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AMIC > SEC Filings for AMIC > Form 10-Q on 9-May-2013All Recent SEC Filings

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Form 10-Q for AMERICAN INDEPENDENCE CORP


9-May-2013

Quarterly Report

Management's Discussion and Analysis of Financial Condition and Results of Operations

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, 2012, 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 wholly owned business development and program management company, IHC Specialty Benefits, Inc. ("Specialty Benefits"), our full service direct writer of medical-stop insurance for self-insured employer groups IHC Risk Solutions, LLC ("Risk Solutions"), our 40% ownership in Global Accident Facilities, LLC ("GAF"), a holding company for a managing general underwriting agency for non-subscriber occupational accident business, our 23% investment in Majestic Underwriters LLC ("Majestic"), and our two insurance and marketing agencies, IPA Family, LLC ("IPA") and HealthInsurance.org ("HIO"). Since November 2002, AMIC has been affiliated with Independence Holding Company ("IHC"), which owned 80.6% of AMIC's stock as of March 31, 2013. The senior management of IHC provides direction to the Company through a service agreement between the Company and IHC. As of March 31, 2013, a significant amount of Independence American's revenue was from reinsurance premiums. The majority of these premiums are ceded to Independence American from IHC under reinsurance treaties to cede its gross medical stop-loss premiums written to Independence American. In addition, Independence American assumes fully insured health, short-term statutory disability benefit product in New York State ("DBL") and long-term disability ("LTD") premiums from IHC, and assumes medical stop-loss premiums from unaffiliated carriers. Independence American writes group major medical, medical stop-loss, major medical plans for individuals and families, short-term medical, dental, and began writing pet insurance in 2012. Given its broad licensing, A- (Excellent) rating from A.M. Best, and that it is the only property and casualty company in IHC, Independence American expects to expand the distribution of its international health, occupational accident, and pet insurance products.

While management considers a wide range of factors in its strategic planning, the overriding consideration is underwriting profitability. Management's assessment of trends in health and pet insurance markets play a significant role in determining whether to expand Independence American's insurance premiums.
Since Independence American reinsures a portion of all of the business produced by Risk Solutions, and since it is also eligible to earn profit sharing commissions based on the profitability of the business it places, Risk Solutions also emphasizes 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 all 50 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 March 31, 2013 was $54,890,000.

Risk Solutions

Risk Solutions has offices near Hartford, Connecticut, Philadelphia, Pennsylvania, Chicago, Illinois, and Ft. Wayne, Indiana and markets and underwrites employer medical stop-loss and group life primarily for Standard Security Life Insurance Company of New York ("Standard Security Life"). It also writes, to a much lesser extent, for three other carriers, including Madison National Life Insurance Company, Inc. ("Madison National Life") and Independence American.

Agencies

The Company has a 51% interest in HIO, which is headquartered in Minneapolis, Minnesota. HIO 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. The Company owns Specialty Benefits, which is headquartered in Minneapolis, Minnesota. Specialty Benefits is a business development and program management company. The Company has a 90% interest in IPA which is headquartered in Tampa, Florida. IPA is a national, career agent marketing organization which 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:

The results of operations for the three months ended March 31, 2013 and 2012 are summarized as follows (in thousands):

                                                       Three Months Ended
                                                            March 31,
                                                        2013         2012

         Revenues                                   $   35,360   $  22,234
         Expenses                                       34,065      20,329
            Income before income tax                     1,295       1,905
            Provision for income taxes                     372         608
         Net income                                        923       1,297
            Less: Net income attributable to the
            non-controlling interest                      (232)       (178)
         Net income attributable to American
         Independence Corp.                         $      691   $   1,119

The book value of the Company increased to $12.78 per share at March 31, 2013 compared to $12.59 per share at December 31, 2012.

The Company repurchased 199,784 shares of its common stock at a cost of $1,198,000 during the quarter ended March 31, 2013.

Net income per share decreased to $.09 per share, diluted, or $0.7 million, for the three months ended March 31, 2013, compared to $.14 per share, diluted, or $1.1 million for the three months ended March 31, 2012, primarily due to an increase in claim reserves for one stop-loss program.

At March 31, 2013, 99.3% of the Company's fixed maturities were investment grade.

Consolidated investment yields were 3.0% and 3.1% for the three months ended March 31, 2013 and 2012, respectively.

Premiums earned increased 63% to $30.0 million for the three months ended March 31, 2013 compared to $18.5 million for the three months ended March 31, 2012, primarily due to higher pet premiums, higher direct and assumed medical stop-loss premiums, higher assumed international premiums, higher group disability premiums, and higher assumed group major medical premiums.

For the three months ended March 31, 2013, our Agencies generated revenues of $4.3 million compared to $3.2 million for the three months ended March 31, 2012 due to higher revenues generated at HIO, Risk Solutions and Specialty Benefits.

Underwriting experience as indicated by GAAP Combined Ratios, on our three lines of business for the three months ended March 31, 2013 and 2012, are as follows (in thousands):

           
           Medical Stop-Loss                         Three Months Ended
                                                         March 31,
                                                      2013        2012

           Premiums Earned                        $   13,874   $ 11,051
           Insurance Benefits Claims and Reserves     10,678      6,642
           Profit Commission Expense (Recovery)          368        250
           Expenses                                    3,421      3,007

           Loss Ratio(A)                                77.0%      60.1%
           Profit Commission Expense Ratio (B)           2.7%       2.3%
           Expense Ratio (C)                            24.6%      27.2%
           Combined Ratio (D)                          104.3%      89.6%

           
           Fully Insured Health                      Three Months Ended
                                                          March 31,
                                                      2013         2012

           Premiums Earned                        $   14,957   $   6,644
           Insurance Benefits Claims and Reserves      9,879       4,594
           Profit Commission Expense (Recovery)          290          (3)
           Expenses                                    3,608       1,467

           Loss Ratio(A)                                66.0%       69.1%
           Profit Commission Expense Ratio (B)           1.9%        0.0%
           Expense Ratio (C)                            24.2%       22.1%
           Combined Ratio (D)                           92.1%       91.2%



           
           Group Disability                          Three Months Ended
                                                          March 31,
                                                      2013         2012

           Premiums Earned                        $    1,165   $     762
           Insurance Benefits Claims and Reserves        676         455
           Expenses                                      228         247

           Loss Ratio(A)                                58.0%       59.7%
           Expense Ratio (C)                            19.6%       32.4%
           Combined Ratio (D)                           77.6%       92.1%

(A)

Loss ratio represents insurance benefits, claims and reserves divided by premiums earned.

(B)

Profit commission expense ratio represents profit commissions divided by premiums earned.

(C)

Expense ratio represents commissions, administrative fees, premium taxes and other underwriting expenses divided by premiums earned.

(D)

The combined ratio is equal to the sum of the loss ratio, profit commission expense ratio and the expense ratio.

The Company recorded an increase in the loss ratio in the medical stop-loss line of business for the three months ended March 31, 2013. This is due to unfavorable reserve development related to business written with a certain producer which resulted in a $1.3 million increase in claim reserves on this program. We have ceased writing new business with this producer.

The Company recorded a decrease in the loss ratio in the fully insured health line of business for the three months ended March 31, 2013 primarily due to favorable performance on pet insurance business, international health business and individual health business.

The Company experienced a lower combined ratio for group disability for the three months ended March 31, 2013 as a result of the addition of profitable LTD business in 2012.

Critical Accounting Policies

The accounting and reporting policies of the Company conform to U.S. generally accepted accounting principles ("U.S. GAAP"). The preparation of the condensed consolidated financial statements in conformity with U.S. 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 year ended December 31, 2012. Management has identified the accounting policies related to Insurance Reserves, Premium and 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, 2012. During the

three months ended March 31, 2013, there were no additions to or changes in the critical accounting policies disclosed in the Form 10-K for the year ended December 31, 2012 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 March 31, 2013, Compared to the
Three Months Ended March 31, 2012.


                                                            Benefits,    Selling,
                                     Fees and      Net        Claims      General       Amortization
       March 31,          Premiums    Other    Investment      and          and             and
          2013             Earned     Income     Income      Reserves      Admin        Depreciation        Total
     (In thousands)

Independence
   American:
  Medical stop-loss       $ 13,874          -         297       10,678       3,789                    -   $    (296)
  Fully Insured Health      14,957          -         140        9,879       3,898                    -       1,320
  Group Disability           1,165          -          15          676         228                    -         276
Total Independence
   American                 29,996          -         452       21,233       7,915                    -       1,300
Risk Solutions
 And Agencies                    -      4,320          28            -       4,338                  228        (218)
Corporate                        -          -          24            -         351                    -        (327)
Subtotal                  $ 29,996      4,320         504       21,233      12,604                  228         755

Net realized investment gains                                                                                   540
Income before income taxes                                                                                    1,295
Income taxes                                                                                                   (372)
Net income                                                                                                      923
             Less: Net income attributable to the
             non-controlling interest                                                                          (232)
Net income attributable to American Independence Corp.                                                    $     691

                                                            Benefits,    Selling,
                                     Fees and      Net        Claims      General       Amortization
       March 31,          Premiums    Other    Investment      and          and             and
          2012             Earned     Income     Income      Reserves      Admin        Depreciation        Total
     (In thousands)

Independence
   American:
  Medical stop-loss       $ 11,051          -         313        6,642       3,257                    -   $   1,465
  Fully Insured Health       6,644          -         110        4,594       1,464                    -         696
  Group Disability             762          -          15          455         247                    -          75
Total Independence
   American                 18,458          -         438       11,691       4,968                    -       2,236
Risk Solutions
 and Agencies                    -      3,155          42            -       3,239                   45         (87)
Corporate                        -          -          16            -         386                    -        (370)
Subtotal                  $ 18,457      3,155         496       11,691       8,593                   45       1,779

Net realized investment gains                                                                                   126
Income before income taxes                                                                                    1,905
Income taxes                                                                                                   (608)
Net income                                                                                                    1,297
             Less: Net income attributable to the
             non-controlling interest                                                                          (178)
Net income attributable to American Independence Corp.                                                    $   1,119

Premiums Earned. Premiums earned increased 63%, or $11,539,000 from 2012 to 2013. The Company currently has three lines of business. Premiums relating to medical stop-loss business increased $2,823,000. This is due to an increase of $1,871,000 in medical stop-loss premiums assumed by Independence American, and an increase of $952,000 in medical stop-loss premiums written by Independence American. Premiums relating to fully insured health consisting of group major medical, limited medical, short-term medical, dental, vision, hospital indemnity, pet insurance, international medical, and individual health increased $8,313,000. The increase is primarily due an increase of $3,321,000 in pet premiums, an increase of $3,046,000 in group major medical premiums assumed by Independence American, and an increase of $991,000 in international medical premiums assumed by Independence American. Premiums relating to group disability increased $404,000 primarily due to higher DBL premiums assumed by Independence American. For the three months ended March 31, 2013, Independence American assumed 10% of IHC's short-term medical business, approximately 8% of certain of IHC's group major medical business, 20% of IHC's DBL business, 8% of certain of IHC's LTD business, and approximately 25% of IHC's medical stop-loss business. There were no significant changes to these percentages from the prior year.

Fee and Agency Income. Fee and agency income increased $1,119,000 from 2012 to 2013. Risk Solutions fee income-administration increased $512,000 to $1,783,000 for 2013, compared to $1,271,000 for 2012. Risk Solutions fee income-profit commission increased $75,000 to $133,000 for 2013, compared to $58,000 for 2012.
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 2013 are based on business written during portions of 2010, 2011 and 2012. In 2013, agency income consisted of commission income and other fees of $938,000 from IPA and revenue of $1,040,000 and $353,000 from HIO and our new company Specialty Benefits, respectively. In 2012, agency income consisted of commission income and other fees of $1,147,000 from IPA and revenue of $652,000 from HIO.

Net Investment Income. Net investment income increased $8,000 from 2012 to 2013. The consolidated investment yields were 3.0% and 3.1% for the three months ended March 31, 2013 and 2012, respectively.

Net Realized Investment Gains. The Company recorded a net realized investment gain of $540,000 for the three months ended March 31, 2013, compared to a gain of $126,000 for the three months ended March 31, 2012. 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 increased $46,000 from 2012 to 2013 due to income from our new equity investment in GAF for the three months ended March 31, 2013, compared to the three months ended March 31, 2012.

Insurance Benefits, Claims and Reserves. Insurance benefits claims and reserves increased 82%, or $9,542,000 from 2012 to 2013. The increase is primarily due to an increase in assumed group major medical of $2,577,000 due to higher premiums assumed and a higher loss ratio, an increase in direct medical stop-loss of $2,118,000 due to an increase in premiums written and a higher loss ratio, an increase in direct pet insurance of $2,102,000 due to a higher premiums written, an increase in assumed medical stop-loss of $1,918,000 due to an increase in premiums assumed and a higher loss ratio, and an increase in assumed international medical of $459,000 due to higher premiums assumed.

Selling, General and Administrative. Selling, general and administrative expenses increased $4,011,000 from 2012 to 2013. This increase is primarily due to higher commission expense of $2,067,000 at Independence American due to higher assumed fully insured premiums, higher pet premiums, and higher assumed stop-loss premiums, higher expenses of $631,000 due to the formation of Specialty Benefits in May 2012, higher expenses at Risk Solutions of $561,000 primarily due to higher salary expense related to an increase in sales, higher travel expense and higher amortization expense, higher profit commission expense of $411,000 at Independence American due to payments made for assumed group major medical, direct medical stop loss, and direct group major medical business, higher administration expense of $350,000 at Independence American due to higher fees in direct fully insured due to higher premiums written, and higher expenses at HIO of $245,000 due to higher referral fees, offset by lower expenses at IPA of $337,000 primarily due to lower agent expenses.

Amortization and Depreciation. Amortization and depreciation expense increased $183,000 from 2012 to 2013, primarily due to the amortization of intangible assets acquired in the 4th quarter of 2012.

Income Taxes. The provision for income taxes decreased $236,000 to $372,000, an effective rate of 35.0%, for the three months ended March 31, 2013, compared to $608,000, an effective rate of 35.2%, for the three months ended March 31, 2012.
Net income for the three months ended March 31, 2013 and 2012 includes a non-cash provision for federal income taxes of $353,000 and $558,000, respectively. The state tax effective rate decreased to 0.6% for the three months ended March 31, 2013, compared to 1.4% for the three months ended March 31, 2012. 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 non-controlling interest. Net income attributable to the non-controlling interest increased $54,000 from 2012 to 2013. The net income for the three months ended March 31, 2013 and 2012 relates to the 49% non-controlling interest in HIO and the 10% non-controlling interest in IPA.

Net Income attributable to American Independence Corp. The net income attributable to the Company decreased to $691,000, or $.09 per share, diluted, for the three months ended March 31, 2013, compared to $1,119,000, or $.14 per share, diluted, for the three months ended March 31, 2012.

LIQUIDITY

Independence American

Independence American principally derives cash flow from: (i) operations; (ii) the receipt of scheduled principal payments

on its portfolio of fixed income securities; and (iii) earnings on investments and other investing activities. Such cash flow is partially used to finance liabilities for insurance policy benefits and reinsurance obligations.

Corporate

Corporate derives cash flow funds principally from: dividends and tax payments from its subsidiaries and investment income from corporate liquidity. The ability of Independence American to pay dividends to its parent company is governed by Delaware insurance laws and regulations; otherwise, there are no regulatory constraints on the ability of any of our subsidiaries to pay dividends to its parent company. For the three months ended March 31, 2013, Independence American and our Agencies paid $245,000 in dividends to Corporate.

Cash Flows

As of March 31, 2013, the Company had $74,276,000 of cash, cash equivalents, and investments net of amounts due to/from securities brokers compared with $71,741,000 as of December 31, 2012.

Net cash provided by operating activities of continuing operations for the three months ended March 31, 2013 was $6,096,000, net cash used by investing activities of continuing operations for the three months ended March 31, 2013 was $4,037,000, and net cash used by financing activities of continuing operations for the three months ended March 31, 2013 was $1,780,000.

At March 31, 2013 and December 31, 2012, the Company had $15,039,000 and $13,321,000 of restricted cash at Risk Solutions. These amounts are directly offset by corresponding liabilities for Premium and Claim Funds Payable. The amount increased $1,718,000 due to an increase in medical stop-loss business written by Risk Solutions. This asset, in part, represents the premium that is remitted by the insureds and is collected by Risk Solutions on behalf of the insurance carriers they represent. Each month the premium is remitted to the insurance carriers by Risk Solutions. Until such remittance is made the collected premium is carried as an asset on the balance sheet with a corresponding payable to each insurance carrier. In addition to the premium being held at Risk Solutions, Risk Solutions is in possession of cash to pay claims. The cash is deposited by each insurance carrier into a bank account that Risk Solutions can access to reimburse claims in a timely manner. The cash is used by Risk Solutions to pay claims on behalf of the insurance carriers they represent.

At March 31, 2013, the Company had $30,051,000 of insurance reserves that it expects to pay out of current assets and cash flows from future business. If necessary, the Company could utilize the cash received from maturities and repayments of its fixed maturity investments if the timing of claim payments associated with the Company's insurance resources does not coincide with future cash flows.

The Company believes it has sufficient cash to meet its currently anticipated business requirements over the next twelve months including working capital requirements and capital investments.

BALANCE SHEET

Total investments, net of amounts due to/from brokers, increased $2,256,000 to $69,421,000 during the three months ended March 31, 2013 from $67,165,000 at December 31, 2012, primarily due to higher net purchases of fixed maturity securities, and a higher net amount due from brokers, offset by the sales of securities purchased under agreements to resell, and net sales of preferred stock.

The Company had receivables from reinsurers of $6,367,000 at March 31, 2013.
Substantially all of the business ceded to such reinsurers is of short duration. All of such receivables are either due from related parties, highly rated companies or are adequately secured. No allowance for doubtful accounts was deemed necessary at March 31, 2013.

The Company's insurance reserves by line of business are as follows (in thousands):

                                         Total Insurance Reserves
                                        March 31,     December 31,
                                           2013           2012

                 Medical Stop-Loss    $    18,699   $      16,363
. . .
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