Company Quick10K Filing
Quick10K
Independence Holding
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$35.76 15 $529
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
8-K 2018-11-13
8-K 2018-09-24
8-K 2018-08-07
8-K 2018-03-16
LFC China Life Insurance
MET Metlife
LNC Lincoln National
AEG Aegon
TMK Torchmark
RGA Reinsurance Group of America
PRI Primerica
BHF Brighthouse Financial
ANAT American National Insurance
PRS Primus Guaranty
IHC 2018-09-30
Part I - Financial Information
Item 1.Financial Statements
Note 1.Organization, Consolidation, Basis of Presentation and Accounting Policies
Note 2.Income per Common Share
Note 3.Cash, Cash Equivalents and Restricted Cash
Note 4.Investment Securities
Note 5.Fair Value Disclosures
Note 6.Other Investments, Including Variable Interest Entities
Note 7.Goodwill and Other Intangible Assets
Note 8.Income Taxes
Note 9.Policy Benefits and Claims
Note 10.Stockholders' Equity
Note 11.Share-Based Compensation
Note 12.Supplemental Disclosures of Cash Flow Information
Note 13.Contingencies
Note 14.Segment Reporting
Item 2.Management's Discussion and Analysis of Financial
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 ihc3q2018_ex31z1.htm
EX-31.2 ihc3q2018_ex31z2.htm
EX-32.1 ihc32018_ex32z1.htm
EX-32.2 ihc3q2018_ex32z2.htm

Independence Holding Earnings 2018-09-30

IHC 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

INDEPENDENCE HOLDING COMPANY - Form 10-Q SEC filing
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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 September 30, 2018.

 

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

For the transition period from: ________ to _________

 

Commission File Number: 001-32244

 

INDEPENDENCE HOLDING COMPANY

(Exact name of registrant as specified in its charter)

 

Delaware

 

581407235

(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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes   [X]   No [  ]

 

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

 

Large Accelerated Filer [    ]

Accelerated Filer   [ X ]

Non-Accelerated Filer   [    ]

Smaller Reporting Company   [ X ]

Emerging Growth Company   [    ]

 

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes   [  ]   No   [X]

 

Class

Outstanding at November 2, 2018

Common stock, $ 1.00  par value

14,795,106 Shares



 

INDEPENDENCE HOLDING COMPANY

 

INDEX

 

PART I – FINANCIAL INFORMATION

PAGE

 

 

NO.

 

 

 

Item 1. Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets

4

 

 

 

Condensed Consolidated Statements of Income

5

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss)

6

 

 

 

Condensed Consolidated Statement of Changes in Equity

7

 

 

 

Condensed Consolidated Statements of Cash Flows

8

 

 

 

Notes to Condensed Consolidated Financial Statements

9

 

 

 

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

28

 

and Results of Operations

 

 

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

42

 

 

 

Item 4. Controls and Procedures

42

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1.    Legal Proceedings

42

 

 

 

 

Item 1A. Risk Factors

43

 

 

 

 

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

43

 

 

 

 

Item 3.   Defaults Upon Senior Securities

43

 

 

 

 

Item 4.    Mine Safety Disclosures

44

 

 

 

 

Item 5.    Other Information

44

 

 

 

Item 6.    Exhibits

44

 

 

 

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

 

Numerous risks and uncertainties may impact the matters addressed by our forward-looking statements, any of which could negatively and materially affect our future financial results and performance.  We describe some of these risks and uncertainties in greater detail in Item 1A, Risk Factors, of IHC’s Annual Report 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)

 

 

 

 

 

September 30, 2018

 

 

December 31, 2017

 

 

 

(Unaudited)

 

 

 

ASSETS:

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

Short-term investments

 

$

1,047  

 

$

50 

Securities purchased under agreements to resell

 

 

18,025  

 

 

10,269 

Fixed maturities, available-for-sale

 

 

432,950  

 

 

441,912 

Equity securities

 

 

5,528  

 

 

6,120 

Other investments

 

 

17,511  

 

 

18,547 

Total investments

 

 

475,061  

 

 

476,898 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

25,620  

 

 

26,465 

Due and unpaid premiums

 

 

29,100  

 

 

21,950 

Due from reinsurers

 

 

371,540  

 

 

380,593 

Goodwill

 

 

50,697  

 

 

50,697 

Other assets

 

 

83,928  

 

 

84,020 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

1,035,946  

 

$

1,040,623 

 

 

 

 

 

 

 

LIABILITIES AND  EQUITY:

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

Policy benefits and claims

 

$

158,168  

 

$

168,683  

Future policy benefits

 

 

209,588  

 

 

214,766  

Funds on deposit

 

 

141,685  

 

 

143,537  

Unearned premiums

 

 

9,452  

 

 

6,666  

Other policyholders' funds

 

 

10,900  

 

 

10,402  

Due to reinsurers

 

 

4,855  

 

 

3,808  

Accounts payable, accruals and other liabilities

 

 

53,752  

 

 

56,453  

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

 

588,400  

 

 

604,315  

 

 

 

 

 

 

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

Redeemable noncontrolling interest

 

 

2,146  

 

 

2,065  

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

Preferred stock $1.00 par value, 100,000 shares authorized;

 

 

 

 

 

 

none issued or outstanding

 

 

-  

 

 

-  

Common stock $1.00 par value, 23,000,000 shares authorized;

 

 

 

 

 

 

18,625,458 and 18,625,458 shares issued; and 14,799,672 and

 

 

 

 

 

 

14,890,285 shares outstanding

 

 

18,625  

 

 

18,625  

Paid-in capital

 

 

125,279  

 

 

124,538  

Accumulated other comprehensive loss

 

 

(11,963) 

 

 

(4,598) 

Treasury stock, at cost; 3,825,786 and 3,735,173 shares

 

 

(66,918) 

 

 

(63,404) 

Retained earnings

 

 

377,848  

 

 

356,383  

 

 

 

 

 

 

 

TOTAL IHC STOCKHOLDERS’ EQUITY

 

 

442,871  

 

 

431,544  

NONREDEEMABLE NONCONTROLLING INTERESTS

 

 

2,529  

 

 

2,699  

 

 

 

 

 

 

 

TOTAL EQUITY

 

 

445,400  

 

 

434,243  

 

 

 

 

 

 

 

TOTAL LIABILITIES AND EQUITY

 

$

1,035,946  

 

$

1,040,623  

 

 

 

See the accompanying Notes to Condensed Consolidated Financial Statements.


4


 

 

 

INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(In thousands, except per share data)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2018

 

2017

 

2018

 

2017

REVENUES:

 

 

 

 

 

 

 

 

Premiums earned

$

81,757  

$

75,639  

$

238,583  

$

210,507  

Net investment income

 

3,611  

 

4,403  

 

10,214  

 

12,414  

Fee income

 

4,397  

 

2,634  

 

14,193  

 

11,556  

Other income

 

153  

 

361  

 

472  

 

2,365  

Net investment gains (losses)

 

17  

 

715  

 

(335) 

 

987  

 

 

 

 

 

 

 

 

 

 

 

89,935  

 

83,752  

 

263,127  

 

237,829  

EXPENSES:

 

 

 

 

 

 

 

 

Insurance benefits, claims and reserves

 

36,011  

 

33,536  

 

105,619  

 

103,071  

Selling, general and administrative expenses

 

41,021  

 

42,337  

 

126,057  

 

115,404  

 

 

 

 

 

 

 

 

 

 

 

77,032  

 

75,873  

 

231,676  

 

218,475  

 

 

 

 

 

 

 

 

 

Income before income taxes

 

12,903  

 

7,879  

 

31,451  

 

19,354  

Income taxes (benefits)

 

2,860  

 

2,666  

 

7,518  

 

(5,175) 

 

 

 

 

 

 

 

 

 

Net income

 

10,043  

 

5,213  

 

23,933  

 

24,529  

(Income) loss from nonredeemable noncontrolling interests

 

(59) 

 

32  

 

(99) 

 

(4) 

(Income) from redeemable noncontrolling interests

 

(49) 

 

(16) 

 

(181) 

 

(29) 

 

 

 

 

 

 

 

 

 

NET INCOME ATTRIBUTABLE TO IHC

$

9,935  

$

5,229  

$

23,653  

$

24,496  

 

 

 

 

 

 

 

 

 

Basic income per common share

$

0.67  

$

0.35  

$

1.60 

$

1.53  

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING

 

14,795  

 

14,965  

 

14,808 

 

15,999  

 

 

 

 

 

 

 

 

 

Diluted income per common share

$

0.66  

$

0.34  

$

1.57 

$

1.50  

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING

 

15,109  

 

15,274  

 

15,104 

 

16,287  

 

 

 

 

 

 

 

 

 

See the accompanying Notes to Condensed Consolidated Financial Statements.


5


 

 

 

INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(In thousands)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

Net income

$

10,043  

$

5,213 

$

23,933  

$

24,529  

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

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

 

(925) 

 

250 

 

(8,908) 

 

7,219  

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

 

(199) 

 

90 

 

(1,893) 

 

2,599  

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

 

(726) 

 

160 

 

(7,015) 

 

4,620  

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax

 

(726) 

 

160 

 

(7,015) 

 

4,620  

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME, NET OF TAX

 

9,317  

 

5,373 

 

16,918  

 

29,149  

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

noncontrolling interests:

 

 

 

 

 

 

 

 

(Income) loss from noncontrolling interests in subsidiaries

 

(108) 

 

16 

 

(280) 

 

(33) 

Other comprehensive income, net of tax, attributable to

 

 

 

 

 

 

 

 

noncontrolling interests

 

 

 

- 

 

 

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE (INCOME) LOSS, NET OF TAX,

 

 

 

 

 

 

 

 

   ATTRIBUTABLE TO NONCONTROLLING INTERESTS

 

(108) 

 

16 

 

(280) 

 

(33) 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME, NET OF TAX,

 

 

 

 

 

 

 

 

   ATTRIBUTABLE TO IHC

$

9,209  

$

5,389 

$

16,638  

$

29,116  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See the accompanying Notes to Condensed Consolidated Financial Statements.


6


 

 

INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ACCUMULATED

 

 

 

 

 

 

 

NONREDEEMABLE

 

 

 

 

 

 

 

 

OTHER

 

TREASURY

 

 

 

TOTAL IHC

 

NON-

 

 

 

 

COMMON

 

PAID-IN

 

COMPREHENSIVE

 

STOCK,

 

RETAINED

 

STOCKHOLDERS'

 

CONTROLLING

 

TOTAL

 

 

STOCK

 

CAPITAL

 

LOSS

 

AT COST

 

EARNINGS

 

EQUITY

 

INTERESTS

 

EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DECEMBER 31, 2017

$

18,625 

$

124,538 

$

(4,598) 

$

(63,404) 

$

356,383  

$

431,544  

$

2,699  

$

434,243  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative effects of new

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

accounting principles

 

 

 

 

 

(350) 

 

 

 

34  

 

(316) 

 

(97) 

 

(413) 

Net income

 

 

 

 

 

 

 

 

 

23,653  

 

23,653  

 

99  

 

23,752  

Other comprehensive

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

income (loss), net of tax

 

 

 

 

 

(7,015) 

 

 

 

 

 

(7,015) 

 

-  

 

(7,015) 

Repurchases of common stock

 

 

 

 

 

 

 

(3,817) 

 

 

 

(3,817) 

 

-  

 

(3,817) 

Common stock dividend ( $0.15 per share)

 

 

 

 

 

 

 

 

 

(2,222) 

 

(2,222) 

 

-  

 

(2,222) 

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

-  

 

(172) 

 

(172) 

Share-based compensation

 

 

 

741 

 

 

 

303  

 

 

 

1,044  

 

-  

 

1,044  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

$

18,625 

$

125,279 

$

(11,963) 

$

(66,918) 

$

377,848  

$

442,871  

$

2,529  

$

445,400  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See the accompanying Notes to Condensed Consolidated Financial Statements.


7


 

 

INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

 

 

 

Nine Months Ended September 30,

 

 

2018

 

 

2017

CASH FLOWS PROVIDED BY (USED BY) OPERATING ACTIVITIES:

 

 

 

 

 

Net income

$

23,933  

 

$

24,529  

Adjustments to reconcile net income to net change in cash from

 

 

 

 

 

operating  activities:

 

 

 

 

 

Amortization of deferred acquisition costs

 

681  

 

 

269  

Net investment (gains) losses

 

335  

 

 

(987) 

Equity (income) loss from equity method investments

 

976  

 

 

(1,412) 

Depreciation and amortization

 

1,953  

 

 

1,379  

Deferred tax expense

 

3,535  

 

 

1,853  

Other

 

4,808  

 

 

4,852  

 Changes in assets and liabilities:

 

 

 

 

 

Change in insurance liabilities

 

(12,181) 

 

 

(83,750) 

Change in  amounts due from reinsurers

 

9,053  

 

 

57,094  

Change in claim fund balances

 

294  

 

 

8,463  

Change in current income tax liability

 

1,031  

 

 

(8,604) 

Change in due and unpaid premiums

 

(7,150) 

 

 

10,218  

Other operating activities

 

(6,630) 

 

 

6,302  

 

 

 

 

 

 

Net change in cash from operating activities

 

20,638  

 

 

20,206  

 

 

 

 

 

 

CASH FLOWS PROVIDED BY (USED BY) INVESTING ACTIVITIES:

 

 

 

 

 

Net (purchases) sales and maturities of short-term investments

 

(999) 

 

 

6,849  

Net (purchases) sales of securities under resale agreements

 

(7,756) 

 

 

8,365  

Sales of equity securities

 

698  

 

 

-  

Sales of fixed maturities

 

55,338  

 

 

158,062  

Maturities and other repayments of fixed maturities

 

21,992  

 

 

16,841  

Purchases of fixed maturities

 

(79,374) 

 

 

(145,444) 

Payments to acquire business, net of cash acquired

 

-  

 

 

(12,323) 

Distributions from other investments

 

-  

 

 

5,246  

Purchases of other investments

 

-  

 

 

(602) 

Other investing activities

 

(3,709) 

 

 

(565) 

 

 

 

 

 

 

Net change in cash from investing activities

 

(13,810) 

 

 

36,429  

 

 

 

 

 

 

CASH FLOWS PROVIDED BY (USED BY) FINANCING ACTIVITIES:

 

 

 

 

 

Repurchases of common stock

 

(3,943) 

 

 

(44,290) 

Withdrawals of investment-type insurance contracts

 

(1,033) 

 

 

(1,359) 

Dividends paid

 

(3,710) 

 

 

(1,927) 

Other financing activities

 

72  

 

 

(328) 

 

 

 

 

 

 

Net change in cash from financing activities

 

(8,614) 

 

 

(47,904) 

 

 

 

 

 

 

Net change in cash, cash equivalents and restricted cash

 

(1,786) 

 

 

8,731  

Cash, cash equivalents and restricted cash, beginning of year

 

32,197  

 

 

23,718  

 

 

 

 

 

 

Cash, cash equivalents and restricted cash, end of period

$

30,411  

 

$

32,449  

 

 

 

 

 

 

 

See the accompanying Notes to Condensed Consolidated Financial Statements.


8


INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

Note 1.Organization, Consolidation, Basis of Presentation and Accounting Policies 

 

(A)    Business and Organization 

 

Independence Holding Company, a Delaware corporation (“IHC”), is a holding company principally engaged in the life and health insurance business through: (i) its insurance companies, Standard Security Life Insurance Company of New York ("Standard Security Life"),  Madison National Life Insurance Company, Inc. ("Madison National Life"), and Independence American Insurance Company (“Independence American”); and (ii) its marketing and administrative companies, including IHC Specialty Benefits Inc., IHC Carrier Solutions, Inc. and a majority interest in PetPartners, Inc. IHC also owns a significant equity interest in Ebix Health Exchange Holdings, LLC (“Ebix Health Exchange”), an administration exchange for health insurance. Standard Security Life, Madison National Life and Independence American are sometimes collectively referred to as the “Insurance Group”. IHC and its subsidiaries (including the Insurance Group) are sometimes collectively referred to as the "Company", or “IHC”, or are implicit in the terms “we”, “us” and “our”. 

 

Geneve Corporation, a diversified financial holding company, and its affiliated entities, held approximately 62% of IHC's outstanding common stock at September 30, 2018.  

 

(B)     Basis of Presentation 

 

The unaudited Condensed Consolidated Financial Statements have been prepared in conformity with U.S. generally accepted accounting principles ("GAAP") for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited Condensed Consolidated Financial Statements include the accounts of IHC and its consolidated subsidiaries. All significant intercompany transactions have been eliminated in consolidation. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect: (i) the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements; and (ii) the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. IHC’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission should be read in conjunction with the accompanying unaudited Condensed Consolidated Financial Statements.

 

In the opinion of management, all adjustments (consisting only of normal recurring accruals) that are necessary for a fair presentation of the consolidated financial position and results of operations for the interim periods have been included. The condensed consolidated results of operations for the three months and nine months ended September 30, 2018 are not necessarily indicative of the results to be anticipated for the entire year.

 

(C)   Reclassifications 

 

Certain amounts in prior year’s consolidated financial statements and Notes thereto have been reclassified to conform to the 2018 presentation primarily as a result of new accounting principles adopted in the current year.


9


 

(D)   Revenue Recognition 

 

Insurance premiums are recognized as revenue over the period insurance protection is provided. For additional information about our policies regarding the recognition of premium revenues, see Note 1 of the Notes to Consolidated Financial Statements included in our 2017 Annual Report on Form 10-K as filed with the Securities and Exchange Commission.

 

Fee income includes fees and commissions for various sales, marketing and administrative services provided by our marketing and administrative companies. Revenue is recognized as these services are performed. For these administrative service and other contracts, we have no material contract assets or contract liabilities on our consolidated balance sheet at September 30, 2018. Revenue recognized from performance obligations related to prior periods, and revenue expected to be recognized in future periods related to unfulfilled contractual performance obligations and contracts with variable consideration, is not material.

 

 

(E)   Recent Accounting Pronouncements 

 

Recently Adopted Accounting Standards

 

In May 2017, the Financial Accounting Standards Board (the “FASB”) issued guidance to provide clarity and reduce both (i) diversity in practice; and (ii) cost and complexity when accounting for a change in the terms or conditions of a share-based payment award. The amendments in this guidance will be applied prospectively. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

 

In January 2017, the FASB issued guidance that clarifies the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. The amendments in this guidance will be applied prospectively. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

 

In November 2016, the FASB issued guidance requiring entities to show the changes in the total cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. The amendments in this guidance were applied retrospectively. The adoption of this guidance did not have a material effect on the Company’s Statements of Cash Flows and had no effect on the Company’s consolidated financial position or results of operations.

 

In October 2016, the FASB issued guidance requiring an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments in this guidance were applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the January 1, 2018. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

 

In August 2016, the FASB issued guidance that changes how certain cash receipts and cash payments are presented and classified in the cash flows statement. The Company has elected to classify distributions received from equity method investees using the cumulative earnings approach. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

 

In January 2016, the FASB issued guidance that eliminates the requirement to classify equity securities with readily determinable fair values as trading or available-for-sale. The guidance requires equity securities, other than those that result in consolidation or are accounted for under the equity method (including other ownership interests, such as partnerships, unincorporated joint ventures, and limited liability companies), to be measured at fair value with changes in the fair value recognized through net income, simplifies the


10


impairment assessment of equity securities without readily determinable fair values and requires changes in disclosure requirements. The amendments in this guidance were applied by means of a cumulative-effect adjustment of $340,000 credit to retained earnings as of January 1, 2018. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) will be applied prospectively to equity investments that existed as of January 1, 2018. The adoption of this guidance did not have a material effect on the Company’s Consolidated Balance Sheet or IHC’s stockholders’ equity.

 

In May 2014, the FASB issued revenue recognition guidance for entities that either enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards such as insurance contracts or lease contracts. The amendment provides specific steps that an entity should apply in order to achieve its main objective which is recognizing revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Substantially all of the Company’s revenue sources are excluded from the scope of the standard. For those revenue sources within the scope of the standard (included in the Fee income line of the Condensed Consolidated Statement of Income), there were no material changes in the timing or measurement of revenues. The amendments in this guidance were applied retrospectively with a cumulative effect adjustment on January 1, 2018, and as such, the Company recorded $552,000 of contract assets and $1,094,000 of deferred revenues, which are included on the Condensed Consolidated Balance Sheet in other assets and accounts payable, accruals and other liabilities. The overall net impact on retained earnings was a charge of $306,000, after the effects of taxes and noncontrolling interests.

 

Recently Issued Accounting Standards Not Yet Adopted 

 

In August 2018, the FASB issued guidance to improve existing measurements, presentation and disclosure requirements for long-duration contracts issued by insurance entities. The amendments in this guidance requires an entity to (1) review and update assumptions used to measure cash flows at least annually as well as update the discount rate assumption at each reporting date; (2) measure market risk benefits associated with deposit contracts at fair value; (3) disclose liability rollforwards and information about significant inputs, judgements assumptions, and methods used in measurement. Additionally, it simplifies the amortization of deferred acquisition costs and other balances on a constant level basis over the expected term of the related contracts. The amendments in this guidance are effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods within that fiscal year. Upon adoption, the amendments in this guidance should be applied to contracts in-force as of the beginning of the earliest period presented with a cumulative adjustment to beginning retained earnings. Management is evaluating the requirements and potential impact that the adoption of this guidance will have on the Company’s consolidated financial statements.

 

In August 2018, the FASB issued guidance to improve the effectiveness of disclosures in the notes to financial statements regarding fair value measurements. The amendments in this guidance are effective for all entities for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. Certain amendments should be applied prospectively for the most recent interim or annual period presented in the initial fiscal year of adoption while other amendments should be applied retrospectively to all periods presented upon the effective date. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.

 

In July 2018, the FASB issued guidance to simplify several aspects of accounting for nonemployee share-based compensation. The amendments in this guidance are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.

 


11


In March 2017, the FASB issued guidance requiring premium amortization on callable debt securities to be amortized to the earliest call date to more closely align the amortization period with expectations incorporated in market pricing of the underlying securities. The amendments in this guidance should be applied using a modified retrospective approach for annual periods beginning after December 15, 2018, including interim periods within those periods. Additional disclosures are required in the period of adoption. Early adoption is permitted. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.

 

In January 2017, the FASB issued guidance to simplify the test for goodwill impairment by eliminating Step 2 in the goodwill impairment test. Instead, under the amendments in this guidance, an entity should perform its annual or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Additionally, an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The amendments in this guidance are effective for public business entities for annual, or any interim, goodwill impairment tests in fiscal years beginning after December 15, 2019. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.

 

In June 2016, the FASB issued guidance requiring financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. An allowance for credit losses will be deducted from the amortized cost basis to present the net carrying value at the amount expected to be collected with changes in the allowance recorded in earnings. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses rather than the currently applied U.S. GAAP method of taking a permanent impairment of the security, which would be limited to the amount by which fair value is below the amortized cost. Certain existing requirements used to evaluate credit losses have been removed. For public entities that are SEC filers, the amendments in this guidance are effective for fiscal years beginning after December 15, 2019, including interim periods within those years. Early adoption is permitted for fiscal years beginning after December 15, 2018. The amendments in this guidance should be applied through a cumulative effect adjustment to retained earnings upon adoption as of the beginning of the first reporting period in which the guidance is effective. Management is evaluating the requirements and potential impact that the adoption of this guidance will have on the Company’s consolidated financial statements.

 

In February 2016, the FASB issued guidance that requires lessees to recognize the assets and liabilities that arise from leases, including operating leases, on the statement of financial position. The amendments in this guidance are effective for fiscal years beginning after December 31, 2018, including interim periods within those fiscal years. In July 2018, the FASB issued additional guidance that allows entities the option to either recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption or to use a modified retrospective approach. The Company is in the process of analyzing its lease portfolio. This process includes the evaluation of policies, processes and internal controls that will be required to comply with this new guidance. The Company plans to elect the practical expedients permitted within the new standard, which among other things, allows us to carryforward the historical lease classification.  In addition, the Company plans to select the new transition method and apply the new lease requirements in the period of adoption without adjustment to the financial statements for periods prior to adoption. The Company expects the adoption of this new standard to result in an increase on its consolidated balance sheet for right-of-use assets and corresponding lease liabilities. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated results of operations or cash flows.


12


 

 

Note 2.Income Per Common Share 

 

Diluted income per share was computed using the treasury stock method and includes incremental common shares, primarily from the dilutive effect of share-based payment awards, amounting to 314,000 and 296,000 shares for the three and nine months ended September 30, 2018, respectively, and 309,000 and 288,000 shares for the three months and nine months ended September 30, 2017.

 

Note 3.Cash, Cash Equivalents and Restricted Cash 

 

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Condensed Consolidated Balance Sheets to the amounts shown in the Condensed Consolidated Statements of Cash Flows for the periods indicated (in thousands): 

 

 

 

September 30,

 

 

2018

 

2017

 

 

 

 

 

Cash and cash equivalents

$

25,620 

$

26,565 

Restricted cash included in other assets

 

4,791 

 

5,884 

 

 

 

 

 

Total cash, cash equivalents and restricted cash

$

30,411 

$

32,449 

 

 

 

 

 

 

Restricted cash includes insurance premiums collected from insureds that are pending remittance to insurance carriers and/or payment of insurance claims and commissions to third party administrators. These amounts are required to be set aside by contractual agreements with the insurance carriers and are included in other assets on the Condensed Consolidated Balance Sheets.

 

Note 4.Investment Securities 

 

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

 

 

 

September 30, 2018 

 

 

 

 

GROSS 

 

GROSS 

 

 

 

 

AMORTIZED

 

UNREALIZED

 

UNREALIZED

 

FAIR 

 

 

COST 

 

GAINS 

 

LOSSES 

 

VALUE 

 

 

 

 

 

 

 

 

 

FIXED MATURITIES

 

 

 

 

 

 

 

 

AVAILABLE-FOR-SALE:

 

 

 

 

 

 

 

 

Corporate securities

$

200,252 

$

537 

$

(6,882) 

$

193,907 

CMOs – residential (1)

 

6,266 

 

2 

 

(388) 

 

5,880 

U.S. Government obligations

 

48,857 

 

- 

 

(730) 

 

48,127 

Agency MBS – residential (2)

 

6 

 

- 

 

- 

 

6 

GSEs (3)

 

9,566 

 

- 

 

(347) 

 

9,219 

States and political subdivisions

 

173,109 

 

129 

 

(7,186) 

 

166,052 

Foreign government obligations

 

4,081 

 

- 

 

(119) 

 

3,962 

Redeemable preferred stocks

 

5,970 

 

- 

 

(173) 

 

5,797 

 

 

 

 

 

 

 

 

 

Total fixed maturities

$

448,107 

$

668 

$

(15,825) 

$

432,950 

 


13


 

 

 

 

December 31, 2017 

 

 

 

 

GROSS 

 

GROSS 

 

 

 

 

AMORTIZED

 

UNREALIZED

 

UNREALIZED

 

FAIR 

 

 

COST 

 

GAINS 

 

LOSSES 

 

VALUE 

 

 

 

 

 

 

 

 

 

FIXED MATURITIES

 

 

 

 

 

 

 

 

AVAILABLE-FOR-SALE:

 

 

 

 

 

 

 

 

Corporate securities

$

148,996 

$

298 

$

(2,847) 

$

146,447 

CMOs - residential (1)

 

6,857 

 

- 

 

(180) 

 

6,677 

U.S. Government obligations

 

85,510 

 

- 

 

(396) 

 

85,114 

Agency MBS - residential (2)

 

14 

 

- 

 

-  

 

14 

GSEs (3)

 

9,887 

 

- 

 

(205) 

 

9,682 

States and political subdivisions

 

182,664 

 

598 

 

(3,619) 

 

179,643 

Foreign government obligations

 

4,227 

 

13 

 

(90) 

 

4,150 

Redeemable preferred stocks

 

10,006 

 

179 

 

- 

 

10,185 

 

 

 

 

 

 

 

 

 

Total fixed maturities

$

448,161 

$

1,088 

$

(7,337) 

$

441,912 

 

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

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

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

 

 

The amortized cost and fair value of fixed maturities available-for-sale at September 30, 2018, by contractual maturity, are shown below (in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

 

 

 

 

AMORTIZED

 

 

FAIR

 

 

 

COST

 

 

VALUE

 

 

 

 

 

 

 

Due in one year or less

 

$

27,898

 

$

27,734

Due after one year through five years

 

 

174,430

 

 

170,503

Due after five years through ten years

 

 

138,042

 

 

132,762

Due after ten years

 

 

91,899

 

 

86,846

Fixed maturities with no single maturity date

 

 

15,838

 

 

15,105

 

 

 

 

 

 

 

 

 

$

448,107

 

$

432,950

 

 

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


14


 

 

 

 

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

Less than 12 Months

 

 

12 Months or Longer

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

Unrealized

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate securities

$

98,623

 

$

2,949 

 

$

88,261

 

$

3,933 

 

$

186,884

$

6,882 

CMOs - residential

 

859

 

 

57 

 

 

5,106

 

 

331 

 

 

5,965

 

388 

U.S. Government obligations

 

39,740

 

 

328 

 

 

8,388

 

 

402 

 

 

48,128

 

730 

GSEs

 

-

 

 

- 

 

 

9,318

 

 

347 

 

 

9,318

 

347 

States and political subdivisions

 

59,619

 

 

1,753 

 

 

99,307

 

 

5,433 

 

 

158,926

 

7,186 

Foreign government obligations

 

1,145

 

 

12 

 

 

2,816

 

 

107 

 

 

3,961

 

119 

Redeemable preferred stocks

 

5,797

 

 

173 

 

 

-

 

 

- 

 

 

5,797

 

173 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Fixed maturities in an

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      unrealized loss position

$

205,783

 

$

5,272 

 

$

213,196

 

$

10,553 

 

$

418,979

$

15,825 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of fixed maturities in an

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  unrealized loss position

 

99

 

 

 

 

 

96

 

 

 

 

 

195

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

Less than 12 Months

 

 

12 Months or Longer

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

Unrealized

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate securities

$

85,642

 

$

1,250 

 

$

44,640

 

$

1,597 

 

$

130,282

$

2,847 

CMOs - residential

 

1,381

 

 

45 

 

 

5,237

 

 

135 

 

 

6,618

 

180 

U.S. Government obligations

 

75,811

 

 

198 

 

 

9,302

 

 

198 

 

 

85,113

 

396 

GSEs

 

-

 

 

- 

 

 

9,669

 

 

205 

 

 

9,669

 

205 

States and political subdivisions

 

83,682

 

 

1,348 

 

 

66,617

 

 

2,271 

 

 

150,299

 

3,619 

Foreign government obligations

 

2,959

 

 

90 

 

 

-

 

 

- 

 

 

2,959

 

90 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Fixed maturities in an

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      unrealized loss position

$

249,475

 

$

2,931 

 

$

135,465

 

$

4,406 

 

$

384,940

$

7,337 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of fixed maturities in an

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  unrealized loss position

 

60

 

 

 

 

 

76

 

 

 

 

 

136

 

 

 

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

 


15


 

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

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

Realized gains (losses):

 

 

 

 

 

 

 

 

  Fixed maturities available-for-sale

$

(247) 

$

719  

$

(442) 

$

1,062  

  Equity securities

 

(2) 

 

-  

 

(7) 

 

-  

 

 

 

 

 

 

 

 

 

     Total realized gains (losses) on debt and equity securities

 

(249) 

 

719  

 

(449) 

 

1,062  

Unrealized gains (losses) on equity securities

 

266  

 

(4) 

 

114  

 

(76) 

 

 

 

 

 

 

 

 

 

Gains (losses) on debt and equity securities

 

17  

 

715  

 

(335) 

 

986  

Gains (losses) on other investments

 

-  

 

-  

 

-  

 

1  

 

 

 

 

 

 

 

 

 

Net investment gains (losses)

$

17  

$

715  

$

(335) 

$

987  

 

 

For the three months and nine months ended September 30, 2018, the Company realized gross gains of $130,000 and $449,000, respectively, and gross losses of $377,000 and $891,000, respectively, from sales, maturities and prepayments of fixed maturities available-for-sale. For the three months and nine months ended September 30, 2017, the company realized gross gains of $780,000 and $2,119,000, respectively, and gross losses of $61,000 and $1,057,000, respectively, from sales, maturities and prepayments of fixed maturities available for sale.

 

Other-Than-Temporary Impairment Evaluations

 

We recognize other-than-temporary impairment losses in earnings in the period that we determine: 1) we intend to sell the security; 2) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis; or 3) the security has a credit loss. Any non-credit portion of the other-than-temporary impairment loss is recognized in other comprehensive income (loss). See Note 1F(iv) to the Consolidated Financial Statements in the 2017 Annual Report on Form 10-K for further discussion of the factors considered by management in its regular review to identify and recognize other-than-temporary impairments on fixed maturities available-for-sale. The Company did not recognize any other-than-temporary impairments on fixed maturities available-for-sale securities in the first nine months of 2018 or 2017.

 

 

Note 5.Fair Value Disclosures  

 

 

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

 

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

 

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

 

Level 3 - Instruments where significant value drivers are unobservable.


16


 

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

 

Fixed maturities available-for-sale:

 

Fixed maturities available-for-sale included in Level 2 are comprised of our portfolio of government securities, agency mortgage-backed securities, corporate fixed income securities, foreign government obligations, collateralized mortgage obligations, municipals and GSEs that were priced with observable market inputs. Level 3 debt securities consist of municipal tax credit strips.  The valuation method used to determine the fair value of municipal tax credit strips is the present value of the remaining future tax credits (at the original issue discount rate) as presented in the redemption tables in the Municipal Prospectuses.  This original issue discount is accreted into income on a constant yield basis over the term of the debt instrument. Further, we retain independent pricing vendors to assist in valuing certain instruments.

 

Equity securities:

 

Equity securities included in Level 1 are equity securities with quoted market prices. 

 

The following tables present our financial assets measured at fair value on a recurring basis for the periods indicated (in thousands):

 

 

 

September 30, 2018

 

 

Level 1

 

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

FINANCIAL ASSETS:

 

 

 

 

 

 

 

 

 

Fixed maturities available-for-sale:

 

 

 

 

 

 

 

 

 

  Corporate securities

$

- 

 

$

193,907 

$

- 

$

193,907 

  CMOs - residential

 

- 

 

 

5,880 

 

- 

 

5,880 

  US Government obligations

 

- 

 

 

48,127 

 

- 

 

48,127 

  Agency MBS - residential

 

- 

 

 

6 

 

- 

 

6 

  GSEs

 

- 

 

 

9,219 

 

- 

 

9,219 

  States and political subdivisions

 

- 

 

 

164,300 

 

1,752 

 

166,052 

  Foreign government obligations

 

- 

 

 

3,962 

 

- 

 

3,962 

  Redeemable preferred stocks

 

5,797 

 

 

- 

 

- 

 

5,797 

     Total fixed maturities

 

5,797 

 

 

425,401 

 

1,752 

 

432,950 

 

 

 

 

 

 

 

 

 

 

Equity securities:

 

 

 

 

 

 

 

 

 

  Common stocks

 

2,691 

 

 

- 

 

- 

 

2,691 

  Nonredeemable preferred stocks

 

2,837 

 

 

- 

 

- 

 

2,837 

     Total equity securities

 

5,528 

 

 

- 

 

- 

 

5,528 

 

 

 

 

 

 

 

 

 

 

Total Financial Assets

$

11,325 

 

$

425,401 

$

1,752 

$

438,478 

 


17


 

 

 

 

December 31, 2017

 

 

Level 1

 

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

FINANCIAL ASSETS:

 

 

 

 

 

 

 

 

 

Fixed maturities available-for-sale:

 

 

 

 

 

 

 

 

 

  Corporate securities

$

- 

 

$

146,447 

$

- 

$

146,447 

  CMOs - residential

 

- 

 

 

6,677 

 

- 

 

6,677 

  US Government obligations

 

- 

 

 

85,114 

 

- 

 

85,114 

  Agency MBS - residential

 

- 

 

 

14 

 

- 

 

14 

  GSEs

 

- 

 

 

9,682 

 

- 

 

9,682 

  States and political subdivisions

 

- 

 

 

177,767 

 

1,876 

 

179,643 

  Foreign government obligations

 

- 

 

 

4,150 

 

- 

 

4,150 

  Redeemable preferred stocks

 

10,185 

 

 

- 

 

- 

 

10,185 

     Total fixed maturities

 

10,185 

 

 

429,851 

 

1,876 

 

441,912 

 

 

 

 

 

 

 

 

 

 

Equity securities:

 

 

 

 

 

 

 

 

 

  Common stocks

 

2,490 

 

 

- 

 

- 

 

2,490 

  Nonredeemable preferred stocks

 

3,630 

 

 

- 

 

- 

 

3,630 

     Total equity securities

 

6,120 

 

 

- 

 

- 

 

6,120 

 

 

 

 

 

 

 

 

 

 

Total Financial Assets

$

16,305 

 

$

429,851 

$

1,876 

$

448,032 

 

 

It is the Company’s policy to recognize transfers of assets and liabilities between levels of the fair value hierarchy at the end of a reporting period. The Company does not transfer out of Level 3 and into Level 2 until such time as observable inputs become available and reliable or the range of available independent prices narrow. The Company did not transfer any securities between Level 1, Level 2 or Level 3 in either 2018 or 2017.

 

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

 

 

 

Three Months Ended September 30,

 

 

2018

 

2017

 

 

States and

 

Total

 

States and

 

Total

 

 

Political

 

Level 3

 

Political

 

Level 3

 

 

Subdivisions

 

Assets

 

Subdivisions

 

Assets

 

 

 

 

 

 

 

 

 

Beginning balance

$

1,794  

$

1,794  

$

1,956  

$

1,956  

 

 

 

 

 

 

 

 

 

Increases (decreases) recognized in earnings:

 

 

 

 

 

 

 

 

   Net investment gains

 

-  

 

-  

 

-  

 

-  

 

 

 

 

 

 

 

 

 

Gains (losses) included in other

 

 

 

 

 

 

 

 

  comprehensive income (loss):

 

 

 

 

 

 

 

 

    Net unrealized gains (losses)

 

(8) 

 

(8) 

 

(8) 

 

(8) 

 

 

 

 

 

 

 

 

 

Repayments and amortization of

 

 

 

 

 

 

 

 

fixed maturities

 

(34) 

 

(34) 

 

(31) 

 

(31) 

Sales

 

-  

 

-  

 

-  

 

-  

 

 

 

 

 

 

 

 

 

Balance at end of period

$

1,752  

$

1,752  

$

1,917  

$

1,917  


18


 

 

 

Nine Months Ended September 30,

 

 

2018

 

2017

 

 

States and

 

Total

 

States and

 

Total

 

 

Political

 

Level 3

 

Political

 

Level 3

 

 

Subdivisions

 

Assets

 

Subdivisions

 

Assets

 

 

 

 

 

 

 

 

 

Beginning balance

$

1,876  

$

1,876  

$

2,033  

$

2,033  

 

 

 

 

 

 

 

 

 

Increases (decreases) recognized in earnings:

 

 

 

 

 

 

 

 

   Net investment gains

 

-  

 

-  

 

-  

 

-  

 

 

 

 

 

 

 

 

 

Gains (losses) included in other

 

 

 

 

 

 

 

 

comprehensive income (loss):

 

 

 

 

 

 

 

 

    Net unrealized gains (losses)

 

(23) 

 

(23) 

 

(26) 

 

(26) 

 

 

 

 

 

 

 

 

 

Repayments and amortization of

 

 

 

 

 

 

 

 

fixed maturities

 

(101) 

 

(101) 

 

(90) 

 

(90) 

Sales

 

-  

 

-  

 

-  

 

-  

 

 

 

 

 

 

 

 

 

Balance at end of period

$

1,752  

$

1,752  

$

1,917  

$

1,917  

 

 

 

The following table provides carrying values, fair values and classification in the fair value hierarchy of the Company’s financial instruments, that are not carried at fair value but are subject to fair value disclosure requirements, for the periods indicated (in thousands):

 

 

 

September 30, 2018

 

December 31, 2017

 

 

Level 1

 

Level 2

 

 

 

Level 1

 

Level 2

 

 

 

 

Fair

 

Fair

 

Carrying

 

Fair

 

Fair

 

Carrying

 

 

Value

 

Value

 

Value

 

Value

 

Value

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

FINANCIAL ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

  Short-term investments

$

1,047 

$

- 

$

1,047 

$

50 

$

- 

$

50 

 

 

 

 

 

 

 

 

 

 

 

 

 

FINANCIAL LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

  Funds on deposit

$

- 

$

141,813 

$

141,685 

$

- 

$

143,702 

$

143,537 

 

The following methods and assumptions were used to estimate the fair value of the financial instruments that are not carried at fair value in the Condensed Consolidated Financial Statements:

 

Short-term Investments

 

Investments with original maturities of 91 days to one year are considered short-term investments and are carried at cost, which approximates fair value.

 

Funds on Deposit

 

The Company has two types of funds on deposit. The first type is credited with a current market interest rate, resulting in a fair value which approximates the carrying amount. The second type carries fixed interest rates which are higher than current market interest rates. The fair value of these deposits was estimated by discounting the payments using current market interest rates. The Company's universal life policies are also credited with current market interest rates, resulting in a fair value which approximates the carrying amount. Both types of funds on deposit are included in Level 2 of the fair value hierarchy.


19


 

Note 6.Other Investments, Including Variable Interest Entities 

 

Included in other investments is our investment in Ebix Health Exchange which administers various lines of health insurance for IHC’s insurance subsidiaries. The carrying value of the Company’s equity investment in Ebix Health Exchange is $6,973,000 and $8,188,000 at September 30, 2018 and December 31, 2017, respectively. The Company recorded $(445,000) and $(1,216,000), respectively, of equity income (loss) from its investment for the three months and nine months ended September 30, 2018 and $(19,000) and $228,000, respectively, of equity income (loss) for the same periods ended September 30, 2017.

 

At September 30, 2018 and December 31, 2017, the Company’s Consolidated Balance Sheets include $1,886,000 and $1,859,000, respectively, of notes and other amounts receivable from Ebix Health Exchange and include $1,086,000 and $1,139,000, respectively, of administrative fees and other expenses payable to Ebix Health Exchange, which are included in other assets and accounts payable, accruals and other liabilities, respectively.  The Company’s Consolidated Statements of Income include administrative fee expenses to Ebix Health Exchange which are included in selling, general and administrative expenses of $1,796,000 and $6,269,000 for the three and nine months ended September 30, 2018, respectively, and $2,613,000 and $8,017,000, respectively, for the same periods of 2017.

 

Variable Interest Entities

 

The Company has a minority interest in certain limited partnerships that we have determined to be Variable Interest Entities (“VIEs”).  The aforementioned VIEs are not required to be consolidated in the Company’s condensed consolidated financial statements as we are not the primary beneficiary since we do not have the power to direct the activities that most significantly impact the VIEs’ economic performance.

 

The Company will periodically reassess whether we are the primary beneficiary in any of these investments. The reassessment process will consider whether we have acquired the power to direct the most significant activities of the VIE through changes in governing documents or other circumstances. Our maximum loss exposure is limited to our combined $4,131,000 carrying value in these equity investments which is included in other investments in the Condensed Consolidated Balance Sheet as of September 30, 2018.

 

 

Note 7.Goodwill and Other Intangible Assets 

 

The carrying amount of goodwill is $50,697,000 at both September 30, 2018 and December 31, 2017.

 

The Company has net other intangible assets of $13,545,000 and $14,669,000 at September 30, 2018 and December 31, 2017, respectively, which are included in other assets in the Condensed Consolidated Balance Sheets. These intangible assets consist of: (i) finite-lived intangible assets, principally the fair value of acquired agent and broker relationships, which are subject to amortization; and (ii) indefinite-lived intangible assets which consist of the estimated fair value of insurance licenses that are not subject to amortization.

 


20


 

The gross carrying amounts of these other intangible assets are as follows for the periods indicated (in thousands):

 

 

 

 

September 30, 2018

 

December 31, 2017

 

 

Gross

 

 

 

Gross

 

 

 

 

Carrying

 

Accumulated

 

Carrying

 

Accumulated

 

 

Amount

 

Amortization

 

Amount

 

Amortization

 

 

 

 

 

 

 

 

 

Finite-lived Intangible Assets:

 

 

 

 

 

 

 

 

  Agent and broker relationships

$

17,253 

$

13,096 

$

17,253 

$

12,140 

  Domain

 

1,000 

 

200 

 

1,000 

 

125 

  Software systems

 

780 

 

169 

 

780 

 

76 

     Total finite-lived

$

19,033 

$

13,465 

$

19,033 

$

12,341 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

 

 

 

 

2018

 

2017

Indefinite-lived Intangible Assets:

 

 

 

 

 

 

 

 

   Insurance licenses

 

 

 

 

$

7,977 

$

7,977 

     Total indefinite-lived

 

 

 

 

$

7,977 

$

7,977 

 

Amortization expense was $381,000 and $1,124,000 for the three and nine months ended September 30, 2018, respectively, and  was $393,000 and $941,000 for the three months and nine months ended September 30, 2017, respectively. 

 

Note 8.Income Taxes 

 

The provisions for income taxes shown in the Condensed Consolidated Statements of Income were computed by applying the effective tax rate expected to be applicable for the reporting periods. In 2017, President Trump signed tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, reducing the Federal corporate income tax rate to 21%. As a result of IHC’s June 30 fiscal tax year, the Tax Act subjects IHC to a blended tax rate of 28% for its fiscal tax year ended June 30, 2018. Other differences between the Federal statutory income tax rate and the Company’s effective income tax rate are principally from the dividends received deduction and tax exempt interest income, state and local income taxes, and compensation related tax provisions.


21


 

 

Note 9.Policy Benefits and Claims 

 

Policy benefits and claims is the liability for unpaid loss and loss adjustment expenses. It is comprised of unpaid claims and estimated IBNR reserves. Summarized below are the changes in the total liability for policy benefits and claims for the periods indicated (in thousands).

 

 

 

Nine Months Ended

 

 

September 30,

 

 

2018

 

 

2017

 

 

 

 

 

 

Balance at beginning of year

$

168,683  

 

$

219,113  

Less: reinsurance recoverable

 

42,136  

 

 

88,853  

Net balance at beginning of year

 

126,547  

 

 

130,260  

 

 

 

 

 

 

Amount incurred, related to:

 

 

 

 

 

  Current year

 

127,544  

 

 

114,795  

  Prior years

 

(19,152) 

 

 

(9,236) 

 

 

 

 

 

 

  Total incurred

 

108,392  

 

 

105,559  

 

 

 

 

 

 

Amount paid, related to:

 

 

 

 

 

  Current year

 

65,380  

 

 

52,822  

  Prior years

 

49,916  

 

 

56,452  

 

 

 

 

 

 

  Total paid

 

115,296  

 

 

109,274  

 

 

 

 

 

 

Net balance at end of period

 

119,643  

 

 

126,545  

Plus:  reinsurance recoverable

 

38,525  

 

 

43,002  

Balance at end of period

$

158,168  

 

$

169,547  

 

Since unpaid loss and loss adjustment expenses are estimates, actual losses incurred may be more or less than the Company’s previously developed estimates and is referred to as either unfavorable or favorable development, respectively. The overall net favorable development of $19,152,000 in 2018 related to prior years consists of favorable developments of $9,729,000 in the Specialty Health reserves, $7,862,000 in the group disability reserves, $1,346,000 in the other individual life, annuities and other reserves, and $215,000 in Medical Stop-Loss reserves. Specialty Health had net favorable development primarily from: (i) the release of reserves due to emerging favorable experience on hospital indemnity plan business written in 2017 on increased sales volume of this product; (ii) short-term medical business as inventory levels decreased during 2018 and paid claim activity was below the levels anticipated; and, (iii) favorable development in other lines of Specialty Health business. Group disability had net favorable development primarily as a result of a lower number of expected claims and greater number of expected terminations in our LTD business. The overall net favorable development of $9,236,000 in 2017 related to prior years primarily consists of favorable developments of $2,420,000 in the Medical Stop-Loss reserves, $5,406,000 in the group disability reserves, and $2,714,000 in the other individual life, annuities and other reserves, partially offset by an unfavorable development of $1,304,000 in Specialty Health reserves.

 


22


 

Included in the preceding rollforward of the Company’s liability for policy benefits and claims are the policy benefits and claims activity associated with the Company’s health insurance lines. These are embedded within the Specialty Health segment. The table below summarizes the components of the change in the liability for policy benefits and claims that are specific to health insurance claims for the periods indicated (in thousands).

 

 

 

 

Specialty Health Segment

 

 

Health Insurance Claims

 

 

Nine Months Ended

 

 

September 30,

 

 

2018

 

 

2017

 

 

 

 

 

 

Balance at beginning of year

$

32,904  

 

$

27,183  

Less: reinsurance recoverable

 

762  

 

 

1,179  

Net balance at beginning of year

 

32,142  

 

 

26,004  

 

 

 

 

 

 

Amount incurred, related to:

 

 

 

 

 

  Current year

 

37,099  

 

 

40,836  

  Prior years

 

(8,266) 

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