Edgar Filing: INDEPENDENCE HOLDING CO

INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

__________________________________________

FORM 10-Q

[X]

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

For the quarterly period ended June 30, 2006

[ ]

Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period from: ________ to _________

Commission File Number: 0-10306

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, CONNECTICUT 06902

(Address of principal executive offices) (Zip Code)

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

NOT APPLICABLE

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer [ ] Accelerated Filer [ X ] Non-Accelerated Filer [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]


Class	Outstanding at August 9, 2006
Common stock, $ 1.00 par value	15,020,224 Shares

INDEPENDENCE HOLDING COMPANY

INDEX


PART I – FINANCIAL INFORMATION				PAGE
					NO.

		Item 1. Financial Statements

			Consolidated Balance Sheets -
			June 30, 2006 (unaudited) and December 31, 2005	3

			Consolidated Statements of Operations -
			Three Months and Six Months Ended June 30, 2006 and 2005 (unaudited)	4

			Consolidated Statements of Cash Flows -
			Six Months Ended June 30, 2006 and 2005 (unaudited)	5

			Notes to Consolidated Financial Statements (unaudited)	6

		Item 2. Management's Discussion and Analysis of Financial Condition		15
			and Results of Operations

		Item 3. Quantitative and Qualitative Disclosures about Market Risk		27

		Item 4. Controls and Procedures		28

PART II - OTHER INFORMATION

		Item 1. Legal Proceedings		28

		Item 1A. Risk Factors		28

		Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		28

		Item 3. Defaults Upon Senior Securities		29

		Item 4. Submission of Matters to a Vote of Security Holders		29

		Item 5. Other Information		29

		Item 6. Exhibits		30

	Signatures			30

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

PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements

INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)


						June 30,		December 31,
						2006		2005
						(unaudited)
ASSETS:
	Investments:
		Short-term investments			$	641	$	8,810
		Securities purchased under agreements to resell				24,454		44,399
		Fixed maturities				664,315		683,008
		Equity securities				65,943		62,300
		Other investments				55,829		57,287

			Total investments			811,182		855,804

	Cash and cash equivalents					15,007		12,659
	Due from securities brokers					469		1,951
	Investment in American Independence Corp. ("AMIC")					38,865		39,167
	Deferred acquisition costs					62,833		62,000
	Due and unpaid premiums					11,732		12,230
	Due from reinsurers					105,507		111,135
	Notes and other receivables					12,334		12,102
	Goodwill					45,958		16,110
	Other assets					42,497		27,765

		Total assets			$	1,146,384	$	1,150,923

LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
	Insurance reserves-health				$	160,389	$	159,600
	Insurance reserves-life and annuity					269,721		273,449
	Funds on deposit					376,820		370,701
	Unearned premiums					20,373		18,524
	Policy claims-life					7,562		8,742
	Policy claims-health					6,382		4,839
	Other policyholders' funds					18,652		18,350
	Due to securities brokers					867		4,856
	Due to reinsurers					8,964		11,667
	Accounts payable, accruals and other liabilities					18,672		30,798
	Debt					12,500		12,500
	Junior subordinated debt securities					38,146		38,146

		Total liabilities				939,048		952,172

STOCKHOLDERS' EQUITY:
	Preferred stock (none issued)					-		-
	Common stock $1.00 par value, 20,000,000 shares authorized;
			15,082,309 and 14,235,066 shares issued, respectively;
			15,019,298 and 14,132,149 shares outstanding, respectively			15,082		14,235
	Paid-in capital					94,639		78,554
	Accumulated other comprehensive loss					(23,323)		(8,414)
	Treasury stock, at cost; 63,011 and 102,917 shares,
				respectively		(1,117)		(1,829)
	Retained earnings					122,055		116,205

		Total stockholders' equity				207,336		198,751

				Total liabilities and stockholders' equity	$	1,146,384	$	1,150,923

The accompanying notes are an integral part of these consolidated financial statements.

INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)


				Three Months Ended						Six Months Ended
				June 30,						June 30,
					2006			2005						2006			2005
REVENUES:
	Premiums earned:
		Health		$	60,411		$	46,490		$				115,784	$			86,198
		Life and annuity		10,879			9,291			21,794					19,011
	Net investment income			11,402			9,037			23,333					18,536
	Fee income			7,702			1,872			15,113					4,329
	Net realized and unrealized gains			50			836			467					1,084
	Equity income from AMIC			183			509			359					986
	Other income			842			947			1,459					4,511
					91,469			68,982					178,309			134,655

EXPENSES:
	Insurance benefits, claims and reserves:
		Health		39,794			25,567			77,090					51,324
		Life and annuity		12,827			10,220			25,711					21,124
	Selling, general and administrative
		expenses		31,665			21,028			58,814					37,536
	Amortization of deferred acquisition
		costs		2,671			2,673			5,189					5,324
	Interest expense on debt				928			865			1,831					1,710
					87,885			60,353			168,635					117,018

	Income before income taxes			3,584			8,629			9,674					17,637
	Income tax expense				1,218			2,763				3,279				6,019

			Net income	$	2,366		$	5,866		$		6,395			$	11,618

Basic income per common share				$		.16	$		.42	$	.44				$	.83

Weighted average shares outstanding					14,862			13,916				14,679				13,962

Diluted income per common share				$	.16		$	.41		$		.43			$	.82

Weighted average diluted shares
	outstanding				15,178			14,200				15,003				14,255

The accompanying notes are an integral part of these consolidated financial statements.

INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


						Six Months Ended
						June 30,
						2006		2005
CASH FLOWS PROVIDED BY (USED BY) OPERATING ACTIVITIES:
	Net income				$	6,395	$	11,618
	Adjustments to reconcile net income to net change in cash from
			operating activities:
			Amortization of deferred acquisition costs			5,189		5,324
			Net realized and unrealized gains			(467)		(1,084)
			Equity income from AMIC and other equity method investments			(768)		(2,025)
			Depreciation and amortization			1,218		764
			Share-based compensation expenses			708		-
			Deferred tax expense			706		4,015
			Other			647		410
Changes in assets and liabilities:
			Net sales of trading securities			334		329
			Change in insurance liabilities			(1,879)		(5,899)
			Additions to deferred acquisition costs			(1,437)		(11,085)
			Change in net amounts due from and to reinsurers			2,925		10,210
			Change in income tax liability			(1,711)		(502)
			Change in due and unpaid premiums			499		(1,205)
			Other			(11,092)		(6,900)

				Net change in cash from operating activities		1,267		3,970

CASH FLOWS PROVIDED BY (USED BY) INVESTING ACTIVITIES:
			Change in net amount due from and to securities brokers			(2,508)		(12,338)
			Net proceeds of short-term investments			8,178		6,718
			Net sales of securities under resale and repurchase agreements			19,945		81,107
			Sales of equity securities			33,852		4,675
			Purchases of equity securities			(37,547)		(40,993)
			Sales of fixed maturities			116,860		425,229
			Maturities of fixed maturities			-		615
			Purchases of fixed maturities			(125,133)		(557,405)
			Sales of other investments			3,602		5,447
			Additional investments in other investments, net of distributions			(2,151)		(1,274)
			Cash paid in acquisitions of companies, net of cash acquired			(20,950)		(10,200)
			Investment in AMIC			-		(2,215)
			Cash (paid) received in purchases of policy blocks			(224)		89,283
			Change in notes and other receivables			(3,658)		(1,816)
			Other			(1,683)		(1,549)

				Net change in cash from investing activities		(11,417)		(14,716)

CASH FLOWS PROVIDED BY (USED BY) FINANCING ACTIVITIES:
		Proceeds from issuance of common stock				2,500		-
		Repurchases of common stock				(60)		(4,744)
		Exercises of common stock options				1,782		350
		Excess tax benefits from exercise of stock options				1,109		-
		Proceeds of investment-type insurance contracts				7,520		12,590
		Dividends paid				(353)		(353)

				Net change in cash from financing activities		12,498		7,843

Net change in cash and cash equivalents						2,348		(2,903)
Cash and cash equivalents, beginning of year						12,659		13,196

Cash and cash equivalents, end of period					$	15,007	$	10,293

The accompanying notes are an integral part of these consolidated financial statements.

INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Note 1.

Significant Accounting Policies and Practices

(A)

Business and Organization

Independence Holding Company, a Delaware corporation (NYSE: IHC), is a holding company principally engaged in the life and health insurance business through: (i) its wholly-owned insurance companies, Standard Security Life Insurance Company of New York ("Standard Security Life") and Madison National Life Insurance Company, Inc. ("Madison National Life"); and (ii) its marketing and administrative companies, including Insurers Administrative Corporation (“IAC”), managing general underwriter (“MGU”) affiliates, Health Plan Administrators (“HPA”), GroupLink Inc. (“GroupLink”) and Community America Insurance Services Inc. (“CAIS”, formerly CA Insurance Services LLC). These companies are sometimes collectively referred to as the "Insurance Group," and IHC and its subsidiaries (including the Insurance Group) are sometimes collectively referred to as the "Company." The Company also owns a 48% equity interest in American Independence Corp. (NASDAQ:AMIC), which owns Independence American Insurance Company (“Independence American”) and several MGU’s.

Geneve Corporation, a diversified financial holding company, and its affiliated entities held approximately 54% of IHC's outstanding common stock at June 30, 2006.

(B)

Basis of Presentation

The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles and 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. generally accepted accounting principles requires management to make estimates and assumptions that affect: (i) the reported amounts of assets and liabilities; (ii) the disclosure of contingent assets and liabilities at the date of the financial statements; and (iii) 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 consolidated financial statements.

In the opinion of management, all adjustments (consisting only of normal recurring accruals) that are necessary for a fair presentation of the consolidated financial position and results of operations for the interim periods have been included. The consolidated results of operations for the three months and six months ended June 30, 2006 are not necessarily indicative of the results to be anticipated for the entire year.

(C)

Reclassifications

Certain amounts in prior years' Consolidated Financial Statements and notes thereto have been reclassified to conform to the 2006 presentation.

(D)

Share-Based Compensation

Effective January 1, 2006, under the modified prospective method, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 123R, "Share-Based Payment" ("SFAS 123R"), which revises SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS

123”) and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” and its related interpretations (“APB 25”). SFAS 123R applies to all awards granted after its effective date and to modifications, repurchases or cancellations of existing awards after that date. Results for prior periods have not been restated. Additionally, under the modified prospective method of adoption, the Company recognizes compensation expense for the portion of outstanding awards on the adoption date for which the requisite service period has not yet been rendered based on the grant-date fair value of those awards calculated under SFAS 123 for purposes of pro forma disclosures.

For the three month and six month periods ended June 30, 2006, total share-based compensation expense was $372,000 and $708,000, respectively, including $287,000 and $575,000, respectively, of incremental share-based compensation expense resulting from the adoption of SFAS 123R. This incremental expense resulted in decreases of $173,000 and $346,000, respectively, to net income, after income tax benefits of $114,000 and $229,000, respectively, for the three months and six months ended June 30, 2006.

Prior to the adoption of SFAS 123R, the Company accounted for its share-based awards under APB 25. The following table details the effect on net income and earnings per share had compensation expense for employee share-based awards been recorded in the three month and six month periods ended June 30, 2005 based on the fair value method under SFAS 123 (in thousands, except per share data):


			Three Months	Six Months
			Ended	Ended
			June 30, 2005	June 30, 2005

Net income, as reported		$	5,866	$	11,618
Add stock-based employee compensation expense included
	in reported net income, net of related tax effects		-	-
Deduct total stock-based compensation expense determined
	under fair value based method for all awards, net of
	related tax effects	$	(165)	$	(340)
Proforma net income		$	5,701	$	11,278

Basic earnings per share:
	As reported	$	.42	$	.83
	Proforma	$	.41	$	.81

Diluted earnings per share:
	As reported	$	.41	$	.82
	Proforma	$	.40	$	.79

Under the terms of the Company’s stock-based compensation plans, option exercise prices are equal to the quoted market price of the shares at the date of grant; option terms range from five to ten years; and vesting periods are three years for employee options. The Company may also grant shares of restricted stock. These shares are valued at the quoted market price of the shares at the date of grant, and have a three year vesting period. There were 1,129,814 shares available for future option or restricted-stock grants under the shareholder-approved plans at June 30, 2006. Substantially all of these available shares relate to the Company’s 2006 Stock Incentive Plan that was approved by shareholders in June 2006.

The total intrinsic value of options exercised during the three month periods ended June 30, 2006 and 2005 was $3,767,000 and $511,000, respectively. The total intrinsic value of options exercised during

the six months ended June 30, 2006 and 2005 was $4,071,000 and $684,000, respectively. Cash proceeds received from options exercised for the three months ended June 30, 2006 and 2005 were $1,705,000 and $258,000, respectively. Cash proceeds received from options exercised for the six months ended June 30, 2006 and 2005 were $1,782,000 and $350,000, respectively.

The Company’s stock option activity for the six months ended June 30, 2006 is as follows:


	Shares	Weighted-Average
	Under Option	Exercise Price

December 31, 2005	1,108,371	$	11.89
Granted	230,000	21.58
Exercised	(269,500)	6.61
Expired	(1,800)		20.89
June 30, 2006	1,067,071	$	15.30

The following table summarizes information regarding outstanding and exercisable options as of June 30, 2006:


		Outstanding		Exercisable

Number of options		1,067,071		724,871
Weighted average exercise price per share	$	15.30	$	12.56
Aggregate intrinsic value for all options	$	7,587,000	$	7,140,000
Weighted average contractual term remaining		2.6 years		1.8 years

The fair value of each option award is estimated on the date of grant using the Black Scholes option valuation model. The weighted average grant-date fair-value of options granted during the six months ended June 30, 2006 was $7.25. No stock options were granted during the six months ended June 30, 2005. The Company issued 49,325 and 2,250 restricted stock awards during the six month periods ended June 30, 2006 and 2005, respectively, with weighted-average grant-date fair values of $22.20 and $17.82 per share, respectively. The assumptions set forth in the table below were used to value the stock options granted during the six month period ended June 30, 2006.


Weighted-average risk-free interest rate		4.9%
Annual dividend rate per share	$	.05
Weighted-average volatility factor of the Company's common stock		32.1%
Weighted-average expected term of options		4.5 years

As of June 30, 2006, there was $2,125,000 and $995,000 of total unrecognized compensation expense related to non-vested options and non-vested restricted stock awards, respectively, which will be recognized over the remaining requisite weighted-average service periods of 1.8 years and 2.7 years, respectively.

Prior to the adoption of SFAS 123R, the Company presented the tax benefit resulting from the exercise of stock options and restricted stock awards as operating cash flows in the Consolidated Statements of Cash Flows. SFAS 123R requires such benefits to be reported as a financing cash flow, rather than as an operating cash flow. In the six month period ended June 30, 2006, excess tax benefits of $1,109,000 were classified as financing cash inflows. In the six month period ended June 30, 2005, excess tax benefits of $190,000 were classified as operating cash inflows.

Note 2.

American Independence Corp.

AMIC is an insurance holding company engaged in the insurance and reinsurance business as a result of its acquisition of First Standard Holdings Corp. ("FSHC") from the Company in November 2002. AMIC does business with the Insurance Group, including reinsurance treaties under which, in 2005, Standard Security Life and Madison National Life ceded to Independence American an average of 22% of their medical stop-loss business, 10% of their fully-insured health business and 20% of their New York Statutory Disability business. IHC owned 48% of AMIC's outstanding common stock at June 30, 2006 and December 31, 2005, which was purchased in various transactions beginning in 2002. IHC accounts for its investment in AMIC under the equity method. At June 30, 2006 and December 31, 2005, IHC's investment in AMIC had a total carrying value of $43,335,000 and $43,637,000, respectively, including goodwill of $4,470,000 at both dates. At June 30, 2006 and December 31, 2005, based on the closing market price of AMIC's common stock, the fair value of the AMIC shares owned by IHC was approximately $49,918,000 and $46,668,000, respectively.

For the three months and six months ended June 30, 2006, IHC recorded $183,000 and $359,000, respectively, of equity income from its investment in AMIC, representing IHC's proportionate share of income based on its ownership interests during those periods. IHC's equity income for the three months and six months ended June 30, 2005 was $509,000 and $986,000, respectively. AMIC paid no dividends on its common stock in the three month and six month periods ended June 30, 2006 and 2005.

IHC and its subsidiaries earned $117,000 and $138,000 for the three months ended June 30, 2006 and 2005, respectively, and $256,000 and $306,000 for the six months ended June 30, 2006 and 2005, respectively, from service agreements with AMIC and its subsidiaries. These are reimbursements to IHC and its subsidiaries, at agreed upon rates including an overhead factor, for management services provided by IHC and its subsidiaries, including accounting, legal, compliance, underwriting and claims. The Company also contracts for several types of insurance (e.g. directors and officers and professional liability) jointly with AMIC. The cost of this coverage is allocated between the Company and AMIC according to the type of risk, and IHC’s portion is recorded in Selling, General and Administrative Expenses. The Company ceded premiums to AMIC of $13,574,000 and $14,108,000 for the three months ended June 30, 2006 and 2005, respectively, and $27,248,000 and $27,123,000 for the six months ended June 30, 2006 and 2005, respectively.

Included in the Company’s Consolidated Balance Sheets at June 30, 2006 and December 31, 2005, respectively, are the following balances arising from transactions in the normal course of business with AMIC and its subsidiaries: Due from reinsurers $13,261,000 and $14,122,000; Other assets $10,127,000 and $10,565,000; and Other liabilities $630,000 and $249,000.

Note 3.

Income Per Common Share

Included in the diluted income per share calculations are 316,000 and 284,000 shares for the three months ended June 30, 2006 and 2005, respectively, and 324,000 and 293,000 shares for the six months ended June 30, 2006 and 2005, respectively, from the assumed exercise of options and vesting of restricted stock, using the treasury stock method. Net income does not change as a result of the assumed dilution.

Note 4.

Acquisitions

The Company completed the following acquisitions in the first quarter of 2006. The results of operations of the acquired companies are included in IHC's Consolidated Financial Statements from the respective acquisition dates. None of the goodwill recognized in these acquisitions is deductible for

income tax purposes. Pro forma results of operations for the six months ended June 30, 2006 and for the three months and six months ended June 30, 2005, as though these acquisitions had been completed at the beginning of those periods, have not been presented since the effect of the acquisitions was not material.

IAC Acquisition

In January 2006, the Company entered into a stock purchase agreement to purchase all of the voting and non-voting shares of the common stock of Insurers Administrative Corporation ("IAC") and Interlock Corporation for a total purchase price of $21,360,000 in cash and 446,663 shares of IHC common stock, which were issued at a value of $21.54 per share or $9,622,000. The Company recorded goodwill of $25,562,000 and other intangible assets consisting of $7,000,000 for the value of agent relationships and $1,800,000 for the value of computer software. The relationship intangible and the capitalized software are being amortized over periods of 13 years and 8.7 years, respectively (a weighted-average period of 12.1 years). Prior to entering into this agreement, IAC owned the minority interest in Strategic Health Associates (“SHA”) and administered IHC’s block of fully-insured group health insurance. As a consequence of IHC’s acquisition of the minority interest in SHA through the IAC purchase, IHC owns 100% of SHA and therefore recognized additional goodwill and other intangibles, and eliminated the minority interest previously reported.

IAC, which is based in Phoenix, Arizona, is a leading administrator, manager and distributor of Consumer Driven Health Plans (“CDHPs”). It currently administers approximately $270 million of individual and group health and life premiums and premium-equivalents. Of this business, approximately 30% is currently insured by Standard Security Life and Madison National Life. IAC, in combination with IHC’s other fully-insured subsidiaries (HPA and GroupLink) administers, manages and distributes a full range of health products, including CDHPs, short-term medical, limited medical, dental and vision.

IHC issued a stock put on 194,443 of the IHC shares issued in the acquisition which vests on January 31, 2007 at a price of $17.00 per share and expires on January 31, 2008. The put was recorded at a fair value of $228,000 at the acquisition date. For the three months and six months ended June 30, 2006, IHC recorded unrealized gains of $20,000 and $79,000, respectively, in the Consolidated Statements of Operations, representing the net change in fair value of the put.

CAIS Acquisition

On March 1, 2006, IHC acquired the remaining 55% membership interest in CA Insurance Services, LLC (“CAIS”) by merging CAIS into Community America Insurance Services, Inc., a newly created and wholly-owned direct subsidiary of IHC. The 55% interest was acquired for 46,250 shares of IHC common stock, which were issued at a value of $22.87 per share or $1,058,000. The Company recorded goodwill of $1,163,000 and other intangible assets of $370,000 for the value of agent relationships in connection with the acquisition. The other intangible assets are being amortized over a period of nine years.

On March 31, 2006, CAIS acquired a marketing organization, including key management and health insurance sales staff, which controls a block of approximately $50 million of fully-insured group major medical business (including CDHPs) for $750,000, which is recorded as an intangible asset. This acquired block of group major medical business began to be transitioned to Madison National Life effective August 1, 2006.

Goodwill and Other Intangible Assets

At June 30, 2006 and December 31, 2005, the Company had goodwill of $45,958,000 and $16,110,000, respectively, and other intangible assets (included in Other assets in the Consolidated Balance Sheets) of $13,541,000 and $3,838,000, respectively. The change in the carrying amount of goodwill and other intangible assets for the first six months of 2006 is as follows (in thousands):


				Other Intangible
		Goodwill		Assets

Balance at December 31, 2005	$	16,110	$	3,838
IAC acquisition		25,562		8,800
SHA minority interest		1,840		644
CAIS acquisition and other additions		2,446		1,120
Amortization expense		-		(861)
Balance at June 30, 2006	$	45,958	$	13,541

Note 5.

New Accounting Pronouncement

In June 2006, the Financial Accounting Standards Board (the "FASB") issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109 ("Interpretation 48"), which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Interpretation 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Interpretation 48 is effective for fiscal years beginning after December 15, 2006. The Company has not yet determined the impact that FIN 48 will have on its consolidated financial statements.

Note 6.

Investments

The following tables summarize, for all securities in an unrealized loss position at June 30, 2006 and December 31, 2005, respectively, the aggregate fair value and gross unrealized loss by length of time those securities had continuously been in an unrealized loss position:


				Less than 12 Months				12 Months or Longer				Total

				Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
June 30, 2006				Value		Losses		Value		Losses		Value		Losses
				(In thousands)

Corporate securities			$	248,520	$	20,599	$	78,984	$	6,681	$	327,504	$		27,280
CMOs and ABS ⁽¹⁾				60,376		2,841		51,992		2,579		112,368	5,420
U.S. Government and
		Agencies		18,601		955		40,437		3,067		59,038	4,022
Agency MBS ⁽²⁾				14,350		759		6,418		339		20,768	1,098
GSE ⁽³⁾				29,648		2,027		19,245		1,182		48,893			3,209
States and political
		Subdivisions		46,064		2,079		11,170		504		57,234			2,583
Total fixed
	Maturities			417,559		29,260		208,246		14,352		625,805	43,612
Common stock				1,817		202		21		6		1,838	208
Preferred stock				15,837		429		3,814		349		19,651			778
Total temporarily
	impaired securities		$	435,213	$	29,891	$	212,081	$	14,707	$	647,294	$		44,598


				Less than 12 Months				12 Months or Longer				Total

				Fair		Unrealized		Fair		Unrealized		Fair	Unrealized
December 31, 2005				Value		Losses		Value		Losses		Value	Losses
				(In thousands)

Corporate securities			$	232,488	$	8,085	$	45,608	$	3,159	$	278,096	$	11,244
CMOs and ABS ⁽¹⁾				50,118		984		38,495		1,358		88,613	2,342
U.S. Government and
		Agencies		40,250		842		21,266		798		61,516	1,640
Agency MBS ⁽²⁾				16,534		239		7,761		117		24,295	356
GSE ⁽³⁾				51,655		1,024		14,647		664		66,302		1,688
States and political
		Subdivisions		75,821		888		-		-		75,821		888
Total fixed
	Maturities			466,866		12,062		127,777		6,096		594,643	18,158
Common stock				1,137		76		96		58		1,233	134
Preferred stock				6,979		245		1,445		55		8,424		300
Total temporarily
	impaired securities		$	474,982	$	12,383	$	129,318	$	6,209	$	604,300	$	18,592

(1)

Collateralized mortgage obligations (“CMOs”) and asset-backed securities (“ABS”).

(2)

Mortgage-backed securities (“MBS”).

(3)

Government-sponsored enterprises (“GSEs”) which are the Federal Home Loan Mortgage Corporation, Federal National Mortgage Association and Federal Home Loan Banks. GSEs are private enterprises established and chartered by the Federal Government.

The Company reviews its investment securities regularly and determines whether other than temporary impairments have occurred. If a decline in fair value is judged by management to be other than temporary, a loss is recognized by a charge to the Consolidated Statements of Operations, establishing a new cost basis for the security. The factors considered by management in its regular review include, but are not limited to: the length of time and extent to which the fair value has been less than cost; the financial condition and near-term prospects of the issuer; adverse changes in ratings announced by one or more rating agencies; whether the issuer of a debt security has remained current on principal and interest payments; whether the decline in fair value appears to be issuer specific or, alternatively, a reflection of general market or industry conditions; and the Company's intent and ability to hold the security for a period of time sufficient to allow for a recovery in fair value. For securities within the scope of Emerging Issues Task Force Issue 99-20, such as purchased interest-only securities, an impairment loss is recognized when there has been a decrease in expected cash flows combined with a decline in the security's fair value below cost. Based on management’s consideration of these factors, the unrealized losses at June 30, 2006 and December 31, 2005 were deemed to be temporary impairments in value.

Substantially all of the unrealized losses at June 30, 2006 and December 31, 2005 relate to investment grade securities and are attributable to changes in market interest rates subsequent to purchase. There were no securities with unrealized losses that were individually significant dollar amounts at June 30, 2006 and December 31, 2005. At June 30, 2006 and December 31, 2005, a total of 124 and 121 securities, respectively, were in a continuous unrealized loss position for less than 12 months and 42 and 22 securities, respectively, had continuous unrealized losses for 12 months or longer. For fixed maturities, there are no securities past due or securities for which the Company currently believes it is not probable that it will collect all amounts due according to the contractual terms of the investment.

Note 7.

Income Taxes

The provision for income taxes shown in the Consolidated Statements of Operations was computed based on the Company's estimate of the effective tax rate expected to be applicable for the current tax year.

The deferred income tax benefit for the six months ended June 30, 2006 allocated to stockholders' equity (principally for net unrealized losses on investment securities) was $8,290,000, representing the increase in the related net deferred tax asset to $12,971,000 at June 30, 2006 from $4,681,000 at December 31, 2005.

Note 8.

Supplemental Disclosures of Cash Flow Information

Cash payments for income taxes were $4,195,000 and $2,511,000 for the six months ended June 30, 2006 and 2005, respectively. Cash payments for interest were $1,709,000 and $1,729,000 for the six months ended June 30, 2006 and 2005, respectively. Common stock issued in acquisitions (a non-cash financing activity) amounted to $10,679,000 during the six months ended June 30, 2006. Non-cash assets acquired (other than intangibles) and liabilities assumed in these transactions were not significant.

Note 9.

Comprehensive Income (Loss)

The components of comprehensive income (loss) include (i) net income or loss reported in the Consolidated Statements of Operations, and (ii) certain amounts reported directly in stockholders’ equity, principally the after-tax net unrealized gains and losses on securities available for sale (net of deferred acquisition costs). The comprehensive income (loss) for the three months and six months ended June 30, 2006 and 2005 is summarized as follows:


			Three Months Ended					Six Months Ended
			June 30,					June 30,
			2006		2005			2006		2005
			(In thousands)

Net income		$	2,366	$		5,866	$	6,395	$		11,618
Unrealized (losses) gains arising during
	the period, net of income taxes		(6,581)			8,458		(14,909)			3,101
Comprehensive (loss) income		$	(4,215)	$		14,324	$	(8,514)	$		14,719

Note 10.

Segment Reporting

The Insurance Group principally engages in the life and health insurance business. Certain allocations of items within segments have been reclassified in the 2005 information to reflect how management analyzes these segments currently. Information by business segment for the three months and six months ended June 30, 2006 and 2005 is presented below:


		Three Months Ended					Six Months Ended
		June 30,					June 30,
		2006		2005			2006		2005
		(In thousands)
Revenues:
Medical stop-loss	$	42,038	$	34,031	$	79,127		$	65,459
Fully-insured health		14,646		3,734			28,904		8,081
Group disability, life, annuities and DBL		13,205		12,424			26,318		24,202
Individual life, annuities and other		15,959		12,131			31,352		24,328
Credit life and disability		5,595		5,543			11,057		10,908
Corporate		(24)		283			1,084		593
		91,419		68,146			177,842		133,571
Net realized and unrealized gains		50		836			467		1,084
	$	91,469	$	68,982	$		178,309	$	134,655


Income (loss) before income taxes:
Medical stop-loss	$	2,896	$	6,486	$	6,662	$	16,009
Fully-insured health		(379)		(107)		127		(1,035)
Group disability, life, annuities and DBL		1,204		1,984		1,706		2,379
Individual life, annuities and other		2,563		1,144		4,685		2,079
Credit life and disability		(202)		112		(350)		345
Corporate		(1,620)		(961)		(1,792)		(1,514)
		4,462		8,658		11,038		18,263

Net realized and unrealized gains		50		836		467		1,084
Interest expense		(928)		(865)		(1,831)		(1,710)
	$	3,584	$	8,629	$	9,674	$	17,637

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

AND RESULTS OF OPERATIONS

This Form 10-Q contains forward-looking statements that involve risks and uncertainties. The actual consolidated results of Independence Holding Company. (“IHC”) and Subsidiaries (collectively referred to as the "Company") could differ significantly from those set forth herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "Risk Factors " as set forth in the Company's annual report on Form 10-K for the fiscal year ended December 31, 2005, as filed with the Securities and Exchange Commission, as well as those discussed here in Item 2 and elsewhere in this quarterly report. Statements contained herein that are not historical facts are forward-looking statements that are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. Words such as "believes", "anticipates", "expects", "intends", “estimates”, "likelihood", “unlikelihood”, “assessment”, and “foreseeable” and other similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. A number of important factors could cause the Company's actual results for the year ending December 31, 2006, and beyond to differ materially from past results and those expressed or implied in any forward-looking statements made by the Company, or on its behalf. The Company undertakes no obligation to release publicly the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

The following discussion of the financial condition and results of operations of 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, 2005, as filed with the Securities and Exchange Commission, and our Consolidated Financial Statements and related Notes thereto appearing elsewhere in this quarterly report.

Overview

While management considers a wide range of factors in its strategic planning and decision-making, underwriting profit is consistently emphasized as the primary goal in all decisions as to whether or not to increase our retention in a core line, expand into new products, acquire an entity or a block of business, or otherwise change our business model. Management's assessment of trends in healthcare and morbidity, with respect to medical stop-loss, major medical, STM, dental, vision, disability and DBL; 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 attachment points quoted, and the percentage of business retained. Management has always focused on managing costs of operations, and the Company believes that the acquisition of IAC in January 2006 affords it an opportunity to affect further cost efficiencies.

The following is a summary of key performance information and events:

Net income of $2.4 million and $6.4 million ($.16 and $.43 per share, diluted) for the three months and six months ended June 30, 2006, respectively, as compared to $5.9 million and $11.6 million ($.41 and $.82 per share, diluted), for the three months and six months ended June 30, 2005;

Consolidated investment yields of 5.2% and 5.3% for the three months and six months ended June 30, 2006, respectively, as compared to 4.9% and 5.0%, respectively, in the comparable periods in 2005;

Revenues of $91.5 million and $178.3 million for the three months and six months ended June 30, 2006, respectively, representing increases of 32.6% and 32.4% over the respective three month and six month periods of 2005; primarily due to an increase in revenues from the fully-insured health segment, an increase in net retention of the Company’s direct medical stop-loss line to 51.5% in 2006 from 41.4% in 2005 (“retention” refers to net earned premiums after reinsurance) and the life and annuity acquisition in June 2005;

Book value of $13.80 per common share; a 1.8% decrease from December 31, 2005, reflecting net unrealized losses on securities offset by net income, stock issuances and option exercises;

As of January 31, 2006, acquired IAC, a leading producer and administrator of group and individual major medical insurance (including Consumer Driven Health Plans (CDHPs)) and other life and health policies;

As of March 1, 2006, acquired the remaining 55% of CAIS to further the marketing reach for CDHPs and other products; by March 31, 2006, CAIS acquired a block of $50 million of fully-insured group major medical business, which began to be transitioned to Madison National Life effective August 1, 2006; and

Approved to write a variety of fully-insured medical products in a majority of states.

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

Income before taxes from the Medical Stop-Loss segment decreased $3.6 million for the three months ended June 30, 2006, and $9.3 million for the six months ended June 30, 2006:

The Net Loss Ratio (defined as insurance benefits, claims and reserves divided by (premiums earned less underwriting expenses)) for the Medical Stop-Loss line of business for the three months and six months ended June 30, 2006 was 97.8% and 95.1%, respectively, compared to 89.6% and 88.6% for the three months and six months ended June 30, 2005, respectively;

Included in operating results for the Medical Stop-Loss segment for the first six months of 2005 was $3.5 million of income from a commutation agreement and a loss cover that did not repeat in the first six months of 2006;

Fully-Insured segment reported a loss before taxes of $.4 million and income before taxes of $.1 million for the three months and six months ended June 30, 2006, respectively, as compared to a loss of $.1 million and $1.0 million for the three months and six months ended June 30, 2005, respectively. Although revenues from this segment have increased, and losses have decreased, continuing losses on this line are due to increased expense from the amortization of intangible assets recorded as a result of the recent acquisitions of IAC, HPA, GroupLink, and CAIS, and from higher selling, general, marketing and legal expenses related to the expansion of staff and product filings in anticipation of upcoming growth in this line;

Income before taxes from the Group disability, life, annuities and DBL segment decreased $.8 million for the three months ended June 30, 2006, and $.7 million for the six months ended June 30, 2006, primarily due to higher death and disability claims during the current quarter;

Income before taxes from the Individual life, annuities and other segment increased $1.4 million for the three months ended June 30, 2006, and $2.6 million for the six months ended June 30, 2006, primarily due to acquisitions of policy blocks of life and annuity business at the end of June 2005;

Income before taxes from the Credit life and disability segment decreased $.3 million for the three months ended June 30, 2006, and $.7 million for the six months ended June 30, 2006, primarily due to higher death and disability claims;

Loss before taxes from the Corporate segment increased $.7 million for the three months ended June 30, 2006, and $.3 million for the six months ended June 30, 2006, primarily due to higher legal, auditing and salary expense, as well as share-based compensation expense from the adoption of SFAS 123R on January 1, 2006; and

Investment gains of $50,000 and $467,000 for the three month and six month periods ended June 30, 2006, respectively, as compared to $836,000 and $1,084,000 for the three month and six month periods ended June 30, 2005.

Gross direct and assumed earned premiums for the three month and six month periods ended June 30, 2006 and 2005 are as follows (in thousands):


		Three months ended June 30,				Six months ended June 30,
		2006		2005		2006		2005

Medical Stop-Loss	$	70,993	$	70,257	$	133,293	$	134,551
Fully-Insured Health		17,111		8,043		36,061		15,930
Group Life and Disability		19,543		19,407		40,421		38,736
Credit Life and Disability		5,616		5,504		11,116		10,770
Individual and Other		8,369		7,112		16,404		14,308

	$	121,632	$	110,323	$	237,295	$	214,295

CRITICAL ACCOUNTING POLICIES

The accounting and reporting policies of the Company conform to U.S. generally accepted accounting principles ("GAAP"). The preparation of the Consolidated Financial Statements in conformity with 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, 2005. Management has identified the accounting policies related to Insurance Premium Revenue Recognition and Policy Charges, Insurance Reserves, Deferred Acquisition Costs, and Investments 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, 2005. During the six months ended June 30, 2006, there were no additions to or changes in the critical accounting policies disclosed in the 2005 Form 10-K.

Results of Operations for the Three Months Ended June 30, 2006 Compared to the Three Months Ended June 30, 2005

Net income was $2.4 million or $.16 per share, diluted, for the three months ended June 30, 2006, a decrease of $3.5 million compared to net income of $5.9 million, or $.41 per share, diluted, for the three months ended June 30, 2005. The Company's income before taxes decreased $5.0 million to $3.6 million for the three months ended June 30, 2006 from $8.6 million for the three months ended June 30, 2005. Information by business segment for the three months ended June 30, 2006 and 2005 is as follows:


						Equity				Benefits,		Amortization		Selling,
				Net		Income		Fee and		Claims		of Deferred		General
June 30,		Premiums		Investment		From		Other		and		Acquisition		And
	2006	Earned		Income		AMIC		Income		Reserves		Costs		Administrative		Total
(In thousands)

Medical stop-loss		$	39,987	1,012		183		856		28,469		-		10,673		$	2,896
Fully-Insured		7,502		35		-		7,109		4,231		13		10,781		(379)
Group disability,
	life, annuities
	and DBL	10,810		2,283		-		112		7,772		42		4,187		1,204
Individual life,
	annuities
	and other	7,655		7,856		-		448		9,681		1,405		2,310		2,563
Credit life and
	disability		5,336		232		-		27		2,468		1,211		2,118			(202)
Corporate			-		(16)		-		(8)		-		-		1,596			(1,620)
Sub total		$	71,290		11,402		183		8,544		52,621		2,671		31,665			4,462
Net realized and
	unrealized gains															50
Interest expense																	(928)
Income before
	income taxes															3,584
Income taxes																	(1,218)
Net income																$	2,366


						Equity				Benefits,		Amortization		Selling,
				Net		Income		Fee and		Claims		of Deferred		General
June 30,		Premiums		Investment		From		Other		and		Acquisition		And
	2005	Earned		Income		AMIC		Income		Reserves		Costs		Administrative		Total
(In thousands)

Medical stop-loss		$	31,869	693		509		960		17,758		-		9,787		$			6,486
Fully-Insured		2,216		7		-		1,511		1,330		150		2,361		(107)
Group disability,
	life, annuities
	and DBL	10,136		2,194		-		94		6,436		39		3,965		1,984
Individual life,
	annuities and
	other	6,268		5,681		-		182		7,825		1,344		1,818		1,144
Credit life and
	disability		5,292		229		-		22		2,438		1,140		1,853		112
Corporate			-		233		-		50		-		-		1,244					(961)
Sub total		$	55,781		9,037		509		2,819		35,787		2,673		21,028					8,658
Net realized and
	unrealized gains															836
Interest expense																			(865)
Income before
	income taxes																				8,629
Income taxes																					(2,763)
Net income																		$			5,866

Premiums Earned

Total premiums earned grew $15.5 million to $71.3 million in the second quarter of 2006 from $55.8 million in the comparable period of 2005. The increase is due to: (i) the Medical Stop-Loss segment which increased $8.1 million primarily due to increased retentions; (ii) the Fully-Insured segment which had a $5.3 million increase in premiums from the second quarter of 2005 to the second quarter of 2006, comprised of a $2.3 million increase in dental premiums, a $1.0 million increase in short-term medical and a $2.0 million increase in group major medical primarily due to new business that did not exist during the second quarter of 2005; (iii) the Individual and Other segment which increased $1.4 million, primarily from a $1.4 million increase in ordinary life due to acquisitions of policy blocks at the end of the second quarter of 2005 and a $.2 million increase in blanket accident and sickness policy premiums, partially offset by a $.2 million decrease in all other lines; (iv) an increase of $.7 million in the Group segment primarily due to a $.7 million increase in point of service and a $.2 million increase in group term life, partially offset by a $.2 million decrease in DBL caused by a reduction in statutory rates.

Net Realized and Unrealized Gains

Net realized and unrealized gains decreased by $.7 million compared to the second quarter of 2005. Decisions to sell securities are based on cash flow needs, investment opportunities and economic and market conditions, thus creating fluctuations in gains and losses from period to period.

Net Investment Income

Total net investment income increased $2.4 million primarily due to the maintenance of a higher level of invested assets due to the acquisitions of policy blocks in 2005, and a slight increase in the investment rate of return during the current year period. The annualized return on total investments was 5.2% in the second quarter of 2006 versus 4.9% in the second quarter of 2005.

Equity Income

Equity income from AMIC decreased $.3 million from the second quarter of 2005, as lower income earned by AMIC was slightly offset by an increase in IHC's ownership which was approximately 48% during the second quarter of 2006 compared to approximately 42% in the second quarter of 2005. The reduction in income is primarily due to an increase in net loss ratios of AMIC's Medical Stop-Loss business.

Fee Income and Other Income

Fee income increased $5.8 million to $7.7 million from $1.9 million in the three months ended June 30, 2005, primarily due to fees of $5.2 million earned by IAC, and $.5 million earned by GroupLink, which are subsidiaries that were not part of the Company during the second quarter of 2005; partially offset by a $.1 million decrease in other fee income.

Total other income decreased $.1 million to $.8 million from $.9 million in the three months ended June 30, 2005.

Insurance Benefits, Claims and Reserves

Benefits, claims and reserves increased $16.8 million. The increase is due to: (i) $10.7 million in the Medical Stop-Loss segment resulting from an increase in retention and an increase in Net Loss Ratios to 97.8% as compared to 89.6% for the second quarter of 2005 (see “Outlook” for a discussion of factors

affecting the recent underwriting profitability of the Medical Stop-Loss segment); (ii) an increase of $2.9 million in the Fully-Insured segment due to the increase in premiums; (iii) a $1.9 million increase in the Individual and Other segment due to higher losses, surrenders and interest credited on policies due to acquisitions made in 2005; and (iv) an increase of $1.3 million in the Group segment primarily due to a $.4 million increase related to new business written for group A&H in point of service, a $.5 million increase in group term life losses, a $.1 million increase in interest credited in group annuities, and a $.6 million increase in LTD claims; partially offset by a $.3 decrease in DBL due to lower losses.

Amortization of Deferred Acquisition Costs

Amortization of deferred acquisition costs were relatively unchanged with a $.2 million decrease in Fully-Insured being offset by a $.1 million increase in credit and a $.1 million increase across all other lines.

Interest Expense on Debt

Interest expense increased $.1 million, primarily due to an increase in the interest rate on $12.4 million of floating rate junior subordinated debt to 9.0% in the second quarter of 2006 as compared to 7.1% in the second quarter of 2005.

Selling, General and Administrative Expenses

Total selling, general and administrative expenses increased $10.7 million in the second quarter of 2006 as compared to the second quarter of 2005. The increase is primarily due to (i) an $8.4 million increase in expenses associated with the operation of the Fully-Insured segment, primarily due to the acquisition of IAC, GroupLink, and higher commission expenses from the increase in Fully-Insured premiums; (ii) a $.9 million increase in commissions and other general expenses in the Medical Stop-Loss segment due to a higher level of premiums earned, slightly offset by a decrease in profit commission expense due to the increase in net loss ratios; (iii) a $.2 million increase in the Group segment due to increased group A&H business in point of service; (iv) a $.5 million increase in the Individual and Other segment due to the block acquisitions in 2005; (v) a $.3 million increase in the Credit Life and Disability segment due to higher commission expense; and (vi) a $.4 million increase in other corporate expenses, including $.3 million of expenses related to share-based compensation due to the adoption of SFAS 123R in the first quarter of 2006.

Income Taxes

Income tax expense decreased $1.6 million to $1.2 million for the quarter ended June 30, 2006 from $2.8 million for the second quarter of 2005 due to the decrease in income in 2006. This results in effective rates of 34.0% for the second quarter of 2006 and 32.0% for the second quarter of 2005.

Results of Operations for the Six Months Ended June 30, 2006 Compared to the Six Months Ended June 30, 2005

Net income was $6.4 million or $.43 per share, diluted, for the six months ended June 30, 2006, a decrease of $5.2 million compared to net income of $11.6 million, or $.82 per share, diluted, for the six months ended June 30, 2005. The Company's income before taxes decreased $7.9 million to $9.7 million for the six months ended June 30, 2006 from $17.6 million for the six months ended June 30, 2005. Information by business segment for the six months ended June 30, 2006 and 2005 is as follows:


						Equity				Benefits,		Amortization		Selling,
				Net		Income		Fee and		Claims		of Deferred		General
June 30,		Premiums		Investment		From		Other		and		Acquisition		and
	2006	Earned		Income		AMIC		Income		Reserves		Costs		Administrative		Total
(In thousands)

Medical stop-loss		$	75,350	1,782		359		1,636		52,589		-		19,876		$	6,662
Fully-Insured		14,946		65		-		13,893		8,738		76		19,963		127
Group disability,
	life, annuities
	and DBL	21,675		4,418		-		225		16,993		81		7,538		1,706
Individual life,
	annuities
	and other	14,995		15,581		-		776		19,498		2,636		4,533		4,685
Credit life and
	disability		10,612		403		-		42		4,983		2,396		4,028			(350)
Corporate			-		1,084		-		-		-		-		2,876			(1,792)
Sub total		$	137,578		23,333		359		16,572		102,801		5,189		58,814			11,038
Net realized and
	unrealized gains															467
Interest expense																	(1,831)
Income before
	income taxes															9,674
Income taxes																	(3,279)
Net income																$	6,395


						Equity				Benefits,		Amortization		Selling,
				Net		Income		Fee and		Claims		of Deferred		General
June 30,		Premiums		Investment		From		Other		and		Acquisition		and
	2005	Earned		Income		AMIC		Income		Reserves		Costs		Administrative		Total
(In thousands)

Medical stop-loss		$	57,159	2,105		986		5,209		33,906		-		15,544		$			16,009
Fully-Insured		5,180		15		-		2,886		3,503		300		5,313		(1,035)
Group disability,
	life, annuities
	and DBL	19,784		4,207		-		211		14,169		75		7,579		2,379
Individual life,
	annuities and
	other	12,694		11,267		-		367		16,225		2,661		3,363		2,079
Credit life and
	disability		10,392		449		-		67		4,645		2,288		3,630		345
Corporate			-		493		-		100		-		-		2,107					(1,514)
Sub total		$	105,209		18,536		986		8,840		72,448		5,324		37,536					18,263
Net realized and
	unrealized gains															1,084
Interest expense																			(1,710)
Income before
	income taxes																				17,637
Income taxes																					(6,019)
Net income																		$			11,618

Premiums Earned

Total premiums earned grew $32.4 million to $137.6 million in the first six months of 2006 from $105.2 million in the comparable period of 2005. The increase is due to: (i) the Medical Stop-Loss segment which increased $18.2 million primarily due to increased retentions; (ii) the Fully-Insured segment which had a $9.8 million increase in premiums, comprised of a $4.3 million increase in dental premiums, a $1.9 million increase in short-term medical and a $3.6 million increase in group major medical primarily due to new business that did not exist during the first six months of 2005; (iii) the Individual and Other segment which increased $2.3 million, primarily from a $3.0 million increase in ordinary life due to higher premiums from policy blocks acquired at the end of the second quarter of 2005 and a $.3 million increase in blanket accident and sickness policy premiums, partially offset by decreases of $.3 million in military premiums, $.3 million in other ordinary life premiums and $.2 million in all other lines; (iv) an increase of $1.9 million in the Group segment primarily due to a $1.9 million increase in point of service, a $.5 million increase in group term life, and a $.1 million increase in LTD, partially offset by a $.6 million decrease in DBL caused by a reduction in statutory rates; and (v) a $.2 million increase in the Credit Life and Disability segment due to new business.

Net Realized and Unrealized Gains

Net realized and unrealized gains decreased by $.6 million compared to the first six months of 2005. Decisions to sell securities are based on cash flow needs, investment opportunities and economic and market conditions, thus creating fluctuations in gains and losses from period to period.

Net Investment Income

Total net investment income increased $4.8 million primarily due to the maintenance of a higher level of invested assets due to the acquisitions of policy blocks in 2005, and a slight increase in the investment rate of return during the current year period. The annualized return on total investments was 5.3% in the first six months of 2006 versus 5.0% in the first six months of 2005.

Equity Income

Equity income from AMIC decreased $.6 million from the first six months of 2005, as lower income earned by AMIC was slightly offset by an increase in IHC's ownership which was approximately 48% during the first six months of 2006 compared to 42% in the first six months of 2005. The reduction in income is primarily due to an increase in net loss ratios of AMIC's Medical Stop-Loss business.

Fee Income and Other Income

Fee income increased $10.8 million to $15.1 million from $4.3 million in the six months ended June 30, 2005, primarily due to fees of $10.2 million earned by IAC, and $.9 million earned by GroupLink, which are subsidiaries that were not part of the Company during the first six months of 2005; partially offset by a $.3 million decrease in other fee income.

Total other income decreased $3.0 million to $1.5 million from $4.5 million in the six months ended June 30, 2005. This was primarily due to the inclusion of $3.5 million of other income in the first six months of 2005 from a commutation agreement and a loss ratio cover with a reinsurer that have no equivalent in the first six months of 2006, slightly offset by a $.5 million increase in all other income.

Insurance Benefits, Claims and Reserves

Benefits, claims and reserves increased $30.4 million. The increase is due to: (i) $18.7 million in the Medical Stop-Loss segment resulting from an increase in retention and an increase in Net Loss Ratios to 95.1% as compared to 88.6% for the first six months of 2005 (see “Outlook”); (ii) an increase of $5.2 million in the Fully-Insured segment due to the increase in premiums; (iii) a $3.3 million increase in the Individual and Other segment due to higher losses on assumed blocks of annuity and life business and surrenders and interest credited on policies due to acquisitions made in 2005; (iv) an increase of $2.8 million in the Group segment primarily due to a $1.8 million increase related to new business written for group A&H in point of service, a $.5 million increase in group term life losses, and a $.5 million increase in LTD claims; and (v) a $.4 million increase in the Credit Life and Disability segment caused by higher loss ratios and new business.

Amortization of Deferred Acquisition Costs

Amortization of deferred acquisition costs decreased $.1 million, primarily due to slower amortization on the interest sensitive products of approximately $.7 million, which was offset by amortization on the prior year acquisitions of $.4 million, which have no comparable amounts in the first six months of 2005, a $.1 million increase in credit, and other small increases of $.1 million.

Interest Expense on Debt

Interest expense increased $.1 million, primarily due to an increase in the interest rate on $12.4 million of floating rate junior subordinated debt to 8.7% in the first six months of 2006 as compared to 6.7% in the first six months of 2005.

Selling, General and Administrative Expenses

Total selling, general and administrative expenses increased $21.3 million in the first six months of 2006 as compared to the first six months of 2005. The increase is primarily due to (i) a $14.7 million increase in expenses associated with the operation of the Fully-Insured segment, primarily due to the acquisition of IAC, GroupLink, and higher commission expense due to the increase in premiums; (ii) a $4.4 million increase in commissions and other general expenses in the Medical Stop-Loss segment due to a higher level of premiums earned; (iii) a $1.1 million increase in the Individual and Other segment due to the block acquisitions in 2005; (iv) a $.3 million increase in the Credit Life and Disability segment due to new business; and (v) a $.8 million increase in other corporate expenses, including $.7 million of expenses related to share-based compensation due to the adoption of SFAS 123R in 2006.

Income Taxes

Income tax expense decreased $2.7 million to $3.3 million for the six months ended June 30, 2006 from $6.0 million for the first six months of 2005 due to the decrease in pre-tax income in 2006. This results in effective rates of 33.9% for the first six months of 2006 and 34.1% for the first six months of 2005.

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.

Total Corporate liquidity (cash, cash equivalents, resale agreements, short-term investments, fixed maturities, equity securities, partnership interests and certain other current assets, net of current liabilities) amounted to $33.5 million at June 30, 2006. Corporate liquidity excludes the repayment of $12.5 million of debt due September 2006, as such debt is in the process of renewal.

BALANCE SHEET

Total investments and cash and cash equivalents decreased $42.3 million during the six months ended June 30, 2006 largely due to $21.0 million in cash used for acquisitions and a $27.5 million increase in unrealized losses on available for sale securities.

The $8.6 million increase in total stockholders' equity in the first six months of 2006 is primarily due to $6.4 million in net income and a $16.9 million net increase in common stock and paid-in capital mostly from issuances of common shares in acquisitions, partially offset by a $14.9 million increase in net unrealized losses on investments.

The Company had net receivables from reinsurers of $96.5 million at June 30, 2006. Substantially all of the business ceded to such reinsurers is of short duration. All of such receivables are either due from the Company's affiliate, Independence American, highly rated companies or are adequately secured. No allowance for doubtful accounts was necessary at June 30, 2006.

Asset Quality

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. Of the aggregate carrying value of the Insurance Group's investment assets, approximately 89.1% was invested in investment grade fixed maturities, resale agreements, policy loans and cash and cash equivalents at June 30, 2006. Also at such date, approximately 96.9% of the Insurance Group's fixed maturities were investment grade. These investments carry less risk and, therefore, lower interest rates than other types of fixed maturity investments. At June 30, 2006, approximately 3.1% of the carrying value of fixed maturities was invested in diversified non-investment grade fixed maturities (investments in such securities have different risks than investment grade securities, including greater risk of loss upon default, and thinner trading markets). The Company does not have any mortgage loans or non-performing fixed maturities at June 30, 2006.

The Company reviews its investments regularly and monitors its investments continually for impairments. For the three months and six months ended June 30, 2006, the Company recorded a realized loss of $247,000 for other-than-temporary impairments (none for the three months and six months ended June 30, 2005).

The Company's gross unrealized losses on fixed maturities totaled $43.6 million at June 30, 2006. Substantially all of these securities were investment grade. The Company holds all fixed maturities as available-for-sale securities and, accordingly, marks all of its fixed maturities to market through accumulated other comprehensive income or loss. The unrealized losses on all available-for-sale securities have been evaluated in accordance with the Company's policy and were determined to be temporary in nature at June 30, 2006.

CAPITAL RESOURCES

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

IHC enters into a variety of contractual obligations with third-parties in the ordinary course of its operations, including liabilities for insurance reserves, funds on deposit, debt and operating lease obligations. However, IHC does not believe that its cash flow requirements can be fully assessed based solely upon an analysis of these obligations. Future cash outflows, whether they are contractual obligations or not, also will vary based upon IHC’s future needs. Although some outflows are fixed, others depend on future events. The maturity distribution of the Company’s obligations, as of June 30, 2006, is not materially different from that reported in the schedule of such obligations at December 31, 2005 which was included in Item 7 of the Company’s Annual Report on Form 10-K.

In accordance with SFAS No. 115, the Company may carry its portfolio of fixed maturities either as held to maturity (carried at amortized cost), as trading securities (carried at fair market value) or as available-for-sale (carried at fair market value). The Company has chosen to carry all of its debt securities as available-for-sale. In the first six months of 2006, the Company experienced an increase in net unrealized losses of $27.5 million which, net of deferred tax benefits of $8.3 million and net of deferred policy acquisition costs of $4.3 million, decreased stockholders' equity by $14.9 million (reflecting net unrealized losses of $23.3 million at June 30, 2006 compared to net unrealized losses of $8.4 million at December 31, 2005). From time to time, as warranted, the Company employs investment strategies to mitigate interest rate and other market exposures.

OUTLOOK

IHC has historically been a life and health insurance holding company for two insurance companies, Standard Security Life Insurance Company of New York ("Standard Security Life") and Madison National Life Insurance Company, Inc. ("Madison National Life"), which relied on independent general agents, managing general underwriters (MGUs) and administrators to perform the majority of all marketing, underwriting, claims and administrative functions for its two primary product segments ( M edical S top- L oss and G roup Disability, L ife, Annuities and DBL). The Company's operating results have been heavily dependent on the results of its Medical Stop-Loss line of business, particularly as IHC has increased its risk retention in recent years. For 2006, IHC’s business plan is to: (i) improve the profitability of its core lines of business, in particular Medical Stop-Loss, while expanding distribution, (ii) diversify its product mix by accelerating its expansion into the Fully-Insured health insurance sector, and thereby reduce the volatility of its portfolio and reduce its exposure to market cycles , and (iii) continue to acquire blocks of life and annuity business , and blocks of fully-insured health and dental .. The following summarizes what IHC has accomplish ed and the outlook for the remainder of 2006 and beyond by segment.

When an excess product, such as Medical Stop-Loss, experiences several consecutive years of underwriting profitability, it is not unusual for there to be more competitors entering that line, which can increase pressure on pricing and create a "softer" market. The Medical Stop-Loss market began to "soften" in 2003, and less favorable conditions continued through 2005. During 2005, the Company increased rates and made changes in its underwriting guidelines in response to the results of its underwriting audits. For the six months ended June 30, 2006, the Medical Stop-Loss line was affected by further development on business incepting in 2005 and, to a lesser extent, in 2004, which caused reduced underwriting profitability. The Company believes that the experience on business written in 2004 should now be nearly complete; and consequently, that business written in 2005 will be nearing completion during the second quarter of 2007. Based upon the Company’s best estimate, due to the changes made in underwriting guidelines made during 2005, the experience on business incepting in 2005 is tracking significantly better than business written in 2004, and business written in 2006 is tracking better than business incepting in 2005 at this point in time.

Through the acquisitions of 100% of HPA and 75% of GroupLink in 2005 , and 100% of IAC in January 2006, IHC has expanded into multiple new Fully-Insured Health product s, including short-term medical (“ST M ”), group major medical (including Consumer Driven Health Plans (“CDHPs”)), limited medical, dental and vision (the “ Fully-Insured Health Products”). IHC will further expand its F ully- I nsured H ealth P roducts in 2006 to include major medical for individuals and families including CDHPs and limited medical .. The Company believes that in the next several years, its Fully-Insured Health premiums may exceed its Medical Stop-Loss premiums. The F ully- I nsured H ealth market is a much larger market than the excess market, estimated at $500 billion compared to a Medical Stop-Loss market of approximately $4 billion. As a result of its multiple product filings, distribution sources, and the sheer size of the market, the Company is optimistic that its F ully- I nsured Health business will grow rapidly while yielding profitable results, which will help balance the more volatile and cyclical M edical S top- L oss business.

IHC will continue to look for financially viable life and annuity acquisitions during 2006. Although the source and timing of new acquisitions is unpredictable, the Company believes that there exists an ample supply of acquisition prospects for the remainder of 2006. The addition of GroupLink has now made it possible to acquire blocks of dental business, and the Company made its first such acquisition in the first quarter of 2006.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company manages interest rate risk by seeking to maintain a portfolio with a duration and average life that falls within the band of the duration and average life of the applicable liabilities. Options may be utilized to modify the duration and average life of such assets.

The Company monitors its investment portfolio on a continuous basis and believes that the liquidity of the Insurance Group will not be adversely affected by its current investments. This monitoring includes the maintenance of an asset-liability model that matches current insurance liability cash flows with current investment cash flows.

The expected change in fair value as a percentage of the Company's fixed income portfolio at June 30, 2006 given a 100 to 200 basis point rise or decline in interest rates is not materially different than the expected change at December 31, 2005 included in Item 7A of the Company’s Annual Report on Form 10-K. In the Company's analysis of the asset-liability model, a 100 to 200 basis point change in interest rates on the Insurance Group's liabilities would not be expected to have a material adverse effect on the Company. With respect to its liabilities, if interest rates were to increase, the risk to the Company

is that policies would be surrendered and assets would need to be sold. This is not a material exposure to the Company since a large portion of the Insurance Group's interest sensitive policies are burial policies that are not subject to the typical surrender patterns of other interest sensitive policies, and many of the Insurance Group's universal life and annuity policies were issued by liquidated companies which tend to exhibit lower surrender rates than such policies of continuing companies. Additionally, there are charges to help offset the benefits being surrendered. If interest rates were to decrease substantially, the risk to the Company is that some of its investment assets would be subject to early redemption. This is not a material exposure because the Company would have additional unrealized gains in its investment portfolio to help offset the future reduction of investment income. With respect to its investments, the Company employs (from time to time as warranted) investment strategies to mitigate interest rate and other market exposures.

ITEM 4.

CONTROLS AND PROCEDURES

IHC’s Chief Executive Officer and Chief Financial Officer 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 Chief Executive Officer and Chief Financial Officer concluded that IHC’s disclosure controls and procedures are effective.

There has been no change in IHC’s internal control over financial reporting during the fiscal quarter ended June 30, 2006 that has materially affected, or is reasonably likely to materially affect, IHC's internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

The Company is involved in legal proceedings and claims which arise in the ordinary course of its businesses. The Company has established reserves that it believes are sufficient given information presently available related to its outstanding legal proceedings and claims. The Company believes the results of pending legal proceedings and claims are not expected to have a material adverse effect on its financial condition or cash flows, although there could be such an effect on its results of operations for a particular period.

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, 2005 in Item 1A to Part 1 of Form 10-K.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not Applicable

Share Repurchase Program

IHC has a program, initiated in 1991, under which it repurchases shares of its common stock. As of June 30, 2006, 106,906 shares were still authorized to be repurchased under the plan. Share repurchases during 2006 are summarized as follows:


2006				Maximum Number
	Number of		Average Price	of Shares Which
Month of	Shares		of Repurchased	Can be
Repurchase	Repurchased		Shares	Repurchased
January	-	$	-	109,837
February	-		-	109,837
March	-		-	109,837
April	-		-	109,837
May	2,931		20.34	106,906
June	-		-	106,906

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

At its Annual Meeting of Stockholders held on June 15, 2006, the following 7 nominees were elected for one-year terms on the Board of Directors:

Larry R. Graber, Allan C. Kirkman, Steven B. Lapin, Edward Netter, John L. Lahey, James G. Tatum and Roy T. K. Thung.

The vote on the election of the above nominees was:

For:

At least 13,159,520 shares

Withheld:

No more than 345,824 shares

The appointment of KPMG LLP as the Company's independent registered public accounting firm for 2006 was ratified by a vote of 13,473,031 shares for, 30,136 shares against, and 2,187 shares abstaining. There were no broker non-votes.

The approval of the adoption of The 2006 Stock Incentive Plan was approved by a vote of 10,693,973 shares for, 152,936 shares against and 452,437 shares abstaining. There were 2,206,008 non-votes.

ITEM 5.

OTHER INFORMATION

Not applicable

ITEM 6.

EXHIBITS

31.1

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

31.2

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

32.1

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

32.2

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

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:

August 9, 2006

Roy T.K. Thung

Chief Executive Officer and President

By:

/s/Teresa A. Herbert

Date:

August 9, 2006

Teresa A. Herbert

Senior Vice President and

Chief Financial Officer