UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________________________
FORM 10-Q
☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the quarterly period ended March 31,September 30, 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 |
| 58-1407235 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
96 CUMMINGS POINT ROAD, STAMFORD, CT 06902
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 358-8000
NOT APPLICABLE
Former name, former address and former fiscal year, if changed since last report.
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] No [ ]
Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted 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 such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [ ] | Accelerated Filer [X] |
Non-Accelerated Filer [ ] | Smaller Reporting Company ☒ |
Emerging Growth Company ☐ |
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No [X]
As of May 7,November 9, 2021, the registrant had 14,639,44914,674,936 shares of Common Stock outstanding.
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 Statements of Changes in Equity | 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 |
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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.
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 Factors, of IHC’s Annual Report on Form 10-K as filed with Securities and Exchange Commission.
Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of these assumptions, and, therefore, also the forward-looking statements based on these assumptions, could themselves prove to be inaccurate. In light of the significant uncertainties inherent in the forward-looking statements that are included in this report, our inclusion of this information is not a representation by us or any other person that our objectives and plans will be achieved. Our forward-looking statements speak only as of the date made, and we will not update these forward-looking statements unless the securities laws require us to do so. In light of these risks, uncertainties and assumptions, any forward-looking event discussed in this report may not occur.
PART I - FINANCIAL INFORMATION
Item 1.Financial Statements
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES | ||||||
CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data) | ||||||
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| December 31, 2020 |
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ASSETS: |
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Investments: |
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Securities purchased under agreements to resell |
| $ |
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| $ |
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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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| $ | 1,083,156 |
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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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| 611,038 |
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Commitments and contingencies (Note |
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Redeemable noncontrolling interest |
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| 2,312 |
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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 shares issued; and |
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14,643,047 shares outstanding |
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| 18,625 |
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| 18,625 |
Paid-in capital |
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| 124,757 |
Accumulated other comprehensive income |
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| 4,197 |
Treasury stock, at cost; |
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| (77,088) |
Retained earnings |
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| 399,273 |
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TOTAL IHC STOCKHOLDERS’ EQUITY |
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| 469,764 |
NONREDEEMABLE NONCONTROLLING INTERESTS |
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| 42 |
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TOTAL EQUITY |
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| 469,806 |
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TOTAL LIABILITIES AND EQUITY |
| $ |
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| $ | 1,083,156 |
See the accompanying Notes to Condensed Consolidated Financial Statements.
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES | INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES | INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES | |||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) | CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) | CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) | |||||||||||
(In thousands, except per share data) |
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| (In thousands, except per share data) | ||||||||
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| Three Months Ended |
| Three Months Ended |
| Nine Months Ended | |||||||
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| March 31, |
| September 30, |
| September 30, | |||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||
REVENUES: |
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Premiums earned | $ | 115,141 |
| $ | 96,050 | ||||||||
Net investment income |
| 2,592 |
| 3,240 | $ | 119 | $ | 170 | $ | 430 | $ | 916 | |
Fee income |
| 6,356 |
| 3,942 |
| 5,569 |
| 6,113 |
| 20,291 |
| 18,465 | |
Other income |
| 353 |
| 477 |
| 873 |
| 615 |
| 1,660 |
| 1,739 | |
Net investment gains |
| 215 |
| 288 | |||||||||
Net investment gains (losses) |
| (48) |
| (53) |
| 105 |
| 122 | |||||
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| 124,657 |
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| 103,997 |
| 6,513 |
| 6,845 |
| 22,486 |
| 21,242 | |
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EXPENSES: |
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Insurance benefits, claims and reserves |
| 67,378 |
| 54,058 | |||||||||
Selling, general and administrative expenses |
| 50,420 |
| 44,574 |
| 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) | |||||
| 117,798 |
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| 98,632 |
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Loss from continuing operations, net of tax |
| (11,512) |
| (7,345) |
| (23,516) |
| (16,362) | |||||
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Income before income taxes |
| 6,859 |
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| 5,365 | ||||||||
Income taxes |
| 1,293 |
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| 1,043 | ||||||||
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 |
| 5,566 |
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| 4,322 |
| 17,359 |
| 8,732 |
| 99,293 |
| 13,592 |
Loss from nonredeemable noncontrolling interests |
| 1 |
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| 9 | ||||||||
(Income) loss from nonredeemable noncontrolling interests |
| - |
| 5 |
| 2 |
| (29) | |||||
(Income) loss from redeemable noncontrolling interests |
| 54 |
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| (53) |
| - |
| (49) |
| 156 |
| (176) |
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NET INCOME ATTRIBUTABLE TO IHC | $ | 5,621 |
| $ | 4,278 | $ | 17,359 | $ | 8,688 | $ | 99,451 | $ | 13,387 |
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Basic income per common share | $ | 0.38 |
| $ | 0.29 |
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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 |
| 14,641 |
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| 14,856 |
| 14,654 |
| 14,670 |
| 14,645 |
| 14,763 |
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Diluted income per common share | $ | 0.38 |
| $ | 0.29 |
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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 |
| 14,778 |
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| 14,911 |
| 14,654 |
| 14,670 |
| 14,645 |
| 14,763 |
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See the accompanying Notes to Condensed Consolidated Financial Statements.
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES | INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES | INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES | ||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) | CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) | CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) | ||||||||||
(In thousands) | (In thousands) | (In thousands) | ||||||||||
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| Three Months Ended |
| Three Months Ended |
| Nine Months Ended | ||||||
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| March 31, |
| September 30, |
| September 30, | ||||||
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| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
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Net income | $ | 5,566 | $ | 4,322 | $ | 17,359 | $ | 8,732 | $ | 99,293 | $ | 13,592 |
Other comprehensive loss: |
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Other comprehensive income (loss): |
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Available-for-sale securities: |
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Unrealized losses on available-for-sale securities, pre-tax |
| (2,460) |
| (134) | ||||||||
Tax benefit on unrealized gains on available-for-sale securities |
| (531) |
| (23) | ||||||||
Unrealized losses on available-for-sale securities, net of taxes |
| (1,929) |
| (111) | ||||||||
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 loss, net of tax |
| (1,929) |
| (111) | ||||||||
Other comprehensive income (loss), net of tax |
| (900) |
| 1,064 |
| (1,877) |
| 2,706 | ||||
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COMPREHENSIVE INCOME, NET OF TAX |
| 3,637 |
| 4,211 |
| 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 |
| 55 |
| (44) |
| - |
| (44) |
| 158 |
| (205) |
Other comprehensive (income) loss, net of tax, attributable to noncontrolling interests |
| - |
| - | ||||||||
Other comprehensive (income) loss, net of tax, attributable to |
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noncontrolling interests |
| - |
| - |
| - |
| - | ||||
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COMPREHENSIVE (INCOME) LOSS, NET OF TAX, |
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ATTRIBUTABLE TO NONCONTROLLING INTERESTS |
| 55 |
| (44) |
| - |
| (44) |
| 158 |
| (205) |
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COMPREHENSIVE INCOME, NET OF TAX, |
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ATTRIBUTABLE TO IHC | $ | 3,692 | $ | 4,167 | $ | 16,459 | $ | 9,752 | $ | 97,574 | $ | 16,093 |
See the accompanying Notes to Condensed Consolidated Financial Statements.
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES | |||||||||||||||||
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Unaudited) (In thousands) | |||||||||||||||||
Three Months Ended | |||||||||||||||||
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| ACCUMULATED |
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| OTHER |
| TREASURY |
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| TOTAL IHC |
| NONREDEEMABLE |
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| 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 | |
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 | |||||||||||||||||
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 | |||||
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BALANCE AT |
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DECEMBER 31, 2020 | $ | 18,625 | $ | 124,757 | $ | 4,197 | $ | (77,088) | $ | 399,273 | $ | 469,764 | $ | 42 | $ | 469,806 | |
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Net income |
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Other comprehensive |
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loss, net of tax |
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| - |
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Repurchases of common stock |
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| - |
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Common stock dividends | |||||||||||||||||
($0.22 per share) | (3,226) | (3,226) | - | (3,226) | |||||||||||||
Share-based compensation |
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| 362 |
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| - |
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| |
Distributions to noncontrolling | |||||||||||||||||
interests | (63) | (63) | (43) | (106) | |||||||||||||
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BALANCE AT |
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| $ | 18,625 | $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
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BALANCE AT |
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DECEMBER 31, 2019 | $ | 18,625 | $ | 122,717 | $ | 1,212 | $ | (69,724) | $ | 386,864 | $ | 459,694 | $ | 18 | $ | 459,712 | |
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Net income |
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Other comprehensive |
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| - |
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| |
Repurchases of common stock |
|
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| - |
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Distributions to noncontrolling |
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interests |
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|
|
|
|
|
|
|
|
|
| - |
| (3) |
| (3) | |
Common stock dividends | |||||||||||||||||
($0.22 per share) | (3,246) | (3,246) | - | (3,246) | |||||||||||||
Share-based compensation |
|
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| 91 |
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| - |
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BALANCE AT |
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| $ | 18,625 | $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ |
| |
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See the accompanying Notes to Condensed Consolidated Financial Statements.
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES | INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES | INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES | ||||||||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) | ||||||||
(In thousands) | (In thousands) | (In thousands) | ||||||||
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|
| ||||||||
|
| Three Months Ended March 31, |
| Nine Months Ended September 30, | ||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | |||
CASH FLOWS PROVIDED BY (USED BY) OPERATING ACTIVITIES: |
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|
|
|
|
| ||
Net income | $ | 5,566 |
| $ | 4,322 | $ | 99,293 |
| $ | 13,592 |
Adjustments to reconcile net income to net change in cash from |
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|
| ||
operating activities: |
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|
|
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|
|
| ||
Amortization of deferred acquisition costs |
| 220 |
| 120 | ||||||
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 |
| 1,169 |
| 857 |
| 408 |
| 481 | ||
Net investment (gains) |
| (215) |
| (288) |
| (105) |
| (122) | ||
Depreciation and amortization |
| 1,118 |
| 908 |
| 977 |
| 800 | ||
Other |
| 1,572 |
| 408 |
| 13,975 |
| 4,710 | ||
Changes in assets and liabilities: |
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|
|
|
|
|
|
| ||
Change in insurance liabilities |
| 42,672 |
| 25,009 |
| 2,048 |
| 14,670 | ||
Change in amounts due from reinsurers |
| 152 |
| 668 |
| 4,279 |
| 5,334 | ||
Change in claim fund balances |
| (130) |
| 58 |
| (1,133) |
| 751 | ||
Change in due and unpaid premiums |
| (11,505) |
| (6,377) |
| (14,577) |
| (2,852) | ||
Change in contract asset |
| (1,186) |
| - |
| (332) |
| - | ||
Other operating activities |
| (2,900) |
| (7,858) |
| 2,836 |
| (2,508) | ||
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|
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| ||
Net change in cash from operating activities |
| 36,533 |
| 17,827 |
| 41,683 |
| 37,785 | ||
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CASH FLOWS PROVIDED BY (USED BY) INVESTING ACTIVITIES: |
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Net (purchases) sales and maturities of short-term investments |
| 1,060 |
| (73,952) |
| 2,560 |
| (1,049) | ||
Net (purchases) sales of securities under resale agreements |
| (95,402) |
| 88,780 |
| (145,314) |
| 28,844 | ||
Sales of equity securities |
| 3,494 |
| - |
| 3,494 |
| - | ||
Sales of fixed maturities |
| - |
| 33,328 |
| 10,351 |
| 39,388 | ||
Maturities and other repayments of fixed maturities |
| 17,963 |
| 11,208 |
| 56,634 |
| 96,964 | ||
Purchases of fixed maturities |
| (7,931) |
| (66,621) |
| (8,343) |
| (170,088) | ||
Cash divested from deconsolidation of subsidiary |
| (4,878) |
| - | ||||||
Payments to acquire business, net of cash acquired |
| - |
| (2,597) |
| - |
| (13,707) | ||
Payments to acquire other investments |
| (2,500) |
| (1,250) |
| (2,500) |
| (1,250) | ||
Other investing activities |
| (398) |
| (719) |
| (2,418) |
| (3,998) | ||
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|
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|
|
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|
| ||
Net change in cash from investing activities |
| (83,714) |
| (11,823) |
| (90,414) |
| (24,896) | ||
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CASH FLOWS PROVIDED BY (USED BY) FINANCING ACTIVITIES: |
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|
|
|
|
Repurchases of common stock |
| (140) |
|
| (1,335) |
| (521) |
|
| (6,882) |
Withdrawals of investment-type insurance contracts |
| (64) |
|
| (173) |
| (144) |
|
| (464) |
Dividends paid |
| (3,221) |
|
| (2,973) |
| (6,443) |
|
| (6,215) |
Other financing activities |
| - |
|
| (3) |
| (431) |
|
| 94 |
|
|
|
|
|
|
|
|
|
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|
Net change in cash from financing activities |
| (3,425) |
|
| (4,484) |
| (7,539) |
|
| (13,467) |
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|
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Net change in cash, cash equivalents and restricted cash |
| (50,606) |
|
| 1,520 |
| (56,270) |
|
| (578) |
Cash, cash equivalents and restricted cash, beginning of year |
| 74,793 |
|
| 24,631 | |||||
Cash, cash equivalents and restricted cash, beginning of year, including discontinued operations |
| 74,793 |
|
| 24,631 | |||||
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Cash, cash equivalents and restricted cash, end of period | $ | 24,187 |
| $ | 26,151 | |||||
Cash, cash equivalents and restricted cash, end of period, including discontinued operations | $ | 18,523 |
| $ | 24,053 | |||||
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NON-CASH ACTIVITY: |
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| |||||
Proceeds from sale of subsidiary – funds held in escrow | $ | 78,263 |
| $ | - | |||||
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|
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| |||||
See the accompanying Notes to Condensed Consolidated Financial Statements.
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1.Organization, Consolidation, Basis of Presentation and Accounting Policies
(A) Business and Organization
Independence Holding Company, a Delaware corporation (“IHC”), is a holding company principally engaged in underwriting, administering and/or distributing group and individual specialty benefit products, including disability, supplemental health, pet, and group life insurance 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; and (ii) its marketing and administrative companies, including IHC Specialty Benefits Inc. (“IHCSB”), IHC Brokerage Group, Inc. (“IBG”), INSXCloud, Inc. (“INSXCloud”) (formerly My1HR, Inc.) and a majority interest in PetPartners, Inc. (“PetPartners”), collectively the “IHC Agencies” and its lead generation company, Torchlight Technology Group LLC., (“Torchlight”). On June 30, 2021, the Company sold its majority interest in PetPartners, Inc. (“PetPartners”), a major distributor and administrator of pet insurance underwritten by Independence American Insurance Company and an 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 financial holding company, andthrough its affiliated entities,wholly-owned subsidiaries (collectively “Geneve”), held approximately 62% of IHC's outstanding common stock as of September 30, 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 March 31,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) Basis of Presentation
The unaudited Condensed Consolidated Financial Statements have been prepared in conformity with U.S. generally accepted accounting principles ("GAAP") for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited Condensed Consolidated Financial Statements include the accounts of IHC and its consolidated subsidiaries. All significant intercompany transactions have been eliminated in consolidation. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect: (i) the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements; and (ii) the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. IHC’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission should be read in conjunction with the accompanying unaudited Condensed Consolidated Financial Statements.
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 further 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 March 31,September 30, 2021 are not necessarily indicative of the results to be anticipated for the entire year.
(C) Reclassifications
Certain amounts in prior year’s condensed consolidated financial statements and Notes thereto have been reclassified to conform to the 2021 presentation. presentation, primarily for the effects of discontinued operations.
(D) Recent Accounting Pronouncements
Recently Adopted Accounting Standards
In December 2019, the Financial Accounting Standard 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 result in a step-up in the tax basis of goodwill. 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 October 2021, the FASB issued guidance to improve comparability after a business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired
in a business combination. The guidance requires an acquirer to recognize and measure contract assets and contract liabilities acquired in a business combination in the same manner that they were recognized and measured in the acquiree’s financial statements before the acquisition. For public companies, the amendments in this guidance are effective for fiscal years beginning after December 15, 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 amendments in this guidance is not expected to have a material effect on the Company’s consolidated financial statements.
In August 2018, the FASB issued guidance to 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 discount rate assumption at each reporting date; (2) measure market risk benefits associated with deposit contracts at fair value; (3) disclose liability rollforwards and information about significant inputs, judgements assumptions, and methods used in measurement. Additionally, it simplifies the amortization of deferred acquisition costs and other balances on a constant level basis over the expected term of the 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 for interim periods within fiscal years beginning after December 15, 2024. Upon adoption, the amendments in this guidance should be applied to contracts in-force as of the beginning of the earliest period presented with a cumulative adjustment to beginning retained earnings. Management is evaluating the requirements and potential impact that the adoption of this guidance will have on the Company’s consolidated financial statements.
In 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 smaller reporting companies, the amendments in this guidance are now effective for fiscal years beginning after December 15, 2022, including interim periods within those years. Early adoption is 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 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 $57,000,000. 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 New York State Department of Financial Services (”NYSDFS”). Standard Security Life focuses on underwriting and selling its New York short-term disability (“DBL”) and paid family leave rider (“PFL”) products and ceded a portion of this business 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 collectively 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 major effect on the Company’s operations and financial 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.
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 issued and 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 stock 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 adjustments for targeted statutory capital and surplus): and
(iii)Following each of the above, IHC will retain a 30% interest in the business sold in the form of an equity investment in Iguana Capital. IHC’s equity interest in Iguana Capital will become diluted in the future as a result additional investments made by Iguana Capital unless IHC invests its pro rata share.
Both agreements are subject to customary closing conditions. The closing of the IAHC Purchase Agreement however is also subject to certain regulatory approvals, one of which is the approval of the Delaware Insurance Department. For this reason, the transaction was structured as two agreements such that the sale of PetPartners 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 applicable 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 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 reinsurance agreement will remain in effect until the underlying business runs out. The aforementioned transaction, consisting of the sale of PetPartners, IAHC and Independence American Insurance Company, and other closing conditions, is collectively 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 major effect on the Company’s 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.
On June 30, 2021, the Company completed the sale of its majority interest in PetPartners and, as a result, the Company ceased to have a controlling financial interest in PetPartners. Upon closing, the Company received proceeds of $78,263,000 (consisting of the purchase price and certain 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 disposal, net of transaction costs and income taxes for the nine months ended September 30, 2021. Transaction costs consisting of transaction bonuses, legal expenses and financial advisor expenses amounted to an aggregate of $6,079,000. The PPI 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 released 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 Condensed Consolidated Balance Sheet.
Continuing involvement with the Pets Sale disposal group will consist of customary transition services, the PPI Put/Call Option and the equity investment in Iguana Capital. At September 30, 2021, the carrying value of the Company’s 30% equity interest in Iguana Capital is $33,475,000. The investment is accounted for using the equity method of accounting, and for the three months and nine months ended September 30, 2021, the Company recorded an equity loss of $(287,000) on its investment in Iguana 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 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 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 137,000 and 55,000 sharescontinuing operations for the three months and nine months ended March 31,September 30, 2021 and 2020, respectively.such shares were deemed anti-dilutive.
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, | ||||
|
| 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.Cash, Cash Equivalents and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Condensed Consolidated Balance Sheets to the amounts shown in the Condensed Consolidated Statements of Cash Flows for the periods indicated (in thousands):
|
| March 31, | |||
|
| 2021 |
| 2020 | |
|
| ||||
Cash and cash equivalents | $ | 22,123 | $ | 23,048 | |
Restricted cash included in other assets |
| 2,064 |
| 3,103 | |
|
|
|
|
| |
Total cash, cash equivalents and restricted cash | $ | 24,187 | $ | 26,151 | |
|
|
|
|
| |
|
| 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 |
|
|
|
|
|
Restricted cash includes insurance premiums collected from insureds that are pending remittance to insurance carriers and/or payment of insurance claims and commissions to third party administrators. These amounts are required to be set aside by contractual agreements with the insurance carriers and are included in other assets on the Condensed Consolidated Balance Sheets.
Note 4.5.Investment Securities
The cost (amortized cost with respect to certain fixed maturities), gross unrealized gains, gross unrealized losses and fair value of fixed maturities available-for-sale are as follows for the periods indicated (in thousands):
|
|
| ||||||
|
|
|
| GROSS |
| GROSS |
|
|
|
| AMORTIZED |
| UNREALIZED |
| UNREALIZED |
| FAIR |
|
| COST |
| GAINS |
| LOSSES |
| VALUE |
|
|
|
| |||||
FIXED MATURITIES |
|
|
|
|
|
|
|
|
AVAILABLE-FOR-SALE: |
|
|
|
|
|
|
|
|
Corporate securities | $ |
| $ |
| $ |
| $ |
|
CMOs – residential (1) |
|
|
|
|
|
|
|
|
U.S. Government obligations |
|
|
|
|
|
|
|
|
Agency MBS - residential (2) |
|
|
| - |
| (4) |
|
|
|
|
|
|
| ||||
States and political subdivisions |
|
|
|
|
|
|
|
|
Foreign government obligations |
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities | $ |
| $ |
| $ |
| $ |
|
|
| December 31, 2020 | ||||||
|
|
|
| GROSS |
| GROSS |
|
|
|
| AMORTIZED |
| UNREALIZED |
| UNREALIZED |
| FAIR |
|
| COST |
| GAINS |
| LOSSES |
| VALUE |
|
|
|
| |||||
FIXED MATURITIES |
|
|
|
|
|
|
|
|
AVAILABLE-FOR-SALE: |
|
|
|
|
|
|
|
|
Corporate securities | $ |
| $ |
| $ |
| $ |
|
CMOs – residential (1) |
|
|
|
|
|
|
|
|
U.S. Government obligations |
|
|
|
|
| - |
|
|
Agency MBS - residential (2) |
| 39 |
| - |
| (5) |
| 34 |
|
|
|
|
| ||||
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.
The amortized cost and fair value of fixed maturities available-for-sale at March 31,September 30, 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 |
|
| AMORTIZED |
|
| FAIR |
|
|
| COST |
|
| VALUE |
|
| COST |
|
| VALUE |
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less |
| $ | 56,936 |
| $ | 57,614 |
| $ | 1,111 |
| $ | 1,111 |
Due after one year through five years |
|
| 217,930 |
|
| 221,207 |
|
| 13,840 |
|
| 13,824 |
Due after five years through ten years |
|
| 36,279 |
|
| 36,337 |
|
| 1,931 |
|
| 2,015 |
Due after ten years |
|
| 66,146 |
|
| 65,025 |
|
| 11,451 |
|
| 11,485 |
Fixed maturities with no single maturity date |
|
| 10,769 |
|
| 10,759 |
|
| 609 |
|
| 635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 388,060 |
| $ | 390,942 |
| $ | 28,942 |
| $ | 29,070 |
The following tables summarize, for all fixed maturities available-for-sale in an unrealized loss position, the aggregate fair value and gross unrealized loss by length of time those securities that have continuously been in an unrealized loss position for the periods indicated (in thousands):
|
| March 31, 2021 |
| September 30, 2021 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
|
| Less than 12 Months |
| 12 Months or Longer |
| Total |
| Less than 12 Months |
| 12 Months or Longer |
| Total | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
|
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized | ||||||||
|
| Value |
| Losses |
| Value |
| Losses |
| Value |
| Losses |
| Value |
| Losses |
| Value |
| Losses |
| Value |
| Losses | ||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Corporate securities | $ | 51,505 |
| $ | 614 |
| $ | 17,249 |
| $ | 1,457 |
| $ | 68,754 | $ | 2,071 | $ | - |
| $ | - |
| $ | 10,720 |
| $ | 92 |
| $ | 10,720 | $ | 92 |
CMOs-residential |
| 716 |
|
| 13 |
| - |
| - |
| 716 |
| 13 | |||||||||||||||||||
U.S. Government obligations |
| 6,655 |
|
| 13 |
| - |
| - |
| 6,655 |
| 13 | |||||||||||||||||||
Agency MBS - residential |
| 34 |
|
| 4 |
| - |
| - |
| 34 |
| 4 |
| 29 |
|
| 4 |
| - |
| - |
| 29 |
| 4 | ||||||
GSEs |
| 788 |
|
| 4 |
| 4,796 |
| 164 |
| 5,584 |
| 168 | |||||||||||||||||||
States and political subdivisions |
| 88,228 |
|
| 382 |
| 8,620 |
| 428 |
| 96,848 |
| 810 |
| 401 |
|
| 8 |
| 1,095 |
| 23 |
| 1,496 |
| 31 | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Fixed maturities in an |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
unrealized loss position | $ | 147,926 |
| $ | 1,030 |
| $ | 30,665 |
| $ | 2,049 |
| $ | 178,591 | $ | 3,079 | $ | 430 |
| $ | 12 |
| $ | 11,815 |
| $ | 115 |
| $ | 12,245 | $ | 127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Number of fixed maturities in an |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
unrealized loss position |
| 32 |
|
|
|
| 20 |
|
|
| 52 |
|
|
| 2 |
|
|
|
| 2 |
|
|
| 4 |
|
| ||||||
|
| December 31, 2020 |
| December 31, 2020 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
|
| Less than 12 Months |
| 12 Months or Longer |
| Total |
| Less than 12 Months |
| 12 Months or Longer |
| Total | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
|
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized | ||||||||
|
| Value |
| Losses |
| Value |
| Losses |
| Value |
| Losses |
| Value |
| Losses |
| Value |
| Losses |
| Value |
| Losses | ||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Corporate securities | $ | 47,369 |
| $ | 719 |
| $ | 12,073 |
| $ | 1,394 |
| $ | 59,442 | $ | 2,113 | $ | 10,998 |
| $ | 96 |
| $ | 4,453 |
| $ | 97 |
| $ | 15,451 | $ | 193 |
CMOs-residential |
| 748 |
|
| 2 |
| - |
| - |
| 748 |
| 2 | |||||||||||||||||||
Agency MBS - residential |
| 34 |
|
| 5 |
| - |
| - |
| 34 |
| 5 |
| 34 |
|
| 5 |
| - |
| - |
| 34 |
| 5 | ||||||
GSEs |
| - |
|
| - |
| 5,693 |
| 155 |
| 5,693 |
| 155 | |||||||||||||||||||
States and political subdivisions |
| 35,555 |
|
| 254 |
| 8,681 |
| 437 |
| 44,236 |
| 691 |
| 4,269 |
|
| 14 |
| 1,124 |
| 31 |
| 5,393 |
| 45 | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Fixed maturities in an |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
unrealized loss position | $ | 83,706 |
| $ | 980 |
| $ | 26,447 |
| $ | 1,986 |
| $ | 110,153 | $ | 2,966 | $ | 15,301 |
| $ | 115 |
| $ | 5,577 |
| $ | 128 |
| $ | 20,878 | $ | 243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Number of fixed maturities in an |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
unrealized loss position |
| 33 |
|
|
|
| 17 |
|
|
| 50 |
|
|
| 5 |
|
|
|
| 2 |
|
|
| 7 |
|
| ||||||
Substantially all of the unrealized losses on fixed maturities available-for-sale at March 31,September 30, 2021 and December 31, 2020 relate to investment grade securities. Management does not intend to sell, and it is likely that management will not be required to sell these 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 credit 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 March 31,September 30, 2021.
Net investment gains (losses) are as follows for periods indicated (in thousands):
|
| Three Months Ended | ||
|
| March 31, | ||
|
| 2021 |
| 2020 |
|
| |||
Realized gains (losses): |
|
|
|
|
Fixed maturities available-for-sale | $ | 168 | $ | 1,070 |
Equity securities |
| 882 |
| - |
|
|
|
|
|
Total realized gains (losses) on debt and equity securities |
| 1,050 |
| 1,070 |
Unrealized gains (losses) on equity securities |
| (835) |
| (787) |
|
|
|
|
|
Gains (losses) on debt and equity securities |
| 215 |
| 283 |
Gains (losses) on other investments |
| - |
| 5 |
|
|
|
|
|
Net investment gains | $ | 215 | $ | 288 |
|
| 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 March 31,September 30, 2021, the Company realized gross gains of $0 and $188,000, respectively, and gross losses of $48,000 and $83,000, respectively, from sales, maturities and prepayments of fixed maturities available-for-sale. For the three months and nine months ended September 30, 2020, the Company realized gross gains of $216,000$0 and $1,091,000,$162,000, respectively, and gross losses of $48,000$53,000 and $21,000,$57,000, respectively, from sales, maturities and prepayments of fixed maturities available-for-sale.
Other-Than-Temporary Impairment Evaluations
We recognize other-than-temporary impairment losses in earnings in the period that we determine: 1) we intend to sell the security; 2) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis; or 3) the security has a credit loss. Any non-credit portion of the other-than-temporary impairment loss is recognized in other comprehensive income (loss). See Note 1G(v) to the Consolidated Financial Statements in the 2020 Annual Report on Form 10-K for further discussion of the factors considered by management in its regular review to identify and recognize other-than-temporary impairments on fixed maturities available-for-sale. The Company did not recognize any other-than-temporary impairments on available-for-sale securities in the first threenine months of 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.
Fixed maturities available-for-sale:
Fixed maturities available-for-sale included in Level 2 are comprised of our portfolio of government securities, agency mortgage-backed securities, corporate fixed income securities, foreign government obligations, collateralized mortgage obligations municipals and GSEsmunicipals that were priced with observable market
inputs. LevelThe Company does not have any level 3 debt securities consist of municipal tax credit strips. The valuation method used to determine the fair value of municipal tax credit strips is the present value of the remaining future tax credits (at the original issue discount rate) as presented in the redemption tables in the Municipal Prospectuses. This original issue discount is accreted into income on a constant yield basis over the term of the debt instrument. Further, we retain independent pricing vendors to assist in valuing certain instruments.
Equity securities:
Equity securities included in Level 1 are equity securities with quoted market prices. continuing operations at September 30, 2021 or December 31, 2020.
The following tables present our financial assets measured at fair value on a recurring basis for the periods indicated (in thousands):
|
|
| |||||||
|
| 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, 2020 | |||||||
|
| Level 1 |
|
| Level 2 |
| Level 3 |
| Total |
|
|
|
|
| |||||
FINANCIAL ASSETS: |
|
|
|
|
|
|
|
|
|
Fixed maturities available-for-sale: |
|
|
|
|
|
|
|
|
|
Corporate securities | $ | - |
| $ |
| $ | - | $ |
|
CMOs - residential |
| - |
|
|
|
| - |
|
|
US Government obligations |
| - |
|
|
|
| - |
|
|
Agency MBS - residential |
| - |
|
| 34 |
| - |
| 34 |
|
|
|
|
| |||||
States and political subdivisions |
| - |
|
|
|
|
|
|
|
Foreign government obligations |
| - |
|
|
|
| - |
|
|
Total fixed maturities |
| - |
|
|
|
|
| ||
| |||||||||
|
|
|
| - |
|
| |||
|
|
|
|
| |||||
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
Total Financial Assets | $ |
|
| $ |
| $ |
| $ |
|
The following table presents the changes in fair value of our Level 3 financial assets for the periods indicated (in thousands):
|
| Three Months Ended March 31, | |||||||
|
| 2021 |
|
| 2020 | ||||
|
| States and |
| Total |
|
| States and |
| Total |
|
| Political |
| Level 3 |
|
| Political |
| Level 3 |
|
| Subdivisions |
| Assets |
|
| Subdivisions |
| Assets |
|
|
|
|
|
|
|
|
|
|
Beginning balance | $ | 1,335 | $ | 1,335 |
| $ | 1,529 | $ | 1,529 |
|
|
|
|
|
|
|
|
|
|
Increases (decreases) recognized in earnings: |
|
|
|
|
|
|
|
|
|
Net investment gains |
| - |
| - |
|
| - |
| - |
|
|
|
|
|
|
|
|
|
|
Gains (losses) included in other |
|
|
|
|
|
|
|
|
|
comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) |
| (5) |
| (5) |
|
| (6) |
| (6) |
|
|
|
|
|
|
|
|
|
|
Repayments and amortization of |
|
|
|
|
|
|
|
|
|
fixed maturities |
| (45) |
| (45) |
|
| (42) |
| (42) |
|
|
|
|
|
|
|
|
|
|
Balance at end of period | $ | 1,285 | $ | 1,285 |
| $ | 1,481 | $ | 1,481 |
Included in unrealized gains (losses) on available-for-sale securities, pre-tax, on the Condensed Consolidated Statement of Comprehensive Income for the three months ended March 31, 2021 are $(5,000) of unrealized gains (losses) attributable to the change in unrealized gains (losses) related to Level 3 securities held at March 31, 2021.
The following table provides carrying values, fair values and classification in the fair value hierarchy of the Company’s financial instruments, that are not carried at fair value but are subject to fair value disclosure requirements, for the periods indicated (in thousands):
|
|
|
| December 31, 2020 | ||||||||
|
| Level 1 |
| Level 2 |
|
|
| Level 1 |
| Level 2 |
|
|
|
| Fair |
| Fair |
| Carrying |
| Fair |
| Fair |
| Carrying |
|
| Value |
| Value |
| Value |
| Value |
| Value |
| Value |
|
|
|
|
|
| |||||||
FINANCIAL ASSETS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities purchased under |
|
|
|
|
|
|
|
|
|
|
|
|
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:
Securities purchased under agreements to resell
Securities purchased under agreements to resell are carried at the amounts at which the securities will be subsequently resold, which approximates fair value.
Short-term Investments
Investments with original maturities of 91 days to one year are considered short-term investments and are carried at cost, which approximates fair value.
Funds on Deposit
The Company has two types of funds on deposit. The first type is credited with a current market interest rate, resulting in a fair value which approximates the carrying amount. The second type carries fixed interest rates which are higher than current market interest rates. The fair value of these deposits was estimated by discounting the payments using current market interest rates. The Company's universal life policies are also credited with current market interest rates, resulting in a fair value which approximates the carrying amount. Both types of funds on deposit are included in Level 2 of the fair value hierarchy.
Other Policyholders’ Funds
Other policyholders’ funds are primarily credited with current market interest rates resulting in a fair value which approximates the carrying amount.
Note 6.7.Other Investments, Including Variable Interest Entities
Equity Method Investments
Equity income (loss) from equity method investments for the three months ended March 31, 2021 and 2020 was $60,000 and $328,000 respectively.
In March 2021, the Company invested $2,500,000 for a 20% investment in Pet Assistant Holdings, LLC. an unaffiliated company centered on pet health and pet insurance that will be accounted for under the equity method.
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 VIE through changes in governing documents or other circumstances. Our maximum loss exposure is limited to our combined $2,018,000$2,050,000 carrying value in thesethis equity investmentsinvestment, which is included in other investments in the Condensed Consolidated Balance Sheet as of March 31,September 30, 2021.
Note 8.Related Party Transactions
At March 31,September 30, 2021 and December 31, 2020, the Company’s Condensed Consolidated Balance Sheets include $130,000$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 other assets and accounts payable, accruals and other liabilities respectively. For the three months ended March 31, 2021, and 2020, theattributable to discontinued operations. The Company’s Condensed Consolidated Statements of Income include $401,000 and $476,000, respectively, of administrative fee expenses to Ebix Health Exchange, which are included in selling, generalpretax income from discontinued operations, of $349,000 and administrative expenses.
The Condensed Consolidated Statement of Income$1,111,000, respectively, for the three months and nine months ended March 31, 2021September 30, 2021; and 2020 includes premiums earned of $7,156,000include $407,000 and $1,097,000,$1,306,000, respectively, and selling, general, and administrative expenses of $2,416,000 and $333,000, respectively, related to pet insurance business produced by FIGO Pet Insurance, LLC (“FIGO”). 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 7.9.Goodwill and Other Intangible AssetsAcquisition
Torchlight Technology Group LLC.
On April 15, 2020 (the "Torchlight Acquisition Date"), the Company acquired the remaining 77% membership units of Torchlight Technology Group LLC, (“Torchlight”) for a purchase price of $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 the former owners based on the future market appreciation of IHC. These payments will be accounted for as compensation for post-combination services. The carrying amountCompany purchased Torchlight for its marketing 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 wants 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, as a result, recorded a gain of $519,000, which is included in other income on the Condensed Consolidated Statement of Income.
Upon the acquisition, the Company consolidated the assets and liabilities of Torchlight. The following table presents the identifiable assets acquired and liabilities assumed in the acquisition of Torchlight on the Torchlight Acquisition Date based on their respective fair values (in thousands):
Cash | $ | 333 | |
Intangible assets | 2,700 | ||
Other assets | 2,132 | ||
Total identifiable assets | 5,165 | ||
Other liabilities | 1,227 | ||
Total liabilities | 1,227 | ||
Net identifiable assets acquired | $ | 3,938 | |
In connection with the acquisition, the Company recorded $11,122,000 of goodwill, is $74,900,000 at March 31, 2021 and December 31, 2020, of which $70,677,000$7,976,000 is deductible for income tax purposes, and $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 attributable to discontinued operations on the Specialty Health SegmentCondensed Consolidated Balance Sheets.
Goodwill for Torchlight represented the synergies with our agencies. With a significant dependence on consumer and small business opportunities, our agencies require a consistent and predictable flow of lead traffic, and as a result, have meaningful synergies with the functions and deliverables that are developed at Torchlight. Before the acquisition of Torchlight, our agency was fully dependent on market traffic, which was both March 31, 2021unpredictable in price and December 31,availability. Such restrictions would not allow for coordinated or scheduled growth. Goodwill was calculated as the sum of (i) the acquisition date fair value of total aggregate consideration transferred of $11,628,000; and (ii) the aggregate acquisition-date fair value of equity interests immediately before the acquisition of $3,432,000; over (iii) the net identifiable assets of $3,938,000 that were acquired. The enterprise value of Torchlight was determined by an independent appraisal using a discounted cash flow model. Acquisition-related costs, primarily legal and consulting fees, were not material and are included in selling, general and administrative expenses in the Condensed Consolidated Statement of Income.
Revenue and net loss from Torchlight for the period from the Torchlight Acquisition Date to September 30, 2020 is $3,920,000 and $4,223,000$(1,815,000), respectively. The net loss is attributableprimarily related to the Group disability, life, DBLintegration of Torchlight with the Company’s other operations.
Pro forma adjustments to present the Company’s consolidated revenues and PFL segment fornet income as if the same periods.acquisition date was January 1, 2019 are not material and accordingly are omitted.
Note 10.Intangible Assets
The Company has net other intangible assets of $14,734,000$3,012,000 and $15,146,000$3,531,000 at March 31,September 30, 2021 and December 31, 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):
|
|
|
| December 31, 2020 | ||||
|
| Gross |
|
|
| Gross |
|
|
|
| Carrying |
| Accumulated |
| Carrying |
| Accumulated |
|
| Amount |
| Amortization |
| Amount |
| Amortization |
|
|
|
| |||||
Finite-lived Intangible Assets: |
|
|
|
|
|
|
|
|
Agent and broker relationships | $ |
| $ |
| $ |
| $ |
|
|
|
|
|
| ||||
Software systems |
|
|
|
|
|
|
|
|
Total finite-lived | $ |
| $ |
| $ |
| $ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| March 31, |
| December 31, |
|
|
|
|
|
| 2021 |
| 2020 |
Indefinite-lived Intangible Assets: |
|
|
|
|
|
| ||
Insurance licenses |
|
|
|
| $ | 7,977 | $ | 7,977 |
Total indefinite-lived |
|
|
|
| $ | 7,977 | $ | 7,977 |
Amortization expense is $412,000was $178,000 and $288,000$519,000 for the three months and nine months ended March 31,September 30, 2021, respectively; and was $162,000 and $386,000 for the three months and nine months ended September 30, 2020, respectively.
Note 8.11.Fee Income
Substantially allAll 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 |
| Three Months Ended |
| Nine Months Ended | |||||||
|
| March 31, |
| September 30, |
| September 30, | |||||||
|
| 2021 |
|
| 2020 |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
|
|
|
|
|
|
| |||||||
Commissions | $ | 2,877 |
| $ | 1,735 | $ | 1,372 | $ | 1,684 | $ | 5,662 | $ | 5,346 |
Commissions from affiliates |
| 1,820 |
| 2,410 |
| 5,572 |
| 7,602 | |||||
Administrative Fees |
| 196 |
|
| 942 |
| - |
| - |
| - |
| 875 |
Marketing Fees |
| 306 |
|
| 351 |
| 198 |
| 290 |
| 757 |
| 933 |
Enrollment Platform Fees |
| 500 |
|
| 518 |
| 454 |
| 502 |
| 1,539 |
| 1,476 |
Lead and Referral Fees |
| 2,080 |
|
| 269 |
| 1,681 |
| 1,111 |
| 6,627 |
| 1,964 |
Payment Plan, Application and Other Fees |
| 397 |
|
| 127 | ||||||||
Application and Other Fees |
| 44 |
| 116 |
| 134 |
| 269 | |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fee Income | $ | 6,356 |
| $ | 3,942 | $ | 5,569 | $ | 6,113 | $ | 20,291 | $ | 18,465 |
Commission Revenuess
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 March 31,September 30, 2021 and December 31, 2020, the aforementioned commission liability was $2,514,000$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).
|
|
|
|
|
|
| ||
Beginning Balance | $ |
|
Commissions recognized during the period |
|
|
Commission adjustments related to prior periods |
|
|
Cash receipts |
|
|
|
|
|
Ending Balance | $ |
|
Remaining Performance Obligations
Deferred revenues are recorded in connection with certain terminable contracts, the right to use our INSX enrollment platform and administrative contracts for a block of pet insurance that is in run-off.platform. At March 31,September 30, 2021 and December 31, 2020, deferred revenues are immaterial and expected to be fully recognized within the next 12 months.
Note 9.12.Income Taxes
The provisions for income taxes shown in the Condensed Consolidated Statements of Income were computed by applying the effective tax rate expected to be applicable for the reporting periods. Differences between the Federal statutory income tax rate and the Company’s effective income tax rate are principally from the dividends received deduction and tax-exempt interest income, state and local income taxes, and compensation related tax provisions.
AtOn December 31, 2020, the Company’s wholly owned subsidiary, AMIC Holdings, Inc. (“AMIC”) and its subsidiaries, had Federal net operating loss carryforwards of approximately $46,669,000 that primarily
expire in June 2021,$46,116,000 and are limited in their utilization to future taxable income earned on a separate company basis. At December 31, 2020, AMIC’scorresponding valuation allowance wasof $8,281,000 and is related to those net operating loss carryforwards that, in the judgment of management, arewere not considered realizable. No change inOn 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 its outstanding Federal net operating loss carryforwards. Total income tax expense related to the pretax gain on disposal of discontinued operations was necessary$11,675,000. The primary differences between the Federal statutory income tax rate and the Company’s effective income tax rate related to the gain on disposal of discontinued operations are the result of AMIC’s decrease in its valuation allowance, partially offset by the three months ended March 31, 2021.non-deductibility of goodwill and other expenses related to the disposal.
The effective income tax rates related to losses from continuing operations in 2021 were impacted by tax benefits from exercises of share-based compensation and state and local income 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 state and local income tax 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). Amounts incurred below do not include expenses for policy benefits and costs incurred for the Company’s life, annuity and other long-duration contracts. In addition, certain loss adjustment expenses related to short-duration contracts that are included in amounts incurred below are classified as selling general and administrative expenses on the Condensed Consolidated Statements of Income.
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Since unpaid loss and loss adjustment expenses are estimates, actual losses incurred may be more or less than the Company’s previously developed estimates and is referred to as either unfavorable or favorable development, respectively.
Net favorable (unfavorable) development in the Specialty Health segment, as depicted in the tables above, is comprised of the following lines of business for the years indicated (in thousands):
|
| Three Months Ended | ||
|
| March 31, | ||
Specialty Health segment: |
| 2021 |
| 2020 |
Short-term Medical | $ | 195 | $ | 259 |
Occupational Accident |
| 454 |
| 262 |
Fixed Indemnity Limited Benefit |
| 464 |
| 244 |
Limited Medical |
| 120 |
| 227 |
Critical Illness |
| 88 |
| 232 |
Group Gap |
| 239 |
| 407 |
Pet |
| 807 |
| 198 |
All other specialty health lines |
| 245 |
| 228 |
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|
|
|
|
Total Specialty Health segment | $ | 2,612 | $ | 2,057 |
In both 2021 and 2020, net favorable development in the various lines of the Specialty Health segment shown above are primarily due to better than expected claim development.
The net favorable development in the New York short-term disability (“DBL”) and paid family leave rider (“PFL”) business in 2021 of $1,618,000 is primarily due to better than expected DBL claim experience. The favorable development in 2020 of $3,949,000 was primarily due to both favorable adjustments to prior
year DBL premium refund reserves and better than expected DBL claims experience.
In 2021, favorable development of $1,312,000 in the group disability business is primarily due to lower frequency and severity in the short-term disability (“STD”) line. In 2020, unfavorable development of $(1,327,000) in the group disability business is primarily due to higher claim severity in the STD and LTD lines.
All other lines, primarily life and other individual health products and including our medical stop-loss business in run-off, experienced favorable development in 2021 and 2020. The favorable development in 2020 is primarily related to the group term life business due to continued improvements in experience.
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).
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| Specialty Health Segment | |||
|
| Health Insurance Claims | |||
|
| Three Months Ended | |||
|
| March 31, | |||
|
| 2021 |
|
| 2020 |
|
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| |||
Balance at beginning of year | $ | 28,295 |
| $ | 31,259 |
Less: reinsurance recoverable |
| 1,766 |
|
| 1,113 |
Net balance at beginning of year |
| 26,529 |
|
| 30,146 |
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Amount incurred, related to: |
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Current year |
| 9,148 |
|
| 13,316 |
Prior years |
| (1,343) |
|
| (1,597) |
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Total incurred |
| 7,805 |
|
| 11,719 |
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Amount paid, related to: |
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Current year |
| 974 |
|
| 3,430 |
Prior years |
| 8,511 |
|
| 11,723 |
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Total paid |
| 9,485 |
|
| 15,153 |
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Net balance at end of period |
| 24,849 |
|
| 26,712 |
Plus: reinsurance recoverable |
| 1,404 |
|
| 1,081 |
Balance at end of period | $ | 26,253 |
| $ | 27,793 |
The liability for the IBNR plus expected development on reported claims associated with the Company’s health insurance claims is $24,849,000 at March 31, 2021.
Note 11.13.Stockholders’ Equity
Accumulated Other Comprehensive Income (Loss)
Other comprehensive income (loss) includes the after-tax net unrealized gains and losses on investment securities available-for-sale, including the subsequent increases and decreases in fair value of available-for-sale securities previously impaired and the non-credit related component of other-than-temporary impairments of fixed maturities.
Changes in the balances of accumulated other comprehensive income, shown net of taxes, for the periods indicated are as follows (in thousands):
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| Three Months Ended | |||
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| March 31, | |||
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| 2021 |
|
| 2020 |
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Beginning balance | $ | 4,197 |
| $ | 1,212 |
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Other comprehensive income (loss): |
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Other comprehensive income (loss) before reclassifications |
| (1,797) |
|
| 734 |
Amounts reclassified from accumulated OCI |
| (132) |
|
| (845) |
Net other comprehensive loss |
| (1,929) |
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| (111) |
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Ending balance | $ | 2,268 |
| $ | 1,101 |
|
| 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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Beginning balance | $ | 3,220 | $ | 2,854 | $ | 4,197 | $ | 1,212 |
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Other comprehensive income (loss): |
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Other comprehensive income (loss) before reclassifications |
| (999) |
| 873 |
| (2,012) |
| 3,417 |
Amounts reclassified from accumulated OCI |
| 99 |
| 191 |
| 135 |
| (711) |
Net other comprehensive income (loss) |
| (900) |
| 1,064 |
| (1,877) |
| 2,706 |
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Ending balance | $ | 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):
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| Three Months Ended | |||
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| March 31, | |||
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| 2021 |
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| 2020 |
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Unrealized gains (losses) on available-for-sale securities |
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reclassified during the period to the following income |
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statement line items: |
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Net investment gains (losses) | $ | 168 |
| $ | 1,070 |
Net impairment losses recognized in earnings |
| - |
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| - |
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Income (loss) before income tax |
| 168 |
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| 1,070 |
Income tax expense (benefit) |
| 36 |
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| 225 |
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Net income (loss) | $ | 132 |
| $ | 845 |
|
| Three Months Ended |
| Nine Months Ended | ||||
|
| September 30, |
| September 30, | ||||
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| 2021 |
| 2020 |
| 2021 |
| 2020 |
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statement line items: |
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Net investment gains (losses) | $ | (48) | $ | (53) | $ | 106 | $ | 105 |
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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 |
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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 |
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Net income (loss) | $ | (99) | $ | (191) | $ | (135) | $ | 711 |
Note 12.14.Supplemental Disclosures of Cash Flow Information
Net cash payments for income taxes were $57,000$10,131,000 and $50,000$436,000 during the threenine months ended March 31,September 30, 2021 and 2020, respectively.
Note 13.15.Contingencies
Third Party Administrator
A third party administrator with whom we formerly did business (“Plaintiff” or “TPA”) commenced 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.) as defendants (“Defendants”). The Plaintiff seeks contractual payments allegedly owed by the Defendants 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 court 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 Madison National Life in the amount of $5,641,000, which the Plaintiff has satisfied. The Company received payment on September 9, 2020 and recorded it2020. The resultant income is included in other income onfrom discontinued operations in the Condensed Consolidated StatementStatements of Income infor the third quarter ofthree 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 a motion for leave to file a Second Amended Complaint. The Defendants have not yet been requiredfiled a Motion to respond toDismiss Plaintiff’s Second Amended Complaint. This motion is fully briefed and we are awaiting the pending complaint in the Texas Action following the lifting of the stay. When they are required to answer or otherwise respond to the complaint, the Defendants will assert a variety of defenses, set-offs and counterclaims..Court’s decision.
Multistate Market Conduct Examination (“MCE”)
As previously disclosed, our subsidiaries Standard Security Life, Madison National Life and Independence American Insurance Company were selected for MCE related to our 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 MCE. Each of Standard 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 RSAs. 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 in October 2020. The corresponding expense is included in income from discontinued operations in the Condensed Consolidated Statements of Income for the nine months ended September 30, 2020. As set forth in the RSAs, theStandard Security Life, Madison National Life and Independence American Insurance Company deniesdeny any wrongdoing or violation of any applicable laws or regulations, and the entry into the RSAs is not an admission or acknowledgment by the Company 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 14.16.Segment Reporting
The Insurance Group principally engages in the life and health insurance business. 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.
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: |
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|
|
|
|
|
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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Income before income taxes |
|
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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 all of the business in the segment is coinsured. Activity in this segment primarily reflects income or expenses related to the coinsurance and the run-off of any remaining blocks that were not coinsured.
(B)The Individual life, annuities and other segment includes amortization of deferred charges in connection with the assumptions of certain ceded life and annuity policies amounting to $158,000 and $188,000, for the three months ended March 31, 2021 and 2020, respectively.
(C)In both 2021 and 2020, we incurred significant costs associated with hiring, training and licensing a significant number of new agents, as well as costs for system development in our marketing and administrative companies.
(B)The three months and nine months ended September 30, 2021 include legal and investment bank fees recorded in connection with the Going Private Transaction (see Note 1) and the obligations of the Special Committee of independent directors to consider the proposal, and to review, evaluate, negotiate and approve or disapprove the proposal and alternatives.
Note 15.Subsequent Events
On April 14, 2021, IHC and its wholly owned subsidiary, Independence Capital Corp. (“ICC”), entered into a Stock Purchase Agreement (the “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. In addition, at closing, the Company will receive a dividend from Standard Security Life equal to the excess of aggregate statutory capital and surplus over $53,000,000 as of the closing date. Standard Security Life had statutory capital and surplus of $68,384,000 at March 31, 2021. The closing of the transaction, the closing dividend and certain other items are subject to customary closing conditions including applicable regulatory approvals. Under the terms of the Purchase Agreement, the transaction includes all of Standard Security Life’s DBL and PFL business and excludes all other lines of business which will be reinsured prior to the closing. The aforementioned transaction, consisting of the sale of Standard Security Life, the closing dividend, the reinsurance of excluded business and other closing conditions, is collectively referred to as the “Standard Security Life Sale Transaction”. Because the Standard Security Life Sale Transaction will result in the Company’s exit from DBL and PFL lines of business, it will represent a strategic shift that will have a major effect on the Company’s operations and financial results. As a result of the Board of Director’s commitment to this sale in April 2021, and the execution of the aforementioned Purchase Agreement, the Standard Security Life Sale Transaction qualifies for reporting as discontinued operations in the second quarter of 2021.
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations of Independence Holding Company ("IHC") and its subsidiaries (collectively, the "Company") should be read in conjunction with, and is qualified in its entirety by reference to, the Consolidated Financial Statements of the Company and the related Notes thereto appearing in our Annual Report on Form 10-K for the fiscal year ended December 31, 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, is a holding company principally engaged in underwriting, administering and/or distributing group and individual specialty benefit products, including disability, supplemental health, pet, and group life insurance through: (i) its insurance companies, Standard Security Life, Madison National Life, and Independence American Insurance Company; and (ii) its marketing and administrative companies consisting of IHCSB, IBG, INSXCloud and a majority interest in PetPartners (collectively the “IHC Agencies”) and its lead generation company, Torchlight. On June 30, 2021, the Company sold its majority interest in PetPartners, a major distributor and administrator of pet insurance underwritten by Independence American Insurance Company and an 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 range of factors in its strategic planningshift that will have a major effect on the Company’s operations and decision-making, underwriting profit is consistently emphasizedfinancial results and as the primary goal in all decisionssuch, they each qualify for reporting as to whether or not to increase our retention in a core line, expand into new products, acquire an entity or a block of business, or otherwise change our business model. Management's assessment of trends in healthcare and morbidity, with respect to specialty health, disability, New York short-term disability (“DBL”) and Paid Family Leave (“PFL”), mortality rates with respect to life insurance, and changes in market conditions in general play a significant role in determining the rates charged, deductibles, and the percentage of business retained. IHC also seeks transactions that permit it to leverage its vertically integrated organizational structure by generating fee income from production and administrative operating companies as well as risk income for its carriers. Management has always focused on managing the costs of itsdiscontinued operations.
(A)On April 14, 2021, IHC and its wholly owned subsidiary ICC entered into a Purchase Agreementpurchase agreement with Reliance Standard (“SSL Purchase Agreement”) 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 million in cash. On July 29, 2021, the SSL Purchase Agreement was amended and restated (the “SSL Amended Purchase Agreement”). In addition, at closing,accordance with the SSL Amended Purchase Agreement, the Company will receive a dividend from Standard Security Life equal to the excess of aggregate statutory capital and surplus, over $53 millioncalculated as of the closing date. Standard Security Life had statutory capital and surplus of $68.4 million at March 31, 2021.date, over $57 million. The closing of the transaction, the closing dividenddistribution and certain other items are subject to customary closing conditions including applicable regulatory approvals.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 and excludesin addition to all its other lines of business which will be reinsured prior to the closing.business. The aforementioned transaction, consisting of the sale of Standard Security Life, the closing dividend,distribution and other closing conditions, is collectively referred to as the “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 of 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 FIGO 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 “Standard Security“Pets Sale” transaction or disposal 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, primarily specialty health products, that are excluded from the Pets Sale Transaction”. Becausetransaction discussed above. The transaction has been approved by the Standard Security Life Sale Transaction will resultBoard of Directors of IHC, and IHC’s majority stockholders have entered into a voting agreement under which such majority shareholders 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.
The following is a summary of key performance information and events:
Results of operations are summarized as follows for the periods indicated (in thousands):
|
| For the Three Months Ended |
| For the Nine Months Ended | ||||
|
| September 30, |
| September 30, | ||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
|
|
|
|
|
|
|
|
|
Revenues | $ | 6,513 | $ | 6,845 | $ | 22,486 | $ | 21,242 |
Expenses |
| 21,592 |
| 16,431 |
| 53,028 |
| 43,221 |
|
|
|
|
|
|
|
|
|
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) |
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
| (11,512) |
| (7,345) |
| (23,516) |
| (16,362) |
Income from discontinued operations |
| 28,871 |
| 16,077 |
| 122,809 |
| 29,954 |
|
|
|
|
|
|
|
|
|
Net income |
| 17,359 |
| 8,732 |
| 99,293 |
| 13,592 |
(Income) loss from noncontrolling interests |
| - |
| (44) |
| 158 |
| (205) |
|
|
|
|
|
|
|
|
|
Net income attributable to IHC | $ | 17,359 | $ | 8,688 | $ | 99,451 | $ | 13,387 |
|
|
|
|
|
|
|
|
|
·Loss from continuing operations of $.79 per share, diluted, for the three months ended September 30, 2021 compared to $.50 per share, diluted, for the same period in 2020. Loss from continuing operations of $1.61 per share, diluted, for the nine months ended September 30, 2021 compared to $1.11 per share, diluted, for the same period in 2020.
·Consolidated investment yields (on an annualized basis) of 0.8% for both the three and 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, 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 with income of $16.1 million and $30.0 million in the Company’s exitcomparable 2020 periods, respectively.
·Results for the first nine months of 2021 were negatively impacted by COVID-19. Sales at our 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 offer employer sponsored coverage to furloughed workers. The agency is seeing an increase in fee and commission income from DBL and PFLthe sale of ACA plans. Certain lines of business it will representthat 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 strategic shift that will have a major effect on the Company’s operations and financial results. summary of key performance information by segment:
As a result of the Boardpending sales discussed above and in Note 2 to the Condensed Consolidated Financial Statements, the operations of Director’s commitment to thisthe 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 AprilNote 2 are consummated.
·The Specialty Health segment reported $7.0 million of losses before taxes for both the three months ended September 30, 2021 and 2020; and reported $17.9 million in losses before taxes for the executionnine-month period ended September 30, 2021 compared to $16.6 million of losses for the same period in 2020.
·The Corporate segment reported losses before taxes of $8.0 million and $2.6 million for the three months ended September 30, 2021 and 2020, respectively; and reported losses of $12.7 million for the nine-month period ended September 30, 2021 compared to losses of $5.5 million for the same period in 2020, primarily due to legal and investment bank fees recorded in connection with the Going Private Transaction (see Note 1) and the formation of the aforementioned Purchase Agreement,Special Committee of independent directors to consider the Standard Security Life Sale Transaction qualifies for reporting as discontinued operations inproposal, and to review, evaluate, negotiate and approve or disapprove the second quarter of 2021.proposal and alternatives.
COVID-19
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 large scale
disruption in the global economy, market instability and widespread unemployment in the United States.
The 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 fiscal year ended December 31, 2020.
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 | ||||
|
| March 31, | ||||
|
| 2021 |
|
| 2020 | |
|
|
|
|
|
| |
Revenues | $ | 124,657 |
| $ | 103,997 | |
Expenses |
| 117,798 |
|
| 98,632 | |
|
|
|
|
|
| |
Income before income taxes |
| 6,859 |
|
| 5,365 | |
Income taxes |
| 1,293 |
|
| 1,043 | |
|
|
|
|
|
| |
Net income |
| 5,566 |
|
| 4,322 | |
(Income) loss from noncontrolling interests |
| 55 |
|
| (44) | |
|
|
|
|
|
| |
| Net income attributable to IHC | $ | 5,621 |
| $ | 4,278 |
|
|
|
|
|
| |
·Income from operations of $.38 per share, diluted, for the three months ended March 31, 2021 compared to $.29 per share, diluted, for the same period in 2020.
·Consolidated investment yields (on an annualized basis) of 2.0% for the three months ended March 31, 2021 compared to 2.5% for the comparable period in 2020;
·Book value of $32.36 per common share at March 31, 2021 compared to $32.08 at December 31, 2020.
·Results for the quarter were both positively and negatively impacted by COVID-19.
oSales at our agency were lower than expected in the first quarter, impacted primarily by lower Independence American Insurance Company 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 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.
oEvolving regulatory mandates for testing and treatment coverage, the length and severity of the outbreak, claims activity, and impacts on payment of premiums have not had a significant impact on the 2021 results to date, however, we may incur additional expenses in the future relating to possible COVID-19 related claims activity and possible non-payment of premiums as the full effects of the outbreak continue to unfold. To date, we have experienced lower utilization related to the deferral of services which more than offset the extra incurred costs mentioned previously. It is still unpredictable how this level of deferred utilization will reverse or not in the future but emerging results will continue to be monitored.
oResults for the Group disability, life, DBL and PFL segment were not materially impacted by COVID-19 from an aggregate claims standpoint. The life incidence rate was higher than expected in the first quarter due to COVID-19 reported deaths. Although premiums increased in PFL due to an increase in rates, both the DBL and PFL premiums decreased as a result of higher unemployment and the loss of smaller groups that have gone out of business due to COVID-19.
The following is a summary of key performance information by segment:
·The Specialty Health segment reported $1.1 million of losses before taxes for the three months ended March 31, 2021 as compared to $.2 million of income before taxes for the comparable period in 2020. The decrease in 2021 when compared to 2020 is primarily due to: (i) lower premium volume in the fixed indemnity limited benefit line, which has lower loss ratios than other lines of business; (ii) lower sales per agent and increased costs related to overall infrastructure improvements in lead generation capabilities and at our call centers; and (iii) increase in costs associated with the pet operations, technology and infrastructure to handle the increase in pet volume;
oPremiums earned for the three months ended March 31, 2021 increased $4.4 million as compared to the same period in 2020. Increases in premiums from the pet line were partially offset by decreases in premiums from fixed indemnity limited benefit, STM and group gap lines.
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 | ||
|
| March 31, | ||
|
| 2021 |
| 2020 |
|
|
|
|
|
Premiums Earned | $ | 48,509 | $ | 44,096 |
Insurance Benefits, Claims & Reserves |
| 23,803 |
| 20,691 |
Expenses |
| 21,810 |
| 21,552 |
|
|
|
|
|
Loss Ratio (A) |
| 49.1% |
| 46.9% |
Expense Ratio (B) |
| 45.0% |
| 48.9% |
Combined Ratio (C) |
| 94.1% |
| 95.8% |
(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.
oThe higher loss ratio in 2021 reflects a higher concentration of product lines with lower profit margins. The lower expense ratio in 2021 is primarily due to the change in product lines which have a lower expense structure.
·Income before taxes from the Group disability, life, DBL and PFL segment increased $3.3 million for the three months ended March 31, 2021 compared to the same period in 2020. The increase in the first-quarter results primarily reflects an increase in PFL profitability due to increased premium rates and lower loss ratios in the STD and LTD lines of business; partially offset by higher loss ratios in the group term life business due to Covid-19 related claims and less income from DBL business due to lower premium volume as a result of higher unemployment and the loss of some smaller employer groups as a result of COVID-19 and less favorable premium reserve adjustments in 2021 than in 2020.
·Income and loss before taxes from the Individual life, annuities and other segment in run-off were not significant for the three months ended March 31, 2021 and 2020;
·The Corporate segment reported a loss before taxes of $2.1 million for the three months ended March 31, 2021 compared with a loss of $1.5 million in the comparable 2020 period, primarily due to higher share-based and incentive compensation expenses; and
·Premiums by principal product for the periods indicated are as follows (in thousands):
|
| Three Months Ended | |||
|
| March 31, | |||
Gross Direct and Assumed |
|
|
|
| |
| Earned Premiums: |
| 2021 |
| 2020 |
|
|
|
|
| |
Specialty Health | $ | 49,573 | $ | 45,669 | |
Group disability, life, DBL and PFL |
| 72,685 |
| 58,242 | |
Individual life, annuities and other |
| 4,767 |
| 4,842 | |
|
|
|
|
| |
| $ | 127,025 | $ | 108,753 | |
|
| Three Months Ended | |||
|
| March 31, | |||
Net Direct and Assumed |
|
|
|
| |
| Earned Premiums: |
| 2021 |
| 2020 |
|
|
|
|
| |
Specialty Health | $ | 48,509 | $ | 44,096 | |
Group disability, life, DBL and PFL |
| 66,620 |
| 51,946 | |
Individual life, annuities and other |
| 12 |
| 8 | |
|
|
|
|
| |
| $ | 115,141 | $ | 96,050 | |
CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of the Company conform to U.S. 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, 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, 2020. During the threenine months ended March 31,September 30, 2021, there were no additions to or changes in the critical accounting policies disclosed in the 2020 Form 10-K except for the recently adopted accounting standards discussed in Note 1(D) of the Notes to Condensed Consolidated Financial Statements.
Results of Operations for the Three Months Ended March 31,September 30, 2021 Compared to the Three Months Ended March 31,September 30, 2020
Information by business segment for the periods indicated is as follows:
|
|
|
|
| Selling, |
| ||||||||
| Net |
|
| General |
| |||||||||
|
| Investment |
|
| and |
| ||||||||
(In thousands) |
| Income | Income |
| Administrative | Total | ||||||||
|
|
|
|
|
|
|
|
|
|
| ||||
Specialty Health | $ |
|
|
|
|
| $ |
| ||||||
| ||||||||||||||
|
| $ |
| $ |
| $ |
|
|
| |||||
| ||||||||||||||
|
|
|
|
|
|
| ||||||||
Corporate |
|
|
|
|
| - |
|
|
|
| (8,009) | |||
Sub total | $ |
| $ |
| $ |
| $ |
|
|
|
|
| ||
|
|
| ||||||||||||
Net investment |
|
| ||||||||||||
|
|
| ||||||||||||
Income |
|
| ||||||||||||
| $ |
| ||||||||||||
| ||||||||||||||
|
|
|
|
| Selling, |
| ||||||||||
| Net |
|
| General |
| |||||||||||
|
| Investment |
|
| and |
| ||||||||||
(In thousands) |
| Income | Income |
| Administrative | Total | ||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||
Specialty Health | $ |
|
|
|
|
| $ |
| ||||||||
| ||||||||||||||||
|
| $ |
| $ |
| $ |
|
|
| |||||||
| ||||||||||||||||
|
|
|
|
|
|
| ||||||||||
Corporate |
|
|
|
|
| - |
|
|
|
| (2,564) | |||||
Sub total | $ |
| $ |
| $ | 615 | $ | 16,431 |
|
|
|
|
|
|
| |
|
|
| ||||||||||||||
Net investment |
|
| ||||||||||||||
|
|
| ||||||||||||||
Income |
|
| ||||||||||||||
| $ |
| ||||||||||||||
|
|
| ||||||||||||||
Premiums Earned
In the first quarter of 2021, premiums earned increased $19.1 million over the comparable period in 2020. The increase is primarily due to a $14.7 million increase in earned premiums from the Group disability, life, DBL and PFL segment primarily as a result of a $14.8 million increase in PFL premiums due to an increase in rates slightly offset by a decrease in volume as a result of higher unemployment and the loss of some smaller employer groups due to COVID-19, a $.7 million increase in the STD/LTD lines due to a decrease in ceded STD premiums and an increase in LTD premium volume, partially offset by a $1.2 million decrease in DBL premium volume as a result of higher unemployment and the loss of some smaller employer groups due to COVID-19. Earned premiums in the Specialty Health segment increased $4.4 million primarily due to an increase of $12.6 million in pet premiums; partially offset by decreases of $3.5 million in the fixed indemnity limited benefit line, $2.8 million in STM premiums and $1.4 million in group gap business.
Net Investment Income
Total net investment income decreased $.6 million. The overall annualized investment yields were 2.0%0.8% and 2.5%0.9% in the firstthird quarter of 2021 and 2020, respectively.
Net Investment Gains
The Company had netNet investment gains of $.2 million in 2021 compared to $.3 million in 2020. These amounts include the gains and losses from sales of fixed maturities available-for-sale, equity securities and other investments. Decisions to sell securities are based on management's ongoing evaluation of investment opportunities and economic and market conditions, thus creating fluctuations in gains and losses from period to period.
Fee Income and Other Income
Fee income increased $2.4decreased $.5 million for the three-month period ended March 31,September 30, 2021 compared to the three-month period ended March 31, 2020September 30, 2020. The decrease is primarily due to lower STM sales in 2021 and decreases in commission accruals principally on Medicare advantage products, partially offset by an increase in sales of insurance products (primarily senior products, ACA plans and small group stop-loss) by the IHC Agencies for multiple unaffiliated insurance carriers. lead generation fees.
Other Income
Other income in the first three months2021 primarily relates to equity losses on equity method investments offset by income from the sale of both 2021an investment asset; and, in 2020, was not significant.
Insurance Benefits, Claims and Reserves
Inother income includes the first quarter of 2021, insurance benefits, claims and reserves increased $13.3 million overgain on the comparable period in 2020. The increase is primarily attributable to: (i) an increase of $10.2 million in benefits, claims and reserves in the Group disability, life, DBL and PFL segment primarily as a resultsale of a $9.3 million increase in PFL benefits to policyholders (which includes a $6.5 million year over year increase in the accrual for a potential risk adjustment payment associated with the New York State Department of Financial Services risk adjustment program), a $1.8 million increase in DBL benefits and claims due to less favorable premium refund reserve adjustments and a $1.1 million increase in group term life benefits and claims as result of higher loss ratios due to COVID-19 related claims; partially offset by a $1.9 million decrease in LTD/STD benefits and claims as a result of lower loss ratios due in part to favorable loss development in the STD line; (ii) an increase of $3.1 million in the Specialty Health segment primarily due to an increase of $6.6 million in pet claims as a result of higher premium volume, partially offset by a decrease of $.7 million in the STM line due lower premium volume partially offset by higher loss ratios, and decreases of $1.1 million in the fixed indemnity limited benefit line and $1.0 million in the group gap line both due to lower premium volume.wholly owned agency that administered occupational accident plans.
Selling, General and Administrative Expenses
Total selling, general and administrative expenses increased $5.8$5.2 million over the comparable period
in 2020. The increase is primarily due to $6.4 million increase in the Corporate segment, primarily legal and investment bank fees recorded in in connection with the formation of a Special Committee of independent directors to consider the proposed Going Private Transaction.
Income Taxes
The effective tax rate for the three months ended September 30, 2021 is (23.7)% compared to (23.4)% for the three months ended September 30, 2020. The effective income tax rate in 2021 relates to losses from continuing operations and are impacted by tax benefits from exercises 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 and includes state and local income tax benefits on certain subsidiaries.
Results of Operations for the Nine Months Ended September 30, 2021 Compared to the Nine Months Ended September 30, 2020
Information by business segment for the periods indicated is as follows:
Selling, | ||||||||||
Net | General | |||||||||
September 30, 2021 | Investment | Fee | Other | and | ||||||
(In thousands) | Income | Income | Income | Administrative | Total | |||||
Specialty Health | $ | (51) | $ | 20,291 | $ | (36) | $ | 38,125 | $ | (17,921) |
Corporate | 481 | - | 1,696 | 14,903 | (12,726) | |||||
Sub total | $ | 430 | $ | 20,291 | $ | 1,660 | $ | 53,028 | (30,647) | |
Net investment gains | 105 | |||||||||
Loss from continuing operations before income taxes | (30,542) | |||||||||
Income tax benefit | (7,026) | |||||||||
Loss from continuing operations, net of tax | $ | (23,516) | ||||||||
Selling, | ||||||||||
Net | General | |||||||||
September 30, 2020 | Investment | Fee | Other | and | ||||||
(In thousands) | Income | Income | Income | Administrative | Total | |||||
Specialty Health | $ | (64) | $ | 18,465 | $ | 787 | $ | 35,767 | $ | (16,579) |
Corporate | 980 | - | 952 | 7,454 | (5,522) | |||||
Sub total | $ | 916 | $ | 18,465 | $ | 1,739 | $ | 43,221 | (22,101) | |
Net investment gains | 122 | |||||||||
Loss from continuing operations before income taxes | (21,979) | |||||||||
Income tax benefit | (5,617) | |||||||||
Loss from continuing operations, net of tax | $ | (16,362) | ||||||||
Net Investment Income
The overall annualized investment yields were 0.8% and 1.5% in the first nine months of 2021 and 2020, respectively.
Net Investment Gains
Net investment gains include the gains and losses from sales of fixed maturities available-for-sale, equity securities and other investments. Decisions to sell securities are based on management's ongoing evaluation of investment opportunities and economic and market conditions, thus creating fluctuations in gains and losses from period to period.
Fee Income
Fee income increased $1.8 million for the nine-month period ended September 30, 2021 compared to the nine-month period ended September 30, 2020. The increase is primarily due to an increase in lead generation fees, partially offset by a decrease in administrative fee income as a result of the sale, in June 2020, of 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 2021 primarily relates to income from the sale of an investment asset partially offset by equity losses from equity method investments; and, in 2020, other income includes a gain recorded in connection with the step-acquisition of Torchlight and a gain on the sale of a wholly owned agency that administered occupational accident plans.
Selling, General and Administrative Expenses
Total selling, general and administrative expenses increased $9.8 million over the comparable period in 2020. The increase is primarily due to: (i) an$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 $4.4$2.3 million in the Specialty Health line of business primarilysegment due to increases in commissions, administrative fees and other general expenses in the pet line of business from increased premium volume, as well as increased lead generation expenses, compensation and system development related expenses in our marketing and administrative companies, increased costs for pet operations, technology and infrastructure to handle the increased pet volume, partially offset by decreases in commission and administrative expenses related to decreased volume in the fixed indemnity limited benefit and STM lines; (ii) an increase of $1.3 million in the Group disability, life, DBL and PFL segment primarily due to increased commission expenses and other general expenses on PFL due to the increase in premiums, group term life and LTD lines of business on increased premium volume; and (iii) an increase of $.4 million in the Corporate segment primarily due to compensation related expenses.companies.
Income Taxes
The effective tax rate for the threenine months ended March 31,September 30, 2021 was 18.9%is (23.0)% compared to 19.4%(25.6)% for the threenine months ended September 30, 2020. Differences between the Federal statutory income tax rate and the Company’sThe effective income tax rate for 2021 relates to losses from continuing operations and are principallyimpacted by tax benefits from the dividends received deductionexercises of share-based compensation and tax-exempt interest income, state and local income taxes, and compensation related tax provisions. The lowerbenefits on certain subsidiaries. In 2020, the effective income tax rate in 2021 is primarily duerelates to state and local income taxes.losses from continuing operations plus a benefit from capital losses attributable to the sale of a 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. No dividends were declared or paid by the Insurance Group during the threenine months ended March 31,September 30, 2021.The Insurance Group declared and paid dividends of $0 and $5.2 million during the nine months ended September 30, 2021 and 2020, respectively.
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 2020. 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 $24.2$18.5 million and $74.8 million of cash, cash equivalents and restricted cash from continuing and discontinued operations as of March 31,September 30, 2021 and December 31, 2020, respectively.
For the threenine months ended March 31,September 30, 2021, operating activities provided $36.5$41.7 million of cash and investment activities utilized $83.7$90.4 million of cash, primarily the result of the investment of cash and cash equivalents in resale agreements. Financing activities utilized $3.4$7.5 million of cash, of which $3.2$6.4 million was utilized to pay common stock dividends.
The Company had $389.7 million of liabilities for future policy benefits and policy benefits and claims as of March 31,For the nine months ended September 30, 2021, 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 maturitiesoperating and repaymentsinvesting activities of its fixed maturity investments if the timing of claim payments associated with the Company's insurance resources does not coincide with future cash flows. For the three months ended March 31, 2021, cash received from the maturitiesdiscontinued operations were $54.7 million and other repayments of fixed maturities was $18.0 million.$(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 quarternine months of 2021. Depending on the length and severity of the outbreak, it is possible that cash flows may be negatively impacted due to increased claim activity as a result of mandated testing and treatment coverage, as well as delayed policy payments or an increase in cancelled policies due to non- payment in the future.
BALANCE SHEET
TheIn connection with the sale of PetPartners in June 2021, the Company had receivables due from reinsurersreceived proceeds of $357.1$78.3 million which was deposited into an escrow account and a 30% interest in Iguana Capital Corp valued at March 31, 2021 compared to $357.2 million at December 31, 2020. All of such reinsurance receivables are from highly rated companies or are adequately secured. No allowance for doubtful accounts was necessary at March 31, 2021.$33.8 million.
The Company's liability for policy benefits and claims by segment are as follows (in thousands):
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| Policy Benefits and Claims | ||
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| March 31, |
| December 31, |
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| 2021 |
| 2020 |
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Specialty Health | $ | 40,592 | $ | 43,455 |
Group Disability |
| 140,765 |
| 124,402 |
Individual A&H and Other |
| 11,925 |
| 11,375 |
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| $ | 193,282 | $ | 179,232 |
For the Specialty Health business, incurred but not reported (“IBNR”) claims liabilities plus expected development on reported claims are calculated using standard actuarial methods and practices. 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 medical and disability coverage are computed using completion factors and expected Net Loss Ratios derived from actual historical premium and claim data. The reserving analysis includes a review of claim processing statistical measures and large claim early notifications; the potential impacts of any changes in these factors are not material. The Company has business that is serviced by third-party administrators. From time to time, there are changes in the timing of claims processing due to any number of factors including, but not limited to, system conversions and staffing changes during the year. These changes are monitored by the Company and the effects of these changes are taken into consideration during the claim reserving process. Other than these considerations, there have been no significant changes to methodologies and assumptions from the prior year.
While these calculations are based on standard methodologies, they are estimates based on historical patterns. To the extent that actual claim payment patterns differ from historical patterns, such estimated reserves may be redundant or inadequate. The effects of such deviations are evaluated by considering claim backlog statistics and reviewing the reasonableness of projected claim ratios. Other factors which may affect the accuracy of policy benefits and claim estimates include the proportion of large claims which may take longer to adjudicate, changes in billing patterns by providers and changes in claim management practices such as hospital bill audits.
Since our analysis considered a variety of outcomes related to these factors, the Company does not believe that any reasonably likely change in these factors will have a material effect.
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 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 $4.0$94.8 million increase in IHC’s stockholders' equity in the first threenine months of 2021 is primarily due to $5.6$99.5 million of net income attributable to IHC, which includes a $62.2 million after tax gain on the sale of PetPartners; reduced by $1.9$3.2 million of other comprehensive losses attributable to IHC.common stock dividends.
Asset Quality and Investment Impairments |
The nature and quality of insurance company investments must comply with all applicable statutes and regulations, which have been promulgated primarily for the protection of policyholders. The Company has gross unrealized gains of $6.0$0.3 million and gross unrealized losses of $3.1$0.1 million on its fixed maturities available-for-sale securities at March 31,September 30, 2021. More than 99%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 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 did not have any non-performing fixed maturities at March 31,September 30, 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 threenine months ended March 31,September 30, 2021 or 2020.
The following table summarizes the carrying value of2020 and does not have any securities with fair values less than 80% of their amortized cost at March 31, 2021 by the length of time the fair values of those securities were below 80% of their amortized cost (in thousands):September 30, 2021.
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Fixed maturities | $ | - | $ | - | $ | - | $ | 1,174 | $ | 1,174 |
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The unrealized losses on fixed maturities available-for-sale were evaluated in accordance with the Company's impairment policy and were determined to be temporary in nature at March 31,September 30, 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, imbalances in liquidity that exist in the marketplace, a worsening of the current economic recession, or 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 which may cause the Company to incur additional write-downs.
CAPITAL RESOURCES |
Due to its strong capital ratios, broad licensing and excellent asset quality and credit-worthiness, the Insurance Group remains well positioned to increase or 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.
OUTLOOK
For the remainder of 2021, and continuing in 2022, the Company anticipates that it will:
·Endeavor to closeClose on the sale of all of the issued and outstanding capital stock of Standard Security Life to Reliance 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 inby the third quarterend of this year. Under the terms of the SSL Amended Purchase Agreement, Standard Security Life will dividend statutory surplus inreceive the excess of $53statutory capital and surplus, calculated as of the closing date, over $57 million to its parent at closing so earnings prior to closing will be retained by IHC.
·ContinueClose on the sale of all of the issued and outstanding capital stock of IAHC to invest inIguana Capital pursuant to the growth of our pet division,IAHC Purchase Agreement signed on May 17, 2021. We believe this transaction, which is continuingsubject to grow significantly in 2021, in particular from our PetPartners distribution channels. The following are highlights of our pet initiatives:
oPetPartners (through its domain www.akcpetinsurance.com) has expanded its relationship with the American Kennel Club (“AKC”) through extension of their multi-year exclusive license and a multi-year marketing agreement with respect to media outlets ownedvarious regulatory approvals, will close by the AKC. This relationship provides PetPartners with unique access to AKC breeders, registrants and consumersend of various AKC media channels, with a particular focus on educating new pet registrants as to the need for pet insurance.
oPet insurance has now become a highly requested employee benefit. Independence American Insurance Company has begun filing what will be an industry-first employer group pet insurance product, sold through the worksite on a payroll deduction basis. We currently have agreements in place, or are negotiating, with several insurers interested in co-branding the new Independence American Insurance Company group pet product for sales to existing groups and through proven affinity distribution relationships. In order to prepare for this potentially material growth, we are making significant investments in pet operations, technology and infrastructure to handle the expected volume, including enhancing automation of claims and customer self-services.
oIndependence American Insurance Company will continue to generate earned premium income from MetLife, FIGO and Pets Best Insurance Services, LLC, with FIGO being a source of significant new business
oWe will also accelerate the generation of non-risk revenue through the pet division’s newest brand asset, TailTrax, an all-inclusive subscription-based app with Tele-Vet and other high-touch engagement features. This app will be available without charge to policyholders. In addition, we will begin in 2021 to generate advertising and lead revenues from Petplace.com, which is one of the leading sites for veterinarian-curated pet information with one million visitors per month.year.
·Increasingly emphasize sales by IHC Agencies of policies underwritten by non-affiliated carriers, including small group stop-loss, ACA plans and Medicare Advantage and Medicare Supplement plans; for which, they will receive commissions and fees for selling these products and will not bear anyClose on the sale of the insurance risk. When they sell productsstock 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 2021. The consummation of these transactions shall be the entire focus of the Company for these other carriers,the remainder of 2021. After all the transactions are consummated, the Company will have the IHC Agencies will record revenue based on estimated constrained LTV representing the expected commissions to be received over the lifetimeAgency operations, hold a substantial amount of the policies sold.cash and investments, net of liabilities, and an equity interest in Iguana Capital. As these products generally renew for multiple years,a result of additional investments being made by Iguana Capital, and the IHC Agencies do not have any future performance obligations with regardsapproval by IHC’s Board of Directors to contribute an additional $3.2 million to Iguana Capital in the renewal process, theyfourth quarter 2021, the Company expects that is equity interest in Iguana Capital will record revenue at the time of sale based on our expected policy duration. Therefore, duebe diluted to the change in focus to sales of unaffiliated carrier products, we expect to continue to experience an increase in commission revenues on sales from unaffiliated carriers inapproximately 18% by December 31, 2021.
o·GrowImprove the numberprofitability and better integrate all of agents using our wholly ownedagencies. IHC has experienced many changes in its agency model in 2021 as a result of a changing market and due to the decision 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 future. IHC has re-evaluated and made significant changes to the direction of the Company. As we progress, our agency operations will be centered around INSXcloud.com (INSX), our CMS approved Web Broker,Broker. INSX Cloud,provides an agent with the ability to do individual ACA enrollments. When agents utilize the INSX Cloud for enrollments we earn fee incomequote, directly enroll and commission. Additionally, we have specialty health planstrack applications on the site thatFederally Facilitated Marketplace, plus much more. Specifically, brokers can
be enrolled atquickly generate quotes, create PDF’s of plan comparisons, enroll customers in plans, and invite customers to enroll themselves – all through an easy-to-use cloud-based web portal. IHC is expanding INSX to directly serve the same timeconsumer and partner market, as well as expanding product offerings on the ACA plans which earn underwriting profit for IHC carriers and in certain instances a commission override for the agency.platform.
o·Continue 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 well positioned for changes torefocusing a portion of our over 65 division into the healthcareunder 65 market brought by the Biden Administration. Through the passage of the American Recovery Plan Act (“ARP”) the administration has increased the availability of Advance Premium Tax Credits (a.k.a. subsidies) to more Americans and by lowering the cost paid by many consumers by increasing subsidy amounts. The expectation is that the Biden Administration will continue to be more favorable to the individual ACA market and is expected to encourage more issuers to enter the market. Our agencies, including INSXCloud, will be ablein order to take advantage of the expectedpositioning of INSX, IHCSB, our lead generation capabilities, and the market growth in this market. The agencies are contracted with many ACA carriers and can quickly scale to add additional issuers. INSXCloud should see increased revenue as more agents engage inresulting from the ACA market. We also are investing in a platform designed to administer Individual Coverage Health Reimbursement Arrangements (“ICHRAs”), a funding mechanism that allows employers to pay for their employee’s individual ACA plans with pre-tax dollars.American Rescue Plan Act.
·Invest both our capital and efforts in continuing to develop a fully integrated direct-to-consumer division, which will generate leads, fully service consumers on-line via automated sales platforms, service consumers both by phone and in-person with licensed agents providing products underwritten by IHC’s carriers as well as other nationally recognized insurers, and manage the consumer relationship and journey via retention and customer service teams and technology.
·Expand in-house capabilities for proprietary lead generation and direct to consumer growth. We have rapidly expanded our portfolio of consumer touchpoints across all of our distribution channels, including web domains (www.healthinsurance.org, www.medicareresources.org, www.healthedeals.com, www.marigoldmedicare.com, www.petplace.com, www.petpartners.com, www.akcpetinsurance.com, and www.mypetinsurance.com), call centers, field agents, and social media. This should improve our cost of sale by: (i) harnessing an in-house marketing team to drive media efficiency and effectiveness, (ii) deploying data science and artificial intelligence to improve lead quality and intent; and (iii) leveraging a proprietary lead marketplace to salvage unused leads and recoup costs.
•Continue to build on the knowledge and experience we’ve gained in the very large market for senior products by selling Medicare products underwritten by leading national insurance companies. (United Healthcare, Aetna, Humana, Anthem and others). We have invested a considerable amount of capital entering this market, and with an estimated 10,000 people aging into Medicare every day, there is a significant opportunity to build a formidable footprint in this space. We continue to build our MarTech infrastructure by developing new brands, acquiring and developing vast data assets, via automated remarketing efforts, and with advanced data analytics, all intended to allow us to generate a significant volume of high-intent consumer leads. This strategy is able to be scaled for other opportunities beyond Medicare including the Under 65 market which is growing due to the impact of the ARP.
·Work with our public sector distribution partner to bring worksite solutions to our current employer paid footprint.
·Accomplish increases in life and disability premium by developing additional strategic functional and distribution partnerships, broaden worksite portfolio, and enhance Business to Business and Business to Consumer website functionality.
·Continue to evaluate strategic transactions. We plan to deploy some of our cash to make additional investments and acquisitions that will 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
·Continue 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 material impact to our business, results of operations or financial condition in 2021. During the COVID-19
pandemic, we have fully transitioned our existing sales teams to work from home. Our customer facing agents have transitioned to a full-time work at home model, and although we have implemented enhanced technology solutions, sales may be impacted as COVID-19 continues to develop.
Subject to making additional repurchases acquisitionsof IHC common stock, dividends to shareholders and various investments, the Company will remainmaintain a highly liquid as a result of the continuing shorter duration of the investmentand high quality portfolio. The short 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.
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 focuseddevelop 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 in the event medical trend levels cause margin pressures. Factors affecting these items, as well as unemployment and global financial markets, may have a material adverse effect on our results of operations and financial condition.directors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for smaller reporting companies.
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. Based upon that evaluation, IHC’S CEO and CFO concluded that IHC’s disclosure controls and procedures were effective.
Management, including the CEO and CFO, identified no change in our internal control over financial reporting that occurred during our fiscal quarter ended March 31,September 30, 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”) commenced 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.) as defendants (“Defendants”). The Plaintiff seeks contractual payments allegedly owed by the Defendants 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 court 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 Madison National Life in the amount of $5,641,000, which the Plaintiff has satisfied. The Company received payment on September 9, 2020 and recorded it2020. The resultant income is included in other income onfrom discontinued operations in the Condensed Consolidated StatementStatements of Income infor the third quarter ofthree 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 a motion for leave to file a Second Amended Complaint. The Defendants have not yet been requiredfiled a Motion to respond toDismiss Plaintiff’s Second Amended Complaint. This motion is fully briefed and we are awaiting the pending complaint in the Texas Action following the lifting of the stay. When they are required to answer or otherwise respond to the complaint, the Defendants will assert a variety of defenses, set-offs and counterclaims.Court’s decision.
Multistate Market Conduct Examination
As previously disclosed, our subsidiaries Standard Security Life, Madison National Life and Independence American Insurance Company were selected for MCE related to our 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 MCE. Each of Standard 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 RSAs. 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 in October 2020. The corresponding expense is included in income from discontinued operations in the Condensed Consolidated Statements of Income for the nine months ended September 30, 2020. As set forth in the RSAs, theStandard Security Life, Madison National Life and Independence American Insurance Company deniesdeny any wrongdoing or violation of any applicable laws or regulations, and the entry into the RSAs is not an admission or acknowledgment by the Company 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.
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, 2020 in Item 1A to Part 1 of Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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. As of March 31,September 30, 2021, 1,535,3931,526,393 shares were still authorized to be repurchased.
Share repurchases during the firstthird quarter of 2021 are summarized as follows:
2021 | 2021 | 2021 | ||||||||||
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Repurchase |
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| Repurchased |
| Repurchased |
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| Repurchased |
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January | 2,055 | $ | 38.93 | 1,536,936 | ||||||||
February | 1,227 | $ | 38.79 | 1,535,709 | ||||||||
March | 316 | $ | 38.90 | 1,535,393 | ||||||||
July | - | $ | - | 1,535,393 | ||||||||
August | 9,000 | $ | 42.38 | 1,526,393 | ||||||||
September | - | $ | - | 1,526,393 | ||||||||
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
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 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; 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; Amendment No. 3 filed as Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on January 7, 2009 and incorporated herein by reference.)
10.7 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).
10.8 Officer Employment Agreement, made as of May 25, 2011, by and among Independence Holding Company, Standard Security Life and Mr. Gary J. 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.
** 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:May 7,November 9, 2021
Roy T.K. Thung
Chief Executive Officer, and Chairman
of the Board of Directors
By:/s/Teresa A. HerbertColleen P. Maggi Date:May 7,November 9, 2021
Teresa A. HerbertColleen P. Maggi
SeniorCorporate Vice President and
Chief Financial Officer
4347