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| IHC > SEC Filings for IHC > Form 10-Q on 9-Aug-2012 | All Recent SEC Filings |
9-Aug-2012
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, 2011, 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 ("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 Risk Solutions, LLC ("Risk Solutions"), IHC Health Solutions, Inc.
("Health Solutions"), and Actuarial Management Corporation ("AMC"). These
companies are sometimes collectively referred to as the "Insurance Group", and
IHC and its subsidiaries (including the Insurance Group) are sometimes
collectively referred to as the "Company." IHC also owns a significant equity
interest in a managing general underwriter ("MGU") that writes medical stop-loss
for Standard Security Life. At June 30, 2012, the Company also owned a 78.6%
interest in American Independence Corp. ("AMIC").
While management considers a wide range of factors in its strategic planning and decision-making, underwriting profit is consistently emphasized as the primary goal in all decisions as to whether or not to increase our retention in a core line, expand into new products, acquire an entity or a block of business, or otherwise change our business model. Management's assessment of trends in healthcare and morbidity, with respect to medical stop-loss, fully insured medical, disability and New York State short-term statutory disability benefit product ("DBL"); mortality rates with respect to life insurance; and changes in market conditions in general play a significant role in determining the rates charged, deductibles and attachment points quoted, and the percentage of business retained. IHC also seeks transactions that permit it to leverage its vertically integrated organizational structure by generating fee income from production and administrative operating companies as well as risk income for its carriers and profit commissions. Management has always focused on managing the costs of its operations and providing its insureds with the best cost containment tools available.
The following is a summary of key performance information and events:
The results of operations for the three months and six months ended June 30, 2012 and 2011 are summarized as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2012 2011 2012 2011
Revenues $ 101,443 $ 105,525 $ 203,599 $ 209,844
Expenses 95,767 100,706 191,507 203,089
Income from operations before income 5,676 4,819 12,092 6,755
taxes
Income taxes (benefits) 1,846 1,355 3,932 (509)
Net income 3,830 3,464 8,160 7,264
Less: Income from noncontrolling (299) (424) (707) (1,040)
interests in subsidiaries
Net income attributable to IHC $ 3,531 $ 3,040 $ 7,453 $ 6,224
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o
Net income of $.20 per share, diluted, for the three months ended June 30, 2012 compared to $.17 per share, diluted, for the same period in 2011. Net income of $.41 per share, diluted, for the six months ended June 30, 2012, compared to $.36 per share, diluted, for the six months ended June 30, 2011.
o
Consolidated investment yields (on an annualized basis) of 3.8% and 3.9% for the three months and six months ended June 30, 2012 compared to 4.2% and 4.3% for the comparable periods in 2011;
o
Declared a special 10% stock dividend to IHC shareholders of record on February 17, 2012 with a distribution date of March 5, 2012. As a result, IHC issued 1.6 million shares of its common stock, net of treasury shares, with a fair value of $15.8 million and paid cash in-lieu of fractional shares;
o
Announced an increase IHC's annual dividend from $.05 to $.07 per share; and
o
Book value of $15.13 per common share, an increase of $.67 per common share from $14.46 at December 31, 2011.
The following is a summary of key performance information by segment:
o
The Medical Stop-Loss segment reported income before taxes of $3.8 million for the second quarter of 2012 compared to $1.9 million in the same quarter in 2011, and reported income before taxes of $9.9 million for the first six months of 2012 compared to $1.9 for the first six months of 2011. The increase is primarily due to increased volume and improved loss ratios in 2012;
o
Premiums earned increased $6.6 million and $11.3 million for the three months and six months ended June 30, 2012, respectively, when compared to the same periods in 2011. The increase in premiums earned is primarily due to increased volume and retention on business underwritten by Risk Solutions.
o
Underwriting experience for the Medical Stop-Loss segment, as indicated by its GAAP Combined Ratios, are as follows for the periods indicated (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2012 2011 2012 2011
Premiums Earned $ 33,984 $ 27,421 $ 66,635 $ 55,316
Insurance Benefits, Claims & Reserves 22,588 18,233 40,995 39,127
Expenses 8,951 8,351 18,475 16,602
Loss Ratio(A) 66.5% 66.5% 61.5% 70.7%
Expense Ratio (B) 26.3% 30.4% 27.7% 30.0%
Combined Ratio (C) 92.8% 96.9% 89.2% 100.7%
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o
Loss ratios for the six months ended June 30, 2012 decreased due to improved underwriting results in business produced by both Risk Solutions and by independent MGUs.
o
The expense ratio decreased for the three months and six months ended June 30, 2012 primarily due to a decrease in profit commission expense as a result of poor performance on certain business written through one program at AMIC.
(A)
Loss ratio represents insurance benefits, claims and reserves divided by premiums earned.
(B)
Expense ratio represents 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, profit commission expense ratio and the expense ratio.
·
The Fully Insured Health segment reported $2.0 million of income before taxes for the three months ended June 30, 2012 as compared to $1.6 million for the comparable period in 2011, and reported $3.2 million of income before taxes for the six months ended June 30, 2012 compared to $4.9 million for the same period in 2011.
o
Premiums earned decreased $3.5 million and $8.2 million for the three months and six months ended June 30, 2012 over the comparable 2011 periods primarily due to decreased volume and retentions in certain lines of the business.
o
Underwriting experience, as indicated by its GAAP Combined Ratios, for the Fully Insured segment are as follows for the periods indicated (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2012 2011 2012 2011
Premiums Earned $ 32,982 $ 36,452 $ 65,067 $ 73,247
Insurance Benefits, Claims & Reserves 21,370 24,888 42,382 46,432
Expenses 9,706 10,662 19,116 22,219
Loss Ratio 64.8% 68.3% 65.1% 63.4%
Expense Ratio 29.4% 29.2% 29.4% 30.3%
Combined Ratio 94.2% 97.5% 94.5% 93.7%
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o
The increase in the loss ratio for the six-month period was primarily attributable to an increase in the claims experience on major medical business for groups and individuals and dental businesses in the first quarter of 2012 partially offset by a decrease in claims experience on major medical business for groups and individuals in the second quarter of 2012.
o
The underwriting expense ratio decreased for the six months ended June 30, 2012, primarily as a result of a decrease in general expenses.
·
Income before taxes from the Group disability, life, annuities and DBL segment decreased $1.1 million and $.9 million for the three months and six months ended June 30, 2012 compared to the three months and six months ended June 30, 2011 primarily as a result of the transfer of certain group annuity contracts in the fourth quarter of 2011;
·
Income before taxes from the Individual life, annuities and other segment decreased $.5 million and $.1 million for the three months and six months ended June 30, 2012 compared to the same periods in 2011 primarily due to the decrease in investment income;
·
Income before taxes from the Corporate segment increased $.7 million for the three months ended June 30, 2012 and decreased $.8 million for the six months ended June 30, 2012, primarily due to an increase in corporate overhead in the first quarter of 2012;
·
Net realized investment gains were $1.9 million and $3.0 million for the three months and six months ended June 30, 2012 compared to net realized investment gains of $1.9 million and $1.7 million for the three months and six months ended June 30, 2011. Other-than-temporary impairment losses recognized in earnings for the three months and six months ended June 30, 2012 were $.6 million and $.7 million, respectively, and were $.2 million and $.5 million for the three months and six months ended June 30, 2011, respectively; and
·
Premiums by principal product for the three months and six months ended June 30, 2012 and 2011 are as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
Gross Direct and Assumed
Earned Premiums: 2012 2011 2012 2011
Medical Stop-Loss $ 40,882 $ 35,655 $ 80,433 $ 70,830
Fully Insured Health 53,002 51,854 105,449 103,776
Group disability, life, annuities and DBL 22,836 23,713 45,642 48,071
Individual, life, annuities and other 7,608 8,504 15,769 17,219
$ 124,328 $ 119,726 $ 247,293 $ 239,896
Three Months Ended Six Months Ended
June 30, June 30,
Net Direct and Assumed
Earned Premiums: 2012 2011 2012 2011
Medical Stop-Loss $ 33,984 $ 27,421 $ 66,635 $ 55,316
Fully Insured Health 32,982 36,452 65,067 73,247
Group disability, life, 12,177 12,594 24,353 25,662
annuities and DBL
Individual, life, annuities 6,326 7,534 13,188 15,649
and other
$ 85,469 $ 84,001 $ 169,243 $ 169,874
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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 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 Consolidated Financial Statements included in Item 8 of the Annual Report on Form 10-K for the fiscal year ended December 31, 2011. Management has identified the accounting policies related to Insurance Premium Revenue Recognition and Policy Charges, Insurance Reserves, Deferred Acquisition Costs, Investments, Goodwill and Other Intangible Assets, and Deferred Income Taxes 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, 2011. During the six months ended June 30, 2012, there were no additions to or changes in the critical accounting policies disclosed in the 2011 Form 10-K except for the recently adopted accounting standards discussed in Note 1(C) of the Notes to Condensed Consolidated Financial Statements.
Results of Operations for the Three Months Ended June 30, 2012 Compared to the
Three Months Ended June 30, 2011
Information by business segment for the three months ended June 30, 2012 and
2011 is as follows:
Benefits, Amortization Selling,
Net Fee and Claims of Deferred General
Premiums Investment Other and Acquisition And
June 30, 2012 Earned Income Income Reserves Costs Administrative Total
(In thousands)
Medical $ 33,984 1,032 (718) 22,588 - 7,861 $ 3,849
Stop-Loss
Fully Insured 32,982 317 6,710 21,370 6 16,627 2,006
Health
Group
disability,
life,
annuities
and DBL 12,177 645 4 8,265 - 3,828 733
Individual
life,
annuities 6,326 5,595 1,140 8,042 1,625 3,566 (172)
and other
Corporate - 20 - - - 1,449 (1,429)
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Net realized investment gains 1,850
Other-than-temporary impairment losses (621)
Interest expense on debt (540)
Income from operations before income taxes 5,676
Income taxes 1,846
Net income $ 3,830
Benefits, Amortization Selling,
Net Fee and Claims of Deferred General
Premiums Investment Other and Acquisition And
June 30, 2011 Earned Income Income Reserves Costs Administrative Total
(In thousands)
Medical $ 27,421 902 1,822 18,233 - 9,978 $ 1,934
Stop-Loss
Fully Insured 36,452 397 7,230 24,888 8 17,604 1,579
Health
Group
disability,
life,
annuities
and DBL 12,594 2,560 32 9,748 133 3,533 1,772
Individual
life,
annuities 7,534 6,194 1,089 9,288 1,617 3,582 330
and other
Corporate - (420) - - - 1,634 (2,054)
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Net realized investment losses 1,883 Other-than-temporary impairment losses (165) Interest expense on debt (460) Income from operations before income taxes 4,819 Income tax benefits 1,355 Net income $ 3,464 |
In the second quarter of 2012, premiums earned increased $1.5 million over the comparable period of 2011. The increase is primarily due to: (i) a $6.6 million increase in the Medical Stop-Loss segment due to increased volume and retention of business in 2012; partially offset by (ii) the Fully Insured Health segment which had a $3.5 million decrease in premiums primarily as a result of decreased retentions and volume in the short term medical business, major medical business for groups and individuals, limited medical and dental lines of business; (iii) a decrease of $1.2 million of earned premiums in the Individual life, annuities and other segment primarily as a result of the transfer of certain annuity contracts in the fourth quarter of 2011 and decreased premium volume from other lines in run-off; and (iv) a $.4 million decrease in the Group disability, life, annuities and DBL segment primarily due to decreased premiums from the group term life and LTD lines due in part to reduced production sources partially offset by premiums generated by a new line of international LTD and life business.
Net Investment Income
Total net investment income decreased $2.0 million. The overall annualized investment yields were 3.8% and 4.2% (approximately 3.9% and 4.3%, on a tax advantaged basis) in the second quarter of 2012 and 2011, respectively. The overall decrease was primarily a result of a decrease in investment income on bonds, equities and short-term investments due to lower yields and the shorter duration of our portfolio. The annualized investment yields on bonds, equities and short-term investments were 3.7% and 4.3% in the second quarter of 2012 and 2011, respectively. IHC has approximately $160.9 million in highly rated shorter duration securities earning on average 1.8%. A portfolio that is shorter in duration enables us, if we deem prudent, the flexibility to reinvest in much higher yielding longer-term securities, which would significantly increase investment income.
Net Realized Investment Gains and Other-Than-Temporary Impairment Losses, Net
The Company had net realized investment gains of $1.9 million in both 2012 and 2011. These amounts include gains and losses from sales of fixed maturities and equity securities available-for-sale and other investments. 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.
For the three months ended June 30, 2012 and 2011, the Company recorded $.6 million and $.2 million, respectively, of other-than-temporary impairment losses, pre-tax. Other-than-temporary impairment losses in both 2012 and 2011 consist of credit losses resulting from expected cash flows of debt securities that are less than the their amortized cost basis.
Fee Income and Other Income
Fee income decreased $2.4 million for the three months ended June 30, 2012 compared to the three months ended June 30, 2011 primarily as a result of higher retentions and therefore an increase in the elimination of intercompany fee income.
Total other income decreased $.6 million in the three months ended June 30, 2012 to $1.2 million from $1.8 million in the three months ended June 30, 2011.
Insurance Benefits, Claims and Reserves
In the second quarter of 2012, insurance, benefits, claims and reserves decreased $1.9 million over the comparable period in 2011. The decrease is primarily attributable to: (i) a decrease of $3.5 million in the Fully Insured Health segment, principally due to the decrease in premiums on the major medical business for groups and individuals, short term medical and dental lines of business in addition to improved loss
ratios on the short term medical business; (ii) a $1.5 million decrease in the Group disability, life, annuities and DBL segment primarily as a result of the transfer of certain annuity contracts in the fourth quarter of 2011 and reduced production of LTD business; and (iii) a $1.3 million decrease in the Individual life, annuity and other segment primarily resulting from the transfer of certain group annuity contracts in the fourth quarter of 2011 and decreased premium volume from other lines in run-off; offset by (iv) an increase of $4.4 million in the Medical Stop-Loss segment as a result of an increase in premium volume by Risk Solutions.
Amortization of Deferred Acquisition Costs
Amortization of deferred acquisition costs decreased $.2 million primarily as a result of the write-off, in the fourth quarter of 2011, of certain deferred acquisition costs in connection with a coinsurance agreement.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $3.0 million. The decrease is primarily due to: (i) a $2.1 million decrease in commissions and other general expenses in the Medical Stop-Loss segment due to increased retentions partially offset by increases in expenses due to volume as a result of increased production; and (ii) a $1.0 million decrease in the Fully Insured Health segment largely due to decreased volume of business in the short term medical and limited medical lines of business in 2012.
Income Taxes
The effective tax rate for the three months ended June 30, 2012 was 32.5% compared to 28.1% in 2011. The lower effective tax rate in 2011 was due to a higher benefit from tax advantaged securities as a percentage of income due to lower income in 2011.
Results of Operations for the Six Months Ended June 30, 2012 Compared to the Six
Months Ended June 30, 2011
Information by business segment for the six months ended June 30, 2012 and 2011
is as follows:
Benefits, Amortization Selling,
Net Fee and Claims of Deferred General
Premiums Investment Other and Acquisition And
June 30, 2012 Earned Income Income Reserves Costs Administrative Total
(In thousands)
Medical $ 66,635 2,386 537 40,995 - 18,629 $ 9,934
Stop-Loss
Fully Insured 65,067 646 12,963 42,382 12 33,124 3,158
Health
Group
disability,
life,
annuities
and DBL 24,353 1,322 66 17,104 - 7,935 702
Individual
life,
annuities 13,188 11,516 2,147 16,919 3,213 6,521 198
and other
Corporate - 490 - - - 3,594 (3,104)
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Net realized investment gains 2,987
Other-than-temporary impairment losses (704)
Interest expense on debt (1,079)
Income from operations before income taxes 12,092
Income taxes 3,932
Net income $ 8,160
Benefits, Amortization Selling,
Net Fee and Claims of Deferred General
Premiums Investment Other and Acquisition And
June 30, 2011 Earned Income Income Reserves Costs Administrative Total
(In thousands)
Medical $ 55,316 2,192 3,272 39,127 - 19,746 $ 1,907
Stop-Loss
Fully Insured 73,247 750 13,321 46,432 15 35,929 4,942
Health
Group
disability,
life,
annuities
and DBL 25,662 4,703 78 21,134 264 7,457 1,588
Individual
life,
annuities 15,649 11,974 2,337 19,713 3,170 6,733 344
and other
Corporate - 130 - - - 2,452 (2,322)
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Net realized investment losses 1,681 Other-than-temporary impairment losses (468) Interest expense on debt (917) Income from operations before income taxes 6,755 Income tax benefits (509) Net income $ 7,264 |
In the first six months of 2012, premiums earned decreased $.6 million over the comparable period of 2011. The decrease is primarily due to: (i) the Fully Insured Health segment which had a $8.2 million decrease in premiums primarily as a result of decreased retentions and volume in the short term medical business, major medical business for groups and individuals, limited medical and dental lines of business; (ii) a decrease of $2.4 million of earned premiums . . .
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