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| IHC > SEC Filings for IHC > Form 10-Q on 10-Nov-2008 | All Recent SEC Filings |
10-Nov-2008
Quarterly Report
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, 2007, 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.
Independence Holding Company, a Delaware corporation (NYSE: IHC), is a holding
company principally engaged in the life and health insurance business through:
(i) its wholly owned insurance companies, Standard Security Life Insurance
Company of New York ("Standard Security Life") and Madison National Life
Insurance Company, Inc. ("Madison National Life"), (the companies are sometimes
collectively referred to as the "insurance group"); and (ii) its marketing,
administrative and actuarial companies, including Insurers Administrative
Corporation ("IAC"), Majestic Underwriters LLC ("Majestic"), Health Plan
Administrators, Inc. ("HPA"), GroupLink Inc., in which it owns a majority
interest ("GroupLink"), IHC Health Solutions, Inc. ("IHC Health Solutions") and,
Actuarial Management Corporation ("AMC"). IHC and its subsidiaries (including
the Insurance Group) are sometimes collectively referred to as the "Company."
The Company also owns a 49.7% equity interest in American Independence Corp.
(NASDAQ:AMIC) which owns Independence American Insurance Company ("Independence
American"), three managing general underwriters ("MGUs"), and controlling
interests in two agencies.
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 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. The Company believes that the acquisition of AMC has further enabled it to make these assessments. 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:
The results of operations for the three months and nine months ended September 30, 2008 and 2007 are summarized as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
Revenues $ 81,934 $ 100,565 $ 275,670 $ 303,501
Expenses 97,226 113,663 297,639 303,021
Income (loss) from continuing
operations
before income taxes (benefit) (15,292) (13,098) (21,969) 480
Income taxes (benefit) (5,836) (4,820) (8,892) (182)
Income (loss) from continuing (9,456) (8,278) (13,077) 662
operations
Discontinued operations:
Income (loss) from discontinued 541 (145) 541 (554)
operations
Gain on disposition of discontinued 167 - 167 -
operations
Net income (loss) $ (8,748) $ (8,423) $ (12,369) $ 108
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Loss from continuing operations of $9.5 million, or $.61 per share, diluted, for the three months ended September 30, 2008 compared to a loss of $8.3 million, or $.54 per share, diluted, for the three months ended September 30, 2007. Loss from continuing operations of $13.1 million, or $.85 per share, diluted, for the nine months ended September 30, 2008 compared to income of $.7 million, or $.04 per share, diluted, for the nine months ended September 30, 2007. The loss in 2008 is primarily attributable to $15.8 million and $33.3 million of pre-tax losses recorded in the three months and nine months ended September 30, 2008, respectively, from other-than-temporary impairments due to the write down in value of preferred stocks of certain financial institutions, fixed maturities (primarily Alt-A securities) and common stocks. The loss in 2007 is primarily attributable to reserve strengthening of $14.9 million, before income taxes, or $10.5 after taxes, in the Medical Stop-Loss segment as more fully described in the Reserve Strengthening discussion under Results of Operations for the three months ended September 30, 2007;
·
Consolidated investment yields of 5.3% and 5.0% for the three months and nine months ended September 30, 2008 compared to 5.2% and 5.4% for the comparable periods in 2007. The decrease in the nine-month yields is primarily a result of losses from investment partnerships in 2008;
·
Revenues of $81.9 million and $275.7 million for the three months and nine months ended September 30, 2008, respectively, representing decreases of 18.5% and 9.2% over the respective three-month and nine-month periods in 2007. The decrease is primarily the result of realized losses from other than temporary impairments;
·
Book value of $11.90 per common share; a 18.7% decrease from December 31, 2007, primarily reflecting net realized and unrealized losses on securities;
·
Effective April 1, 2008, acquired a block of life insurance policies with approximately $65.7 million of life reserves. The block consists of approximately $33.4 million of older, traditional life reserves and $32.3 million of annuity reserves. Under the terms of the acquisition, Madison National Life assumed administration of the policies on November 1, 2008;
·
Effective April 1, 2008, increased the Company's controlling interest in Majestic Underwriters LLC ("Majestic"), a medical stop-loss MGU, to 77% with the purchase of an additional 14.7% interest from a retired senior officer;
·
Income from discontinued operations of $.5 million, net of taxes, is primarily a result of an adjustment to the credit claim reserve for claims prior to December 31, 2007; and
·
Income from the disposition of discontinued operations is a result of the final settlement on the sale of the credit segment, net of taxes.
The following is a summary of key performance information by segment:
·
Income before taxes from the Medical Stop-Loss segment increased $11.5 million for the three months ended September 30, 2008 compared to the same period in 2007 and $7.1 million for the nine months ended September 30, 2008 compared to the same period in 2007. The third quarter results for 2007 include a $14.9 million charge for Reserve Strengthening as more fully discussed under the Results of Operation for the Three Months Ended September 30, 2007;
o
Underwriting experience, as indicated by its GAAP Combined Ratios, for the Medical Stop-Loss segment is as follows for the three months and nine months ended September 30, 2008 and 2007 (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
Premiums Earned $ 38,124 $ 44,535 $ 120,745 $ 124,777
Insurance Benefits, Claims & Reserves 28,909 44,321 88,755 99,075
Expenses 9,642 11,659 30,532 30,962
Loss Ratio(A) 75.8% 99.5% 73.5% 79.4%
Expense Ratio (B) 25.3% 26.2% 25.3% 24.8%
Combined Ratio (C) 101.1% 125.7% 98.8% 104.2%
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(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)
The combined ratio is equal to the sum of the loss ratio and the expenses ratio.
·
The Fully Insured Health segment reported a loss before taxes of $.6 million for the three months ended September 30, 2008 as compared to a loss of $.8 million for the comparable period in 2007, and income before taxes of $1.8 million for the nine months ended September 30, 2008 as
compared to a loss of $1.4 million for the nine months ended September 30, 2007. Included in the nine month results of 2007 is $1.3 million of adverse development recorded in 2007 on premiums earned in 2006 on certain fully insured programs. The loss ratio on the fully insured business decreased due to an increase in volume in the dental and student accident lines which have higher profit margins, improved margins in our short term medical business, and improved margins in our small group major medical line. The expense ratio is higher due to a greater portion of higher-commission lines of business;
o
Premiums earned from this segment have increased $2.5 million and $8.2 million for the three months and nine months ended September 30, 2008, respectively, over the comparable periods in 2007.
o
Underwriting experience, as indicated by its GAAP Combined Ratios, for the Fully Insured segment for the three months and nine months ended September 30, 2008 and 2007 is as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
Premiums Earned $ 19,977 $ 17,501 $ 61,726 $ 53,457
Insurance Benefits, Claims & Reserves 13,083 12,654 39,544 38,565
Expenses 5,871 4,081 17,459 12,871
Loss Ratio 65.5% 72.3% 64.0% 72.1%
Expense Ratio 29.4% 23.3% 28.3% 24.1%
Combined Ratio 94.9% 95.6% 92.3% 96.2%
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Income before taxes from the Group disability, life, annuities and DBL segment increased $2.0 million and $2.6 million for the three months and nine months ended September 30, 2008, respectively, compared to 2007 primarily due to a refund of DBL premiums in 2007 and lower claims in 2008;
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Income before taxes from the Individual life, annuities and other segment remained flat for the three months ended September 30, 2008 and decreased $1.8 million for the nine months ended September 30, 2008, compared to the prior year. Prior year results include $.9 million of other income due to adjustments in settlement of a reinsurance agreement;
·
Loss before taxes from the Corporate segment decreased $1.5 million for the three months ended September 30, 2008 due to lower expenses and increased $.2 million for the nine months ended September 30, 2008 compared to the prior year due to losses from partnership income slightly offset by lower expenses;
·
Net realized investment losses were $17.1 million and $32.1 million for the three months and nine months ended September 30, 2008, respectively, compared to net realized investment income of $.5 million and $1.5 million for the comparable periods in 2007. Included in realized losses for the three months and nine months ended September 30, 2008 are $15.8 million and $33.3 million from other than temporary impairments primarily due to the write down in value of
preferred stocks of certain financial institutions, fixed maturities (primarily Alt-A securities) and common stocks due to the severity of the decrease in fair value and length of time that these securities were in a loss position;
·
Premiums by principal product for the three months and nine months ended 2008 and 2007 are as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
Gross Direct and Assumed
Earned Premiums: 2008 2007 2008 2007
Medical Stop-Loss $ 60,978 $ 73,109 $ 194,363 $ 210,586
Fully Insured Health 49,205 48,963 152,463 159,402
Group disability, life, 18,962 17,537 58,521 58,079
annuities and DBL
Individual, life, annuities 7,860 7,103 24,265 23,016
and other
$ 137,005 $ 146,712 $ 429,612 $ 451,083
Three Months Ended Nine Months Ended
September 30, September 30,
Net Premiums Earned: 2008 2007 2008 2007
Medical Stop-Loss $ 38,124 $ 44,535 $ 120,745 $ 124,777
Fully Insured Health 19,977 17,501 61,726 53,457
Group disability, life, 11,436 9,810 35,109 32,781
annuities and DBL
Individual, life, annuities 7,395 6,411 22,690 20,972
and other
$ 76,932 $ 78,257 $ 240,270 $ 231,987
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The accounting and reporting policies of the Company conform to U.S. generally accepted accounting principles ("GAAP"). The preparation of the Consolidated Financial Statements in conformity with GAAP requires the Company's management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. A summary of the Company's significant accounting policies and practices is provided in Note 1 of the Notes to the Consolidated Financial Statements included in Item 8 of the Annual Report on Form 10-K for the fiscal year ended December 31, 2007. Management has identified the accounting policies related to Insurance Premium Revenue Recognition and Policy Charges, Insurance Reserves, Deferred Acquisition Costs, and Investments as those that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of the Company's Consolidated Financial Statements and this Management's Discussion and Analysis. A full discussion of these policies is included under the heading, "Critical Accounting Policies" in Item 7 of the Annual Report on Form 10-K for the fiscal year ended December 31, 2007. During the nine months ended September 30, 2008, there were no additions to or changes in the critical accounting policies disclosed in the 2007 Form 10-K.
Results of Operations for the Three Months Ended September 30, 2008 Compared to the Three Months Ended September 30, 2007
Loss from continuing operations was $9.5 million, or $.61 per share, diluted, for the three months ended September 30, 2008, an increase of $1.2 million compared to loss from continuing operations of $8.3 million, or $.54 per share, diluted, for the three months ended September 30, 2007. The Company's loss from continuing operations before taxes increased $2.2 million to a loss of $15.3 million for the three months ended September 30, 2008 from $13.1 million for the three months ended September 30, 2007. Information by business segment for the three months ended September 30, 2008 and 2007 is as follows:
Equity Benefits, Amortization Selling,
Net Income Fee and Claims of Deferred General
Premiums Investment From Other and Acquisition And
September 30, 2008 Earned Income AMIC Income Reserves Costs Administrative Total
(In thousands)
Medical Stop-Loss $ 38,124 1,304 223 279 28,909 - 10,307 $ 714
Fully Insured Health 19,977 226 54 9,195 13,083 12 16,910 (553)
Group disability,
life, annuities
and DBL 11,436 2,540 20 90 7,290 38 4,063 2,695
Individual life,
annuities and other 7,395 8,036 - 392 10,189 1,369 3,428 837
Corporate - (219) - - - - 728 (947)
Sub total $ 76,932 $ 11,887 $ 297 $ 9,956 $ 59,471 $ 1,419 $ 35,436 2,746
Net realized investment losses (17,138)
Interest expense (900)
Loss from continuing operations before income taxes (15,292)
Income tax benefits (5,836)
Loss from continuing operations (9,456)
Income from discontinued operations 541
Gain on disposition of discontinued operations 167
Net loss $ (8,748)
Equity Benefits, Amortization Selling,
Net Income Fee and Claims of Deferred General
Premiums Investment From Other and Acquisition And
September 30, 2007 Earned Income AMIC Income Reserves Costs Administrative Total
(In thousands)
Medical Stop-Loss $ 44,535 1,482 (432) 432 44,321 - 12,469 $ (10,773)
Fully Insured Health 17,501 176 (216) 10,641 12,654 48 16,194 (794)
Group disability,
life, annuities
and DBL 9,810 2,781 (48) 103 8,420 36 3,535 655
Individual life,
annuities and
other 6,411 7,173 - 355 8,803 1,592 2,737 807
Corporate (610) - 1,803 (2,413)
Sub total $ 78,257 $ 11,002 $ (696) $ 11,531 $ 74,198 $ 1,676 $ 36,738 (12,518)
Net realized investment gains 471
Interest expense (1,051)
Loss from continuing operations before income taxes (13,098)
Income tax benefits (4,820)
Loss from continuing operations (8,278)
Loss from discontinued operations (145)
Net loss $ (8,423)
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Premiums Earned
Total premiums earned decreased $1.4 million to $76.9 million in the third quarter of 2008 from $78.3 million in the comparable period of 2007. The decrease is primarily due to: (i) the Medical Stop-Loss segment which decreased $6.5 million primarily due to stricter underwriting guidelines and reduced production sources in 2008; offset by (ii) the Fully Insured Health segment which had a $2.5 million increase in premiums in the third quarter of 2008 compared to the third quarter of 2007, comprised primarily of: (a) a $1.5 million increase in student accident premiums as a result of new programs, (b) a $1.3 million increase in dental premiums as a result of continuing growth, (c) an increase of $.5 million in the small group business primarily from increased retention in assumed major medical business, offset by (d) a decrease of $.9 million in short-term medical premiums primarily due to lower production caused in part by an increase in rates; (iii) an increase of $1.6 million in group disability, life, annuities and DBL segment primarily due to lower premiums in the prior year resulting from a refund of DBL premiums in 2007 as Standard Security Life experienced loss ratios below mandated minimums in this line of business; and (iv) a $1.0 million increase in the individual life, annuities and other segment primarily as a result of the recent acquisition of a block of life and annuity business.
Net Investment Income
Total net investment income increased $.9 million compared to the same period in 2007. The overall investment yields were 5.3% and 5.2% in the third quarter of 2008 and 2007, respectively. Income from partnerships was $.5 million higher in the third quarter of 2008 compared to the same period in 2007.
Net Realized Investment Gains (Losses)
Net realized investment gains (losses) include gains and losses from sales of fixed maturities and equity securities available-for-sale, as well as trading securities and other investments, and other-than-temporary impairments. Decisions to sell securities are based on management's ongoing evaluation of investment opportunities and economic and market conditions, thus creating fluctuations in gains and losses from period to period. Included in the net realized investment gains (losses) for the three months ended September 30, 2008 are $15.8 million of other than temporary impairments primarily due to the write down in value of preferred stocks of certain financial institutions, fixed maturities (primarily Alt-A securities) and common stocks due to the severity of the decrease in fair value and length of time that these securities were in a loss position.
Fee Income and Other Income
Fee income decreased $1.6 million to $9.4 million in the third quarter of 2008 from $11.0 million in the comparable period of 2007 primarily due to a decrease in administrative fees earned by the Fully Insured Health segment as a result of decreases in gross premiums from the short-term medical and small group lines of business.
Insurance Benefits, Claims and Reserves
Benefits, claims and reserves decreased $14.7 million. The decrease is due to:
(i) a decrease of $15.4 million in the Medical Stop-Loss segment, primarily
resulting from a $14.9 million charge, before income taxes, in the third quarter
of 2007 for reserve strengthening in addition to decreased production in 2008;
(ii) a decrease of $1.1 million in the group disability, life, annuities and DBL
segment primarily as a result of lower loss ratios in the DBL and group term
life lines of business; (iii) an increase of $1.4 million in the individual
life, annuities and other segment, resulting from the recent acquisition of a
block
of life and annuity policies in the second quarter of 2008; and (iv) an increase of $.4 million in the Fully Insured Health segment primarily resulting from increases in dental ($.9 million) and student accident ($.7 million) lines which correspond to premium growth, partially offset by a decrease in the short-term medical ($1.1 million) line due to improved loss ratios in this line and a decrease in premiums.
Amortization of Deferred Acquisition Costs
Amortization of deferred acquisition costs decreased slightly in the third quarter of 2008 primarily as a result of decreases from blocks of business in run-off partially offset by an increase from the recent acquisition of a block of life and annuity policies.
Interest Expense on Debt
Interest expense decreased $.2 million, primarily due to a $2.5 million decrease in outstanding debt under a line of credit in both the third quarter of 2007 and the third quarter of 2008. In addition, the interest rate on $12.4 million of floating rate junior subordinated debt averaged 6.8% in the third quarter of 2008 as compared to 9.5% during the third quarter of 2007.
Selling, General and Administrative Expenses
Total selling, general and administrative expenses decreased $1.3 million in the third quarter of 2008 compared to the third quarter of 2007. The decrease is primarily due to (i) a $2.2 million decrease in commissions and other general expenses in the Medical Stop-Loss segment due to a lower level of premiums earned; (ii) a $1.1 million decrease in corporate overhead expenses (primarily employee benefits, bonus and audit expenses); offset by (iii) an increase of $.7 million in commission and administrative expenses in the Fully Insured Health segment largely due to increased profit commissions in the small group line as a result of improved loss ratios; (iv) an increase of $.5 million in the group disability, life, annuities and DBL expenses resulting from a higher level of premiums; and (v) an increase of $.7 million in commission and administrative expenses in the individual life, annuities and other segment due to increased volume from the recent acquisition of a block of life and annuity policies.
Income Taxes
Income tax benefits increased $1.0 million resulting in a tax benefit of $5.8 million for the quarter ended September 30, 2008 compared to a tax benefit of $4.8 million for the third quarter of 2007 primarily due to an increase in the pre-tax loss. The effective tax rates were 37.9% for the third quarter of 2008 and 36.6% for the third quarter of 2007. The difference in the effective tax rates is primarily attributable to higher tax benefits derived from dividend-received deductions ("DRDs") and tax exempt interest in the third quarter of 2008 compared to the third quarter of 2007.
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