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AMIC > SEC Filings for AMIC > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for AMERICAN INDEPENDENCE CORP

Form 10-Q for AMERICAN INDEPENDENCE CORP


8-Aug-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 June 30, 2014.
The senior management of IHC provides direction to the Company through a service agreement between the Company and IHC. As of June 30, 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 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 June 30, 2014 was $58,871,000.

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 table summarizes selected consolidated financial data and certain operating information of the Company. The consolidated financial statements and financial information of AMIC reported prior to this period are not directly comparable to the financial statements and financial information of AMIC included in this report as a result of the change in accounting principle as noted in the explanatory note to the financial statements. The differences relate to basis differences in goodwill, intangible assets and related amortization, other assets, other investments, non-controlling interests in subsidiaries, taxes and related tax provisions, net income, additional paid-in capital, retained earnings and total shareholders' equity.

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, 2014 and 2013 are summarized as follows (in thousands):

                                              Three Months Ended        Six Months Ended
                                                   June 30,                 June 30,
                                               2014         2013        2014        2013

Revenues                                   $   40,020   $  37,374   $  83,107   $  72,735
Expenses                                       39,270      35,062      81,133      69,340
   Income before income tax                       750       2,312       1,974       3,395
   Provision for income taxes                     307         747         649       1,044
Net income                                        443       1,565       1,325       2,351
   Less: Net income attributable to the                                  (226)       (433)
   non-controlling interest                        14        (201)
Net income attributable to American                                     1,099       1,918
Independence Corp.                         $      457   $   1,364   $           $

The book value of the Company increased to $10.84 per share at June 30, 2014 compared to $10.44 per share at December 31, 2013.

Net income per share decreased to $.06 per share, diluted, or $0.5 million, for the three months ended June 30, 2014, compared to $.17 per share, diluted, or $1.4 million for the three months ended June 30, 2013. Net income per share decreased to $.14 per share, diluted, or $1.1 million, for the six months ended June 30, 2014, compared to $.24 per share, diluted, or $1.9 million for the six months ended June 30, 2013.

At June 30, 2014, 99.5% of the Company's fixed maturities were investment grade.

Consolidated investment yields were 2.8% and 3.2% for the six months ended June 30, 2014 and 2013, respectively.

Premiums earned increased 7% to $66.1 million for the six months ended June 30, 2014 compared to $61.6 million for the six months ended June 30, 2013, primarily due to higher premiums for pet insurance, assumed medical stop-loss, and occupational accident business, offset by lower premiums for assumed group major medical, direct medical stop-loss, and direct individual health business due to the run-off of these lines.

For the six months ended June 30, 2014, our Agencies generated revenues of $15.6 million compared to $9.2 million for the six months ended June 30, 2013 due to higher revenues generated at HIO, Risk Solutions, IPAD and Specialty Benefits.

Agency net income (loss) decreased from $120,000 and $(97,000) for the three and six months ended June 30, 2013, respectively, to $(832,000) and $(561,000) for the three and six months ended June 30, 2014, respectively, due to the changes in the Affordable Care Act which have disrupted sales in the second quarter of 2014, and due to expenses attributable to the start-up of IPAD, our consumer direct sales call center.

Underwriting experience as indicated by GAAP Combined Ratios, on our three lines of business for the three months and six months ended June 30, 2014 and 2013, are as follows (in thousands):


Medical Stop-Loss                         Three Months Ended       Six Months Ended
                                               June 30,                June 30,
                                           2014        2013         2014      2013

Premiums Earned                        $   13,538   $ 14,228    $  28,096  $ 28,102
Insurance Benefits Claims and Reserves      8,021      8,219       18,300    18,897
Profit Commission Expense (Recovery)        1,422      1,273        1,743     1,641
Expenses                                    3,388      3,597        7,160     7,018

Loss Ratio(A)                                59.2%      57.8%        65.1%     67.2%
Profit Commission Expense Ratio (B)          10.5%       8.9%         6.2%      5.8%
Expense Ratio (C)                            25.0%      25.3%        25.5%     25.0%
Combined Ratio (D)                           94.7%      92.0%        96.8%     98.0%




Fully Insured Health                      Three Months Ended        Six Months Ended
                                               June 30,                 June 30,
                                            2014       2013          2014        2013

Premiums Earned                        $    18,616  $ 15,935    $     35,121  $ 30,892
Insurance Benefits Claims and Reserves      12,093    11,035          22,757    20,914
Profit Commission Expense (Recovery)           145        17              487      307
Expenses                                     5,783     4,148          10,593     7,756

Loss Ratio(A)                                 65.0%     69.3%           64.8%     67.7%
Profit Commission Expense Ratio (B)            0.8%      0.1%            1.4%      1.0%
Expense Ratio (C)                             31.1%     26.0%           30.2%     25.1%
Combined Ratio (D)                            96.9%     95.4%           96.4%     93.8%




Group Disability                           Three Months Ended        Six Months Ended
                                                June 30,                 June 30,
                                           2014         2013          2014       2013

Premiums Earned                        $    1,490   $    1,455    $   2,911   $ 2,620
Insurance Benefits Claims and Reserves        883          940        1,726     1,616
Expenses                                      453          511          874       739

Loss Ratio(A)                                59.3%        64.6%        59.3%     61.7%
Expense Ratio (C)                            30.4%        35.1%        30.0%     28.2%
Combined Ratio (D)                           89.7%        99.7%        89.3%     89.9%

(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 six months ended June 30, 2014. This is due to favorable claims experience on direct business, partially offset by unfavorable claims experience on the run-off of 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 and six months ended June 30, 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 decreased loss ratio for group disability for the three months and six months ended June 30, 2014 as a result of a lower frequency of DBL claims due to a better experience in 2014 than in 2013.

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 six months ended June 30, 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 change related to push-down accounting as described in Note 1(B) of the Notes to the Condensed Consolidated Financial Statements and 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, 2014, Compared to the
Three Months Ended June 30, 2013.


                                                            Benefits,    Selling,
                                     Fees and      Net        Claims      General      Amortization
        June 30,          Premiums    Other    Investment      and          and             and
          2014             Earned     Income     Income      Reserves      Admin       Depreciation        Total
     (In thousands)

Independence
   American:
  Medical stop-loss       $ 13,538          -         307        8,021       4,810                   -   $   1,014
  Fully Insured Health      18,616          -         186       12,093       5,928                   -         781
  Group Disability           1,490          -          24          883         453                   -         178
Total Independence
   American                 33,644          -         517       20,997      11,191                   -       1,973

Agencies                         -      5,576          34            -       6,204                 238        (832)
Corporate                        -          -          14            -         444                 196        (626)
Subtotal                  $ 33,644      5,576         565       20,997      17,839                 434         515

Net realized investment gains                                                                                  235
Income before income taxes                                                                                     750
Income taxes                                                                                                  (307)
Net income                                                                                                     443
             Less: Net income attributable to the
             non-controlling interest                                                                            14
Net income attributable to American Independence Corp.                                                   $     457

                                                            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

Agencies                         -      4,868          31            -       4,523                 256         120
Corporate                        -          -           3            -         328                 215        (540)
Subtotal                  $ 31,618      4,868         501       20,194      14,397                 471       1,925

Net realized investment gains                                                                                  387
Income before income taxes                                                                                   2,312
Income taxes                                                                                                  (747)
Net income                                                                                                   1,565
             Less: Net income attributable to the
             non-controlling interest                                                                         (201)
Net income attributable to American Independence Corp.                                                   $   1,364

Premiums Earned. Premiums earned increased 6%, or $2,026,000 from 2013 to 2014. The company currently has three lines of business. Premiums relating to medical stop-loss business decreased $690,000. This is due to a decrease of $1,289,000 in medical stop-loss premiums written by Independence American through an independent MGU that has been terminated, offset by an increase of $599,000 in medical stop-loss assumed by Independence American. 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 $2,681,000. The increase is primarily due to an increase of $2,878,000 in pets premium written by Independence American, an increase in occupational accident business written by Independence American of $1,847,000, an increase in international medical premiums assumed by Independence American of $808,000, an increase of $754,000 in hospital indemnity premiums written by Independence American, an increase of $630,000 in small group stop-loss premiums written by Independence American, an increase of $491,000 in occupational accident premiums assumed by Independence American, and an increase of $215,000 in short-term medical premiums assumed by Independence American, offset by a decrease in major medical premiums written and assumed by Independence American of $4,477,000 and a decrease of $290,000 in vision premiums assumed by Independence American. Premiums relating to group disability increased $35,000 due to higher DBL premiums assumed by Independence American, offset by lower international premiums assumed. For the three months ended June 30, 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 June 30, 2014 and June 30, 2013, Independence American assumed approximately 11% and 8%, respectively, of certain of IHC's group major medical business.

Fee and Agency Income. Fee and agency income increased $873,000 from 2013 to 2014. Risk Solutions fee income-administration increased $949,000 to $2,831,000 for 2014, compared to $1,882,000 for 2013. Risk Solutions fee income-profit commission decreased $150,000 to $187,000 for 2014, compared to $337,000 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 $314,000 and $203,000 from IPA Family and IPAD, respectively, and revenue of $1,634,000 and $392,000 from HIO and Specialty Benefits, respectively. In 2013, agency income consisted of commission income and other fees of $992,000 from IPA Family and revenue of $1,062,000 and $415,000 from HIO and Specialty Benefits, respectively.

Net Investment Income. Net investment income increased $64,000 from 2013 to 2014 due to an increase in investable assets. The consolidated investment yields were 2.9% and 3.4% for the three months ended June 30, 2014 and 2013, respectively.

Net Realized Investment Gains. The Company recorded a net realized investment gain of $235,000 for the three months ended June 30, 2014, compared to a gain of $387,000 for the three months ended June 30, 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 $165,000 from 2013 to 2014 due to lower equity income from the Company's 40% investment in GAF.

Insurance Benefits, Claims and Reserves. Insurance benefits claims and reserves increased 4%, or $803,000 from 2013 to 2014. The increase is primarily due to an increase in direct pet health of $1,918,000 due to higher premiums and a higher loss ratio, an increase in direct occupational accident of $1,019,000 due to higher premiums, an increase in small group stop-loss of $495,000 due to higher premiums, an increase in assumed international health of $488,000 due to higher premiums assumed and a higher loss ratio, an increase in direct integrated stop-loss of $469,000 due to a higher loss ratio, an increase in assumed medical stop-loss of $246,000 due to higher premiums assumed, an increase in assumed occupational accident of $229,000 due to higher premiums, and an increase in assumed limited medical of $146,000 due to higher premiums assumed and a higher loss ratio, offset by a decrease in direct and assumed major medical of $3,733,000 due to lower premiums, and a decrease in direct medical stop-loss of $444,000 due to lower premiums somewhat offset by a lower loss ratio.

Selling, General and Administrative. Selling, general and administrative expenses increased $3,442,000 from 2013 to 2014. This increase is due to higher commission expense of $1,030,000 at Independence American due to higher premiums and a change in the mix of business, higher expenses of $1,077,000 and $741,000 at Specialty Benefits and Risk Solutions, respectively, primarily due to higher salary expense relating to an increase in sales, and higher expenses of $344,000 due to the formation of IPAD in July 2013.

Amortization and Depreciation. Amortization and depreciation expense decreased $37,000 from 2013 to 2014.

Income Taxes. The provision for income taxes decreased $440,000 to $307,000, an effective rate of 40.2%, for the three months ended June 30, 2014, compared to $747,000, an effective rate of 35.4%, for the three months ended June 30, 2013.
Net income for the three months ended June 30, 2014 and 2013 includes a non-cash provision for federal income taxes of $307,000 and $705,000, respectively. The state tax effective rate decreased to (1.2)% for the three months ended June 30, 2014, compared to 0.3% for the three months ended June 30, 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 decreased $215,000 from 2013 to 2014. The net income for the three months ended June 30, 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 June 30, 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 decreased to $457,000, or $.06 per share, diluted, for the three months ended June 30, 2014, compared to $1,364,000, or $.17 per share, diluted, for the three months ended June 30, 2013.

Results of Operations for the Six Months Ended June 30, 2014, Compared to the
Six Months Ended June 30, 2013.


                                                             Benefits,    Selling,
                                     Fees and      Net         Claims      General      Amortization
        June 30,          Premiums    Other     Investment      and          and             and
          2014             Earned     Income      Income      Reserves      Admin       Depreciation        Total
     (In thousands)

Independence
   American:
  Medical stop-loss       $ 28,096          -          609       18,300       8,903                   -   $   1,502
  Fully Insured Health      35,121          -          355       22,757      11,080                   -       1,639
  Group Disability           2,911          -           44        1,726         874                   -         355
Total Independence
   American                 66,128          -        1,008       42,783      20,857                   -       3,496

Agencies                         -     15,595           63            -      15,744                 475        (561)
Corporate                        -          -           30            -         887                 387      (1,244)
Subtotal                  $ 66,128     15,595        1,101       42,783      37,488                 862       1,691

Net realized investment gains                                                                                   283
Income before income taxes                                                                                    1,974
Income taxes                                                                                                   (649)
Net income                                                                                                    1,325
             Less: Net income attributable to the
. . .
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