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AMIC > SEC Filings for AMIC > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for AMERICAN INDEPENDENCE CORP

Form 10-Q for AMERICAN INDEPENDENCE CORP


9-May-2014

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, 2013, 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 sales and marketing company, IHC Specialty Benefits, Inc. ("Specialty Benefits"), our wholly owned full service direct writer of medical-stop insurance for self-insured employer groups, IHC Risk Solutions, LLC ("Risk Solutions"), our 92% owned consumer direct sales call center, IPA Direct, LLC ("IPAD"), our 90% owned consumer direct sales agency, IPA Family LLC ("IPA Family"), and our 51% owned lead generation agency, HealthInsurance.org ("HIO"). Risk Solutions, Specialty Benefits, HIO, IPAD and IPA Family are collectively referred to as "our Agencies". Since November 2002, AMIC has been affiliated with Independence Holding Company ("IHC"), which owned 90% of AMIC's stock as of March 31, 2014.
The senior management of IHC provides direction to the Company through a service agreement between the Company and IHC. As of March 31, 2014, 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 pet insurance, medical stop-loss, short-term medical, occupational accident, dental and other ancillary products. Given its broad licensing, A- (Excellent) rating from A.M. Best Company, Inc. ("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 healthcare and in the medical stop-loss market play a significant role in determining whether to expand Independence American's health insurance premiums. Since Independence American reinsures a portion of all of the business produced by 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. We have been informed by A.M. Best that 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 towards protection of investors.
A.M. Best 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, 2014 was $58,341,000.

Agencies

Risk Solutions has offices near Hartford, CT, Philadelphia, PA, Chicago, IL, and Ft. Wayne, IN and markets and underwrites employer medical stop-loss for Standard Security Life Insurance Company of New York ("Standard Security Life"), Madison National Life Insurance Company, Inc. ("Madison National Life"), Independence American, and one other carrier. The Company has a 51% interest in HIO, which is headquartered in Minneapolis, MN. HIO is a lead generation agency through its well-established internet domain address: www.healthinsurance.org.
The Company owns Specialty Benefits, which is also headquartered in Minneapolis, MN. Specialty Benefits is a sales and marketing company. The Company has a 90% interest in IPA Family, which is headquartered in Tampa, FL.
IPA Family is a consumer direct sales agency. The Company has a 92% interest in IPAD, which is headquartered in Lake Mary, FL. IPAD is a consumer direct sales call center.

The following is a summary of key performance information and events:

The results of operations for the three months ended March 31, 2014 and 2013 are summarized as follows (in thousands):

                                                       Three Months Ended
                                                            March 31,
                                                        2014         2013

         Revenues                                   $   43,087   $  35,360
         Expenses                                       41,672      34,065
            Income before income tax                     1,415       1,295
            Provision for income taxes                     409         372
         Net income                                      1,006         923
            Less: Net income attributable to the
            non-controlling interest                      (240)       (232)
         Net income attributable to American
         Independence Corp.                         $      766   $     691

The book value of the Company increased to $12.94 per share at March 31, 2014 compared to $12.68 per share at December 31, 2013.

Net income per share was to $.09 per share, diluted, or $0.8 million, for the three months ended March 31, 2014, compared to $.09 per share, diluted, or $0.7 million for the three months ended March 31, 2013.

At March 31, 2014, 99.5% of the Company's fixed maturities were investment grade.

Consolidated investment yields were 2.8% and 3.0% for the three months ended March 31, 2014 and 2013, respectively.

Premiums earned increased 8% to $32.5 million for the three months ended March 31, 2014 compared to $30.0 million for the three months ended March 31, 2013, primarily due to higher premiums for pet insurance, assumed medical stop-loss, and occupational accident business, offset by lower premiums for direct and assumed group major medical, direct medical stop-loss, and direct individual health business.

For the three months ended March 31, 2014, our Agencies generated revenues of $10.0 million compared to $4.3 million for the three months ended March 31, 2013 due to higher revenues generated at HIO, Risk Solutions, IPAD and Specialty Benefits.

Underwriting experience as indicated by GAAP Combined Ratios, on our three lines of business for the three months ended March 31, 2014 and 2013, are as follows (in thousands):


Medical Stop-Loss                         Three Months Ended
                                              March 31,
                                           2014        2013

Premiums Earned                        $   14,558   $ 13,874
Insurance Benefits Claims and Reserves     10,279     10,678
Profit Commission Expense                     320        368
Expenses                                    3,773      3,421

Loss Ratio(A)                                70.6%      77.0%
Profit Commission Expense Ratio (B)           2.2%       2.7%
Expense Ratio (C)                            25.9%      24.6%
Combined Ratio (D)                           98.7%     104.3%


Fully Insured Health                      Three Months Ended
                                              March 31,
                                           2014        2013

Premiums Earned                        $   16,505   $ 14,957
Insurance Benefits Claims and Reserves     10,664      9,879
Profit Commission Expense                     342        290
Expenses                                    4,810      3,608

Loss Ratio(A)                                64.6%      66.0%
Profit Commission Expense Ratio (B)           2.1%       1.9%
Expense Ratio (C)                            29.1%      24.2%
Combined Ratio (D)                           95.8%      92.1%




Group Disability                           Three Months Ended
                                               March 31,
                                           2014         2013

Premiums Earned                        $    1,421   $    1,165
Insurance Benefits Claims and Reserves        843          676
Expenses                                      421          228

Loss Ratio(A)                                59.3%        58.0%
Expense Ratio (C)                            29.7%        19.6%
Combined Ratio (D)                           89.0%        77.6%

(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 ended March 31, 2014. This is due to favorable claims experience on direct business, partially offset by unfavorable claims experience on assumed business emanating from a non-owned MGU program that was terminated effective December 31, 2013.

The Company recorded an increase in the combined ratio in the fully insured health line of business for the three months ended March 31, 2014 primarily due to an increase in the expense ratio due to a change in the mix of business to lines that have higher commission and expenses structures, partially offset by a decrease in loss ratio as the Company moves to specialty health lines and moves away from major medical.

The Company experienced a slightly higher loss ratio for group disability for the three months ended March 31, 2014 as a result of a higher frequency of DBL claims and a higher percentage change in the expense ratio as a result of a change in the mix of business.

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, 2013. Management has identified the accounting policies related to Policy Benefits and Claims, 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, 2013. During the three months ended March 31, 2014, there were no additions to or changes in the critical accounting policies disclosed in the Form 10-K for the year ended December 31, 2013 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, 2014, Compared to the
Three Months Ended March 31, 2013.


                                                            Benefits,    Selling,
                                     Fees and      Net        Claims      General      Amortization
       March 31,          Premiums    Other    Investment      and          and             and
          2014             Earned     Income     Income      Reserves      Admin       Depreciation        Total
     (In thousands)

Independence
   American:
  Medical stop-loss       $ 14,558          -         302       10,279       4,093                   -   $     488
  Fully Insured Health      16,505          -         169       10,664       5,152                   -         858
  Group Disability           1,421          -          21          843         421                   -         177
Total Independence
   American                 32,484          -         491       21,786       9,666                   -       1,523
Risk Solutions
 And Agencies                    -     10,019          29            -       9,540                 237         271
Corporate                        -          -          16            -         443                   -        (427)
Subtotal                  $ 32,484     10,019         536       21,786      19,649                 237       1,367

Net realized investment gains                                                                                   48
Income before income taxes                                                                                   1,415
Income taxes                                                                                                  (409)
Net income                                                                                                   1,006
             Less: Net income attributable to the
             non-controlling interest                                                                         (240)
Net income attributable to American Independence Corp.                                                   $     766

                                                            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

Premiums Earned. Premiums earned increased 8%, or $2,488,000 from 2013 to 2014.
The Company currently has three lines of business. Premiums relating to medical stop-loss business increased $684,000. This is due to an increase of $1,939,000 in medical stop-loss premiums assumed by Independence American, offset by a decrease of $1,255,000 in medical stop-loss premiums written by Independence American through an independent MGU that has been terminated.
Premiums relating to fully insured health consisting of major medical, fixed indemnity limited benefit, short-term medical, dental, vision, small group stop-loss, hospital indemnity, occupational accident, pet insurance, international medical, and individual health increased $1,548,000. The increase is primarily due to an increase of $2,896,000 in pet premiums, an increase in occupational accident business written by Independence American of $2,003,000, an increase in international medical premiums assumed by Independence American of $312,000, an increase in small group stop-loss business written by Independence American of $272,000, and an increase in fixed indemnity limited benefit assumed by Independence American of $250,000, offset by a decrease in major medical premiums written and assumed by

Independence American of $3,554,000, and a decrease in individual health premiums written by Independence American of $864,000. Premiums relating to group disability increased $256,000 due to higher DBL premiums assumed by Independence American. For the three months ended March 31, 2014, Independence American assumed 10% of IHC's short-term 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. For the three months ended March 31, 2014 and March 31, 2013, Independence American assumed approximately 10% and 8%, respectively, of certain of IHC's group major medical business.

Fee and Agency Income. Fee and agency income increased $5,729,000 from 2013 to 2014. Risk Solutions fee income-administration increased $928,000 to $2,711,000 for 2014, compared to $1,783,000 for 2013. Risk Solutions fee income-profit commission increased $52,000 to $185,000 for 2014, compared to $133,000 for 2013. 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 2014 are based on business written during portions of 2011, 2012 and 2013. In 2014, agency income consisted of commission income and other fees of $795,000 and $109,000 from IPA Family and IPAD, respectively, and revenue of $4,470,000 and $1,706,000 from HIO and Specialty Benefits, respectively. In 2013, agency income consisted of commission income and other fees of $938,000 from IPA Family and revenue of $1,040,000 and $353,000 from HIO and Specialty Benefits, respectively.

Net Investment Income. Net investment income increased $32,000 from 2013 to 2014. The consolidated investment yields were 2.8% and 3.0% for the three months ended March 31, 2014 and 2013, respectively.

Net Realized Investment Gains. The Company recorded a net realized investment gain of $48,000 for the three months ended March 31, 2014, compared to a gain of $540,000 for the three months ended March 31, 2013. 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 decreased $30,000 from 2013 to 2014.

Insurance Benefits, Claims and Reserves. Insurance benefits claims and reserves increased 3%, or $553,000 from 2013 to 2014. The increase is primarily due to an increase in pet of $1,858,000 due to higher premiums, an increase in assumed medical stop-loss of $1,547,000 due to higher premiums assumed and a higher loss ratio, an increase in occupational accident of $1,028,000 due to higher premiums, an increase in other major medical of $460,000 due to higher premiums and a higher loss ratio, and an increase in assumed international health of $299,000 due to higher premiums assumed and a higher loss ratio, offset by a decrease in direct and assumed major medical of $2,702,000 due to lower premiums, and a decrease in direct medical stop-loss of $1,945,000 due to lower premiums and a lower loss ratio.

Selling, General and Administrative. Selling, general and administrative expenses increased $7,045,000 from 2013 to 2014. This increase is due to higher expenses at HIO of $3,412,000 due to higher referral fees, higher commission expense of $1,483,000 at Independence American due to higher premiums, higher expenses of $1,063,000 and $657,000 at Specialty Benefits and Risk Solutions, respectively, primarily due to higher salary expense relating to an increase in sales, and higher expenses of $290,000 due to the formation of IPAD in July 2013.

Amortization and Depreciation. Amortization and depreciation expense increased $9,000 from 2013 to 2014.

Income Taxes. The provision for income taxes increased $37,000 to $409,000, an effective rate of 34.8%, for the three months ended March 31, 2014, compared to $372,000, an effective rate of 35.0%, for the three months ended March 31, 2013.
Net income for the three months ended March 31, 2014 and 2013 includes a non-cash provision for federal income taxes of $398,000 and $353,000, respectively. The state tax effective rate decreased to (0.2)% for the three months ended March 31, 2014, compared to 0.6% for the three months ended March 31, 2013. 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 $8,000 from 2013 to 2014.
The net income for the three months ended March 31, 2014 and 2013 relates to the 49% non-controlling interest in HIO and the 10% non-controlling interest in IPA Family. Also included in the net income for the three months ended March 31, 2014 is the 8% non-controlling interest in our new company IPAD.

Net Income attributable to American Independence Corp. The net income attributable to the Company increased to $766,000, or $.09 per share, diluted, for the three months ended March 31, 2014, compared to $691,000, or $.09 per share, diluted, for the three months ended March 31, 2013.

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, 2014, Independence American and our Agencies paid $136,000 in dividends to Corporate.

Cash Flows

The Company had $3.1 million and $4.4 million of cash and cash equivalents as of March 31, 2014 and December 31, 2013, respectively.

For the three months ended March 31, 2014, operating activities provided the Company with $0.4 million of cash, whereas $1.4 million of cash was utilized by investing activities due to higher net purchases of fixed maturity securities offset by higher net sales of securities under resale and repurchase agreements.
Financing activities, which utilized $0.2 million for the period, includes a $0.2 million utilized to pay dividends to noncontrolling interests.

At March 31, 2014 and December 31, 2013, the Company had $14,693,000 and $10,067,000 of restricted cash at Risk Solutions. These amounts are directly offset by corresponding liabilities for Premium and Claim Funds Payable. The amount increased $4,626,000 due to the timing of paid claims during the year.
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, 2014, the Company had $34,806,000 of policy benefits and claims 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 policy benefits and claims 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 $2,787,000 to $76,546,000 during the three months ended March 31, 2014 from $73,759,000 at December 31, 2013, primarily due to higher net purchases of fixed maturity securities, and a decrease in net unrealized losses on investments.

The Company had receivables from reinsurers of $6,507,000 at March 31, 2014.
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, 2014.

The Company's policy benefits and claims by line of business are as follows (in thousands):

                                     Total Policy Benefits and Claims
                                     March 31,          December 31,
                                        2014                2013

            Medical Stop-Loss    $        20,670   $            20,618
            Fully Insured Health          12,695                13,276
            Group Disability               1,441                 1,358

                                 $        34,806   $            35,252

The decrease in total policy benefits and claims of $446,000 is primarily attributable to a decrease in group major medical premiums written and assumed by Independence American, offset by an increase in pet and occupational accident premiums written.

. . .

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