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| AMIC > SEC Filings for AMIC > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-2009
Quarterly Report
The following discussion of the financial condition and results of operations of American Independence Corp. ("AMIC") 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 year ended December 31, 2008, as filed with the Securities and Exchange Commission, and our condensed consolidated financial statements and related Notes thereto appearing elsewhere in this quarterly report.
Overview
We are an insurance holding company engaged in the insurance and reinsurance business through our wholly owned insurance company, Independence American Insurance Company ("Independence American"), our marketing organizations, including our three medical stop-loss managing general underwriter subsidiaries ("our MGUs"), our two insurance and marketing agencies Independent Producers of America, LLC ("IPA") and HealthInsurance.org, LLC ("HIO"), and our claims administration company, Excess Claims Administrators, Inc. ("ECA"). Since November 2002, AMIC has been affiliated with Independence Holding Company ("IHC"), which currently owns 49.7% of AMIC's stock, and IHC's senior management has provided direction to us through service agreements between us and IHC. As of September 30, 2009, the majority of Independence American's revenue was reinsurance premiums. The majority of these premiums are ceded to Independence American from IHC under long-term reinsurance treaties to cede its gross medical stop-loss premiums written to Independence American. In addition, Independence American assumes fully insured health premiums and New York State short-term statutory disability benefit law ("DBL") premiums from IHC, and assumes medical stop-loss premiums from unaffiliated carriers. Independence American also writes group major medical, medical stop-loss, major medical plans for individuals and families, and short-term medical.
While management considers a wide range of factors in its strategic planning, the overriding consideration is underwriting profitability. Management's assessment of trends in healthcare and in the medical stop-loss market play a significant role in determining whether to expand Independence American's health insurance premiums. Since Independence American reinsures a portion of all of the business produced by our MGUs, and since these companies are also eligible to earn profit sharing commissions based on the profitability of the business they place, our MGUs also emphasize underwriting profitability. In addition, management focuses on controlling operating costs. By sharing employees with IHC and sharing resources among our subsidiaries, we strive to maximize our earnings.
Independence American Insurance Company
Independence American, which is domiciled in Delaware, is licensed to write property and/or casualty insurance in 49 states and the District of Columbia, and has an A- (Excellent) rating from A.M. Best. An A.M. Best rating is assigned after an extensive quantitative and qualitative evaluation of a company's financial condition and operating performance, and is also based upon factors relevant to policyholders, agents, and intermediaries, and is not directed toward protection of investors. A.M. Best's ratings are not recommendations to buy, sell or hold securities of the Company. Independence American's unaudited statutory capital and surplus as of September 30, 2009 was $43,567,000.
Managing General Underwriters
Risk Assessment Strategies, Inc. ("RAS"), which is headquartered near Hartford, Connecticut, markets and underwrites employer medical stop-loss and group life for Standard Security Life Insurance Company of New York ("Standard Security Life"), Madison National Life Insurance Company, Inc. ("Madison National Life"), Independence American and another carrier. RAS has 9 employees who are responsible for marketing, underwriting, billing and collecting premiums, and administrative services. Marlton Risk Group LLC ("Marlton"), which is headquartered near Philadelphia, Pennsylvania, markets and underwrites employer medical stop-loss and group life for Standard Security Life, Independence American and two other carriers. Marlton has 17 employees who are responsible for marketing, underwriting, billing and collecting premiums, and administrative services. IndependenceCare Holdings L.L.C. and its subsidiaries (collectively referred to as "IndependenceCare"), which is headquartered in Minneapolis, Minnesota, marketed and underwrote employer medical stop-loss, provider excess loss, HMO Reinsurance and ancillary products for Standard Security Life, Madison National Life, Independence American and another carrier. During the third quarter of 2009, IndependenceCare ceased writing new business. The Company has a 23% interest in Majestic Underwriters LLC ("Majestic"), an employer medical stop-loss MGU for Standard Security Life and another carrier. The Company accounts for this investment using the equity method of accounting. Majestic, which is headquartered in Troy, Michigan, has 17 employees who are responsible for marketing, underwriting, billing and collecting premiums, and administrative services.
Agencies
In the fourth quarter of 2008, the Company formed ECA to administer, adjudicate, and process claims and perform medical management services for our MGUs, Majestic and third parties. These functions, which were previously performed by each MGU
separately, were consolidated in order to generate cost savings through economies of scale and provide more uniform results among the MGUs. ECA, which is headquartered near Philadelphia, Pennsylvania, has 12 employees. The Company has a 51% interest in both HIO and IPA. HIO, which is headquartered in Minneapolis, Minnesota, is an insurance and marketing agency through its well-established internet domain address: www.healthinsurance.org. This domain generates hundreds of daily leads from individuals and small employers seeking affordable health insurance solutions. IPA, which is headquartered in Tampa, Florida, is a national, career agent marketing organization. IPA operates under a controlled career agent distribution model in which independent producers sell products approved by IPA and AMIC.
The following is a summary of key performance information and events:
·
Net income per share was $.25, diluted, or $2.1 million for the nine months ended September 30, 2009, compared to net income per share of $.26, diluted, or $2.2 million for the nine months ended September 30, 2008. Net income per share decreased to $.03, diluted, or $0.2 million for the three months ended September 30, 2009, compared to net income per share of $.07, diluted, or $0.6 million for the three months ended September 30, 2008.
·
The book value of the Company's shareholders' equity increased to $10.40 per share at September 30, 2009 compared to $9.75 per share at December 31, 2008.
·
Of the aggregate carrying value of the Company's investment assets, approximately 92.0% was invested in investment grade fixed maturities, securities purchased under resale agreements, and cash and cash equivalents at September 30, 2009. Also at such date, 97.5% of the Company's fixed maturities were investment grade.
·
Consolidated investment yields (on an annualized basis) were 4.7% and 5.3% for the nine months ended September 30, 2009 and 2008, respectively. The lower yield is due to an increase in more liquid assets which bear lower interest rates.
·
Premiums earned decreased 12% from $73.8 million for the nine months ended September 30, 2008 to $65.1 million for the nine months ended September 30, 2009, primarily due to lower assumed medical stop-loss premiums and lower group major medical premiums written.
·
The Company recorded improved loss ratios in both fully insured health and medical stop-loss for the nine months and three months ended September 30, 2009 despite the negative impact on the medical stop-loss ratios of an unexpected development relating to a prior treaty year.
·
For the nine months ended September 30, 2009 and 2008, Independence American wrote $7.7 million and $2.6 million of individual health business produced by our marketing organization IPA, respectively.
·
Underwriting experience, as indicated by its GAAP Combined Ratios on our three lines of business for the three months and nine months ended September 30, 2009 and 2008, are as follows (in thousands):
§
Medical Stop-Loss Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
Premiums Earned $ 11,229 $ 12,996 $ 35,344 $ 41,949
Insurance Benefits Claims and Reserves 7,749 9,167 22,630 28,535
Expenses 3,270 3,881 11,206 13,083
Loss Ratio(A) 69.0% 70.5% 64.0% 68.0%
Expense Ratio (B) 29.1% 29.9% 31.7% 31.2%
Combined Ratio (C) 98.1% 100.4% 95.7% 99.2%
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§
Fully Insured Health Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
Premiums Earned $ 8,954 $ 10,052 $ 27,259 $ 29,341
Insurance Benefits Claims and Reserves 7,231 9,194 20,748 23,302
Expenses 2,197 2,004 6,310 7,009
Loss Ratio(A) 80.8% 91.5% 76.1% 79.4%
Expense Ratio (B) 24.5% 19.9% 23.1% 23.9%
Combined Ratio (C) 105.3% 111.4% 99.2% 103.3%
§
DBL Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
Premiums Earned $ 804 $ 833 $ 2,460 $ 2,556
Insurance Benefits Claims and Reserves 434 425 1,423 1,419
Expenses 203 215 722 739
Loss Ratio(A) 54.0% 51.0% 57.8% 55.5%
Expense Ratio (B) 25.2% 25.8% 29.3% 28.9%
Combined Ratio (C) 79.2% 76.8% 87.1% 84.4%
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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 expense ratio.
·
For the nine months ended September 30, 2009, our MGUs and Agencies generated revenues of $11.7 million compared to $10.8 million for the nine months ended September 30, 2008, an increase of 8%, primarily due to higher revenue at HIO and additional revenue at IPA and ECA, partially offset by lower revenue at our MGUs.
The accounting and reporting policies of the Company conform to U.S. generally accepted accounting principles ("GAAP"). The preparation of the condensed 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 Condensed Consolidated Financial Statements included in Item 8 of the Annual Report on Form 10-K for the year ended December 31, 2008. Management has identified the accounting policies related to Insurance Reserves, Premium and MGU Fee income Revenue Recognition, Reinsurance, Income Taxes, Investments, Goodwill and Other Intangibles as those that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of the Company's condensed consolidated financial statements and this Management's Discussion and Analysis. A full discussion of these policies is included under Critical Accounting Policies in Item 7 of the Annual Report on Form 10-K for the year ended December 31, 2008. During the nine months ended September 30, 2009, there were no additions to or changes in the critical accounting policies disclosed in the Form 10-K for the year ended December 31, 2008 except for the recently adopted accounting standards discussed in Note 1(C) of the Notes to the Condensed Consolidated Financial Statements.
Results of Operations for the Three Months Ended September 30, 2009, Compared to the Three Months Ended September 30, 2008
Benefits, Selling,
Fees and Net Claims General Amortization
September 30, Premiums Other Investment and and and
2009 Earned Income Income Reserves Admin Depreciation Total
(In thousands)
Independence
American:
Medical stop-loss $ 11,229 17 527 7,749 3,233 37 $ 754
Fully Insured Health 8,954 60 157 7,231 2,072 125 (258)
DBL 804 - 19 434 203 - 186
Total Independence
American 20,987 77 703 15,414 5,509 162 682
MGU Subs and
Agencies - 3,915 80 - 3,698 48 249
Corporate - - - - 363 - (363)
Subtotal $ 20,987 3,992 783 15,414 9,569 210 569
Net realized investment loss (27)
Other-than-temporary impairment losses -
Income before income taxes 542
Income taxes (141)
Net income 401
Less: Net income attributable to the
noncontrolling interest (176)
Net income attributable to American Independence Corp. $ 225
Benefits, Selling,
Fees and Net Claims General Amortization
September 30, Premiums Other Investment and and and
2008 Earned Income Income Reserves Admin Depreciation Total
(In thousands)
Independence
American:
Medical stop-loss $ 12,996 240 538 9,167 3,844 37 $ 726
Fully Insured Health 10,052 1,057 224 9,194 1,879 125 135
DBL 833 - 17 425 215 - 210
Total Independence
American 23,881 1,297 779 18,786 5,938 162 1,071
MGU Subs and
Agencies - 4,095 52 - 3,467 62 618
Corporate - 2 12 - 337 - (323)
Subtotal $ 23,881 5,394 843 18,786 9,742 224 1,366
Net realized investment gains 27
Other-than-temporary impairment losses (297)
Income before income taxes 1,096
Income taxes (331)
Net income 765
Less: Net income attributable to the
noncontrolling interest (169)
Net income attributable to American Independence Corp. $ 596
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Premiums Earned. Premiums earned decreased 12%, or $2,894,000, to $20,987,000
for the three months ended September 30, 2009, compared to $23,881,000 for the
three months ended September 30, 2008. The Company currently has three lines of
business. Premiums relating to medical stop-loss business were $11,229,000 and
$12,996,000 for the three months ended September 30, 2009 and 2008,
respectively. This is due to a decrease in medical stop-loss premiums assumed
by Independence American ($2,051,000), partially offset by an increase in
medical stop-loss written by Independence American ($284,000). Premiums
relating to fully insured health consisting of group major medical, limited
medical, STM, dental, vision, and individual health were $8,954,000 and
$10,052,000 for the three months ended September 30, 2009 and 2008,
respectively. The decrease is primarily due to a decrease in group major
medical premiums written by Independence American ($1,693,000) and a decrease in
group major medical premiums assumed from IHC ($365,000), offset by an increase
in individual health premiums written by Independence American ($825,000).
Premiums relating to DBL were $804,000 and $833,000 for the three months ended
September 30, 2009 and 2008, respectively. For the three months ended September
30, 2009, Independence American assumed 10% of IHC's STM business, approximately
9% of certain of IHC's group major medical business, 20% of IHC's DBL business
and approximately 23% of IHC's medical stop-loss business. There were no
significant changes to these percentages from the prior year.
MGU and Agency Income. MGU and agency income decreased $124,000 to $3,968,000 for the three months ended September 30, 2009, compared to $4,092,000 for the three months ended September 30, 2008. MGU fee income-administration decreased $542,000 to $1,376,000 for the three months ended September 30, 2009, compared to $1,918,000 for the three months ended September 30, 2008, as our MGUs have decreased their volume of business as a result of stricter underwriting guidelines. MGU fee income-profit commission increased $171,000 to $248,000 for the three months ended September 30, 2009, compared to $77,000 for the three months ended September 30, 2008. Profit commissions for a given year are based primarily on the performance of business written during portions of the three preceding years. Therefore, profit commissions for 2009 are based on business written during portions of 2006, 2007 and 2008. For the three months ended September 30, 2009, income from our Agencies consisted of commission income and other fees of $1,853,000 from IPA, revenue of $359,000 from HIO, and $132,000 of claims administration fees from ECA. For the three months ended September 30, 2008, income from our Agencies consisted of commission income and other fees of $1,725,000 from IPA and revenue of $372,000 from HIO. ECA commenced operations in the fourth quarter of 2008.
Net Investment Income. Net investment income decreased $60,000 to $783,000 for the three months ended September 30, 2009, compared to $843,000 for the three months ended September 30, 2008. The overall annualized investment yields were 4.9% for the three months ended September 30, 2009 and 5.4% for the comparable period in 2008. The lower yield is due to an increase in more liquid assets which bear lower interest rates.
Net Realized Investment Gains and Other-Than-Temporary Impairment Losses. The Company recorded a net realized investment loss of $27,000 for the three months ended September 30, 2009, compared to a gain of $27,000 for the three months ended September 30, 2008. For the three months ended September 30, 2009 and 2008, the Company recorded a realized loss of $0 and $297,000, respectively, for other-than-temporary impairments. The loss of $297,000 as of September 30, 2008 represents a loss on bonds and preferred stock that the Company determined to be other-than-temporary due to the severity of the decrease in market values and the length of time that these securities were in a loss position. The Company's decision as to whether to sell securities is based on management's ongoing evaluation of investment opportunities and economic market conditions, thus creating fluctuations in realized gains or losses from period to period.
Other Income. Other income was $24,000 for the three months ended September 30,
2009 compared to $1,302,000 for the three months ended September 30, 2008.
Included in the three months ended September 30, 2009 is income of $77,000
representing a decrease in the fair value of the derivative liability relating
to the agreement with Employers Direct Health, Inc. ("EDH") (see Note 13 of
Notes to Condensed Consolidated Financial Statements). Included in the three
months ended September 30, 2008 is income of $1,297,000 representing a decrease
in the fair value of the derivative liability relating to the agreement with
EDH. The unrealized gain for 2009 and 2008 reflects the lower probability of
EDH business meeting target benchmarks.
Insurance Benefits, Claims and Reserves. Insurance benefits claims and reserves decreased 18%, or $3,372,000, to $15,414,000 for the three months ended September 30, 2009, compared to $18,786,000 for the three months ended September 30, 2008. The decrease of $3,372,000 is primarily comprised of a decrease in direct fully insured of $2,029,000 due to lower premiums written and improved loss ratios in group major medical, slightly offset by higher premiums and higher loss ratios in individual health, and a decrease in assumed medical stop-loss of $1,277,000 due to lower earned premiums.
Selling, General and Administrative. Selling, general and administrative
expenses decreased $173,000 to $9,569,000 for the three months ended September
30, 2009, compared to $9,742,000 for the three months ended September 30, 2008.
This decrease is primarily due to (i) a decrease in commission expense of
$601,000 incurred by Independence American, which results, in large part, from a
decrease in medical stop-loss premiums assumed and a decrease in group major
medical premiums written, and (ii) lower expenses at IndependenceCare and
Marlton of $240,000 and $196,000, respectively, primarily due to lower payroll
expenses. This was, offset by (i) an increase in underwriting expenses at
Independence American of $396,000, due to costs associated with higher
individual health premiums written, (ii) additional expenses at IPA of $204,000,
and (iii) $290,000 expenses at ECA, which was formed in the fourth quarter of
2008.
Amortization and Depreciation. Amortization and depreciation expense decreased $14,000 to $210,000 for the three months ended September 30, 2009, compared to $224,000 for the three months ended September 30, 2008. The decrease in amortization is primarily due to the acquisition of 51% of IPA in 2008.
Income Taxes. The provision for income taxes decreased $190,000 to $141,000, an effective rate of 38.5%, for the three months ended September 30, 2009, compared to $331,000, an effective rate of 35.7%, for the three months ended September 30, 2008. Net income for the three months ended September 30, 2009 and 2008 includes a non-cash provision for federal income taxes of $115,000 and $317,000, respectively. The state tax effective rate increased to 9.0% for the three months ended September 30, 2009, compared to 2.5% for the three months ended September 30, 2008. As compared to our MGUs, Independence American pays a nominal amount of state income tax; therefore, the Company's state tax effective rate will increase relative to an decrease in Independence American's pre-tax income. For as long as AMIC utilizes its NOL carryforwards, it will not pay any income taxes, except for federal alternative minimum taxes and state income taxes.
Net Income attributable to the noncontrolling interest. The Company recorded net income attributable to the noncontrolling interest of $176,000 and $169,000 for the three months ended September 30, 2009 and 2008, respectively. The net income for the three months ended September 30, 2009 and 2008 relates to the 49% noncontrolling interest in IPA and the 49% noncontrolling interest in HIO.
Net Income attributable to American Independence Corp. The net income attributable to the Company decreased 62% to $225,000, or $.03 per share, diluted, for the three months ended September 30, 2009, compared to $596,000, or $.07 per share, diluted, for the three months ended September 30, 2008.
Results of Operations for the Nine Months Ended September 30, 2009, Compared to the Nine Months Ended September 30, 2008
Benefits, Selling,
Fees and Net Claims General Amortization
September 30, Premiums Other Investment and and and
2009 Earned Income Income Reserves Admin Depreciation Total
(In thousands)
Independence
American:
Medical stop-loss $ 35,344 46 1,503 22,630 11,096 110 $ 3,057
Fully Insured Health 27,259 161 428 20,748 5,934 376 790
DBL 2,460 - 54 1,423 722 - 369
Total Independence
American 65,063 207 1,985 44,801 17,751 486 4,216
MGU Subs and
Agencies - 11,406 275 - 11,200 143 338
Corporate - - 1 - 1,088 - (1,087)
Subtotal $ 65,063 11,613 2,261 44,801 30,039 629 3,468
Net realized investment gains 234
Other-than-temporary impairment losses -
Income before income taxes 3,702
Income taxes (1,168)
Net income 2,534
Less: Net income attributable to the
noncontrolling interest (443)
Net income attributable to American Independence Corp. $ 2,091
. . .
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