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AMIC > SEC Filings for AMIC > Form 10-Q on 8-Aug-2013All Recent SEC Filings

Show all filings for AMERICAN INDEPENDENCE CORP

Form 10-Q for AMERICAN INDEPENDENCE CORP


8-Aug-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 June 30, 2013. The senior management of IHC provides direction to the Company through a service agreement between the Company and IHC. As of June 30, 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 June 30, 2013 was $56,226,000.

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 and six months ended June 30, 2013 and 2012 are summarized as follows (in thousands):

                                              Three Months Ended        Six Months Ended
                                                   June 30,                 June 30,
                                               2013         2012        2013        2012

Revenues                                   $   37,373   $  23,475   $  72,733   $  45,709
Expenses                                       34,847      22,728      68,912      43,057
   Income before income tax                     2,526         747       3,821       2,652
   Provision for income taxes                     821         196       1,193         804
Net income                                      1,705         551       2,628       1,848
   Less: Net income attributable to the                                  (433)       (420)
   non-controlling interest                      (201)       (242)
Net income attributable to American                                     2,195       1,428
Independence Corp.                         $    1,504   $     309   $           $

The book value of the Company increased to $12.67 per share at June 30, 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 six months ended June 30, 2013.

Net income per share increased to $.19 per share, diluted, or $1.5 million, for the three months ended June 30, 2013, compared to $.04 per share, diluted, or $0.3 million for the three months ended June 30, 2012. Net income per share increased to $.27 per share, diluted, or $2.2 million, for the six months ended June 30, 2013, compared to $.17 per share, diluted, or $1.4 million for the three months ended June 30, 2012.

At June 30, 2013, 99.4% of the Company's fixed maturities were investment grade.

Consolidated investment yields were 3.2% and 3.1% for the six months ended June 30, 2013 and 2012, respectively.

Premiums earned increased 63% to $61.6 million for the six months ended June 30, 2013 compared to $37.8 million for the six months ended June 30, 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 six months ended June 30, 2013, our Agencies generated revenues of $9.2 million compared to $6.9 million for the six months ended June 30, 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 and six months ended June 30, 2013 and 2012, are as follows (in thousands):


Medical Stop-Loss                         Three Months Ended       Six Months Ended
                                               June 30,                June 30,
                                           2013        2012         2013      2012

Premiums Earned                        $   14,228   $ 11,620    $  28,102  $ 22,671
Insurance Benefits Claims and Reserves      8,219      9,191       18,897    15,833
Profit Commission Expense (Recovery)        1,273       (647)       1,641      (397)
Expenses                                    3,597      3,173        7,018     6,180

Loss Ratio(A)                                57.8%      79.1%        67.2%     69.8%
Profit Commission Expense Ratio (B)           8.9%      -5.6%         5.8%     -1.8%
Expense Ratio (C)                            25.3%      27.3%        25.0%     27.3%
Combined Ratio (D)                           92.0%     100.8%        98.0%     95.3%


Fully Insured Health                      Three Months Ended        Six Months Ended
                                               June 30,                 June 30,
                                           2013         2012         2013      2012

Premiums Earned                        $   15,935   $   6,952    $  30,892  $ 13,596
Insurance Benefits Claims and Reserves     11,035       4,608       20,914     9,202
Profit Commission Expense (Recovery)           17         125          307       122
Expenses                                    4,148       1,512        7,756     2,979

Loss Ratio(A)                                69.3%       66.3%        67.7%     67.7%
Profit Commission Expense Ratio (B)           0.1%        1.8%         1.0%      0.9%
Expense Ratio (C)                            26.0%       21.7%        25.1%     21.9%
Combined Ratio (D)                           95.4%       89.8%        93.8%     90.5%




Group Disability                          Three Months Ended        Six Months Ended
                                               June 30,                 June 30,
                                           2013         2012         2013       2012

Premiums Earned                        $    1,455   $     762    $   2,620   $ 1,524
Insurance Benefits Claims and Reserves        940         467        1,616       922
Expenses                                      511         263          739       510

Loss Ratio(A)                                64.6%       61.3%        61.7%     60.5%
Expense Ratio (C)                            35.1%       34.5%        28.2%     33.5%
Combined Ratio (D)                           99.7%       95.8%        89.9%     94.0%

(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 a decrease in the loss ratio in the medical stop-loss line of business for the three months and six months ended June 30, 2013. This is due to better claims experience on direct business.

The Company recorded an increase in the loss ratio in the fully insured health line of business for the three months ended June 30, 2013 primarily due to an increase in the claims experience on major medical business for small groups and individuals.

The Company experienced a higher loss ratio for group disability for the three months and six months ended June 30, 2013 as a result of unfavorable claims experience.

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 June 30, 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 June 30, 2013, Compared to the
Three Months Ended June 30, 2012.


                                                            Benefits,    Selling,
                                     Fees and      Net        Claims      General       Amortization
        June 30,          Premiums    Other    Investment      and          and             and
          2013             Earned     Income     Income      Reserves      Admin        Depreciation        Total
     (In thousands)

Independence
   American:
  Medical stop-loss       $ 14,228          -         279        8,219       4,870                    -   $   1,418
  Fully Insured Health      15,935          -         172       11,035       4,165                    -         907
  Group Disability           1,455          -          16          940         511                    -          20
Total Independence
   American                 31,618          -         467       20,194       9,546                    -       2,345
Risk Solutions
 And Agencies                    -      4,867          31            -       4,523                  256         119
Corporate                        -          -           3            -         328                    -        (325)
Subtotal                  $ 31,618      4,867         501       20,194      14,397                  256       2,139

Net realized investment gains                                                                                   387
Income before income taxes                                                                                    2,526
Income taxes                                                                                                   (821)
Net income                                                                                                    1,705
             Less: Net income attributable to the
             non-controlling interest                                                                          (201)
Net income attributable to American Independence Corp.                                                    $   1,504

                                                            Benefits,    Selling,
                                     Fees and      Net        Claims      General       Amortization
        June 30,          Premiums    Other    Investment      and          and             and
          2012             Earned     Income     Income      Reserves      Admin        Depreciation        Total
     (In thousands)

Independence
   American:
  Medical stop-loss       $ 11,620          -         337        9,191       2,526                    -   $     240
  Fully Insured Health       6,952          -          94        4,608       1,637                    -         801
  Group Disability             762          -          14          467         263                    -          46
Total Independence
   American                 19,334          -         445       14,266       4,426                    -       1,087
Risk Solutions
 and Agencies                    -      3,786          42            -       3,580                   45         203
Corporate                        -          -          13            -         411                    -        (398)
Subtotal                  $ 19,334      3,786         500       14,266       8,417                   45         892

Net realized investment gains                                                                                    44
Other-than-temporary impairment losses                                                                         (189)
Income before income taxes                                                                                      747
Income taxes                                                                                                   (196)
Net income                                                                                                      551
             Less: Net income attributable to the
             non-controlling interest                                                                          (242)
Net income attributable to American Independence Corp.                                                    $     309

Premiums Earned. Premiums earned increased 64%, or $12,284,000 from 2012 to 2013. The Company currently has three lines of business. Premiums relating to medical stop-loss business increased $2,608,000. This is due to an increase of $2,733,000 in medical stop-loss premiums assumed 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 $8,983,000.
The increase is primarily due an increase of $4,483,000 in pet premiums, an increase of $2,762,000 in group major medical premiums assumed by Independence American, and an increase of $1,250,000 in international medical premiums assumed by Independence American. Premiums relating to group disability increased $693,000 due to higher DBL and LTD premiums assumed by Independence American. For the three months ended June 30, 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 26% 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 $949,000 from 2012 to 2013. Risk Solutions fee income-administration increased $692,000 to $1,882,000 for 2013, compared to $1,190,000 for 2012. Risk Solutions fee income-profit

commission decreased $64,000 to $337,000 for 2013, compared to $401,000 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 $993,000 from IPA and revenue of $1,062,000 and $414,000 from HIO and Specialty Benefits, respectively. In 2012, agency income consisted of commission income and other fees of $1,113,000 from IPA and revenue of $809,000 and $226,000 from HIO and Specialty Benefits, respectively.

Net Investment Income. Net investment income increased $1,000 from 2012 to 2013. The consolidated investment yields were 3.4% and 3.1% for the three months ended June 30, 2013 and 2012, respectively.

Net Realized Investment Gains and Other-Than-Temporary Impairment Losses. The Company recorded a net realized investment gain of $387,000 for the three months ended June 30, 2013, compared to a gain of $44,000 for the three months ended June 30, 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. For the three months ended June 30, 2013 and 2012, the Company recorded $0 and $189,000, respectively, of other-than-temporary-impairment losses. These credit losses were a result of the expected cash flows of a debt security being less than the debt security's amortized cost.

Other Income. Other income increased $132,000 from 2012 to 2013 due to income from our new equity investment in GAF for the three months ended June 30, 2013, compared to the three months ended June 30, 2012.

Insurance Benefits, Claims and Reserves. Insurance benefits claims and reserves increased 42%, or $5,928,000 from 2012 to 2013. The increase is primarily due to an increase in assumed group major medical of $2,371,000 due to higher premiums assumed and a higher loss ratio, an increase in direct pet insurance of $2,941,000 due to higher premiums written, an increase in assumed medical stop-loss of $2,800,000 due to an increase in premiums assumed and a higher loss ratio, an increase in assumed international medical of $677,000 due to higher premiums assumed, and an increase in DBL of $375,000 due to an increase in premiums assumed and a higher loss ratio, offset by a decrease in direct medical stop-loss of $3,772,000 due to a decrease in premiums written and a lower loss ratio.

Selling, General and Administrative. Selling, general and administrative expenses increased $5,980,000 from 2012 to 2013. This increase is primarily due to higher commission expense of $2,768,000 at Independence American due to higher assumed fully insured premiums, higher pet premiums, and higher assumed stop-loss premiums, higher profit commission expense of $1,812,000 at Independence American due to payments made for direct medical stop loss business, higher administration expense of $456,000 at Independence American primarily due to higher fees for direct pet insurance written, higher expenses of $334,000 due to the formation of Specialty Benefits in May 2012, higher expenses at Risk Solutions of $386,000 primarily due to higher salary expense and travel expense related to an increase in sales, and higher expenses at HIO of $325,000 due to higher referral fees, offset by lower expenses at IPA of $100,000 primarily due to lower commissions.

Amortization and Depreciation. Amortization and depreciation expense increased $211,000 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 increased $625,000 to $821,000, an effective rate of 35.3%, for the three months ended June 30, 2013, compared to $196,000, an effective rate of 38.8%, for the three months ended June 30, 2012.
Net income for the three months ended June 30, 2013 and 2012 includes a non-cash provision for federal income taxes of $779,000 and $152,000, respectively. The state tax effective rate decreased to 0.3% for the three months ended June 30, 2013, compared to 7.5% for the three months ended June 30, 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 decreased $41,000 from 2012 to 2013. The net income for the three months ended June 30, 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 increased to $1,504,000, or $.19 per share, diluted, for the three months ended June 30, 2013, compared to $309,000, or $.04 per share, diluted, for the three months ended June 30, 2012.

Results of Operations for the Six Months Ended June 30, 2013, Compared to the
Six Months Ended June 30, 2012.


                                                             Benefits,    Selling,
                                     Fees and      Net         Claims      General       Amortization
        June 30,          Premiums    Other     Investment      and          and             and
          2013             Earned     Income      Income      Reserves      Admin        Depreciation        Total
     (In thousands)

Independence
   American:
  Medical stop-loss       $ 28,102          -          576       18,897       8,659                    -   $   1,122
  Fully Insured Health      30,892          -          312       20,914       8,063                    -       2,227
  Group Disability           2,620          -           31        1,616         739                    -         296
Total Independence
   American                 61,614          -          919       41,427      17,461                    -       3,645
Risk Solutions
 And Agencies                    -      9,187           59            -       8,861                  484         (99)
Corporate                        -          -           27            -         679                    -        (652)
Subtotal                  $ 61,614      9,187        1,005       41,427      27,001                  484       2,894

Net realized investment gains                                                                                    927
Income before income taxes                                                                                     3,821
Income taxes                                                                                                  (1,193)
Net income                                                                                                     2,628
             Less: Net income attributable to the
             non-controlling interest                                                                           (433)
Net income attributable to American Independence Corp.                                                     $   2,195

                                                             Benefits,    Selling,
                                     Fees and      Net         Claims      General       Amortization
        June 30,          Premiums    Other     Investment      and          and             and
          2012             Earned     Income      Income      Reserves      Admin        Depreciation        Total
     (In thousands)

Independence
   American:
  Medical stop-loss       $ 22,671          -          650       15,833       5,783                    -   $   1,705
  Fully Insured Health      13,596          -          204        9,202       3,101                    -       1,497
  Group Disability           1,524          -           29          922         510                    -         121
Total Independence
   American                 37,791          -          883       25,957       9,394                    -       3,323
Risk Solutions
 and Agencies                    -      6,941           84            -       6,819                   90         116
Corporate                        -          -           29            -         797                    -        (768)
Subtotal                  $ 37,791      6,941          996       25,957      17,010                   90       2,671

Net realized investment gains                                                                                    170
. . .
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