunities in an affordable and controlled environment. The Company accounted for its prior ownership interest using the equity method. Immediately preceding the transaction, the Company determined the fair value of its equity interest to be $3,432,000 using the income approach and, are therefore presentedas a result, recorded a gain of $519,000, which is included in other income on the balance sheet as a redeemable noncontrolling interest.Condensed Consolidated Statement of Income.
Upon the acquisition, the Company consolidated the assets and liabilities of PetPartners.Torchlight. The following table presents the identifiable assets acquired and liabilities assumed in the acquisition of PetPartnersTorchlight on the Torchlight Acquisition Date based on their respective fair values (in thousands):
Cash |
| $ |
|
Intangible assets |
|
|
|
Other assets |
|
|
|
|
|
|
|
Total identifiable assets |
|
|
|
|
|
|
|
Other liabilities |
|
|
|
|
| ||
|
|
|
|
Total liabilities |
|
|
|
|
|
|
|
Net identifiable assets acquired |
| $ |
|
|
|
|
|
|
|
|
In connection with the acquisition, the Company recorded $9,124,000$11,122,000 of goodwill, of which $7,976,000 is deductible for income tax purposes, and $5,880,000$2,700,000 of intangible assets. In 2021, this goodwill was allocated among the Pets Sale and MNL Sale disposal groups and is included in assets (see Note 8). attributable to discontinued operations on the Condensed Consolidated Balance Sheets.
Goodwill reflectsfor Torchlight represented the synergies between PetPartnerswith our agencies. With a significant dependence on consumer and Independence Americansmall business opportunities, our agencies require a consistent and predictable flow of lead traffic, and as PetPartners will provide Independence American with increased distribution sources for its pet insurance business through its marketing relationshipa result, have meaningful synergies with the American Kennel Club.functions and deliverables that are developed at Torchlight. Before the acquisition of Torchlight, our agency was fully dependent on market traffic, which was both unpredictable in price and availability. Such restrictions would not allow for coordinated or scheduled growth. Goodwill was calculated as the excesssum of the sum of: (i) the acquisition date fair value of total cashaggregate consideration transferred of $12,713,000;$11,628,000; and (ii) the aggregate acquisition-date fair value of the redeemable noncontrolling interest in PetPartners of $2,005,000 onequity interests immediately before the acquisition date;of $3,432,000; over (iii) the net identifiable assets of $5,594,000$3,938,000 that were acquired. The enterprise value of PetPartnersTorchlight was determined by an independent appraisal using a discounted cash flow model based upon the projected future earnings of PetPartners including a control premium. The fair value of the redeemable noncontrolling interest was determined based upon their percentage of the PetPartners enterprise value discounted for a lack of control. The fair value of the acquired identifiable intangible assets and deferred taxes are provisional pending receipt of the final valuations for those assets and liabilities. The Company
22
expects to finalize the preliminary estimates of the fair value of the intangible assets and deferred taxes by the end of this year.model. Acquisition-related costs, primarily legal and consulting fees, were expensednot material and are included in selling, general and administrative expenses in the Condensed Consolidated Statement of Income.
ForRevenue and net loss from Torchlight for the period from the Torchlight Acquisition Date to September 30, 2017,2020 is $3,920,000 and $(1,815,000), respectively. The net loss is primarily related to the integration of Torchlight with 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 and $199,000, respectively, for the three months and nine months ended September 30, 2017 from PetPartners.other operations.
Pro forma adjustments to present the Company’s consolidated revenues and net income as if the acquisition date was January 1, 20162019 are not material and accordingly are omitted.
Note 8. 10.Goodwill and Other Intangible Assets
The carrying amount of goodwill was $50,697,000 and $41,573,000 at September 30, 2017 and December 31, 2016, respectively. Goodwill 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.
The Company has net other intangible assets of $15,062,000$3,012,000 and $10,122,000$3,531,000 at September 30, 20172021 and December 31, 2016,2020, respectively, which are included in other assets in the Condensed Consolidated Balance Sheets. These intangible assets consist of: (i)of 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 30, |
| December 31, | ||||
|
| Gross |
|
|
| Gross |
|
|
|
| Carrying |
| Accumulated |
| Carrying |
| Accumulated |
|
| Amount |
| Amortization |
| Amount |
| Amortization |
|
|
|
| |||||
Finite-lived Intangible Assets: |
|
|
|
|
|
|
|
|
Agent and broker relationships | $ |
| $ |
| $ |
| $ |
|
|
|
|
|
| ||||
Software systems |
|
|
|
|
|
|
|
|
Total finite-lived | $ |
| $ |
| $ |
| $ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, |
|
|
|
|
|
| 2017 |
| 2016 |
Indefinite-lived Intangible Assets: |
|
|
|
|
|
|
|
|
Insurance licenses |
|
|
|
| $ | 7,977 | $ | 7,977 |
Total indefinite-lived |
|
|
|
| $ | 7,977 | $ | 7,977 |
In connection with the acquisition of PetPartners in the first quarter of 2017 discussed in Note 7, the Company recorded $9,124,000 of goodwill and $5,880,000 of intangible assets associated with the Specialty Health segment. None of the goodwill is deductible for income tax purposes. The intangible assets primarily represent the fair value of customer relationships and are being amortized over a weighted average period of 9.6 years.
Amortization expense was $393,000$178,000 and $941,000$519,000 for the three months and nine months ended September 30, 2017, respectively,2021, respectively; and was $366,000$162,000 and $1,057,000$386,000 for the three months and nine months
23
ended September 30, 2016,2020, respectively.
Note 9. 11.Fee Income
All of the fee income recorded by the IHC Agencies and its lead generation company relate to our Specialty Health segment. The following table presents fee income disaggregated by type for the periods indicated (in thousands).
|
| Three Months Ended |
| Nine Months Ended | ||||
|
| September 30, |
| September 30, | ||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
|
|
|
| |||||
Commissions | $ | 1,372 | $ | 1,684 | $ | 5,662 | $ | 5,346 |
Commissions from affiliates |
| 1,820 |
| 2,410 |
| 5,572 |
| 7,602 |
Administrative Fees |
| - |
| - |
| - |
| 875 |
Marketing Fees |
| 198 |
| 290 |
| 757 |
| 933 |
Enrollment Platform Fees |
| 454 |
| 502 |
| 1,539 |
| 1,476 |
Lead and Referral Fees |
| 1,681 |
| 1,111 |
| 6,627 |
| 1,964 |
Application and Other Fees |
| 44 |
| 116 |
| 134 |
| 269 |
|
|
|
|
|
|
|
|
|
Total Fee Income | $ | 5,569 | $ | 6,113 | $ | 20,291 | $ | 18,465 |
Commissions
Commission revenues result from the sales of certain policies by the IHC Agencies on behalf of multiple unaffiliated insurance carriers. Increased sales of products to these unaffiliated insurance carriers began in 2020 as a result of new contracts with the carriers and increased distribution channels. These policies primarily consist of senior products, such as Medicare Advantage, Medicare Part D prescription drug plans and Medicare Supplement plans, as well as Affordable Care Act (“ACA”) plans. A significant portion of our commission revenues are recorded at a point in time upon the issuance of a policy by the unaffiliated insurance carrier based on expected constrained lifetime value (“LTV”). Constrained LTV represents expected commissions to be received over the lifetime of the policies sold. The Company analyzes various factors, such as commission rates, carrier mix, contract amendments and terminations, estimated average plan durations, cancellations and non-renewals, to estimate the LTV. Constraints are applied to help ensure that the total estimated lifetime commissions expected to be collected are recognized as revenue only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur.
We evaluate the appropriateness of our constraints on a quarterly basis and update the LTV assumptions if we observe evidence that suggests a change in the underlying long-term expectations. In doing this, we apply significant judgement in assessing historical cash collections and changes in circumstances that would impact future cash collections such as, but not limited to, commission rates, carrier mix, plan durations, plan cancellations and non-renewals. Changes in LTV result in an increase or decrease to fee income revenue and a corresponding increase or decrease to contract assets. Any significant impact due to changes in the LTV assumptions are recognized in revenue (i) in the period of the change; and (ii) to the extent we do not believe a significant reversal is probable.
Commissions from Affiliates
Commissions from affiliates represent commission revenues from the sales of certain insurance policies by the IHC Agencies on behalf of the Company’s wholly owned insurance carriers. These amounts were previously eliminated in consolidation. In 2021, the Company committed to various plans to sell these insurance carriers (see Note 2) and as a result, the insurance carrier operations are now presented as discontinued operations in the accompanying financial statements. In the Condensed Consolidated Statements of Income, commission revenues from affiliates are included in fee income as presented in continuing operations; and the carriers’ corresponding commission expense is included in pretax income from discontinued operations.
Costs to Fulfill a Contract
Costs to fulfill a contract include commissions owed to independent licensed agents or affinity partners that are contracted by the IHC Agencies. Upon the submission of a completed insurance application, the sales and marketing performance obligation is complete and the resultant estimated lifetime commission costs incurred are expensed and a corresponding commission liability is recorded on the Condensed Consolidated Balance Sheet. As policyholders continue their policy and remit monthly premium payments, the Company receives its commissions from the insurance carrier. Commissions owed to the agent or affinity partner are then paid and the corresponding liability is reduced. Judgement is required to estimate total expected lifetime commissions based on policy duration assumptions. At September 30, 2021 and December 31, 2020, the aforementioned commission liability was $2,750,000 and $2,362,000, respectively, and is included in accounts payable, accruals and other liabilities on the Condensed Consolidated Balance Sheet.
Contract Asset
Contract assets primarily relate to our commission revenues for the sales of senior products, such as Medicare Advantage and Medicare Supplement plans and ACA plans, which began in 2020. When commission revenue for the sales of these products is recognized, a corresponding contract asset is recorded in other assets on the Condensed Consolidated Balance Sheet. The timing of revenue differs from the collection of commissions. As policyholders continue their policy and remit monthly premium payments, the Company receives its commissions from the insurance carrier and the contract asset is reduced.
The following table summarizes the contract asset activity for the period indicated (in thousands).
Nine Months Ended | ||
September 30, 2021 | ||
Beginning Balance | $ | 7,760 |
Commissions recognized during the period | 6,950 | |
Commission adjustments related to prior periods | (1,295) | |
Cash receipts | (5,291) | |
Ending Balance | $ | 8,124 |
Remaining Performance Obligations
Deferred revenues are recorded in connection with the right to use our INSX enrollment platform. At September 30, 2021 and December 31, 2020, deferred revenues are immaterial and expected to be fully recognized within the next 12 months.
Note 12.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 approximateby applying the effective tax rate expected to be applicable for the balance ofreporting periods. Differences between the current fiscal year in accordance with consolidated life/non-life groupFederal statutory 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 grouprate and the non-life insurance company group.Company’s effective income tax rate are principally from the dividends received deduction and tax-exempt interest income, state and local income taxes, and compensation related tax provisions.
On December 31, 2020, AMIC had Federal net operating loss carryforwards of approximately $46,116,000 and a corresponding valuation allowance of $8,281,000 related to those net operating loss carryforwards that, in the judgment of management, were not considered realizable. On June 30, 2021, the Company sold PetPartners and recorded a pretax gain of $74,008,000 (See Note 2). As a result, AMIC decreased its valuation allowance by $8,281,000 and utilized the $46,116,000 of the winding down of operations and dissolution of IHC Administrative Services, Inc. (“IHC AS”), a subsidiary of IHC, in the quarter ended June 30, 2017, the Company recognized an estimated $11,589,000its outstanding Federal net operating loss carryforwards. Total income tax benefit on a worthless stock deduction of $33,110,000 representing the Company’s tax basisexpense 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 benefitpretax gain on disposal of this worthless stock deduction. Excluding this tax benefit, thediscontinued operations was $11,675,000. The primary differences between the Federal statutory income tax rate of 35% and the Company’s effective income tax rate resulted principallyrelated to the gain on disposal of discontinued operations are the result of AMIC’s decrease in its valuation allowance, partially offset by the non-deductibility of goodwill and other expenses related to the disposal.
The effective income tax rates related to losses from the dividends received deductioncontinuing operations in 2021 were impacted by tax benefits from exercises of share-based compensation and tax exempt interest income, state and local income taxes,tax benefits on certain subsidiaries. In 2020, the effective income tax rates related to losses from continuing operations reflect a benefit from capital losses attributable to the sale of a subsidiary and health insurer specificstate and local income tax provisions.benefits on certain subsidiaries.
On March 27, 2020, as part of the business stimulus package in response to the COVID-19 pandemic, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security ("CARES") Act. The CARES Act established new tax provisions including, but not limited to: (1) five-year carryback of net operating losses ("NOLs") generated in 2018, 2019 and 2020; (2) accelerated refund of alternative minimum tax (AMT) credit carryforwards; and (3) retroactive changes to allow accelerated depreciation for certain depreciable property. At this time, the legislation does not have a material impact on the Company due to the lack of taxable losses in the stated carryback eligible tax years and the fact that the Company was already expecting to receive a cash benefit for the remaining AMT credits in the fiscal 2018 tax year return.
The New York State Department of Taxation and Finance has selected the Company’s 2015 and 2016 NYS returns for audit.
Note 10. Policy Benefits and Claims
Policy benefits and claims is the liability for unpaid loss and loss adjustment expenses. It is comprised of unpaid claims and estimated 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 |
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 in 2017 related to prior years consists of favorable developments of $2,420,000 in the Medical Stop-Loss reserves, $5,406,000 in the group
24
disability reserves and $2,714,000 in the other individual life, annuities and other reserves, partially offset by an unfavorable development of $1,304,000 in Specialty Health reserves. The overall net favorable development of $7,048,000 in 2016 related to prior years primarily consists of favorable developments of $2,916,000 in the group disability reserves, $494,000 in Medical Stop-Loss reserves, and $3,769,000 in Specialty health reserves.
Included in the preceding rollforward of the Company’s liability for policy benefits and claims are the policy benefits and claims activity associated with the Company’s health insurance lines. These are embedded within the Specialty Health segment. The table below summarizes the components of the change in the liability for policy benefits and claims that are specific to health insurance claims for the periods indicated (in thousands).
|
| 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 |
The liability for the IBNR plus expected development on reported claims associated with the Company’s health insurance claims was $30,659,000 at September 30, 2017.
Note 11. 13.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.
Changes in the balances of accumulated other comprehensive income, shown net of taxes, for the periods indicated wereare as follows (in thousands):
|
| Three Months Ended |
| Nine Months Ended |
| Three Months Ended |
| Nine Months Ended | ||||||||
|
| September 30, |
| September 30, |
| September 30, |
| September 30, | ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Beginning balance | $ | (2,504) | $ | 4,054 | $ | (6,964) | $ | (3,440) | $ | 3,220 | $ | 2,854 | $ | 4,197 | $ | 1,212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
| ||||||||
Other comprehensive income (loss) before reclassifications |
| 627 |
| (182) |
| 5,305 |
| 8,522 |
| (999) |
| 873 |
| (2,012) |
| 3,417 |
Amounts reclassified from accumulated OCI |
| (467) |
| (573) |
| (685) |
| (1,618) |
| 99 |
| 191 |
| 135 |
| (711) |
Net other comprehensive income |
| 160 |
| (755) |
| 4,620 |
| 6,904 | ||||||||
|
|
|
|
|
|
|
|
| ||||||||
Less: Other comprehensive income attributable |
|
|
|
|
|
|
|
| ||||||||
to noncontrolling interests |
| - |
| 47 |
| - |
| (118) | ||||||||
Acquired from noncontrolling interests |
| - |
| 102 |
| - |
| 102 | ||||||||
Net other comprehensive income (loss) |
| (900) |
| 1,064 |
| (1,877) |
| 2,706 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance | $ | (2,344) | $ | 3,448 | $ | (2,344) | $ | 3,448 | $ | 2,320 | $ | 3,918 | $ | 2,320 | $ | 3,918 |
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 |
| Nine Months Ended | ||||
|
| September 30, |
| September 30, | ||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
|
|
|
| |||||
Unrealized gains (losses) on available-for-sale securities |
|
|
|
|
|
|
|
|
reclassified during the period to the following income |
|
|
|
|
|
|
|
|
statement line items: |
|
|
|
|
|
|
|
|
Net investment gains (losses) | $ | (48) | $ | (53) | $ | 106 | $ | 105 |
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes |
| (48) |
| (53) |
| 106 |
| 105 |
Income tax expense (benefit) |
| (11) |
| (10) |
| 20 |
| 23 |
Income (loss) from continuing operations, net of tax |
| (37) |
| (43) |
| 86 |
| 82 |
|
|
|
|
|
|
|
|
|
Total pretax income (loss) from discontinued operations |
| (79) |
| (188) |
| (280) |
| 796 |
Income tax expense (benefit) on discontinued operations |
| (17) |
| (40) |
| (59) |
| 167 |
Income from discontinued operations, net of tax |
| (62) |
| (148) |
| (221) |
| 629 |
|
|
|
|
|
|
|
|
|
Net income (loss) | $ | (99) | $ | (191) | $ | (135) | $ | 711 |
Note 12. 14.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 was as follows:
|
| Shares |
| Weighted- Average | |
|
| Under Option |
| Exercise Price | |
|
|
|
|
| |
December 31, 2016 |
| 697,180 |
| $ | 11.75 |
Granted |
| 34,000 |
|
| 22.20 |
Exercised |
| (38,800) |
|
| 9.09 |
September 30, 2017 |
| 692,380 |
| $ | 12.41 |
The weighted average grant date fair value of options granted during the period ended September 30, 2017 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:
| |
|
|
|
|
|
|
|
|
In 2017, 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 in cash from the exercise of stock options with an aggregate intrinsic value of $67,000 and realized $15,000 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 to IHC’s non-vested stock options was $537,000 and it is expected to be recognized as compensation expense over a weighted average period of 2.3 years.
Restricted Stock
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.
28
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. Supplemental Disclosures of Cash Flow Information
Net cash payments for income taxes were $292,000$10,131,000 and $11,312,000$436,000 during the nine months ended September 30, 20172021 and 2016.2020, respectively.
Cash payments for interest were $0 and $1,422,000 during the nine months ended September 30, 2017 and 2016, respectively.
Note 14. 15.Contingencies
Third Party Administrator
A third party administrator with whom we formerly did business (“Plaintiff” or “TPA”) filed a Complaint datedcommenced an action on May 17, 2017 in the United States District Court, Northern District of Texas, Dallas Division (the “Texas Action”), naming IHC, Madison National Life, Standard Security Life, and Independence Brokerage Group, Inc. (formerly IHC Carrier Solutions, Inc. (collectively referred to) as “Defendants”defendants (“Defendants”). 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 sharecontractual payments allegedly owed to Plaintiff underby the agreementsDefendants 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 moved to Compel Arbitrationcourt had previously stayed the proceedings during the pendency of two arbitrations. The first arbitration resulted in a judicially-confirmed award in favor of Standard Security Life and Dismiss or StayMadison National Life in the original Complaint.amount of $5,641,000, which the Plaintiff has satisfied. The Company received payment on September 9, 2020. The resultant income is included in income from discontinued operations in the Condensed Consolidated Statements of Income for the three months and nine months ended September 30, 2020. The second arbitration resulted in no monetary obligations owed by any of the parties. The Plaintiff has filed ana motion for leave to file a Second Amended Complaint on August 18, 2017.Complaint. The Defendants filed a Motion to Compel Arbitration or StayDismiss Plaintiff’s Second Amended Complaint. This motion is fully briefed and we are awaiting the Amended Complaint, which is still pending. In the fourth quarter of 2017,Court’s decision.
Multistate Market Conduct Examination (“MCE”)
As previously disclosed, our subsidiaries Standard Security Life, Madison National Life agreedand Independence American Insurance Company were selected for MCE related to pay finesour short-term medical (“STM”), limited medical and fixed indemnity limited health insurance products for the period of January 1, 2014 through September 30, 2017. The insurance departments of five jurisdictions (Delaware, Wisconsin, District of Columbia, Kansas and South Dakota) served as lead states, and the District of Columbia Department of Insurance, Securities and Banking and the Delaware Department of Insurance served as the managing lead states of the MCE. In addition to the five lead states, 37 other states participated in the stateMCE. Each of Texas primarilyStandard Security Life, Madison National Life and Independence American Insurance Company responded to inquiries and document production requests in the MCE and proactively communicated and cooperated with the applicable regulatory agencies for the MCE. Each of these subsidiaries also provided a detailed action plan to regulators that summarized its enhanced compliance and control mechanisms.
In an effort to avoid long‐term litigation and/or administrative proceedings that would be required to resolve disputes between Standard Security Life, Madison National Life and Independence American Insurance Company and the states involved in the MCE, the Lead States and Standard Security Life, Madison National Life and Independence American Insurance Company entered into separate RSAs on July 14, 2020. The RSAs require the implementation of a compliance plan, impose certain requirements related to specified business practices and monetary payments. The thirty-seven participating states adopted the claimsRSAs. The Company accrued $3,660,000 in accounts payable, accruals and other liabilities on the Consolidated Balance Sheet in the second quarter of 2020 and processed payment practicesin October 2020. The corresponding expense is included in income from discontinued operations in the Condensed Consolidated Statements of Income for the Plaintiff.nine months ended September 30, 2020. As set forth in the RSAs, Standard Security Life, Madison National Life and Independence American Insurance Company deny any wrongdoing or violation of any applicable laws or regulations, and the entry into the RSAs is not an admission or acknowledgment of any wrongdoing or liability. In accordance with the RSAs, the Monitoring Period commenced and Standard Security Life, Madison National Life and Independence American Insurance Company continue to comply.
Note 15. 16.Segment Reporting
The Insurance Group principally engages in the life and health insurance business. Interest expense, taxes,As a result of the pending sales discussed in Note 2, the operations of the Insurance Group, and certain other pet assets, are presented in discontinued operations. Continuing operations consist primarily of the IHC Agencies which are in the Specialty Health segment. 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. Management will re-assess the Company’s reportable segments based on its new organizational structure after the pending sale transactions discussed in Note 2 are consummated.
29
Information by business segment is presented below for the periods indicated (in thousands):
|
| |||||||
|
| |||||||
|
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| Three Months Ended |
| Nine Months Ended | ||||
|
| September 30, |
| September 30, | ||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | |
Revenues: |
|
|
|
|
|
|
|
|
Specialty Health | $ | 5,520 | $ | 6,749 | $ | 20,204 | $ | 19,188 |
Group disability and life |
| - |
| - |
| - |
| - |
Individual life, annuities and other |
| - |
| - |
| - |
| - |
Corporate |
| 1,041 |
| 149 |
| 2,177 |
| 1,932 |
| 6,561 |
| 6,898 |
| 22,381 |
| 21,120 | |
Net investment gains (losses) |
| (48) |
| (53) |
| 105 |
| 122 |
Total revenues | $ | 6,513 | $ | 6,845 | $ | 22,486 | $ | 21,242 |
|
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|
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Income before income taxes |
|
|
|
|
|
|
|
|
Specialty Health (A) | $ | (7,022) | $ | (6,969) | $ | (17,921) | $ | (16,579) |
Group disability and life |
| - |
| - |
| - |
| - |
Individual life, annuities and other |
| - |
| - |
| - |
| - |
Corporate (B) |
| (8,009) |
| (2,564) |
| (12,726) |
| (5,522) |
| (15,031) |
| (9,533) |
| (30,647) |
| (22,101) | |
Net investment gains (losses) |
| (48) |
| (53) |
| 105 |
| 122 |
Loss from continuing operations before income taxes | $ | (15,079) | $ | (9,586) | $ | (30,542) | $ | (21,979) |
(A) Substantially allIn both 2021 and 2020, we incurred significant costs associated with hiring, training and licensing a significant number of the businessnew agents, as well as costs for system development in the segment is coinsured. Activity in this segment primarily reflects income or expenses related to the coinsuranceour marketing and the run-off of any remaining blocks that were not coinsured.
administrative companies.
(B)The Specialty Health segment includes amortization of intangible assets. Total amortization expense was $393,000 and $366,000 for the three months ended September 30, 2017 and 2016, respectively, and was $941,000 and $1,057,000, respectively, for the nine months ended September 30, 20172021 include legal and 2016.
(C) The Individual life, annuities and other segment includes amortization of deferred chargesinvestment bank fees recorded in connection with the assumptionsGoing Private Transaction (see Note 1) and the obligations of certain ceded lifethe Special Committee of independent directors to consider the proposal, and annuity policies amounting to $368,000review, evaluate, negotiate and $296,000 forapprove or disapprove the three months ended September 30, 2017proposal and 2016, respectively, and $937,000 and $1,949,000 for the nine months ended September 30, 2017 and 2016, respectively.alternatives.
30
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 reportAnnual Report on Form 10-K for the fiscal year ended December 31, 2016,2020, 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 theunderwriting, administering and/or distributing group and individual specialty benefit products, including disability, supplemental health, pet, and group 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”);Company; and (ii) its marketing and administrative companies including IHC Specialty Benefits Inc., IHC Carrier Solutions, Inc.consisting of IHCSB, IBG, INSXCloud (collectively the “IHC Agencies”) and aits lead generation company, Torchlight. On June 30, 2021, the Company sold its majority interest in PetPartners, Inc. IHC also owns a significant equity interest in Ebix Health Exchange Holdings, LLC (“Ebix Health Exchange”),major distributor and administrator of pet insurance underwritten by Independence American Insurance Company and an administration exchange for health insurance.unaffiliated insurer. Standard Security Life, Madison National Life and Independence American Insurance Company 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 considersDuring the second and third quarters of 2021, the Board of Directors committed to the following plans for the disposal of several business operations. Each disposal plan below represents a wide rangestrategic shift that will have a major effect on the Company’s operations and financial results and as such, they each qualify for reporting as discontinued operations.
(A)On April 14, 2021, IHC and its wholly owned subsidiary ICC entered into a purchase agreement with Reliance Standard (“SSL Purchase Agreement”) to sell all of factorsthe issued and outstanding capital stock of Standard Security Life, a wholly owned subsidiary of ICC, for an aggregate purchase price of $180 million in cash. On July 29, 2021, the SSL Purchase Agreement was amended and restated (the “SSL Amended Purchase Agreement”). In accordance with the SSL Amended Purchase Agreement, the Company will receive the excess of aggregate statutory capital and surplus, calculated as of the closing date, over $57 million. The closing of the transaction, the closing distribution and certain other items are subject to customary closing conditions including applicable regulatory approvals, one of which is the approval of the NYSDFS. Under the terms of the SSL Amended Purchase Agreement, the transaction includes all of Standard Security Life’s DBL and PFL business in addition to all its strategic planningother lines of business. The aforementioned transaction, consisting of the sale of Standard Security Life, the closing distribution and decision-making, underwriting profitother closing conditions, is consistently emphasizedcollectively referred to as the primary goal“SSL Sale” transaction or disposal group.
(B)On May 17, 2021, IHC and its wholly owned subsidiary SBH entered into a stock purchase agreement with a subsidiary of Iguana Capital to sell its 85% interest in PetPartners, a major distributor and administrator of pet insurance underwritten by Independence American Insurance Company and an unaffiliated insurer. In addition, IHC and its wholly owned subsidiary, AMIC, entered into a stock purchase agreement with Iguana Capital to sell all decisions as to whether or not to increase our retentionof the issued and outstanding capital stock of IAHC (“IAHC Purchase Agreement”), which owns all of the issued and outstanding common stock of Independence American Insurance Company and other pet assets including the Company’s equity investments in a core line, expand into new products, acquire an entity or a blockFIGO Pet Insurance, LLC and Pet Assistant Holdings, LLC. Under the terms of the IAHC Purchase Agreement, the transaction includes all of Independence American Insurance Company’s pet
business and excludes all other lines of business which will be reinsured by Madison National Life prior to the closing. The impact of these two agreements, taken in the aggregate, represents the sale of 70% of the Company’s pet business. The Company will retain a 30% interest in the business sold in the form of an equity investment in the buyer, Iguana Capital. On June 30, 2021, the sale of PetPartners closed and in exchange for its shares of PetPartners, the Company received $78.3 million in cash, retained a 30% equity investment valued at $33.8 million and recorded a $74.0 million pretax gain on sale of discontinued operations, net of transaction costs. The cash is held in escrow until such time as the IAHC sale transaction closes. In connection with the pending sale of IAHC, the Company will receive approximately $190.4 million in cash and retain a 30% equity interest in the business sold valued at approximately $81.6 million. The closing of the transactions contemplated by the IAHC Purchase Agreement is subject to customary closing conditions, including applicable regulatory approvals, one of which is the approval of the Delaware Insurance Department. The aforementioned transaction, consisting of the sale of PetPartners, IAHC and Independence American Insurance Company, the reinsurance of excluded business, and other closing conditions, is collectively referred to as the “Pets Sale” transaction or otherwise change ourdisposal group.
(C)On July 14, 2021, IHC and its wholly owned subsidiary ICC entered into a stock purchase agreement with Horace Mann Educators Corporation to sell all of the issued and outstanding capital stock of Madison National Life, which is wholly owned by ICC, for an aggregate purchase price of $172.5 million in cash; in addition, if Madison National Life reaches specified financial targets in 2023, IHC will receive an additional purchase price of up to $12.5 million. In accordance with the stock purchase agreement and prior to closing, Madison National Life will enter into a reinsurance agreement with Independence American Insurance Company to reinsure all of Independence American Insurance Company’s non-pet business, model. Management's assessmentprimarily specialty health products, that are excluded from the Pets Sale transaction discussed above. The transaction has been approved by the Board of trends in healthcareDirectors of IHC, and morbidity, with respectIHC’s majority stockholders have entered into a voting agreement under which such majority shareholders agreed to specialty medical, disability and New York short-term disability (“DBL”); mortality rates with respect to life insurance; and changes in market conditions in general play a significant role in determiningapprove the rates charged, deductibles and attachment points quoted,transaction. IHC’s majority stockholders approved the transaction by written consent on October 18, 2021. The closing is expected no earlier than January 1, 2022; and the percentagetransaction is subject to customary closing conditions, including applicable regulatory approvals, one of which is the approval by the Wisconsin Office of the Commissioner of Insurance. The aforementioned transaction, which includes the reinsured specialty health business retained. Management has always focused on managingof Independence American Insurance Company, is referred to as the costs of its operations.“MNL Sale” transaction or disposal group.
31
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 |
| For the Three Months Ended |
| For the Nine Months Ended | ||||||||
|
|
| September 30, |
| September 30, |
| September 30, |
| September 30, | ||||||||
|
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues | Revenues | $ | 83,752 | $ | 78,542 | $ | 237,829 | $ | 232,133 | $ | 6,513 | $ | 6,845 | $ | 22,486 | $ | 21,242 |
Expenses | Expenses |
| 75,873 |
| 71,540 |
| 218,475 |
| 208,810 |
| 21,592 |
| 16,431 |
| 53,028 |
| 43,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 | |||||||||
Loss from continuing operations before income taxes |
| (15,079) |
| (9,586) |
| (30,542) |
| (21,979) | |||||||||
Income tax benefit |
| (3,567) |
| (2,241) |
| (7,026) |
| (5,617) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, net of tax |
| 5,213 |
| 4,366 |
| 24,529 |
| 14,757 | |||||||||
|
|
|
|
|
|
|
|
| |||||||||
Loss from continuing operations |
| (11,512) |
| (7,345) |
| (23,516) |
| (16,362) | |||||||||
Income from discontinued operations | Income from discontinued operations |
| - |
| - |
| - |
| 109,912 |
| 28,871 |
| 16,077 |
| 122,809 |
| 29,954 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income | Net income |
| 5,213 |
| 4,366 |
| 24,529 |
| 124,669 |
| 17,359 |
| 8,732 |
| 99,293 |
| 13,592 |
(Income) loss from noncontrolling interests |
| - |
| (44) |
| 158 |
| (205) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: (Income) loss from noncontrolling interests in subsidiaries |
| 16 |
| (43) |
| (33) |
| (9,900) | |||||||||
Net income attributable to IHC | $ | 17,359 | $ | 8,688 | $ | 99,451 | $ | 13,387 | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income attributable to IHC | $ | 5,229 | $ | 4,323 | $ | 24,496 | $ | 114,769 | ||||||||
|
|
|
|
|
|
·IncomeLoss from continuing operations of $.34$.79 per share, diluted, for the three months ended September 30, 20172021 compared to $.25$.50 per share, diluted, for the same period in 2016. Income2020. Loss from continuing operations of $1.50$1.61 per share, diluted, for the nine months ended September 30, 20172021 compared to $.83$1.11 per share, diluted, for the same period in 2016.2020.
Income taxes for the nine months ended September 30, 2017, include an income tax benefit of $11.6 million on the tax basis in an unrecovered investment in a subsidiary.
·Consolidated investment yields (on an annualized basis) of 3.6%0.8% for both the three and 3.2%nine months ended September 30, 2021, respectively, compared to 0.9% and 1.5% for the three month and nine month periods, respectively, in 2020;
·Book value of $38.47 per common share at September 30, 2021 compared to $32.08 at December 31, 2020.
·Income from discontinued operations for the three months and nine months ended September 30, 2017,2021 includes an after tax gain (loss) of $(.5) and $62.2 million on the sale of PetPartners. Excluding this gain (loss), income from discontinued operations for the three months and nine months ended September 30, 2021 were $29.4 million and $60.6 million, respectively, compared to 2.5%with income of $16.1 million and 2.7% for$30.0 million in the comparable three and nine month2020 periods, in 2016, respectively;respectively.
·Book valueResults for the first nine months of $28.19 per common share2021 were negatively impacted by COVID-19. Sales at September 30, 2017 comparedour agency were lower than expected in the first half of 2021, impacted by lower short-term medical (“STM”) sales, as consumers, especially those over the age of 50 who often purchased STM coverage took advantage of Special Enrollment Periods for ACA coverage and the increased Advanced Premium Tax Credits, also known as subsidies, as well as employers continuing to $25.53 at December 31, 2016.offer employer sponsored coverage to furloughed workers. The agency is seeing an increase in fee and commission income from the sale of ACA plans. Certain lines of business that are sold with ACA coverage, such as dental and accident plans exceeded expectations but due to lower commission on these products did not fully offset the commission lost through lower STM sales. We are shifting our call center focus to the ACA market for this period.
The following is a summary of key performance information by segment:
As a result of the pending sales discussed above and in Note 2 to the Condensed Consolidated Financial Statements, the operations of the Insurance Group, and certain other pet assets, are presented in discontinued operations. Continuing operations consist primarily of the IHC Agencies which are in the Specialty Health segment. Taxes and general expenses associated with parent company activities are included in Corporate. Management will re-assess the Company’s reportable segments based on its new organizational structure after the pending sale transactions discussed in Note 2 are consummated.
·The Specialty Health segment reported $5.2$7.0 million of incomelosses before taxes for both the three months ended September 30, 2017 as compared to $1.4 million for the comparable period in 2016;2021 and 2020; and reported $9.4$17.9 million of incomein losses before taxes for the nine monthsnine-month period ended September 30, 20172021 compared to $3.8$16.6 million of losses for the same period in 2016.2020.
o·Premiums earned increased $11.1The Corporate segment reported losses before taxes of $8.0 million and $23.5 million for the three and nine months ended September 30, 2017, respectively, over the comparable periods in 2016. For the three months and nine months ended September 30, 2017, 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.
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):
|
| 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% |
(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.
oAlthough the loss ratios for the three months and nine months in 2017 are lower than in the comparable periods in 2016, the expense ratios are higher in 2017 because of changes in the mix of products within 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.
oSpecialty 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 and DBL segment decreased $0.2$2.6 million for the three months ended September 30, 20172021 and $0.72020, respectively; and reported losses of $12.7 million for the nine monthsnine-month period ended September 30, 20172021 compared to the same periods in 2016. The decrease in the in the three and nine-month results primarily reflects a decrease in the group term life lines due to higher claims in 2017 and lower income from the international line due to run-offlosses of that line of business.
The Individual life, annuities and other segment reported losses before income taxes of $0.4$5.5 million for the three monthssame period in 2020, primarily due to legal and nine months ended September 30, 2017, respectively, compared with losses of $0.4 million and $1.9 million for the comparable periods ended September 30, 2016. The losses in 2016 were related to the accelerated amortization of deferred costsinvestment bank fees recorded in connection with the assumptionGoing Private Transaction (see Note 1) and the formation of certain ceded lifethe Special Committee of independent directors to consider the proposal, and annuity policies for which there are no comparable amounts in 2017.to review, evaluate, negotiate and approve or disapprove the proposal and alternatives.
The Medical Stop-Loss segment reported a loss before taxes of $0.5 million for the three months ended and income of $2.8 million for the nine months ended September 30, 2017 as compared to income of $2.2 million and $13.9 million for the comparable periods in 2016. The reduction in 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.COVID-19
Losses before tax fromIn March 2020, the Corporate segment increased $0.4 millionWorld Health Organization declared the outbreak of COVID-19, a global health pandemic, and the United States declared a national health emergency. COVID-19 has led to large scale disruption in the three monthsglobal economy, market instability and decreased $1.1 millionwidespread unemployment in the nine months ended September 30, 2017 over the comparable periods of 2016 primarily due to changes in share-based compensation, consulting, legal and accounting expenses; and United States.
Premiums by principal productThe COVID-19 outbreak continues to be a fluid situation. The business continuity and emergency response plans we implemented during 2020 continue to ensure we provide a high level of service to our customers and support our everyday business needs. To help protect the safety and wellbeing of our employees and mitigate the spread of COVID-19, we have limited travel and directed our employees to work remotely whenever possible. As the COVID-19 outbreak continues to evolve, the duration of COVID-19 and its potential effects on our business cannot be certain. Regulatory mandates have affected, and we anticipate will continue to impact, the insurance industry. We currently cannot predict if there will be a material impact to our business, results of operations or financial condition in future reporting periods. For more information, see the risk factor under the heading “We continue to face risks related to the ongoing Coronavirus (COVID-19) pandemic that could impact our sales, operating results and financial condition” in Item 1A. Risk Factors of our Annual Report on Form 10-K for the periods indicated are as follows (in thousands): fiscal year ended December 31, 2020.
|
| 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 |
| 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 |
CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of the Company conform to U.S. generally accepted accounting principles ("GAAP").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, 2016.2020. Management has identified the accounting policies related to Insurance Premium Revenue Recognition and Policy Charges, Fee Income Revenue Recognition, 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, 2016.2020. During the nine months ended September 30, 2017,2021, there were no additions to or changes in the critical accounting policies disclosed in the 20162020 Form 10-K except for the recently adopted accounting
34
standards discussed in Note 1(E)1(D) of the Notes to Condensed Consolidated Financial Statements.
Results of Operations for the Three Months Ended September 30, 20172021 Compared to the Three Months Ended September 30, 20162020
Information by business segment for the periods indicated is as follows:
|
|
|
|
| Selling, |
| ||||||
| Net |
|
| General |
| |||||||
September 30, |
| Investment |
|
| and |
| ||||||
(In thousands) |
| Income | Income |
| Administrative | Total | ||||||
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
| ||||||||
| $ |
| $ |
| $ |
| $ |
|
| $ |
| |
| ||||||||||||
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
| ||||||
Corporate |
|
|
| - |
|
|
|
| (8,009) | |||
Sub total | $ |
| $ |
| $ |
| $ |
|
|
|
|
|
|
|
| ||||||||||
Net |
|
| ||||||||||
|
|
| ||||||||||
Income |
|
| ||||||||||
| $ |
| ||||||||||
|
|
|
|
|
| Selling, |
| ||||||||||||
| Net |
|
| General |
| |||||||||||||
September 30, |
| Investment |
|
| and |
| ||||||||||||
(In thousands) |
| Income | Income |
| Administrative | Total | ||||||||||||
|
|
|
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| $ |
| $ |
| $ |
| $ |
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| $ |
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Corporate |
|
|
|
|
|
|
|
| (41) | 2,713 | (2,564) | |||||||
Sub total | $ |
| $ |
| $ |
| $ |
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| ||||||
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| ||||||||||||||||
Net |
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Income |
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| ||||||||||||||||
| $ |
| ||||||||||||||||
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%0.8% and 2.5%0.9% in the third quarter of 20172021 and 2016,2020, 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 realizedNet investment gains of $0.7 million in 2017 compared to $2.4 million in 2016. These amounts include the gains and losses from sales of fixed maturities andavailable-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 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 $1.4$.5 million for the three-month period ended September 30, 20172021 compared to the three-month period ended September 30, 20162020. The decrease is primarily due to the lack of agency feeslower STM sales in 2017 from Accident Insurance Services, Inc., our primary producer of the Occupational Accident line of business, which was sold2021 and decreases in the third quarter of 2016;commission accruals principally on Medicare advantage products, partially offset by fee income earned by PetPartners, our recently acquired subsidiary, with no comparable amountsan increase in 2016, and increased fee income as a result of higher premium volume in certain lines of the specialty health business. lead generation fees.
Other Income
Other income in the third quarter of 2017 decreased $1.9 million2021 primarily relates to equity losses on equity method investments offset by income 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 Solutionsan investment asset; and, exit fromin 2020, other income includes the medical stop-loss business, further described in Note 3; and (ii) decreased benefits, claims and reservesgain on the sale 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.wholly owned agency that administered occupational accident plans.
Selling, General and Administrative Expenses
Total selling, general and administrative expenses increased $9.5$5.2 million over the comparable period in 2016.2020. The increase is primarily attributable to: (i) a $6.6due to $6.4 million increase in the Specialty HealthCorporate segment, primarily due to administrativelegal and commission expenses associatedinvestment bank fees recorded in in connection with the increased premium volume in
36
formation of a Special Committee of independent directors to consider 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.proposed Going Private Transaction.
Income TaxesTaxes
The effective tax rate for the three months ended September 30, 2017 was 33.8%2021 is (23.7)% compared to 37.6%(23.4)% for the three months ended 2016.September 30, 2020. The lowereffective income tax rate is primarily due to: (i) an increase in 2021 relates to losses from continuing operations and are impacted by tax benefits from tax-advantaged securities as a percentageexercises of share-based compensation and state and local income in 2017; (ii) a decrease intax benefits on certain subsidiaries. In 2020, the effective income tax rate relates to losses from continuing operations and includes state taxes as a percentage of income; and (iii) a decrease in non-deductible expenses.local income tax benefits on certain subsidiaries.
Results of Operations for the Nine Months Ended September 30, 20172021 Compared to the Nine Months Ended September 30, 20162020
Information by business segment for the periods indicated is as follows:
|
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| Selling, |
| ||||||
| Net |
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| General |
| |||||||
September 30, |
| Investment |
|
| and |
| ||||||
(In thousands) |
| Income | Income |
| Administrative | Total | ||||||
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| $ |
| $ |
| $ |
| $ |
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| ||||||
Corporate |
|
|
| - |
|
|
|
| (12,726) | |||
Sub total | $ |
| $ |
| $ |
| $ |
|
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Net |
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Income tax |
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| $ |
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| Selling, |
| ||||||||||||
| Net |
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| General |
| |||||||||||||
September 30, |
| Investment |
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| and |
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(In thousands) |
| Income | Income |
| Administrative | Total | ||||||||||||
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| $ |
| $ |
| $ |
| $ |
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| $ |
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Corporate |
|
|
|
|
|
|
|
| 952 | 7,454 | (5,522) | |||||||
Sub total | $ |
| $ |
| $ |
| $ |
|
|
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| ||||||
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| ||||||||||||||||
Net |
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Income |
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| $ |
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Premiums Earned
In the first nine months of 2017, premiums earned increased $15.0 million over the comparable period of 2016. 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 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 segment as a result of the sale of Risk Solutions and exit from the medical stop-loss business, further described in Note 3.
Net Investment Income
Total net investment income decreased $0.3 million over the comparable period in 2016. The overall annualized investment yields were 3.2%0.8% and 2.7%1.5% in the first nine months of 20172021 and 2016,2020, 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% in the first nine months 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 realizedNet investment gains of $1.0 million ininclude the first nine months of 2017 compared to $3.9 million in 2016. These amounts include gains and losses from sales of fixed maturities andavailable-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 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 that the securities would be sold before the recovery of their amortized cost basis.
Fee Income and Other Income
Fee income decreased $1.0increased $1.8 million for the nine-month period ended September 30, 20172021 compared to the nine-month period ended September 30, 20162020. The increase is primarily due to the lack of agencyan increase in lead generation 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 amountsa decrease in 2016, and increasedadministrative fee income as a result of higher premium volumethe sale, in certain linesJune 2020, of the specialty health business. a wholly owned agency that administered occupational accident plans, lower STM and fixed indemnity limited benefit plan sales, and a decrease in commission accruals principally on Medicare advantage products.
Other Income
Other income in the first nine months of 2017 decreased $6.5 million2021 primarily relates to income 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 first nine months of 2017, insurance benefits, claims and reserves decreased $6.4 million over the comparable period in 2016. The decrease 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;an investment asset partially offset by (iii) an increaseequity losses from equity method investments; and, in 2020, other income includes a gain recorded in connection with the step-acquisition of $4.4 million inTorchlight and a gain on the Specialty Health segment, primarily due to an increasesale 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 thewholly owned agency that administered 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 million in benefits, claims and reserves in the Group disability, life, annuities and DBL segment, primarily due to growth in this line and increased loss ratios on group term life and LTD lines of business.plans.
Selling, General and Administrative Expenses
Total selling, general and administrative expenses increased $17.5$9.8 million over the comparable period in 2016.2020. The increase is primarily attributabledue to: (i) a $15.7$7.4 million increase in the Corporate segment, primarily legal and investment bank fees recorded in connection with the formation of a Special Committee of independent directors to consider the proposed Going Private Transaction; and (ii) and increase of $2.3 million in the Specialty Health segment primarily due to administrativeincreased lead generation expenses, compensation and commission expenses associated with the increased premium volume in the short term medical and fixed indemnity limited benefit lines, and agency expenses from PetPartners with no comparablesystem development related expenses in the prior year, partially offset by a decrease inour marketing and 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 million in the Medical Stop-Loss segment primarily due to a credit in premium taxes in 2016 with no comparable amount for 2017; partially offset by (iii) a decrease of $1.2 million in the Individual life, annuity and other 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.companies.
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 months ended September 30, 2017 was 33.1%2021 is (23.0)% compared to 36.7%(25.6)% for the nine months ended 2016.September 30, 2020. The lowereffective income tax rate is primarily due to: (i) an increase infor 2021 relates to losses from continuing operations and are impacted by tax benefits from tax-advantaged securities asexercises of share-based compensation and state and local income tax benefits on certain subsidiaries. In 2020, the effective income tax rate relates to losses from continuing operations plus a percentagebenefit from capital losses attributable to the sale of income in 2017; (ii) a decrease in state taxes as a percentage of income; and (iii) a decrease in non-deductible expenses.subsidiary.
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. TheNo dividends were declared or paid by the Insurance Group declared and paid $7.0 million and $17.8 million of dividends during the nine months ended September 30, 20172021.The Insurance Group declared and 2016,paid dividends of $0 and $5.2 million during the nine months ended September 30, 2021 and 2020, respectively.
39
It is anticipated that cash flows to be received upon the close of the disposal transactions will provide sources of corporate liquidity to offset the loss of cash flows previously derived from the insurance operations currently held in discontinued operations. The Company is evaluating the best use of liquidity derived from the disposal transactions.
The proceeds received from the sale of PetPartners were deposited into an escrow account owned by SBH and treated as a security deposit. The funds will be released from escrow upon either the consummation of the IAHC purchase or upon the exercise of the PPI Put/Call Option. At September 30, 2021, the security deposit is presented as funds held in escrow on the Condensed Consolidated Balance Sheet.
Cash Flows
The Company had $26.6$18.5 million and $22.0$74.8 million of cash, and cash equivalents and restricted cash from continuing and discontinued operations as of September 30, 20172021 and December 31, 2016,2020, respectively.
For the nine months ended September 30, 2017,2021, operating activities provided $41.7 million of cash and investment activities provided $36.4utilized $90.4 million of cash, primarily the result of salesthe investment of investment securities, partially offset by $12.3 million net cash outflow to acquire PetPartners.and cash equivalents in resale agreements. Financing activities utilized $47.9$7.5 million of cash, of which $44.3$6.4 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 itspay 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. The tender offer was fully funded through corporate liquidity.
The Company has $387.0 million of liabilities for future policy benefits and policy benefits and claims 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.dividends. For the nine months ended September 30, 2017,2021, cash receivedflows from the maturitiesoperating and other repaymentsinvesting activities of fixed maturities was $16.8 million.discontinued operations were $54.7 million and $(100.3) million, respectively.
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.
There were no material negative impacts on the Company’s cash flows or liquidity with regards to COVID-19 during the first nine months of 2021.
BALANCE SHEET
TheIn connection with the sale of PetPartners in June 2021, the Company had receivables due from reinsurersreceived proceeds of $383.2$78.3 million which was deposited into an escrow account and a 30% interest in Iguana Capital Corp valued at September 30, 2017 compared to $440.3 million at December 31, 2016. The decrease is primarily attributable to the decrease in medical stop-loss reserves that are 100% coinsured. All of such reinsurance receivables are from highly rated companies or are adequately secured. No allowance for doubtful accounts was necessary at September 30, 2017.$33.8 million.
The Company's liability for policy benefits and claims by segment are as follows (in thousands):
|
| Policy Benefits and Claims | ||
|
| September 30, |
| December 31, |
|
| 2017 |
| 2016 |
|
|
|
|
|
Specialty Health | $ | 52,157 | $ | 50,237 |
Group Disability |
| 103,933 |
| 104,428 |
Individual A&H and Other |
| 8,527 |
| 9,688 |
Medical Stop-Loss |
| 4,930 |
| 54,760 |
|
|
|
|
|
| $ | 169,547 | $ | 219,113 |
The primary assumption in the determination of Specialty Health reserves is that historical claim development patterns are representative of future 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 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. 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.
The Company’s disability business is comprised of group disability and DBL. The two “primary” assumptions on which disability policy benefits and claims are based are: (i) morbidity levels; and (ii) recovery rates. If morbidity levels$94.8 million 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 million decrease in IHC’s stockholders' equity in the first nine months of 20172021 is primarily due to $44.4 million of treasury stock purchases and $0.9 in common stock dividends, partially offset by $24.5$99.5 million of net income attributable to IHC, and $4.6which includes a $62.2 million after tax gain on the sale of PetPartners; reduced by $3.2 million of other comprehensive income attributable to IHC.common stock dividends.
Asset Quality and Investment Impairments |
The natureCompany has gross unrealized gains of $0.3 million 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 of $0.1 million on its fixed maturities available-for-sale securities totaled $6.1 million at September 30, 2017, 100%2021. 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 doesdid not have any non-performing fixed maturities at September 30, 2017.2021.
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 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 is more likely than2021 or 2020 and does not that we would sell the securities before the recovery of their amortized cost basis.
The following table summarizes the carrying value ofhave any securities with fair values less than 80% of their amortized cost at September 30, 2017 by the length of time the fair values of those securities were below 80% of their amortized cost (in thousands):2021.
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| Greater than |
| Greater than |
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| 3 months, |
| 6 months, |
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|
|
| Less than |
| less than |
| less than |
| Greater than |
|
|
|
| 3 months |
| 6 months |
| 12 months |
| 12 months |
| Total |
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities | $ | 4,345 | $ | - | $ | - | $ | - | $ | 4,345 |
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|
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|
|
|
|
The unrealized losses on allfixed maturities available-for-sale securities have beenwere evaluated in accordance with the Company's impairment policy and were determined to be temporary in nature at September 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.2021. 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 andwhich may cause the Company mayto 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 diversifywith its current activities. It is anticipated that any future acquisitions or other expansion of operations at the remaining entities of IHC will be funded internally from existing capital and surplus and parent company liquidity.anticipated cash flows to be received upon the close of the disposal transactions. 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 7of the Company’s Annual Report on Form 10-K.
OUTLOOK
For the balanceremainder of 20172021, and 2018,continuing in 2022, the Company anticipates that weit will:
·ContinueClose on the sale of all of the issued and outstanding capital stock of Standard Security Life to show significant increasesReliance Standard pursuant to the SSL Purchase Agreement signed on April 14, 2021 and amended on July 29, 2021. Reliance Standard believes that this transaction, which is subject to various regulatory approvals, will close by the end of this year. Under the terms of the SSL Amended Purchase Agreement, Standard Security Life will receive the excess of statutory capital and surplus, calculated as of the closing date, over $57 million so earnings prior to closing will be retained by IHC.
·Close on the sale of all of the issued and outstanding capital stock of IAHC to Iguana Capital pursuant to the IAHC Purchase Agreement signed on May 17, 2021. We believe this transaction, which is subject to various regulatory approvals, will close by the end of this year.
·Close on the sale of the stock of Madison National Life to Horace Mann Educators Corporation pursuant to the MNL Purchase Agreement signed on July 14, 2021. This transaction, subject to various regulatory approvals, is expected to close no earlier than January 1, 2022.
·Focus on the transition and consummation of all transactions entered into in specialty health premiums (including hospital indemnity, group limited medical2021. The consummation of these transactions shall be the entire focus of the Company for the remainder of 2021. After all the transactions are consummated, the Company will have the IHC Agency operations, hold a substantial amount of cash and group gapinvestments, net of liabilities, and other supplemental health products, such as accident medical, gapan equity interest in Iguana Capital. As a result of additional investments being made by Iguana Capital, and critical illness products).the approval by IHC’s Board of Directors to contribute an additional $3.2 million to Iguana Capital in the fourth quarter 2021, the Company expects that is equity interest in Iguana Capital will be diluted to approximately 18% by December 31, 2021.
·Improve the profitability and better integrate all of our agencies. IHC has begun to packageexperienced many changes in its hospital indemnity, accident and critical illness plansagency model 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. We are also very well positioned for the expected increase in the duration of short-term medical plans2021 as a result of the Trump Administration’s executive order directing 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 systemsa changing market and infrastructure and will contribute additional capitaldue to the insurance companies if needed. Fordecision to sell all three of IHC’s carriers. Although we continue to record losses in our agency business, we expect that to improve in the preceding reasons,future. IHC has re-evaluated and made significant changes to the direction of the Company. As we believe that weprogress, our agency operations will continuebe centered around INSXcloud.com (INSX), our CMS approved Web Broker. INSX provides an agent with the solid sales growth we have been experiencing forability to quote, directly enroll and track applications on the balanceFederally Facilitated Marketplace, plus much more. Specifically, brokers can quickly generate quotes, create PDF’s of 2017,plan comparisons, enroll customers in plans, and will report significantly higher earned premiumsinvite customers to enroll themselves – all through an easy-to-use cloud-based web portal. IHC is expanding INSX to directly serve the consumer and income in this segment in 2018.
Continue to increase IHC’s emphasis on lead generation for its direct-to-consumer and career advisor distribution initiatives,partner market, as well as expanding our controlled sales through our call center, career model and transactional websites as a result ofproduct offerings on the acquisition of PetPlace.com, IHC’s ownership of HealtheDeals.com, and AspiraAmas and its investment in HealthInsurance.org.platform.
·Expand salesContinue to expand on our IHCSB agency. The balance of IHCSB includes our W-2 Call Centers and our captive independent Advisors unit, both of which sell into the under/over age 65 health insurance markets, as well as our Independence Brokerage Group (IBG) which recruits independent agents and agencies to sell via our platforms and contracts. We are refocusing a portion of our specialty health products as a resultover 65 division into the under 65 market in order to take advantage of private-labelthe positioning of INSX, IHCSB, our lead generation capabilities, and white-label distribution arrangements with large national partners and our equity investments last year in two call center agencies
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and a worksite marketing company. We recently announced at partnership with eHealth to sell packages of specialty health products.the market growth resulting from the American Rescue Plan Act.
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 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.efficiencies and the transition of the three insurance carriers as we progress towards closing on all three sales in the next few quarters
·SellContinue to monitor the COVID-19 outbreak as it evolves. The duration of COVID-19 and its potential effects on our business cannot be certain, so we currently cannot predict if there will be a new rider (“Paid Family Leave”material impact to our business, results of operations or “PFL”) as part of our New York DBL policiesfinancial condition in 2018. Effective January 1, 2018, New York State will require 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 that2021. During the implementation of this coverage is expected to more than double our current $30 million DBL block. The rates for PFL are set by New York State and as this is a new product the underwriting profitability is unclear at this point.COVID-19
On March 31, 2016, IHC 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 million 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.
As a result of the sale of Risk Solutions, IHC remains highly liquid with excess capital; however,pandemic, we have used some of this capitalfully transitioned our existing sales teams to make equity investments, retire debtwork from home. Our customer facing agents have transitioned to a full-time work at home model, and purchase IHC stock. If the Specialty Health business werealthough we have implemented enhanced technology solutions, sales may be impacted as COVID-19 continues to grow exponentially as a result of the turmoil in the major medical markets, IHC may need to contribute additional capital to one 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 lines of business are expected to offset this reduction in earnings.develop.
Subject to making additional repurchases acquisitions, investments and capital contributions to support growth, the Company will remain highly liquid in 2017 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 priordividends to shareholders and various investments, the commencement of the tender offerCompany will maintain a highly liquid and a gross aggregate purchase price of $27.7 million. The tender offer was fully funded out of corporate liquidity.high quality portfolio.
Our financial results in the future will depend on the adequacy of our product pricing, our underwriting, the accuracy of our reserving methodology, returns on our invested assets, andon: (i) our ability to manage expenses. We will also need to be diligent with increased rate review scrutiny to effect timely rate changesexecute on our revised agency model and will need to stay focused
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develop the agencies into a profitable operation; and (ii) any increase in the value of our minority interest in Iguana Capital where we participate on the managementboard of medical cost drivers as 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.directors.
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.
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As previously disclosed in Item 9A of our Form 10-K for the year ended December 31, 2016, managementBased upon that evaluation, IHC’S CEO and CFO concluded that thereIHC’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 30, 2017,2021 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.
Third Party Administrator
A third party administrator with whom we formerly did business (“Plaintiff” or “TPA”) filed a Complaint datedcommenced an action on May 17, 2017 in the United States District Court, Northern District of Texas, Dallas Division (the “Texas Action”), naming IHC, Madison National Life, Standard Security Life, and Independence Brokerage Group, Inc. (formerly IHC Carrier Solutions, Inc. (collectively referred to) as “Defendants”defendants (“Defendants”). 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 sharecontractual payments allegedly owed to Plaintiff underby the agreementsDefendants 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 moved to Compel Arbitrationcourt had previously stayed the proceedings during the pendency of two arbitrations. The first
arbitration resulted in a judicially-confirmed award in favor of Standard Security Life and Dismiss or StayMadison National Life in the original Complaint.amount of $5,641,000, which the Plaintiff has satisfied. The Company received payment on September 9, 2020. The resultant income is included in income from discontinued operations in the Condensed Consolidated Statements of Income for the three months and nine months ended September 30, 2020. The second arbitration resulted in no monetary obligations owed by any of the parties. The Plaintiff has filed ana motion for leave to file a Second Amended Complaint on August 18, 2017.Complaint. The Defendants filed a Motion to Compel Arbitration or StayDismiss Plaintiff’s Second Amended Complaint. This motion is fully briefed and we are awaiting the Amended Complaint, which is still pending. In the fourth quarter of 2017,Court’s decision.
Multistate Market Conduct Examination
As previously disclosed, our subsidiaries Standard Security Life, Madison National Life agreedand Independence American Insurance Company were selected for MCE related to pay finesour STM, limited medical and fixed indemnity limited health insurance products for the period of January 1, 2014 through September 30, 2017. The insurance departments of five jurisdictions (Delaware, Wisconsin, District of Columbia, Kansas and South Dakota) served as lead states, and the District of Columbia Department of Insurance, Securities and Banking and the Delaware Department of Insurance served as the managing lead states of the MCE. In addition to the five lead states, 37 other states participated in the stateMCE. Each of Texas primarilyStandard Security Life, Madison National Life and Independence American Insurance Company responded to inquiries and document production requests in the MCE and proactively communicated and cooperated with the applicable regulatory agencies for the MCE. Each of these subsidiaries also provided a detailed action plan to regulators that summarized its enhanced compliance and control mechanisms.
In an effort to avoid long‐term litigation and/or administrative proceedings that would be required to resolve disputes between Standard Security Life, Madison National Life and Independence American Insurance Company and the states involved in the MCE, the Lead States and Standard Security Life, Madison National Life and Independence American Insurance Company entered into separate RSAs on July 14, 2020. The RSAs require the implementation of a compliance plan, impose certain requirements related to specified business practices and monetary payments. The thirty-seven participating states adopted the claimsRSAs. The Company accrued $3,660,000 in accounts payable, accruals and other liabilities on the Consolidated Balance Sheet in the second quarter of 2020 and processed payment practicesin October 2020. The corresponding expense is included in income from discontinued operations in the Condensed Consolidated Statements of Income for the Plaintiff.nine months ended September 30, 2020. As set forth in the RSAs, Standard Security Life, Madison National Life and Independence American Insurance Company deny any wrongdoing or violation of any applicable laws or regulations, and the entry into the RSAs is not an admission or acknowledgment of any wrongdoing or liability. In accordance with the RSAs, the Monitoring Period commenced and Standard Security Life, Madison National Life and Independence American Insurance Company continue to comply.
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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, 20162020 in Item 1A to Part 1 of Form 10-K.
ITEM 2. UNREGISTERED SALES UNREGISTERED SALESOF EQUITY SECURITIES EQUITY SECURITIESAND USE USEOF PROCEEDS 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 30, 2017, 2,068,9312021, 1,526,393 shares were still authorized to be repurchased.
Share repurchases during the third quarter of 20172021 are summarized as follows:
2017 | |||||||||||
2021 | 2021 | ||||||||||
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| Maximum Number |
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| Maximum Number | |||||
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| Average Price | of Shares which |
| Average Price | of Shares Which | |||||
Month of | Shares | of Repurchased | can be | Shares | of Repurchased | Can be | |||||
Repurchase | Repurchased | Shares | Repurchased |
| Repurchased |
| Shares |
| Repurchased | ||
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|
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| |||||
July | 16,327 | $ | 21.42 | 2,154,346 | - | $ | - | 1,535,393 | |||
August | 27,704 | $ | 21.61 | 2,126,642 | 9,000 | $ | 42.38 | 1,526,393 | |||
September | 57,711 | $ | 24.06 | 2,068,931 | - | $ | - | 1,526,393 |
ITEM 3. DEFAULTS DEFAULTSUPON SENIOR SECURITIES SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
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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).
3.3 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).
10.5 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.)
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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).
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).
10.18Officer Employment Agreement, made as of May 20, 2011, by and between Independence Holding Company and Colleen P. Maggi(Filed as Exhibit 10.18 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2021 and incorporated herein by reference).
10.19First Amendment to the Stock Purchase Agreement, dated as of June 28, 2021, by and among Independence American Holdings Corp., IHC SB Holdings, LLC, Iguana PP Holdings, Inc., Iguana Capital, Inc., and JAB Holdings B.V. (Filed as Exhibit 10.19 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2021 and incorporated herein by reference).
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. *
104Cover page formatted as inline XBRL and contained in Exhibit 101.
* Filed herewith.
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** Certain portions of this exhibit have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company hereby undertakes to furnish supplemental copies of any of the omitted portions upon request by the SEC; provided, however, that Company may request confidential treatment pursuant to Rule 24b-2 of the Exchange Act for any portions so furnished.
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, 20172021
Roy T.K. Thung
Chief Executive Officer, and Chairman
of the Board of Directors
By:/s/Teresa A. HerbertColleen P. Maggi Date:November 9, 20172021
Teresa A. HerbertColleen P. Maggi
SeniorCorporate Vice President and
Chief Financial Officer
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