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, 2011.


[   ]

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes   [  ]   No [  ]


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


Large Accelerated Filer [    ]

Accelerated Filer   [     ]

Non-Accelerated Filer   [X ]

Smaller Reporting Company   [     ]


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


Class

Outstanding at August 5, 2011

Common stock, $ 1.00  par value

15,833,215 Shares






INDEPENDENCE HOLDING COMPANY


INDEX



PART I – FINANCIAL INFORMATION

PAGE

 

 

NO.

 

 

 

Item 1. Financial Statements

 

 

 

 

 

 

Condensed Consolidated Balance Sheets -

4

 

 

June 30, 2011 (unaudited) and December 31, 2010

 

 

 

 

 

Condensed Consolidated Statements of Operations -

5

 

 

Three Months and Six Months Ended June 30, 2011 and 2010 (unaudited)

 

 

 

 

 

Condensed Consolidated Statement of Changes in Equity -

6

 

Six Months Ended June 30, 2011 (unaudited)

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows -

7

 

Six Months Ended June 30, 2011 and 2010 (unaudited)

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

8

 

 

 

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

29

 

 

and Results of Operations

 

 

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

43

 

 

 

Item 4. Controls and Procedures

44

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1.    Legal Proceedings

45

 

 

 

 

Item 1A. Risk Factors

45

 

 

 

 

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

45

 

 

 

 

Item 3.    Defaults Upon Senior Securities

45

 

 

 

 

Item 4.    Removed and Reserved

45

 

 

 

 

Item 5.    Other Information

46

 

 

 

Item 6.    Exhibits

46

 

 

 

Signatures

46

 

 

 

 


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



2



Forward-Looking Statements


This report on Form 10Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created by those laws. We have based our forward-looking statements on our current expectations and projections about future events. Our forward-looking statements include information about possible or assumed future results of our operations. All statements, other than statements of historical facts, included or incorporated by reference in this report that address activities, events or developments that we expect or anticipate may occur in the future, including such things as the growth of our business and operations, our business strategy, competitive strengths, goals, plans, future capital expenditures and references to future successes may be considered forward-looking statements. Also, when we use words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “probably” or similar expressions, we are making forward-looking statements.


Numerous risks and uncertainties may impact the matters addressed by our forward-looking statements, any of which could negatively and materially affect our future financial results and performance.  We describe some of these risks and uncertainties in greater detail in Item 1A, Risk Factors, of IHC’s annual report on Form 10-K as filed with Securities and Exchange Commission.


Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of these assumptions, and, therefore, also the forward-looking statements based on these assumptions, could themselves prove to be inaccurate. In light of the significant uncertainties inherent in the forward-looking statements that are included in this report, our inclusion of this information is not a representation by us or any other person that our objectives and plans will be achieved. Our forward-looking statements speak only as of the date made, and we will not update these forward-looking statements unless the securities laws require us to do so. In light of these risks, uncertainties and assumptions, any forward-looking event discussed in this report may not occur.




3


PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements

    

INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)


 

 

 

June 30, 2011

 

 

December 31, 2010

 

 

 

(Unaudited)

 

 

 

ASSETS:

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

Short-term investments

 

$

50

 

$

53

 

Securities purchased under agreements to resell

 

 

13,980

 

 

41,081

 

Fixed maturities, available-for-sale

 

 

817,257

 

 

793,656

 

Equity securities, available-for-sale

 

 

54,142

 

 

48,073

 

Other investments

 

 

37,731

 

 

36,864

 

Total investments

 

 

923,160

 

 

919,727

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

11,309

 

 

11,426

 

Due from securities brokers

 

 

17,421

 

 

15,022

 

Deferred acquisition costs

 

 

42,466

 

 

43,465

 

Due and unpaid premiums

 

 

43,095

 

 

48,586

 

Due from reinsurers

 

 

156,067

 

 

154,243

 

Premium and claim funds

 

 

37,102

 

 

37,646

 

Notes and other receivables

 

 

17,494

 

 

16,766

 

Goodwill

 

 

51,713

 

 

51,713

 

Other assets

 

 

57,592

 

 

63,198

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

1,357,419

 

$

1,361,792

 

 

 

 

 

 

 

LIABILITIES AND EQUITY:

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

Insurance reserves-health

 

$

182,064

 

$

181,447

 

Insurance reserves-life and annuity

 

 

278,673

 

 

278,000

 

Funds on deposit

 

 

413,685

 

 

408,566

 

Unearned premiums

 

 

3,310

 

 

4,043

 

Policy claims-health

 

 

15,458

 

 

16,521

 

Policy claims-life

 

 

11,443

 

 

11,809

 

Other policyholders' funds

 

 

20,756

 

 

20,195

 

Due to securities brokers

 

 

18,338

 

 

32,469

 

Due to reinsurers

 

 

30,349

 

 

31,554

 

Accounts payable, accruals and other liabilities

 

 

66,966

 

 

70,497

 

Liabilities related to discontinued operations

 

 

-

 

 

771

 

Debt

 

 

7,500

 

 

7,500

 

Junior subordinated debt securities

 

 

38,146

 

 

38,146

 

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

 

1,086,688

 

 

1,101,518

 

 

 

 

 

 

 

EQUITY:

 

 

 

 

 

 

IHC STOCKHOLDERS' EQUITY:

 

 

 

 

 

 

 

Preferred stock (none issued)

 

 

-

 

 

 

Common stock $1.00 par value, 20,000,000 shares authorized;

 

 

 

 

 

 

 

16,080,270 and 15,472,020 shares issued;  

 

 

 

 

 

 

 

15,833,215 and 15,232,865 shares outstanding

 

 

16,080 

 

 

15,472

 

Paid-in capital

 

 

105,960 

 

 

101,003

 

Accumulated other comprehensive income (loss)

 

 

5,393 

 

 

633

 

Treasury stock, at cost 247,055 and  239,155 shares

 

 

(1,998)

 

 

(1,917)

 

Retained earnings

 

 

121,212 

 

 

115,437

 

 

 

 

 

 

 

TOTAL IHC STOCKHOLDERS’ EQUITY

 

 

246,647 

 

 

230,628

NONCONTROLLING INTERESTS IN SUBSIDIARIES

 

 

24,084 

 

 

29,646

 

 

 

 

 

 

 

 

 

TOTAL EQUITY

 

 

270,731 

 

 

260,274

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND EQUITY

 

$

1,357,419 

 

$

1,361,792


See the accompanying Notes to Condensed Consolidated Financial Statements.



4



INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data) (Unaudited)

 


 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2011

 

2010

 

2011

 

2010

REVENUES:

 

 

 

 

 

 

 

 

 

Premiums earned:

 

 

 

 

 

 

 

 

 

Health

$

74,738 

$

75,822 

$

150,461 

$

137,664 

 

Life and annuity

 

9,263 

 

8,792 

 

19,413 

 

17,834 

 

Net investment income

 

9,633 

 

10,131 

 

19,749 

 

19,502 

 

Fee income

 

8,328 

 

9,681 

 

15,705 

 

17,241 

 

Net realized investment gains

 

1,883 

 

1,634 

 

1,681 

 

1,983 

 

Other-than-temporary impairment losses

 

(165)

 

(1,039)

 

(468)

 

(2,665)

 

Equity income from AMIC

 

 

 

 

280 

 

Gain on bargain purchase of AMIC

 

 

 

 

27,830 

 

Other income

 

1,845 

 

1,410 

 

3,303 

 

3,112 

 

 

105,525 

 

106,431 

 

209,844 

 

222,781 

EXPENSES:

 

 

 

 

 

 

 

 

 

Insurance benefits, claims and reserves:

 

 

 

 

 

 

 

 

 

Health

 

50,503 

 

53,252 

 

101,079 

 

96,815 

 

Life and annuity

 

11,654 

 

11,427 

 

25,327 

 

24,692 

 

Selling, general and administrative expenses

 

36,331 

 

36,390 

 

72,317 

 

67,825 

 

Amortization of deferred acquisitions costs

 

1,758 

 

1,720 

 

3,449 

 

3,038 

 

Interest expense on debt

 

460 

 

477 

 

917 

 

948 

 

 

100,706 

 

103,266 

 

203,089 

 

193,318 

 

Income from continuing operations

 

 

 

 

 

 

 

 

 

 

before income taxes

 

4,819 

 

3,165 

 

6,755 

 

29,463 

 

Income taxes  (benefits)

 

1,355 

 

847 

 

(509)

 

10,768 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

3,464 

 

2,318 

 

7,264 

 

18,695 

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

Loss from discontinued operations, net of tax

 

 

(55)

 

 

(182)

 

 

 

 

 

 

 

 

 

 

 

Net income

 

3,464 

 

2,263 

 

7,264 

 

18,513 

 

 

 

 

 

 

 

 

 

 

 

Less income from noncontrolling interests in subsidiaries

 

(424)

 

(565)

 

(1,040)

 

(781)

 

 

 

 

 

 

 

 

 

 

 

NET INCOME ATTRIBUTABLE TO IHC

$

3,040 

$

1,698 

$

6,224 

$

17,732 

 

 

 

 

 

 

 

 

 

Basic income per common share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

$

.19 

$

.11 

$

.40 

$

1.17 

 

Loss from discontinued operations

 

 

 

 

(.01)

 

Basic income per common share

$

.19 

$

.11 

$

.40 

$

1.16 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING

 

15,835 

 

15,266 

 

15,658 

 

15,303 

 

 

 

 

 

 

 

 

 

Diluted income per common share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

$

.19 

$

.11 

$

.40 

$

1.17 

 

Loss from discontinued operations

 

 

 

 

(.01)

 

Diluted income per common share

$

.19 

$

.11 

$

.40 

$

1.16 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING

 

15,848 

 

15,268 

 

15,667 

 

15,306 



See the accompanying Notes to Condensed Consolidated Financial Statements.



5



INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Unaudited)

SIX MONTHS ENDED JUNE 30, 2010 (In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ACCUMULATED

 

 

 

 

 

 

 

NON-

 

 

 

 

 

 

 

 

OTHER

 

TREASURY

 

 

 

TOTAL IHC

 

CONTROLLING

 

 

 

 

COMMON

 

PAID-IN

 

COMPREHENSIVE

 

STOCK,

 

RETAINED

 

STOCKHOLDERS'

 

INTERESTS IN

 

TOTAL

 

 

STOCK

 

CAPITAL

 

INCOME (LOSS)

 

AT COST

 

EARNINGS

 

EQUITY

 

SUBSIDIARIES

 

EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DECEMBER 31, 2010

$

15,472

$

101,003

$

633

$

(1,917)

$

115,437 

$

230,628 

$

29,646 

$

260,274 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

6,224 

 

6,224 

 

1,040 

 

7,264 

Net change in unrealized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

gains (losses)

 

 

 

 

 

4,747

 

 

 

 

 

4,747 

 

256 

 

5,003 

 

Total comprehensive

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income

 

 

 

 

 

 

 

 

 

 

 

10,971 

 

1,296 

 

12,267 

Aquire noncontrolling

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

interests in American

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Independence Corp.

 

600

 

4,430

 

13

 

 

 

 

 

5,043 

 

(6,043)

 

(1,000)

Aquire noncontrolling

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

interests in Wisconsin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Underwriting Associates

 

 

 

391

 

 

 

 

 

 

 

391 

 

(391)

 

Repurchase of common stock

 

 

 

 

 

 

 

(81)

 

 

 

(81)

 

 

(81)

Common Stock dividend

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

($0.025 Per share)

 

 

 

 

 

 

 

 

 

(396)

 

(396)

 

 

(396)

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

expenses and related

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

tax benefits

 

8

 

55

 

 

 

 

 

 

 

63 

 

 

63 

Distributions to noncontrolling

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

interests

 

 

 

 

 

 

 

 

 

 

 

 

(448)

 

(448)

Other capital transactions

 

 

 

81

 

 

 

 

 

(53)

 

28 

 

24 

 

52 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

JUNE 30,  2011

$

16,080

$

105,960

$

5,393

$

(1,998)

$

121,212 

$

246,647 

$

24,084 

$

270,731 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 








See the accompanying Notes to Condensed Consolidated Financial Statements.



6




INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 (In thousands) (Unaudited)


 

 

Six Months Ended June 30,

 

 

2011

 

 

2010

CASH FLOWS PROVIDED BY (USED BY) OPERATING ACTIVITIES:

 

 

 

 

 

 

Net income

$

7,264 


$

18,513 

 

Adjustments to reconcile net income to net change in cash from

 

 


 

 

 

 operating  activities:

 

 


 

 

 

Gain on bargain purchase of AMIC

 


 

(27,830)

 

Loss from discontinued operations

 


 

182 

 

Amortization of deferred acquisition costs

 

3,449 


 

3,038 

 

Net realized investment gains

 

(1,681)


 

(1,983)

 

Other-than-temporary impairment losses

 

468 


 

2,665 

 

Equity income from AMIC and other equity method investments

 

(714)


 

(487)

 

Depreciation and amortization

 

2,233 


 

2,461 

 

Share-based compensation expenses

 

351 


 

348 

 

Deferred tax (benefit) expense

 

250 


 

12,811 

 

Other

 

2,015 


 

666 

  Changes in assets and liabilities:

 

 


 

 

 

Change in insurance liabilities

 

646 


 

(21,980)

 

Additions to deferred acquisition costs, net

 

(3,786)


 

(2,170)

 

Change in net amounts due from and to reinsurers

 

(3,028)


 

11,075 

 

Change in premium and claim funds

 

544 


 

2,556 

 

Change in income tax liability

 

2,888 


 

(2,820)

 

Change in due and unpaid premiums

 

5,492 


 

10,763 

 

Change in other assets

 

(2,009)


 

1,400 

 

Change in other liabilities

 

(3,379)


 

(11,182)

 

Net change in cash from operating activities of continuing operations

 

11,003 


 

(1,974)

 

Net change in cash from operating activities of discontinued operations

 


 

(767)

 

Net change in cash from operating activities

 

11,003 


 

(2,741)

 

 

 


 

 

CASH FLOWS PROVIDED BY (USED BY) INVESTING ACTIVITIES:

 

 


 

 

 

Change in net amount due from and to securities brokers

 

(16,530)


 

2,913 

 

Net sales of securities under resale and repurchase agreements

 

27,101 


 

17,376 

 

Sales of equity securities

 

30,770 


 

28,613 

 

Purchases of equity securities

 

(35,386)


 

(17,022)

 

Sales of fixed maturities

 

244,277 


 

379,878 

 

Maturities and other repayments of fixed maturities

 

39,792 


 

67,702 

 

Purchases of fixed maturities

 

(301,198)


 

(473,161)

 

Additional investments in other investments, net of distributions

 

(153)


 

1,428 

 

Cash acquired in acquisition of AMIC, net of cash paid

 


 

4,562 

 

Cash paid in acquisitions of companies, net of cash acquired

 


 

(3,469)

 

Cash paid in acquisitions of noncontrolling interest in AMIC

 

(1,000)


 

-

 

Cash received in acquisition of policy blocks

 


 

1,192 

 

Change in notes and other receivables

 

(727)


 

(705)

 

Other

 

(884)


 

(993)

 

Net change in cash from investing activities

 

(13,938)


 

8,314 

 

 

 


 

 

CASH FLOWS PROVIDED BY (USED BY)  FINANCING ACTIVITIES:

 

 


 

 

 

Repurchases of common stock

 

(81)


 

(1,591)

 

Excess tax expense from expired stock options and vesting of restricted stock

 

(164)


 

(22)

 

Proceeds  of investment-type insurance contracts

 

3,390 


 

1,587 

 

Dividends paid

 

(375)


 

(386)

 

Other capital transactions

 

48 


 

44 

 

Net change in cash from financing activities

 

2,818 


 

(368)

 

 

 


 

 

Net change in cash and cash equivalents

 

(117)


 

5,205 

Cash and cash equivalents, beginning of year

 

11,426 


 

7,394 

 

 

 


 

 

Cash and cash equivalents, end of period

$

11,309 


$

12,599 



See the accompanying Notes to Condensed Consolidated Financial Statements.



7


INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)


Note 1.  

Significant Accounting Policies and Practices


(A)

Business and Organization


Independence Holding Company, a Delaware corporation ("IHC"), is a holding company principally engaged in the life and health insurance business through: (i) its 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"); (ii) its majority owned insurance company, Independence American Insurance Company (“Independence American”); and (iii) its marketing and administrative companies, including IHC Administrative Services, Inc., IHC Risk Solutions, LLC and its other managing general underwriters ("MGUs") in which it owns a significant voting interest, IHC Health Solutions, Inc. (“IHC Health Solutions”), Actuarial Management Corporation (“AMC”), MedWatch, LLC and Hospital Bill Analysis, 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." At June 30, 2011, IHC also owns a 63.0% interest in American Independence Corp. (“AMIC”).


Geneve Corporation, a diversified financial holding company, and its affiliated entities held approximately 52% of IHC's outstanding common stock at June 30, 2011.


(B)

Basis of Presentation


The 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 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; (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 Condensed Consolidated Financial Statements.


In the opinion of management, all adjustments (consisting only of normal recurring accruals) that are necessary for a fair presentation of the consolidated financial position and results of operations for the interim periods have been included. The condensed consolidated results of operations for the three months and six months ended June 30, 2011 are not necessarily indicative of the results to be anticipated for the entire year.  


(C)

Recent Accounting Pronouncements


Recently Adopted Accounting Standards


In December 2010, the FASB issued guidance that clarifies the existing requirements for pro forma revenue and earnings disclosures, and expands the supplemental pro forma revenue and earnings disclosures, for public companies that have completed business acquisitions. The amendments in this guidance were effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The adoption of



8


this guidance, effective January 1, 2011, did not have a material effect on the Company’s consolidated financial statements.


In December 2010, the FASB issued guidance that amends existing goodwill impairment test standards to include a requirement that entities perform Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts if it is more likely than not that an impairment exists. This guidance was effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. The adoption of this guidance, effective January 1, 2011, did not have a material effect on the Company’s consolidated financial statements.


In January 2010, the FASB issued standards requiring entities to provide the activity of Level 3 security purchases, sales, issuances, and settlements on a gross basis, which was effective for fiscal years beginning after December 15, 2010. The adoption of this guidance, effective January 1, 2011, did not have a material effect on the Company's consolidated financial statements.


Recently Issued Accounting Standards Not Yet Adopted


In July 2011, the FASB issued guidance specifying that the liability for the fees paid to the Federal Government by health insurers as a result of recent healthcare reform legislation should be estimated and recorded in full once the entity provides qualifying health insurance in the applicable calendar year in which the fee is payable with a corresponding deferred cost that is amortized to expense using a straight-line method of allocation unless another method better allocates the fee over the calendar year that it is payable. The amendments in this Update are effective for calendar years beginning after December 31, 2013, when the fee initially becomes effective. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.


In June 2011, the FASB issued guidance that requires all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. For public entities, the amendments are effective for fiscal years and interim periods within those years, beginning after December 15, 2011. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.


In May 2011, the FASB issued guidance to achieve common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards. Some of the amendments in this update clarify the FASB’s intent about the application of certain existing fair value measurement requirements and other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. None of the amendments in this update require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. For public entities, this guidance is effective during interim and annual periods beginning after December 15, 2011. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.


In April 2011, the FASB issued guidance that amends existing standards with regards to transfers of financial assets under repurchase and other agreements that entitle and obligate the transferor to repurchase or redeem the assets prior to maturity. Specifically, with respect to assessing effective control in such agreements, the criteria that the transferor must have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even upon the transferee's default, has been eliminated; as has the corresponding criterion calling for the transferor to have obtained cash or other sufficient collateral to purchase replacement assets from a third party, which was required to demonstrate such ability. This guidance is effective for the first interim or annual period beginning after December 15, 2011. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.




9


In October 2010, the FASB issued guidance that specifies the accounting treatment for the costs incurred by insurance entities when acquiring new and renewal insurance contracts. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011 and should be applied prospectively upon adoption. The Company is currently evaluating the potential impact the amendments in this update will have on its consolidated financial statements.


(D)

Subsequent Events


Subsequent events are events or transactions that occur after the balance sheet date but before the financial statements are issued or are available to be issued. The Company has evaluated all such events occurring subsequent to the balance sheet date herein of June 30, 2011. The effects of all subsequent events that provided additional evidence about conditions that existed at the date of the balance sheet, including estimates, if any, have been recognized in the accompanying Condensed Consolidated Balance Sheet and Condensed Consolidated Statements of Operations as of and for the three-month and  six-month periods ended June 30, 2011.


Note 2.

 

American Independence Corp.


AMIC is an insurance holding company engaged in the insurance and reinsurance business. AMIC does business with the Insurance Group, including reinsurance treaties under which Standard Security Life and Madison National Life cede to Independence American an average of 20% of their medical stop-loss business, 9% of a majority of their fully insured health business and 20% of their New York Statutory Disability business.


In January 2011, a subsidiary of IHC acquired 200,000 shares of AMIC common stock from a noncontrolling interest for $1,000,000 cash. In February and March 2011, IHC acquired an aggregate 900,325 shares of AMIC common stock from noncontrolling interests in exchange for the issuance of an aggregate 600,218 shares of IHC’s common stock in various private placements of unregistered securities under Section 4(2) of the Securities Act of 1933, as amended. Accordingly, the shares are "restricted securities", subject to a legend and will not be freely tradable in the United States until the shares are registered for resale under the Securities Act, or to the extent they are tradable under Rule 144 promulgated under the Securities Act or any other available exemption. As a result of these transactions, the Company: (i) recorded a $95,000 credit to paid-in capital representing the difference between the fair  value of the consideration paid and the carrying value of the noncontrolling interest; and (ii) increased its ownership interest in AMIC to 63.0%.


Subsequent to the balance sheet date, on July 15, 2011, IHC commenced an offer to exchange up to 908,085 shares of its common stock for properly tendered and accepted shares of common stock of AMIC (the “Exchange Offer”).  IHC filed a Registration Statement on Form S-4 in connection with the Exchange Offer that was declared effective by the Securities and Exchange Commission on July 15, 2011. The Exchange Offer will expire on Friday, August 12, 2011, unless extended or earlier terminated by IHC.  For each share of AMIC common stock accepted in accordance with the terms of the Exchange Offer, IHC will issue 0.625 of a share of IHC common stock.  If IHC were to exchange all of the shares of IHC common stock offered in the Exchange Offer for shares of AMIC common stock, IHC’s total ownership of AMIC would increase to 80%.


Acquisition of AMIC in 2010


In March 2010, IHC acquired a controlling interest in AMIC as a result of the purchase of AMIC common stock in the open market. The principal reasons for acquiring control were: (i) the low market price of the AMIC stock; (ii) the improved financial presentation for IHC resulting from the consolidation of financial reporting; and (iii) a closer relationship that will create greater long-term value for both companies. The acquisition furthers IHC's goal of creating efficiencies by integrating the back office operations of our MGUs and marketing companies. Share purchases of 27,668 shares, or $141,000, through



10


March 5, 2010 (the "Acquisition Date"), totaling 0.33% of voting equity interest, brought the total of AMIC shares owned by the Company to more than 50% of AMIC's outstanding common stock and as a result, IHC has included AMIC’s consolidated assets and liabilities and results of operations, subsequent to the Acquisition Date, in its condensed consolidated financial results.


In determining the bargain purchase gain with regard to the acquisition of the controlling interest in AMIC, IHC first recognized a gain of $2,201,000 as a result of remeasuring its equity interest in AMIC to its fair value of $22,013,000 immediately before the acquisition based on the closing market price of AMIC's common stock. Then, upon the acquisition of a controlling interest on March 5, 2010, the Company consolidated the net assets of AMIC.  Accordingly, the Company determined the fair value of the identifiable assets acquired and liabilities assumed from AMIC on the Acquisition Date.  The fair value of the net assets acquired exceeded the sum of: (i) the fair value of the consideration paid; (ii) the fair value of IHC’s equity investment prior to the acquisition; and (iii) the fair value of the noncontrolling interests in AMIC, resulting in a bargain purchase gain of $25,629,000. The total gain, amounting to $27,830,000, pre-tax, is included in gain on bargain purchase of AMIC on the Company’s Condensed Consolidated Statement of Operations. This gain is a result of the quoted market price of AMIC being significantly less than the fair value of the net assets of AMIC.  This disparity is due to the low trading volume in AMIC shares, and a discount on the shares traded due to a lack of control by minority shareholders.  The fair value of the noncontrolling interests in AMIC was based on the closing market price of AMIC’s common stock on the Acquisition Date.

 

In connection with the acquisition, the Company recorded $12,200,000 of intangible assets. Of this amount, $1,700,000 represents the fair value of agent and marketing contracts and relationships, $1,000,000 represents the fair value of a domain name, and $2,000,000 represents the fair value of customer lists and all are amortizable over the life of the respective intangible asset. The remaining $7,500,000 represents non-amortizable intangible assets consisting of the fair value of insurance licenses with indefinite lives. As the AMIC acquisition was accounted for as a bargain purchase, the Company did not record goodwill in connection with the transaction.





11


The following table presents the identifiable assets acquired and liabilities assumed in the acquisition of AMIC on the Acquisition Date based on their respective fair values (in thousands).


 

 

 

 

Investments

 

$

58,418

Cash and cash equivalents

 

 

4,761

Identifiable intangible assets

 

 

12,200

Deferred tax assets, net

 

 

10,654

Other assets

 

 

31,127

 

 

 

 

 

Total identifiable assets

 

 

117,160

 

 

 

 

Insurance liabilities

 

 

27,671

Other liabilities

 

 

19,023

 

 

 

 

 

Total liabilities

 

 

46,694

 

 

 

 

Net identifiable assets acquired

 

 

70,466

 

 

 

 

Purchase consideration

 

 

(71)

Fair value of equity investment prior to the acquisition

 

 

(22,013)

Noncontrolling interests in AMIC

 

 

(22,065)

Elimination of the fair value adjustment related to AMIC’s

 

 

 

 

investment in Majestic

 

 

(688)

 

 

 

 

 

Gain on bargain purchase

 

 

25,629

 

Gain on fair value of equity investment prior to the acquisition

 

 

2,201

 

 

 

 

 

 

Total gain on bargain purchase of AMIC, pretax

 

 

27,830

 

 

 

 

 

 

Deferred income taxes

 

 

11,097

 

 

 

 

 

 

Total gain on bargain purchase of AMIC, after tax

 

$

16,733



For the three months ended June 30, 2010, the Company’s Condensed Consolidated Statement of Operations includes revenues and net income of $23,788,000 and $886,000, respectively, from AMIC.


For the period from the Acquisition Date to June 30, 2010, the Company’s Condensed Consolidated Statement of Operations includes revenues and net income of $31,404,000 and $1,253,000, respectively, from AMIC.


The unaudited pro forma revenues and operating results, had the acquisition occurred as of the beginning of the three-month period ended June 30, 2010, were $106,431,000 and $2,304,000, respectively. The unaudited pro forma revenues and operating results, had the acquisition occurred as of the beginning of the six-month period ended June 30, 2010, were $208,551,000 and $2,292,000, respectively. The unaudited pro forma information presented is not indicative of the results of operations in future periods, nor does it necessarily reflect the results of operations that would have resulted had the acquisition been completed as of the beginning of the applicable period. Pro forma adjustments to revenues principally reflect the elimination of intercompany fee income, the elimination of the Company’s equity income related to AMIC and the elimination of the gain resulting from the bargain purchase. Pro forma adjustments to net income principally reflect the elimination of the Company’s equity income related to AMIC and the elimination of the gain resulting from the bargain purchase.




12


During the period from January 1, 2010 to the Acquisition Date (the “Stub Period”), IHC recorded $280,000 of equity income from its investment in AMIC, representing IHC's proportionate share of income based on its ownership interest during that period. AMIC paid no dividends on its common stock during the Stub Period.


The following disclosures summarize the effects of certain transactions between IHC and its subsidiaries with AMIC during the Stub Period. Subsequent to the Acquisition Date, the effects of these transactions are eliminated in consolidation. IHC and its subsidiaries recorded income of $208,000 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 ceded premiums to AMIC of $5,867,000. Benefits to policyholders on business ceded to AMIC were $3,020,000. Additionally, AMIC subsidiaries market, underwrite and provide administrative services (including premium collection, medical management and claims adjudication) for a substantial portion of the Medical Stop-Loss business written by the insurance subsidiaries of IHC. IHC recorded gross premiums of $8,452,000 and net commission expense of $326,000 for these services. The Company also contracts for several types of insurance coverage (e.g. directors and officers and professional liability coverage) 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.



Note 3.

Income Per Common Share


Income per share calculations are based on income from continuing operations attributable to the common shareholders of IHC for the three-month and six-month periods ended June 30, 2011 and 2010, as shown below (in thousands):


 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

Income from continuing operations

$

3,464 

$

2,318 

$

7,264 

$

18,695 

 

 

 

 

 

 

 

 

 

Less income from noncontrolling interests

 

 

 

 

 

 

 

 

 

in subsidiaries

 

(424)

 

(565)

 

(1,040)

 

(781)

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

 

 

 

 

 

 

 

 

attributable to IHC shareholders, net of tax

 

3,040 

 

1,753 

 

6,224 

 

17,914 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations, net of tax

 

 

(55)

 

 

(182)

 

 

 

 

 

 

 

 

 

Net income attributable to IHC shareholders

$

3,040 

$

1,698 

$

6,224 

$

17,732 

 

 

 

 

 

 

 

 

 


Included in the diluted income per share calculations for the three months and six months ended June 30, 2011 are 13,000 and 9,000 of incremental shares, respectively, from; (1) the assumed exercise of dilutive stock options; (ii) the assumed vesting of dilutive restricted stock; and (iii) assumed share settlement of dilutive stock appreciation rights (“SARs”), computed using the treasury stock method. Included in the diluted income per share calculations for the three months and six months ended June 30, 2010 are 2,000 and 3,000 of incremental shares, respectively, from the assumed exercise of dilutive stock options and the assumed vesting of dilutive restricted stock computed using the treasury stock method.




13


Note  4.

Investments


The cost (amortized cost with respect to certain fixed maturities), gross unrealized gains, gross unrealized losses and fair value of investment securities are as follows:


 

 

June 30, 2011

 

 

 

 

GROSS

 

GROSS

 

 

 

 

AMORTIZED

 

UNREALIZED

 

UNREALIZED

 

FAIR

 

 

COST

 

GAINS

 

LOSSES

 

VALUE

 

 

(In thousands)

FIXED MATURITIES

 

 

 

 

 

 

 

 

 

AVAILABLE-FOR-SALE:

 

 

 

 

 

 

 

 

 

Corporate securities

$

324,161

$

5,540

$

(2,726)

$

326,975

 

CMOs- residential (1)

 

41,204

 

5,727

 

(2,441)

 

44,490

 

CMOs - commercial

 

1,447

 

-

 

(713)

 

734

 

U.S. Government obligations

 

13,206

 

516

 

-

 

13,722

 

Agency MBS - residential (2)

 

9,199

 

315

 

-

 

9,514

 

GSEs (3)

 

67,868

 

803

 

(315)

 

68,356

 

States and political subdivisions

 

352,708

 

3,718

 

(2,960)

 

353,466

 

 

 

 

 

 

 

 

 

 

 

Total fixed maturities

$

809,793

$

16,619

$

(9,155)

$

817,257

 

 

 

 

 

 

 

 

 

EQUITY SECURITIES

 

 

 

 

 

 

 

 

 

AVAILABLE-FOR-SALE:

 

 

 

 

 

 

 

 

 

Common stocks

$

7,385

$

69

$

(182)

$

7,272

 

Preferred stock - perpetuals

 

32,242

 

796

 

(510)

 

32,528

 

Preferred stock - with maturities

 

12,305

 

2,045

 

(8)

 

14,342

 

 

 

 

 

 

 

 

 

 

Total equity securities

$

51,932

$

2,910

$

(700)

$

54,142

 

 

 



 

 

December 31, 2010

 

 

 

 

GROSS

 

GROSS

 

 

 

 

AMORTIZED

 

UNREALIZED

 

UNREALIZED

 

FAIR

 

 

COST

 

GAINS

 

LOSSES

 

VALUE

 

 

(In thousands)

FIXED MATURITIES

 

 

 

 

 

 

 

 

 

AVAILABLE-FOR-SALE:

 

 

 

 

 

 

 

 

 

Corporate securities

$

272,061

$

3,595

$

(3,661)

$

271,995

 

CMOs - residential (1)

 

58,829

 

6,662

 

(1,847)

 

63,644

 

CMOs - commercial

 

1,447

 

-

 

(639)

 

808

 

U.S. Government obligations

 

16,617

 

351

 

-

 

16,968

 

Agency MBS - residential (2)

 

10,069

 

206

 

(51)

 

10,224

 

GSEs (3)

 

70,199

 

510

 

(182)

 

70,527

 

States and political subdivisions

 

365,578

 

2,070

 

(8,158)

 

359,490

 

 

 

 

 

 

 

 

 

 

 

Total fixed maturities

$

794,800

$

13,394

$

(14,538)

$

793,656

 

 

 

 

 

 

 

 

 

EQUITY SECURITIES

 

 

 

 

 

 

 

 

 

AVAILABLE-FOR-SALE:

 

 

 

 

 

 

 

 

 

Common stocks

$

4,600

$

167

$

(98)

$

4,669

 

Preferred stock - perpetuals

 

31,530

 

1,065

 

(315)

 

32,280

 

Preferred stock - with maturities

 

9,790

 

1,334

 

-

 

11,124

 

 

 

 

 

 

 

 

 

 

Total equity securities

$

45,920

$

2,566

$

(413)

$

48,073


(1)

Collateralized mortgage obligations (“CMOs”).

(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.



14



Unrealized gains (losses) on certain preferred stocks with maturities at June 30, 2011 and December 31, 2010 include $1,763,000 related to the non-credit related component of other-than-temporary impairment losses recorded in accumulated other comprehensive income in prior periods.


The amortized cost and fair value of fixed maturities at June 30, 2011, by contractual maturity, are shown below. 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. The average life of mortgage-backed securities is affected by prepayments on the underlying loans and, therefore, is materially shorter than the original stated maturity.


 

 

 

 

 

 

 

 

% OF

 

 

 

AMORTIZED

 

 

FAIR

 

TOTAL FAIR

 

 

 

COST

 

 

VALUE

 

VALUE

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

7,130

 

$

7,312

 

.9%

Due after one year through five years

 

 

179,047

 

 

181,967

 

22.3%

Due after five years through ten years

 

 

175,451

 

 

177,093

 

21.6%

Due after ten years

 

 

334,743

 

 

334,349

 

40.9%

 

 

 

696,371

 

 

700,721

 

85.7%

CMO and MBS

 

 

 

 

 

 

 

 

 

15 year

 

 

60,613

 

 

63,610

 

7.8%

 

20 year

 

 

873

 

 

879

 

.1%

 

30 year

 

 

51,936

 

 

52,047

 

6.4%

 

 

 

 

 

 

 

 

 

 

 

$

809,793

 

$

817,257

 

100.0%


The following tables summarize, for all securities in an unrealized loss position at June 30, 2011 and December 31, 2010, respectively, the aggregate fair value and gross unrealized loss by length of time those securities that have continuously been in an unrealized loss position:


 

 

Less than 12 Months

 

 

12 Months or Longer

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

Unrealized

June 30, 2011

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

Losses

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate securities

$

130,726

 

$

2,579

 

$

8,125

 

$

147

 

$

138,851

$

2,726

CMOs - residential

 

11,142

 

 

936

 

 

7,251

 

 

1,505

 

 

18,393

 

2,441

CMO's - commercial

 

-

 

 

-

 

 

734

 

 

713

 

 

734

 

713

GSEs

 

45,042

 

 

296

 

 

3,371

 

 

19

 

 

48,413

 

315

States and political

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

subdivisions

 

131,142

 

 

2,194

 

 

34,741

 

 

766

 

 

165,883

 

2,960

Total fixed maturities

 

318,052

 

 

6,005

 

 

54,222

 

 

3,150

 

 

372,274

 

9,155

Common stocks

 

3,906

 

 

182

 

 

-

 

 

-

 

 

3,906

 

182

Preferred stocks-perpetual

 

16,365

 

 

490

 

 

975

 

 

20

 

 

17,340

 

510

Preferred stocks with

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

maturities

 

2,508

 

 

8

 

 

-

 

 

-

 

 

2,508

 

8

Total temporarily

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

impaired securities

$

340,831

 

$

6,685

 

$

55,197

 

$

3,170

 

$

396,028

$

9,855





15



 

 

 

 

 

 

 

 

 

 

 

Less than 12 Months

 

 

12 Months or Longer

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

Unrealized

December 31, 2010

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

Losses

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate securities

$

103,247

 

$

3,404

 

$

12,253

 

$

257

 

$

115,500

$

3,661

CMOs - residential

 

12,494

 

 

476

 

 

16,979

 

 

1,371

 

 

29,473

 

1,847

CMOs - commercial

 

-

 

 

-

 

 

808

 

 

639

 

 

808

 

639

Agency MBS (2) residential

 

5,085

 

 

51

 

 

-

 

 

-

 

 

5,085

 

51

GSEs

 

32,481

 

 

170

 

 

1,389

 

 

12

 

 

33,870

 

182

States and political

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

subdivisions

 

195,589

 

 

5,292

 

 

37,655

 

 

2,866

 

 

233,244

 

8,158

Total fixed maturities

 

348,896

 

 

9,393

 

 

69,084

 

 

5,145

 

 

417,980

 

14,538

Common stocks

 

999

 

 

98

 

 

-

 

 

-

 

 

999

 

98

Preferred stocks-perpetual

 

14,845

 

 

315

 

 

-

 

 

-

 

 

14,845

 

315

Total temporarily

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

impaired securities

$

364,740

 

$

9,806

 

$

69,084

 

$

5,145

 

$

433,824

$

14,951


At June 30, 2011 and December 31, 2010, a total of 102 and 117 fixed maturities, respectively, and 18 and 13 equity securities, respectively, were in a continuous unrealized loss position for less than 12 months. At June 30, 2011 and December 31, 2010 a total of 24 and 27 fixed maturities, respectively, and 1 and nil equity securities, respectively, had continuous unrealized losses for 12 months or longer. 


Substantially all of the unrealized losses on fixed maturities at June 30, 2011 and December 31, 2010 relate to investment grade securities and are attributable to changes in market interest rates and general disruptions in the credit market subsequent to purchase. The unrealized loss on corporate securities and state and political subdivisions are due to wider spreads. Spreads have widened as investors shifted funds to US Treasuries in response to the current market turmoil.  Because the Company does not intend to sell, nor is it more likely than not that the Company will have to sell such investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2011


At June 30, 2011, the Company had $22,659,000 invested in whole loan CMOs backed by Alt-A mortgages. Of this amount, 48.6% were in CMOs that originated in 2005 or earlier and 51.4% were in CMOs that originated in 2006. The unrealized losses on all other CMO’s relate to prime rate CMO’s and are primarily attributed to general disruptions in the credit market subsequent to purchase. The Company’s mortgage security portfolio has no exposure to sub-prime mortgages.


Other-Than-Temporary Impairment Evaluations


The Company reviews its investment securities regularly and determines whether other-than- temporary impairments have occurred. The factors considered by management in its regular review to identify and recognize other-than-temporary impairment losses on fixed maturities include, but are not limited to:  the length of time and extent to which the fair value has been less than cost; the Company's intent to sell, or be required to sell, the debt security before the anticipated recovery of its remaining amortized cost basis; the financial condition and near-term prospects of the issuer; adverse changes in ratings announced by one or more rating agencies; subordinated credit support; whether the issuer of a debt security has remained current on principal and interest payments; current expected cash flows; whether the decline in fair value appears to be issuer specific or, alternatively, a reflection of general market or industry conditions including the effect of changes in market interest rates. If the Company intends to sell a debt security, or it is more likely than not that it would be required to sell a debt security before the recovery of its amortized cost basis, the entire difference between the security's amortized cost basis and its fair value at the balance sheet date would be recognized by a charge to total other-than-temporary impairment losses in the Condensed Consolidated Statement of Operations.  If a decline in fair value of a debt security is judged



16


by management to be other-than-temporary and; (i) the Company does not intend to sell the security; and (ii) it is not more likely than not that it will be required to sell the security prior to recovery of the security’s amortized cost, the Company assesses whether the present value of the cash flows to be collected from the security is less than its amortized cost basis. To the extent that the present value of the cash flows generated by a debt security is less than the amortized cost basis, a credit loss exists. For any such security, the impairment is bifurcated into (a) the amount of the total impairment related to the credit loss, and (b) the amount of the total impairment related to all other factors. The amount of the other-than-temporary impairment related to the credit loss is recognized by a charge to total other-than-temporary impairment losses in the Condensed Consolidated Statement of Operations, establishing a new cost basis for the security. The amount of the other-than-temporary impairment related to all other factors is recognized in other comprehensive income in the Condensed Consolidated Balance Sheet. It is reasonably possible that further declines in estimated fair values of such investments, or changes in assumptions or estimates of anticipated recoveries and/or cash flows, may cause further other-than-temporary impairments in the near term, which could be significant.


In assessing corporate debt securities for other-than-temporary impairment, the Company evaluates the ability of the issuer to meet its debt obligations and the value of the company or specific collateral securing the debt position. For mortgage-backed securities where loan level data is not available, the Company uses a cash flow model based on the collateral characteristics. Assumptions about loss severity and defaults used in the model are primarily based on actual losses experienced and defaults in the collateral pool. Prepayment speeds, both actual and estimated, are also considered. The cash flows generated by the collateral securing these securities are then determined with these default, loss severity and prepayment assumptions. These collateral cash flows are then utilized, along with consideration for the issue’s position in the overall structure, to determine the cash flows associated with the mortgage-backed security held by the Company. In addition, the Company evaluates other asset-backed securities for other-than-temporary impairment by examining similar characteristics referenced above for mortgage-backed securities.  The Company evaluates U.S. Treasury securities and obligations of U.S. Government corporations, U.S. Government agencies, and obligations of states and political subdivisions for other-than-temporary impairment by examining the terms and collateral of the security.


Equity securities may experience other-than-temporary impairment in the future based on the prospects for full recovery in value in a reasonable period of time and the Company’s ability and intent to hold the security to recovery. If a decline in fair value is judged by management to be other-than-temporary or management does not have the intent or ability to hold a security, a loss is recognized by a charge to total other-than-temporary impairment losses in the Condensed Consolidated Statement of Operations. For the purpose of other-than-temporary impairment evaluations, preferred stocks with maturities are treated in a manner similar to debt securities. Declines in the creditworthiness of the issuer of debt securities with both debt and equity-like features requires the use of the equity model in analyzing the security for other-than-temporary impairment.


Subsequent increases and decreases, if not an other-than-temporary impairment, in the fair value of available-for-sale securities that were previously impaired, are included in other comprehensive income in the Condensed Consolidated Balance Sheet.




17


Based on management’s review of the portfolio, which considered these factors, the Company recorded the following losses for other-than-temporary impairments in the Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 2011 and 2010 (in thousands):


 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

Other-than-temporary impairments:

 

 

 

 

 

 

 

 

 

Fixed maturities

$

165

$

1,039

$

468

$

2,665 


For the three-month and six-month periods ended June 30, 2011, other-than-temporary impairments on fixed maturities of $165,000 and $468,000, respectively, consist of credit losses recorded as a result of expected cash flows of certain debt securities less than the debt securities’ amortized cost. For the three-month and six-month periods ended June 30, 2010, $1,039,000 and $1,933,000, respectively, are credit losses resulting from expected cash flows of debt securities less than the debt securities’ amortized cost. The six-month period ended June 30, 2010 also includes losses of $732,000 as a result of the Company’s intent to sell certain municipal debt securities prior to the recovery of their amortized cost bases.  No losses for other-than-temporary impairments were recognized in other comprehensive income during the three months or six months ended June 30, 2011 and 2010.


At June 30, 2011 and December 31, 2010, cumulative credit losses for other-than-temporary impairments recorded on securities for which a portion of an other-than-temporary impairment was recognized in other comprehensive income was $1,763,000.


Further deterioration in credit quality of the companies backing the securities, further deterioration in the condition of the financial services industry, a continuation of the current imbalance in liquidity that exists in the marketplace, a continuation or worsening of the current economic recession, or additional declines in real estate values may further affect the fair value of these securities and increase the potential that certain unrealized losses be designated as other-than-temporary in future periods and the Company may incur additional write-downs.


Note 5.

Net Realized Investment Gains


Net realized investment gains for the three months and six months ended June 30, 2011 and 2010 are as follows (in thousands):


 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

Net realized investment gains (losses):

 

 

 

 

 

 

 

 

 

Fixed maturities

$

1,778

$

1,584 

$

283

$

1,743

 

Common stocks

 

19

 

65 

 

(26)

 

152

 

Preferred stocks

 

86

 

(15)

 

1,424

 

26

 

Total available-for-sale securities

 

1,883

 

1,634 

 

1,681

 

1,921

 

 

 

 

 

 

 

 

 

Other

 

-

 

 

-

 

62

 

 

 

 

 

 

 

 

 

Net realized investment gains

$

1,883

$

1,634 

$

1,681

$

1,983

 

 

 

 

 

 

 

 

 






18


For the three months and six months ended June 30, 2011, the Company realized gross gains of $3,085,000 and $6,617,000, respectively, and realized gross losses of $1,202,000 and $4,936,000, respectively, on sales of available-for-sale securities. For the three months and six months ended June 30, 2010, the Company realized gross gains of $3,445,000 and $5,181,000, respectively, and realized gross losses of $1,811,000 and $3,260,000, respectively, on sales of available-for-sale securities.


Note 6.

Fair Value Disclosures of Financial Instruments


For all financial and non-financial assets and liabilities accounted for at fair value on a recurring basis, the Company utilizes valuation techniques based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market expectations. These two types of inputs create the following fair value hierarchy:


Level 1 - Quoted prices for identical instruments in active markets.


Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.


Level 3 - Instruments where significant value drivers are unobservable.


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

  

Investments in fixed maturities and equity securities:

  

Available-for-sale securities included in Level 1 are equities with quoted market prices. Level 2 is primarily comprised of our portfolio of government securities, agency mortgage-backed securities, corporate fixed income securities, collateralized mortgage obligations, municipals, GSEs and certain preferred stocks that were priced with observable market inputs. Level 3 securities consist of CMO securities, primarily Alt-A mortgages.  For these securities, we use industry-standard pricing methodologies, including discounted cash flow models, whose inputs are based on management’s assumptions and available market information. Further we retain independent pricing vendors to assist in valuing certain instruments.

    



19


  The following tables present our financial assets and liabilities measured at fair value on a recurring basis, at June 30, 2011 and December 31, 2010, respectively (in thousands):


June 30, 2011

 

 

 

 

 

 

 

 

 

 

 

Level 1

 

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

FINANCIAL ASSETS:

 

 

 

 

 

 

 

 

 

Fixed maturities available-for-sale:

 

 

 

 

 

 

 

 

 

 

Corporate securities

$

-

 

$

326,975

$

-

$

326,975

 

CMOs - residential

 

-

 

 

19,211

 

25,279

 

44,490

 

CMOs - commercial

 

-

 

 

-

 

734

 

734

 

US Government obligations

 

-

 

 

13,722

 

-

 

13,722

 

Agency MBS - residential

 

-

 

 

9,514

 

-

 

9,514

 

GSEs

 

-

 

 

68,356

 

-

 

68,356

 

States and political subdivisions

 

-

 

 

353,466

 

-

 

353,466

 

Total fixed maturities

 

-

 

 

791,244

 

26,013

 

817,257

 

 

 

 

 

 

 

 

 

 

Equity securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

Common stocks

 

7,272

 

 

-

 

-

 

7,272

 

Preferred stocks - perpetual

 

32,528

 

 

-

 

-

 

32,528

 

Preferred stocks - with maturities

 

14,342

 

 

-

 

-

 

14,342

 

Total equity securities

 

54,142

 

 

-

 

-

 

54,142

 

 

 

 

 

 

 

 

 

 

 

Total

$

54,142

 

$

791,244

$

26,013

$

871,399

 

 

 

 

 

 

 

 

 

 



December 31, 2010

 

 

 

 

 

 

 

 

 

 

 

Level 1

 

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

FINANCIAL ASSETS:

 

 

 

 

 

 

 

 

 

Fixed maturities available-for-sale:

 

 

 

 

 

 

 

 

 

 

Corporate securities

$

-

 

$

271,995

$

-

$

271,995

 

CMOs - residential

 

-

 

 

26,187

 

37,457

 

63,644

 

CMOs - commercial

 

-

 

 

-

 

808

 

808

 

US Government obligations

 

-

 

 

16,968

 

-

 

16,968

 

Agency MBS - residential

 

-

 

 

10,224

 

-

 

10,224

 

GSEs

 

-

 

 

70,527

 

-

 

70,527

 

States and political subdivisions

 

-

 

 

359,490

 

-

 

359,490

 

Total fixed maturities

 

-

 

 

755,391

 

38,265

 

793,656

 

 

 

 

 

 

 

 

 

 

Equity securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

Common stocks

 

4,669

 

 

-

 

-

 

4,669

 

Preferred stocks - perpetual

 

32,280

 

 

-

 

-

 

32,280

 

Preferred stocks - with maturities

 

11,124

 

 

-

 

-

 

11,124

 

Total equity securities

 

48,073

 

 

-

 

-

 

48,073

 

 

 

 

 

 

 

 

 

 

Total

$

48,073

 

$

755,391

$

38,265

$

841,729

 

 

 

 

 

 

 

 

 

 




20


It is the Company’s policy to recognize transfers of assets and liabilities between levels of the fair value hierarchy at the end of a reporting period. At June 30, 2011, there were no transfers of assets and liabilities between Level 1 and Level 2 of the fair value hierarchy. No securities were transferred out of Level 2 and into the Level 3 category at June 30, 2011. The Company does not transfer out of Level 3 and into Level 2 until such time as observable inputs become available and reliable or the range of available independent prices narrow. No securities were transferred out of the Level 3 category in 2011. The changes in the carrying value of Level 3 assets and liabilities for the six months ended June 30, 2011 are summarized as follows (in thousands):



 

 

June 30, 2011

 

 

CMOs

 

 

 

 

Residential

 

Commercial

 

Total

 

 

 

 

 

 

 

Beginning balance

$

37,457

$

808

$

38,265

 

 

 

 

 

 

 

Gains(losses) included in earnings:

 

 

 

 

 

 

 

Net realized investment losses

 

(364)

 

-

 

(364)

 

Other-than-temporary impairments

 

(468)

 

-

 

(468)

 

 

 

 

 

 

 

Net unrealized gains (losses) included in

 

 

 

 

 

 

 

accumulated other comprehensive loss

 

(975)

 

(74)

 

(1,049)

Sales of securities

 

(8,075)

 

-

 

(8,075)

Repayments and amortization of fixed maturities

 

(2,296)

 

-

 

(2,296)

 

 

 

 

 

 

 

Balance at end of period

$

25,279

$

734

$

26,013


The following methods and assumptions were used to estimate the fair value of financial instruments not disclosed elsewhere in the Notes to Condensed Consolidated Financial Statements:


(A)

Policy Loans


The fair value of policy loans is estimated by projecting aggregate loan cash flows to the end of the expected lifetime period of the life insurance business at the average policy loan rates, and discounting them at a current market interest rate.


(B)

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.


(C)

Debt


The fair value of debt with variable interest rates approximates its carrying amount. The fair value of fixed rate debt is estimated by discounting the cash flows using current market interest rates.




21


The estimated fair values of financial instruments not disclosed elsewhere in the Notes to Condensed Consolidated Financial Statements are as follows:


 

 

 

June 30, 2011

 

December 31, 2010

 

 

 

Carrying

 

 

Fair

 

Carrying

 

 

Fair

 

 

 

Amount

 

 

Value

 

Amount

 

 

Value

 

 

 

(In thousands)

FINANCIAL ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

Policy loans

 

$

23,164

 

$

28,239

$

23,216

 

$

28,298

 

 

 

 

 

 

 

 

 

 

 

 

FINANCIAL

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

Funds on deposit

 

$

413,685

 

$

416,263

$

406,366

 

$

411,036

 

Debt and junior

 

 

 

 

 

 

 

 

 

 

 

 

subordinated debt

 

 

 

 

 

 

 

 

 

 

 

 

securities

 

 

45,646

 

 

45,646

 

45,646

 

 

45,646


Note 7.

Goodwill and Other Intangible Assets


The change in the carrying amount of goodwill and other intangible assets (included in other assets in the Condensed Consolidated Balance Sheets) for the first six months of 2011 is as follows (in thousands):


 

 

 

 

Other Intangible Assets

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

Other

 

 

 

 

Definitive

 

Indefinite

 

Intangible

 

 

Goodwill

 

Lives

 

Lives

 

Assets

 

 

 

 

 

 

 

 

 

Balance at December 31, 2010

$

51,713

$

12,081

$

7,997

$

20,078

 

 

 

 

 

 

 

 

 

Capitalized software development

 

-

 

79

 

-

 

79

Amortization expense

 

-

 

(1,155)

 

-

 

(1,155)

 

 

 

 

 

 

 

 

 

Balance at June 30, 2011

$

51,713

$

11,005

$

7,997

$

19,002

 

 

 

 

 

 

 

 

 


Note 8.

Share-Based Compensation


IHC and AMIC each have share-based compensation plans. The following is a summary of the activity pertaining to each of these plans. AMIC disclosures reflect the activity subsequent to the Acquisition Date.


A)

IHC Share-Based Compensation Plans


Total share-based compensation was $205,000 and $143,000 for the three months ended June 30, 2011 and 2010, respectively, and was $327,000 and $322,000 for the six months ended June 30, 2011 and 2010, respectively.  Related tax benefits of $82,000 and $57,000 were recognized for the three months ended June 30, 2011 and 2010, respectively, and were $130,000 and $128,000 for the six months ended June 30, 2011 and 2010, respectively.  


Under the terms of IHC’s stock-based compensation plans, option exercise prices are more than or 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, share appreciation rights (“SARs”) and share-based performance awards. Restricted shares are valued at the quoted market price of the shares at the date of grant and have a three year vesting period. Exercise



22


prices of SARs are more than or equal to the quoted market price of IHC shares at the date of the grant and have three year vesting periods. At June 30, 2011, there were 709,755 shares available for future stock-based compensation grants under IHC’s stock incentive plans.


Stock Options


IHC’s stock option activity for the six months ended June 30, 2010 is as follows:


 

 

Shares

 

Weighted- Average

 

 

Under Option

 

Exercise Price

 

 

 

 

 

December 31, 2010

 

756,480

 

$

11.68

Expired

 

(66,740)

 

21.94

June 30, 2011

 

689,740

 

 

10.68


The following table summarizes information regarding IHC’s outstanding and exercisable options as of June 30, 2011:


 

 

Outstanding

 

Exercisable

 

 

 

 

 

Number of options

 

689,740

 

381,872

Weighted average exercise price per share

$

10.68

$

11.24

Aggregate intrinsic value for all options

$

203,000

$

68,000

Weighted average contractual term remaining

 

2.9 years

 

2.4 years


The fair value of an option award is estimated on the date of grant using the Black-Scholes option valuation model. No options were granted during the six months ended June 30, 2011. The weighted average grant-date fair-value of options granted during the six months ended 2010 was $1.57 per share. The assumptions set forth in the table below were used to value the stock options granted during the six-month period ended June 30, 2010:


Weighted-average risk-free interest rate

 

 

 

2.3%

Annual dividend rate per share

 

 

$

0.05

Weighted-average volatility factor of the Company's common stock

 

 

 

45.0%

Weighted-average expected term of options

 

 

 

4.5 years


Compensation expense of $61,000 and $135,000 was recognized in the three months ended June 30, 2011 and 2010, respectively, and $171,000 and $254,000 was recognized in the six months ended June 30, 2011 and 2010, respectively, for the portion of the grant-date fair value of stock options vesting during those periods.


No options were exercised during the three months and six months ended June 30, 2011 or 2010.


As of June 30, 2011, the total unrecognized compensation expense related to non-vested stock options was $363,000 which is expected to be recognized over the remaining requisite weighted-average service period of 1.5 years.


Restricted Stock


No shares of restricted stock were issued by IHC during the first six months of 2011. IHC issued 2,250 shares of restricted stock during the six months ended June 30, 2010. The total fair value of restricted stock that vested during each of the first six months of 2011 and 2010 was $23,000. Restricted stock expense was $4,000 and $7,000 for the three months ended June 30, 2011 and 2010, respectively, and was $9,000 and $19,000 for the six months ended June 30, 2011 and 2010, respectively.



23



The following table summarizes restricted stock activity for the six months ended June 30, 2011:


 

 

No. of

 

Weighted-Average

 

 

Non-vested

 

   Grant-Date

 

 

Shares

 

Fair Value

 

 

 

 

 

December 31, 2010

 

4,500 

 

$

7.80

 

Vested

 

(2,250)

 

$

8.67

 

 

 

 

 

 

 

 

June 30, 2011

 

2,250 

 

$

6.92

 


As of June 30, 2011, the total unrecognized compensation expense related to IHC’s non-vested restricted stock awards was $15,000 which is expected to be recognized over the remaining requisite weighted-average service period of 1.6 years.


SARs and Share-Based Performance Awards


The fair value of SARs is calculated using the Black-Scholes valuation model at the grant date and each subsequent reporting period until settlement. Compensation cost is based on the proportionate amount of the requisite service that has been rendered to date. Once fully vested, changes in fair value of the SARs continue to be recognized as compensation expense in the period of the change until settlement. For the three months ended June 30, 2011 and 2010, IHC recorded $110,000 and $(9,000), respectively, of compensation costs for these awards, and for the six months ended June 30, 2011 and 2010, recorded $125,000 and $18,000, respectively. No SARs were exercised during the six months ended June 30, 2011 or 2010. Included in Other Liabilities in the Company’s Condensed Consolidated Balance Sheet at June 30, 2011 and December 31, 2010 are liabilities of $204,000 and $79,000, respectively, pertaining to SARs.


Other outstanding awards include share-based performance awards. Compensation costs for these awards are recognized and accrued as performance conditions are met, based on the current share price. For the three months ended June 30, 2011 and 2010, IHC recorded $30,000 and $10,000, respectively, of compensation costs for these awards, and for the six months ended June 30, 2011 and 2010, recorded $21,000 and $31,000, respectively. The intrinsic value of share-based performance awards paid during the six months ended June 30, 2011 and 2010 was $47,000 and $54,000, respectively. Included in Other Liabilities in the Company’s Condensed Consolidated Balance Sheet at June 30, 2011 and December 31, 2010 are liabilities of $49,000 and $75,000, respectively, pertaining to share-based performance awards.


B.

AMIC Share-Based Compensation Plans


Total AMIC share-based compensation expense was $9,000 and $19,000 for the three months ended June 30, 2011and 2010, respectively, and was $25,000 and $26,000 for the six months ended June 30, 2011 and the period between the Acquisition Date and June 30, 2010, respectively.  Related tax benefits of $3,000 and $7,000 were recognized for the three months ended June 30, 2011 and 2010, respectively, and were $9,000 and $10,000 for the six months ended June 30, 2011 and the period between the Acquisition Date and June 30, 2010, respectively.


Under the terms of the AMIC’s stock-based compensation plan, option exercise prices are equal to the quoted market price of the shares at the date of grant; option terms are ten years; and vesting periods range from three to four years.  AMIC may also grant shares of restricted stock, stock appreciation rights and share-based performance awards.  Restricted shares are valued at the quoted market price of the shares at the date of grant, and have a three year vesting period. At June 30, 2011, there were 6,523,888 shares available for future stock-based compensation grants under the AMIC stock incentive plan.





24


Stock Options


AMIC’s stock option activity for the six months ended June 30, 2011 is as follows:


 

 

Shares

 

Weighted- Average

 

 

Under Option

 

Exercise Price

 

 

 

 

 

December 31, 2010

 

359,234

 

$

9.95

Grants

 

13,334

 

5.85

Expired

 

(31,668)

 

4.50

Exercised

 

(11,389)

 

4.17

June 30, 2011

 

329,511

 

$

10.51


The following table summarizes information regarding AMIC’s outstanding and exercisable options as of June 30, 2011:


 

 

Outstanding

 

Exercisable

 

 

 

 

 

Number of options

 

329,511

 

307,288

Weighted average exercise price per share

$

10.51

$

10.88

Aggregate intrinsic value for all options

$

16,001

$

5,334

Weighted average contractual term remaining

 

3.53 years

 

3.10 years


The fair value of an 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, 2011 and during the period between the Acquisition Date and June 30, 2010 was $3.24 and $2.79 per share, respectively. The assumptions set forth in the table below were used to value the stock options granted during the periods:


 

        June 30,

 

 

2011

 

2010

 

 

 

 

 

Weighted-average risk-free interest rate

 

2.95%

       

3.69%

Annual dividend rate per share

$

-

$

-

Weighted-average volatility factor of the Company's common stock

 

37.07

 

45.00

Weighted-average expected term of options

 

5 years

 

5 years


Compensation expense of $6,000 and $14,000 was recognized for the three months ended June 30, 2011 and 2010, respectively, and was $18,000 and $19,000 for the six months ended June 30, 2011 and the period between the Acquisition Date and June 30, 2010, respectively, for the portion of the grant-date fair value of AMIC’s stock options vesting during those periods.


AMIC received cash proceeds of $48,000 upon the exercise of 11,389 options with an intrinsic value of $8,000 during the six months ended June 30, 2011. AMIC received cash proceeds of $45,000 upon the exercise of 10,000 options with an intrinsic value of $1,000 during the period between the Acquisition Date and June 30, 2010.


As of June 30, 2011, the total unrecognized compensation expense related to AMIC’s non-vested options was $76,000 which will be recognized over the remaining requisite service periods.


Restricted Stock


AMIC issued 12,000 restricted stock awards in the second quarter of 2008, with a weighted average grant-date fair value of $6.92 per share.  No restricted stock awards were issued in 2011 or 2010.  The total



25


fair value of AMIC’s restricted stock that vested during the six months ended June 30, 2011 and during the period between the Acquisition Date and June 30, 2010 was $12,000 and $13,000, respectively. Restricted stock expense was $3,000 and $5,000 for the three months ended June 30, 2011 and 2010, respectively, and was $7,000 for both the six months ended June 30, 2011 and the period between the Acquisition Date and June 30, 2010, respectively.


The following table summarizes AMIC’s restricted stock activity for the six months ended June 30, 2011:


 

 

No. of

 

Weighted-Average

 

 

Non-vested

 

   Grant-Date

 

 

Shares

 

Fair Value

 

 

 

 

 

December 31, 2010

 

2,500 

 

$

6.92

 

Vested

 

(2,000)

 

$

6.92

 

Forfeited

 

(500)

 

$

6.92

 

 

 

 

 

 

 

 

June 30, 2011

 

 

$

-

 


Note 9.

Income Taxes


The provision for income taxes shown in the Condensed Consolidated Statements of Operations was computed based on the Company's actual results which approximate the effective tax rate expected to be applicable for the balance of the current fiscal year in accordance with consolidated life/non-life group income tax regulations. Such regulations adopt a subgroup method in determining consolidated taxable income, whereby taxable income is determined separately for the life insurance company group and the non-life insurance company group.


The deferred income tax benefit for the six months ended June 30, 2011 allocated to stockholders' equity (principally for net unrealized losses on investment securities) was $2,325,000, representing the decrease in the related deferred tax liability from $360,000 at December 31, 2010 to $2,685,000 at June 30, 2011.


Included in the $509,000 benefit for income taxes recorded for the six months ended June 30, 2011 is a deferred income tax benefit of $2,319,000 associated with IHC’s investment in AMIC. As the result of management’s intention to adopt tax planning strategies to recover IHC’s investment in AMIC in a tax-free manner, the cumulative Federal and State deferred income tax liabilities established as of December 31, 2010 for temporary differences between IHC’s book value and tax basis in AMIC became permanent. Accordingly, IHC released its previously recorded deferred income tax liabilities and will not record deferred income taxes in 2011 and future periods for any earnings or stockholders’ equity adjustments relating to IHC’s investment in AMIC.


At June 30, 2011, AMIC, had net operating loss carryforwards of approximately $272,800,000 for federal income tax purposes which expire between 2019 and 2029. The federal deferred tax asset relative to AMIC included in other assets on IHC’s Condensed Consolidated Balance Sheet at June 30, 2011 was $9,362,000, net of a valuation allowance of $85,817,000. AMIC continues to file its own separate income tax return and is not included in the consolidated tax return of IHC.




26


Note 10.

Supplemental Disclosures of Cash Flow Information


Tax refunds, net of tax payments, were $3,957,000 and $(436,000) during the six months ended June 30, 2011 and 2010, respectively.


Cash payments for interest were $922,000 and $938,000 during the six months ended June 30, 2011 and 2010, respectively.  


Note 11.

Comprehensive Income (Loss)


The components of comprehensive income (loss) include: (i) net income or loss reported in the Condensed Consolidated Statements of Operations; (ii) 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 (iii) the non-credit related component of other-than-temporary impairments of fixed maturities, net of tax.


The comprehensive income for the three months and six months ended June 30, 2011 and 2010 is summarized as follows (in thousands):



 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

Net income

$

3,464

$

2,263

$

7,264

$

18,513

Unrealized gains arising

 

 

 

 

 

 

 

 

 

during the period, net of income taxes

 

5,128

 

4,507

 

5,003

 

8,931

 

 

 

 

 

 

 

 

 

Comprehensive income

 

8,592

 

6,770

 

12,267

 

27,444

Less comprehensive income attributable to

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

(711)

 

(565)

 

(1,296)

 

(781)

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to IHC

$

7,881

$

6,205

$

10,971

$

26,663


Included in accumulated other comprehensive income at June 30, 2011 and December 31, 2010 are after-tax adjustments of $1,132,000 related to the non-credit related component of other-than-temporary impairment losses recorded in prior years. No losses for other-than-temporary impairments of fixed maturities were recognized in other comprehensive income during the six months ended June 30, 2011.




27


Note 12.

 Segment Reporting


The Insurance Group principally engages in the life and health insurance business. Information by business segment for the three months and six months ended June 30, 2011 and 2010 is presented below (in thousands):



 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

Medical Stop-Loss (A)

$

30,145 

$

37,446

$

60,780 

$

65,346

Fully Insured Health (B)

 

44,079 

 

37,478

 

87,318 

 

68,352

Group disability, life, annuities and DBL (C)

 

15,186 

 

16,632

 

30,443 

 

33,790

Individual life, annuities and other

 

14,817 

 

14,074

 

29,960 

 

28,169

Corporate

 

(420)

 

206

 

130 

 

27,806

 

 

103,807 

 

105,836 

 

208,631 

 

223,463 

Net realized investment gains

 

1,883 

 

1,634 

 

1,681 

 

1,983 

Other-than-temporary impairment losses, net

 

(165)

 

(1,039)

 

(468)

 

(2,665)

 

 

 

 

 

 

 

 

 

 

$

105,525 

$

106,431 

$

209,844 

$

222,781 

 

 

 

 

 

 

 

 

 

Income Before Income Taxes:

 

 

 

 

 

 

 

 

Medical Stop-Loss (A)

$

1,934 

$

1,859

$

1,907 

$

2,452

Fully Insured Health(B) (D)

 

1,579 

 

(75)

 

4,942 

 

1,079 

Group disability, life, annuities and DBL (C)

 

1,772 

 

1,829

 

1,588 

 

1,314

Individual life, annuities and other

 

330 

 

761

 

344 

 

894

Corporate

 

(2,054)

 

(1,327)

 

(2,322)

 

25,354 

 

 

3,561 

 

3,047

 

6,459 

 

31,093 

Net realized investment gains

 

1,883 

 

1,634

 

1,681 

 

1,983 

Other-than-temporary impairment losses, net

 

(165)

 

(1,039)

 

(468)

 

(2,665)

Interest expense

 

(460)

 

(477)

 

(917)

 

(948)

 

 

 

 

 

 

 

 

 

 

$

4,819 

$

3,165

$

6,755 

$

29,463 


(A)

The amount includes equity income from AMIC (prior to its acquisition) of $14,000 for the six months ended June 30, 2010.


(B)

The amount includes equity income from AMIC (prior to its acquisition) of $244,000 for the six months ended June 30, 2010.


(C)

The amount includes equity income from AMIC (prior to its acquisition) of $22,000 for the six months ended June 30, 2010.


(D)

The Fully Insured Health segment includes amortization of intangible assets recorded as a result of purchase accounting for the recent acquisitions. Total amortization expense was $604,000 and $669,000 for the three months ended June 30, 2011 and 2010, respectively, and $1,212,000 and $1,160,000 for the six months ended June 30, 2011 and 2010, respectively. Amortization expense for the other segments is insignificant.


Note 13.

Subsequent Event


On July 1, 2011, a subsidiary of IHC amended its amortizing term loan with a commercial bank and increased its outstanding debt from $7,500,000 to $10,000,000. The amortizing term loan, as amended:  (i) matures on July 1, 2016; (ii) bears a variable interest rate of Libor plus 3.35%; and (iii) requires annual principal payments in the amount of $2,000,000 commencing on July 2012 through maturity. The Company



28


simultaneously entered into an interest rate swap with the commercial bank lender, for a notional amount equal to the amortizing debt principal amount, under which the Company receives a variable rate equal to the rate on the debt and pays a fixed rate of 1.60%. As a result of the interest rate swap, interest payments on this debt will be fixed at 4.95%. It is anticipated that there will be no hedge ineffectiveness on this swap, which will be accounted for as a cash flow hedge.



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, 2010, as filed with the Securities and Exchange Commission, and our unaudited Condensed Consolidated Financial Statements and related Notes thereto appearing elsewhere in this quarterly report.


Overview


Independence Holding Company, a Delaware corporation ("IHC"), is a holding company principally engaged in the life and health insurance business through: (i) its 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"); (ii) its majority owned insurance company, Independence American Insurance Company (“Independence American”); and (iii) its marketing and administrative companies, including IHC Administrative Services, Inc., IHC Risk Solutions, LLC (“IHCRS”) and its other managing general underwriters ("MGUs") in which it owns a significant voting interest, IHC Health Solutions, Inc. (“IHC Health Solutions”), Actuarial Management Corporation (“AMC”), MedWatch, LLC and Hospital Bill Analysis, 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." At June 30, 2011, IHC also owns a 63.0% interest in American Independence Corp. (“AMIC”).


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, fully insured medical, disability and New York State short-term statutory disability benefit product ("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. 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 and profit commissions.  Management has always focused on managing the costs of its operations and providing its insureds with the best cost containment tools available.


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


On March 5, 2010, IHC acquired a controlling interest in AMIC. Upon achieving control, AMIC’s income and expense amounts became consolidated with IHC’s results. Accordingly, the individual line items on the Condensed Consolidated Statement of Operations for 2010 include approximately four months of operations of AMIC.



29



The results of operations for the three months and six months ended June 30, 2011 and 2010 are summarized as follows (in thousands):


 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

Revenues

$

105,525 

$

106,431 

$

209,844 

$

222,781 

Expenses

 

100,706 

 

103,266 

 

203,089 

 

193,318 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

 

 

 

 

 

 

 

 

before income taxes

 

4,819 

 

3,165 

 

6,755 

 

29,463 

Income taxes  (benefits)

 

1,355 

 

847 

 

(509)

 

10,768 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

3,464 

 

2,318 

 

7,264 

 

18,695 

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

Loss from discontinued operations

 

 

(55)

 

 

(182)

 

 

 

 

 

 

 

 

 

Net income

 

3,464 

 

2,263 

 

7,264 

 

18,513 

 

 

 

 

 

 

 

 

 

Less income from noncontrolling interests

 

 

 

 

 

 

 

 

 

in subsidiaries

 

(424)

 

(565)

 

(1,040)

 

(781)

 

 

 

 

 

 

 

 

 

 

Net income attributable to IHC

$

3,040 

$

1,698 

$

6,224 

$

17,732 

 

 

 

 

 

 

 

 

 


·

Income from continuing operations of $.19 per share, diluted, for the three months ended June 30, 2011 compared to $.11 per share, diluted, for the same period in 2010. Income from continuing operations of $.40 per share, diluted, for the six months ended June 30, 2011, compared to $1.17 per share, diluted, for the six months ended June 30, 2010.  Net income for 2010 includes a $16.7 million after-tax gain on the bargain purchase of AMIC;


·

Consolidated investment yields (on an annualized basis) of 4.2% and 4.3% for the three months and six months ended June 30, 2011 compared to 4.5% and 4.4% for the respective periods in 2010;


·

Released $2.3 million of deferred income taxes relative to its investment in AMIC based on the Company’s intention to adopt tax planning strategies to recover its investment in AMIC in a tax-free manner;


·

Increased ownership interest in AMIC to 63.0% and, in July 2011, commenced an offer to exchange up to 908,085 shares of IHC common stock for shares of AMIC common stock in an effort to further increase its ownership interest in AMIC to 80%; and


·

Book value of $15.58 per common share, an increase of $.44 per common share from December 31, 2010. The increase is primarily a result of current period net income and the acquisition of noncontrolling interests in AMIC, offset by the issuance of 600,218 shares of common stock during the period.


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


·

The Medical Stop-Loss segment reported income before taxes of $1.9 million for each of the second quarters of 2011 and 2010, and reported income before taxes of $1.9 million for the six months ended June 30, 2011 compared to $2.5 million in the first six months of 2010. The decrease is primarily due to increased combined ratios in 2011 from certain non-owned MGUs;



30



o

Premiums earned decreased $6.5 million and $4.5 million for the three-month and six-month periods ended June 30, 2011, respectively, when compared to the same periods in 2010. The decrease in premiums earned is due to the cancellation of certain non-owned managing general underwriters in 2010.


o

Underwriting experience for the Medical Stop-Loss segment, as indicated by its GAAP Combined Ratios, are as follows for the periods indicated (in thousands):


 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

Premiums Earned

$

27,421

$

33,947

$

55,316

$

59,796

Insurance Benefits, Claims & Reserves

 

18,233

 

24,458

 

39,127

 

43,274

Expenses

 

8,351

 

8,633

 

16,602

 

15,409

 

 

 

 

 

 

 

 

 

Loss Ratio(A)

 

66.5%

 

72.0%

 

70.7%

 

72.4%

Expense Ratio (B)

 

30.4%

 

25.5%

 

30.0%

 

25.7%

Combined Ratio (C)

 

96.9%

 

97.5%

 

100.7%

 

98.1%

 

 

 

 

 

 

 

 

 


(A)

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

(B)

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

(C)

Combined ratio is equal to the sum of the loss ratio and the expenses ratio.


·

The Fully Insured Health segment reported $1.6 million of income before taxes for the three months ended June 30, 2011 as compared to break-even results for the comparable period in 2010, and reported $4.9 million of income before taxes for the six months ended June 30, 2011 compared to $1.1 million for the same period in 2010.


o

Fee and other income decreased $.4 million and $.7 million for the three months and six months ended June 30, 2011, respectively, as compared to the same periods in 2010.


o

Premiums earned increased $7.0 million and $19.7 million for the three months and six months ended June 30, 2011 over the comparable periods in 2010. The increase is primarily due to increased retentions in certain lines of this business.


o

Underwriting experience, as indicated by its GAAP Combined Ratios, for the Fully Insured segment are as follows for the periods indicated (in thousands):



31




 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

Premiums Earned

$

36,452

$

29,541

$

73,247

$

53,508

Insurance Benefits, Claims & Reserves

 

24,888

 

21,241