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| IHC > SEC Filings for IHC > Form 10-Q on 8-Nov-2012 | All Recent SEC Filings |
8-Nov-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 September 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 nine months ended September 30, 2012 and 2011 are summarized as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2012 2011 2012 2011
Revenues $ 111,502 $ 103,659 $ 315,101 $ 313,503
Expenses 104,921 97,972 296,428 301,061
Income from operations before income 6,581 5,687 18,673 12,442
taxes
Income taxes (benefits) 2,191 1,676 6,123 1,167
Net income 4,390 4,011 12,550 11,275
Less: Income from noncontrolling (472) (457) (1,179) (1,497)
interests in subsidiaries
Net income attributable to IHC $ 3,918 $ 3,554 $ 11,371 $ 9,778
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o
Net income of $.22 per share, diluted, for the three months ended September 30, 2012 compared to $.20 per share, diluted, for the same period in 2011. Net income of $.63 per share, diluted, for the nine months ended September 30, 2012, compared to $.56 per share, diluted, for the nine months ended September 30, 2011.
o
Consolidated investment yields (on an annualized basis) of 4.6% and 4.2% for the three months and nine months ended September 30, 2012 compared to 4.0% and 4.2% 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 $15.59 per common share, an increase of $1.13 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 $2.9 million for the third quarter of 2012 compared to $2.7 million in the same quarter in 2011, and reported income before taxes of $12.8 million for the first nine months of 2012 compared to $4.6 million for the first nine months of 2011. The increase is primarily due to increased volume and improved loss ratios in 2012;
o
Premiums earned increased $6.1 million and $17.4 million for the three months and nine months ended September 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 Nine Months Ended
September 30, September 30,
2012 2011 2012 2011
Premiums Earned $ 36,465 $ 30,342 $ 103,100 $ 85,658
Insurance Benefits, Claims & Reserves 24,590 19,562 65,585 58,689
Expenses 10,718 9,228 29,193 25,830
Loss Ratio(A) 67.4% 64.5% 63.6% 68.5%
Expense Ratio (B) 29.4% 30.4% 28.3% 30.2%
Combined Ratio (C) 96.8% 94.9% 91.9% 98.7%
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o
Loss ratios for the nine months ended September 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 nine months ended September 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 $1.5 million of income before taxes for the three months ended September 30, 2012 as compared to $2.4 million for the comparable period in 2011, and reported $4.6 million of income before taxes for the nine months ended September 30, 2012 compared to $7.3 million for the same period in 2011.
o
Premiums earned increased $1.5 million for the three months ended September 30, 2012 and decreased $6.7 million for the nine months ended September 30, 2012 over the comparable 2011 periods. The increased premiums during the quarter resulted primarily from the new pet insurance line of business at AMIC. The decrease in premiums earned for the nine months were primarily due to decreased volume and retentions in certain other 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 Nine Months Ended
September 30, September 30,
2012 2011 2012 2011
Premiums Earned $ 37,137 $ 35,619 $ 102,204 $ 108,866
Insurance Benefits, Claims & Reserves 25,154 21,616 67,536 68,048
Expenses 11,265 11,563 30,369 33,782
Loss Ratio 67.7% 60.7% 66.1% 62.5%
Expense Ratio 30.3% 32.5% 29.7% 31.0%
Combined Ratio 98.0% 93.2% 95.8% 93.5%
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o
The increase in the loss ratio for the three and nine-month period was primarily attributable to an increase in the claims experience on major medical business for groups and individuals and dental.
o
The underwriting expense ratio decreased for the nine months ended September 30, 2012, primarily as a result of a decrease in general expenses.
·
Income before taxes from the Group disability, life, annuities and DBL segment increased $.3 million for the three months ended September 30, 2012 and decreased $.6 million for the nine months ended September 30, 2012 compared to the three months and nine months ended September 30, 2011. The increase in quarterly income was principally due to lower claims in the group life and LTD business;
·
Income before taxes from the Individual life, annuities and other segment increased $.5 million and $.4 million for the three months and nine months ended September 30, 2012 compared to the same periods in 2011 primarily due to new business written;
·
Income before taxes from the Corporate segment increased $.6 million for the three months ended September 30, 2012 and decreased $.2 million for the nine months ended September 30, 2012. The increase in the comparable quarter is primarily due to losses in a partnership investment in 2011;
·
Net realized investment gains were $1.0 million and $4.0 million for the three months and nine months ended September 30, 2012 compared to net realized investment gains of $.9 million and $2.6 million for the three months and nine months ended September 30, 2011. Other-than-temporary impairment losses recognized in earnings for the nine months ended September 30, 2012 were $.7 million, and were $.1 million and $.6 million for the three months and nine months ended September 30, 2011, respectively; and
·
Premiums by principal product for the three months and nine months ended September 30, 2012 and 2011 are as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
Gross Direct and Assumed
Earned Premiums: 2012 2011 2012 2011
Medical Stop-Loss $ 42,992 $ 38,472 $ 123,425 $ 109,301
Fully Insured Health 58,518 53,276 163,967 157,052
Group disability, life, annuities and DBL 22,371 23,098 68,013 71,169
Individual, life, annuities and other 7,488 7,921 23,257 25,140
$ 131,369 $ 122,767 $ 378,662 $ 362,662
Three Months Ended Nine Months Ended
September 30, September 30,
Net Direct and Assumed
Earned Premiums: 2012 2011 2012 2011
Medical Stop-Loss $ 36,465 $ 30,342 $ 103,100 $ 85,658
Fully Insured Health 37,137 35,619 102,204 108,866
Group disability, life, 12,423 12,416 36,776 38,078
annuities and DBL
Individual, life, annuities 6,211 6,853 19,399 22,502
and other
$ 92,236 $ 85,230 $ 261,479 $ 255,104
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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 nine months ended September 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 September 30, 2012 Compared to the Three Months Ended September 30, 2011
Information by business segment for the three months ended September 30, 2012 and 2011 is as follows:
Benefits, Amortization Selling,
Net Fee and Claims of Deferred General
Premiums Investment Other and Acquisition And
September 30, Earned Income Income Reserves Costs Administrative Total
2012
(In thousands)
Medical $ 36,465 1,733 88 24,590 - 10,843 $ 2,853
Stop-Loss
Fully Insured 37,137 477 7,743 25,154 6 18,736 1,461
Health
Group
disability,
life,
annuities
and DBL 12,423 713 24 5,772 - 3,798 3,590
Individual
life,
annuities 6,211 6,401 1,054 7,518 1,581 3,715 852
and other
Corporate - 22 - - 2,699 (2,677)
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Net realized investment gains 1,011
Other-than-temporary impairment losses -
Interest expense on debt (509)
Income from operations before income taxes 6,581
Income taxes 2,191
Net income $ 4,390
Benefits, Amortization Selling,
Net Fee and Claims of Deferred General
Premiums Investment Other and Acquisition And
September 30, Earned Income Income Reserves Costs Administrative Total
2011
(In thousands)
Medical $ 30,342 1,487 839 19,562 - 10,415 $ 2,691
Stop-Loss
Fully Insured 35,619 367 6,402 21,616 8 18,409 2,355
Health
Group
disability,
life,
annuities
and DBL 12,416 2,528 42 7,520 133 4,048 3,285
Individual
life,
annuities 6,853 5,977 1,094 7,956 1,703 3,957 308
and other
Corporate - (1,124) - - - 2,129 (3,253)
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Net realized investment losses 924 Other-than-temporary impairment losses (107) Interest expense on debt (516) Income from operations before income taxes 5,687 Income tax benefits 1,676 Net income $ 4,011 |
In the third quarter of 2012, premiums earned increased $7.0 million over the comparable period of 2011. The increase is primarily due to: (i) a $6.1 million increase in the Medical Stop-Loss segment due to increased volume and retention of business in 2012; (ii) a $1.5 million increase in the Fully Insured Health segment which had increased premiums of $3.0 million, from the new 2012 pet and international lines of business; $.5 million in increased premiums in ancillary medical and other minor lines; offset by $2.0 million in decreased premiums as a result of lower retentions and volume in the short term medical business, major medical business for groups and individuals, limited medical and dental lines of business; and (iii) a decrease of $.6 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. The Group disability, life, annuities and DBL segment stayed constant.
Net Investment Income
Total net investment income increased $.1 million. The overall annualized investment yields were 4.6% and 4.0% (approximately 4.8% and 4.1%, on a tax advantaged basis) in the third quarter of 2012 and 2011, respectively. The slight increase was primarily a result of higher returns on a partnership investment. The annualized investment yields on bonds, equities and short-term investments were 4.3% in both the third quarter of 2012 and 2011. IHC has approximately $185.1 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 $1.0 million and $.9 million in the third quarter of 2012 and 2011, respectively. 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.
No other-than-temporary impairment losses were recorded for the three months ended September 2012. For the three months ended September 30, 2011, the Company recorded $.1 million of other-than-temporary impairment losses, pre-tax. Other-than-temporary impairment losses in 2011 consist of credit losses resulting from expected cash flows of debt securities that are less than their amortized cost basis.
Fee Income and Other Income
Fee income increased $.6 million for the three months ended September 30, 2012 compared to the three months ended September 30, 2011 primarily as a result of higher agency referral fees and medical management fees.
Total other income decreased $.1 million in the three months ended September 30, 2012 to $1.2 million from $1.3 million in the three months ended September 30, 2011.
Insurance Benefits, Claims and Reserves
In the third quarter of 2012, insurance, benefits, claims and reserves increased $6.3 million over the comparable period in 2011. The increase is primarily attributable to: (i) an increase of $5.0 million in the Medical Stop-Loss segment as a result of an increase in premium volume by Risk Solutions partially offset by improved loss ratios; (ii) an increase of $3.5 million in the Fully Insured Health segment, principally due to increased claims on the major medical business for groups and individuals and short term medical lines of business, increased premium volume associated with the new pet line of business; partially offset due to
decreased dental premiums; (ii) a $1.8 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; and
(iii) a $.4 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.
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 increased $.8 million. The increase is primarily due to: (i) a $.4 million increase in expenses due to volume as a result of increased production, in the Medical Stop-Loss segment; (ii) a $.3 million increase in the Fully Insured Health segment largely due to employee costs related to an increased sales and marketing force; and (iii) an increase of $.6 million in corporate employee benefit related expenses; partially offset by (iv) a decrease of $.3 million in Group, life, annuities and other lines of business primarily as a result of the transfer of certain annuity contracts in the fourth quarter of 2011; and (v) a decrease of $.2 million principally due to Individual annuities, and other run off lines.
Income Taxes
The effective tax rate for the three months ended September 30, 2012 was 33.3% compared to 29.8% 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 Nine Months Ended September 30, 2012 Compared to the Nine Months Ended September 30, 2011
Information by business segment for the nine months ended September 30, 2012 and 2011 is as follows:
Benefits, Amortization Selling,
Net Fee and Claims of Deferred General
Premiums Investment Other and Acquisition And
September 30, Earned Income Income Reserves Costs Administrative Total
2012
(In thousands)
Medical $ 103,100 4,119 625 65,585 - 29,472 $ 12.787
Stop-Loss
Fully Insured 102,204 1,123 20,706 67,536 18 51,860 4.619
Health
Group
disability,
life,
annuities
and DBL 36,776 2,035 90 22,876 - 11,733 4.292
Individual
life,
annuities 19,399 17,917 3,201 24,437 4,794 10,236 1.050
and other
Corporate - 512 - - - 6,293 (5,781)
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Net realized investment gains 3,998
Other-than-temporary impairment losses (704)
Interest expense on debt (1,588)
Income from operations before income taxes 18,673
Income taxes 6,123
Net income $ 12,550
Benefits, Amortization Selling,
Net Fee and Claims of Deferred General
Premiums Investment Other and Acquisition And
September 30, Earned Income Income Reserves Costs Administrative Total
2011
(In thousands)
Medical $ 85,658 3,679 4,111 58,689 - 30,161 $ 4,598
Stop-Loss
Fully Insured 108,866 1,117 19,723 68,048 23 54,338 7,297
Health
Group
disability,
life,
annuities
and DBL 38,078 7,231 120 28,654 397 11,505 4,873
Individual
life,
annuities 22,502 17,951 3,431 27,669 4,873 10,690 652
and other
Corporate - (994) - - - 4,581 (5,575)
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Net realized investment losses 2,605 Other-than-temporary impairment losses (575) Interest expense on debt (1,433) Income from operations before income taxes 12,442 Income tax benefits 1,167 Net income $ 11,275 |
In the first nine months of 2012, premiums earned increased $6.4 million over the comparable period of 2011. The increase is primarily due to: (i) an $17.4 . . .
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