XNYS:IHC Independence Holding Company Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

__________________________________________


FORM 10-Q


[X]

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended March 31, 2012.


[   ]

Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period from: ________ to _________  


Commission File Number: 0-10306


INDEPENDENCE HOLDING COMPANY

(Exact name of registrant as specified in its charter)


Delaware

 

58-1407235

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)


96 CUMMINGS POINT ROAD, STAMFORD, CONNECTICUT                      06902

                                  (Address of principal executive offices)                                              (Zip Code)


Registrant's telephone number, including area code: (203) 358-8000


NOT APPLICABLE

Former name, former address and former fiscal year, if changed since last report.


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   [X]   No [  ]


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes   [X]   No [  ]


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.


Large Accelerated Filer [    ]

Accelerated Filer   [     ]

Non-Accelerated Filer   [X ]

Smaller Reporting Company   [     ]


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   [  ]   No   [X]


Class

Outstanding at May 4, 2012

Common stock, $ 1.00  par value

17,991,661 Shares






INDEPENDENCE HOLDING COMPANY


INDEX



PART I – FINANCIAL INFORMATION

PAGE

 

 

NO.

 

 

 

Item 1. Financial Statements

 

 

 

 

 

 

Condensed Consolidated Balance Sheets -

 

 

 

March 31, 2012 (unaudited) and December 31, 2011

4

 

 

 

 

Condensed Consolidated Statements of Operations -

 

 

 

Three Months Ended March 31, 2012 and 2011 (unaudited)

5

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income-

 

 

Three Months Ended March 31, 2012 and 2011 (unaudited)

6

 

 

 

 

Condensed Consolidated Statement of Changes in Equity -

 

 

Three Months Ended March 31, 2012 (unaudited)

7

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows -

 

 

Three Months Ended March 31, 2012 and 2011 (unaudited)

8

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

9

 

 

 

Item 2. Management's Discussion and Analysis of Financial Condition

 

 

 

and Results of Operations

27

 

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

38

 

 

 

Item 4. Controls and Procedures

38

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1.    Legal Proceedings

39

 

 

 

 

Item 1A. Risk Factors

39

 

 

 

 

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

39

 

 

 

 

Item 3.    Defaults Upon Senior Securities

39

 

 

 

 

Item 4.    Submission of Matters to a Vote of Security Holders

39

 

 

 

 

Item 5.    Other Information

39

 

 

 

Item 6.    Exhibits

40

 

 

 

Signatures

41

 

 

 

 


Copies of the Company’s SEC filings can be found on its website at www.ihcgroup.com.



2




Forward-Looking Statements


This report on Form 10Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created by those laws. We have based our forward-looking statements on our current expectations and projections about future events. Our forward-looking statements include information about possible or assumed future results of our operations. All statements, other than statements of historical facts, included or incorporated by reference in this report that address activities, events or developments that we expect or anticipate may occur in the future, including such things as the growth of our business and operations, our business strategy, competitive strengths, goals, plans, future capital expenditures and references to future successes may be considered forward-looking statements. Also, when we use words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “probably” or similar expressions, we are making forward-looking statements.


Numerous risks and uncertainties may impact the matters addressed by our forward-looking statements, any of which could negatively and materially affect our future financial results and performance.  We describe some of these risks and uncertainties in greater detail in Item 1A, Risk Factors, of IHC’s annual report on Form 10-K as filed with Securities and Exchange Commission.


Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of these assumptions, and, therefore, also the forward-looking statements based on these assumptions, could themselves prove to be inaccurate. In light of the significant uncertainties inherent in the forward-looking statements that are included in this report, our inclusion of this information is not a representation by us or any other person that our objectives and plans will be achieved. Our forward-looking statements speak only as of the date made, and we will not update these forward-looking statements unless the securities laws require us to do so. In light of these risks, uncertainties and assumptions, any forward-looking event discussed in this report may not occur.




3


PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements

    

INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)


 

 

 

March  31, 2012

 

 

December 31, 2011

 

 

 

(Unaudited)

 

 

 

ASSETS:

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

Short-term investments

 

$

50

 

$

50

 

Securities purchased under agreements to resell

 

 

17,112

 

 

17,258

 

Trading securities

 

 

6,851

 

 

-

 

Fixed maturities, available-for-sale

 

 

716,809

 

 

842,873

 

Equity securities, available-for-sale

 

 

29,463

 

 

37,541

 

Other investments

 

 

32,496

 

 

35,223

 

Total investments

 

 

802,781

 

 

932,945

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

9,286

 

 

18,227

 

Due from securities brokers

 

 

9,585

 

 

12,106

 

Deferred acquisition costs

 

 

37,270

 

 

37,101

 

Due and unpaid premiums

 

 

39,091

 

 

37,341

 

Due from reinsurers

 

 

306,933

 

 

159,729

 

Premium and claim funds

 

 

40,194

 

 

43,604

 

Notes and other receivables

 

 

19,827

 

 

15,500

 

Goodwill

 

 

50,318

 

 

50,318

 

Other assets

 

 

49,126

 

 

51,988

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

1,364,411

 

$

1,358,859

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

Insurance reserves-health

 

$

173,531

 

$

179,042

 

Insurance reserves-life and annuity

 

 

279,611

 

 

279,636

 

Funds on deposit

 

 

421,796

 

 

417,310

 

Unearned premiums

 

 

5,935

 

 

4,319

 

Policy claims-health

 

 

14,024

 

 

13,945

 

Policy claims-life

 

 

12,035

 

 

11,948

 

Other policyholders' funds

 

 

22,010

 

 

21,546

 

Due to securities brokers

 

 

1,988

 

 

383

 

Due to reinsurers

 

 

44,581

 

 

40,030

 

Accounts payable, accruals and other liabilities

 

 

60,504

 

 

66,410

 

Debt

 

 

10,000

 

 

10,000

 

Junior subordinated debt securities

 

 

38,146

 

 

38,146

 

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

 

1,084,161

 

 

1,082,715

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

IHC STOCKHOLDERS' EQUITY:

 

 

 

 

 

 

 

Preferred stock (none issued)

 

 

-

 

 

- - 

 

Common stock $1.00 par value, 20,000,000 shares authorized;

 

 

 

 

 

 

 

18,457,336 and 18,450,917 shares issued;  

 

 

 

 

 

 

 

18,008,947 and 18,052,661 shares outstanding

 

 

18,457

 

 

18,451

 

Paid-in capital

 

 

126,377

 

 

126,298

 

Accumulated other comprehensive income

 

 

8,270

 

 

7,853

 

Treasury stock, at cost; 448,389 and 398,257 shares

 

 

(3,747)

 

 

(3,277)

 

Retained earnings

 

 

115,675

 

 

111,752

 

 

 

 

 

 

 

TOTAL IHC STOCKHOLDERS’ EQUITY

 

 

265,032

 

 

261,077

NONCONTROLLING INTERESTS IN SUBSIDIARIES

 

 

15,218

 

 

15,067

 

 

 

 

 

 

 

 

 

TOTAL EQUITY

 

 

280,250

 

 

276,144

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND EQUITY

 

$

1,364,411

 

$

1,358,859


See the accompanying Notes to Condensed Consolidated Financial Statements.



4



INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In thousands, except per share data)

 


 

 

Three Months Ended

 

 

March 31,

 

 

2012

 

2011

REVENUES:

 

 

 

 

 

Premiums earned:

 

 

 

 

 

Health

$

74,285

$

 75,723 

 

Life and annuity

 

9,489

 

 10,150 

 

Net investment income

 

8,751

 

 10,116 

 

Fee income

 

7,421

 

 7,377 

 

Other income

 

1,156

 

 1,458 

 

Net realized investment gains (losses)

 

1,137

 

 (202)

 

 

 

 

 

 

 

Other-than-temporary impairment losses:

 

 

 

 

 

Total other-than-temporary impairment losses

 

(83)

 

(303)

 

Portion of losses recognized in other comprehensive income

 

-

 

-

 

Net impairment losses recognized in earnings

 

(83)

 

(303)

 

 

 

 

 

 

 

102,156

 

104,319

EXPENSES:

 

 

 

 

 

Insurance benefits, claims and reserves:

 

 

 

 

 

Health

 

46,193

 

 50,576 

 

Life and annuity

 

10,942

 

 13,673 

 

Selling, general and administrative expenses

 

36,472

 

 35,986 

 

Amortization of deferred acquisitions costs

 

1,594

 

 1,691 

 

Interest expense on debt

 

539

 

 457 

 

 

 

 

 

 

 

95,740

 

 102,383 

 

 

 

 

 

 

 

Income from operations before income taxes

 

6,416

 

 1,936 

 

Income taxes (benefits)

 

2,086

 

 (1,864)

 

 

 

 

 

 

 

Net income

 

4,330

 

3,800

 

Less: income from noncontrolling interests in subsidiaries

 

(408)

 

(616)

 

 

 

 

 

 

 

NET INCOME ATTRIBUTABLE TO IHC

$

3,922

$

3,184

 

 

 

 

 

Basic income per common share

$

.22

$

.19

 

 

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING

 

18,029

 

17,027

 

 

 

 

 

Diluted income per common share

$

.22

$

.19

 

 

 

 

 

WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING

 

18,176

 

17,031











See the accompanying Notes to Condensed Consolidated Financial Statements.



5




INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(In thousands)

 


 

 

Three Months Ended

 

 

March 31,

 

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

4,330

$

3,800

 

Other comprehensive income (loss):

 

 

 

 

 

Unrealized gains (losses) on available-for-sale securities

 

719

 

(264)

 

Other-than-temporary impairment losses recorded in other comprehensive

 

 

 

 

 

income

 

-

 

-

 

Allocation to deferred acquisition costs

 

(14)

 

82

 

Unrealized gains (losses) on derivative instruments

 

(36)

 

-

 

Other comprehensive income (loss) before income taxes (benefits)

 

669

 

(182)

 

Income taxes (benefits) related to other comprehensive income

 

286

 

(57)

 

Other comprehensive income (loss), net of tax

 

383

 

(125)

 

 

 

 

 

 

 

Comprehensive income, net of tax

 

4,713

 

3,675

 

 

 

 

 

 

 

Comprehensive income, net of tax, attributable to noncontrolling interests:

 

 

 

 

 

Income from noncontrolling interests in subsidiaries

 

(408)

 

(616)

 

Other comprehensive loss, net of tax, attributable to noncontrolling interests:

 

 

 

 

 

Unrealized losses on available-for-sale securities, net of tax

 

33

 

31

 

Other-than-temporary impairment losses recorded in other

 

 

 

 

 

comprehensive income (loss), net of tax

 

-

 

-

 

Other comprehensive loss, net of tax, attributable to noncontrolling interests

 

33

 

31

 

 

 

 

 

 

Comprehensive income, net of tax, attributable to noncontrolling interests:

 

(375)

 

(585)

 

 

 

 

 

 

Comprehensive income, net of tax, attributable to IHC

$

4,338

$

3,090
























See the accompanying Notes to Condensed Consolidated Financial Statements.




6



INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Unaudited)

THREE MONTHS ENDED MARCH 31, 2012 (In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ACCUMULATED

 

 

 

 

 

 

 

NON-

 

 

 

 

 

 

 

 

OTHER

 

TREASURY

 

 

 

TOTAL IHC

 

CONTROLLING

 

 

 

 

COMMON

 

PAID-IN

 

COMPREHENSIVE

 

STOCK,

 

RETAINED

 

STOCKHOLDERS'

 

INTERESTS IN

 

TOTAL

 

 

STOCK

 

CAPITAL

 

INCOME (LOSS)

 

AT COST

 

EARNINGS

 

EQUITY

 

SUBSIDIARIES

 

EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DECEMBER 31, 2011

$

18,451

$

126,298

$

7,853

$

(3,277)

$

111,752

$

261,077

$

15,067

$

276,144

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

3,922

 

3,922

 

408

 

4,330

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(loss), net of tax

 

 

 

 

 

416

 

 

 

 

 

416

 

(33)

 

383

Repurchases of common

 

 

 

 

 

 

 

(470)

 

12

 

(458)

 

-

 

(458)

Acquire noncontrolling

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

interests in American

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Independence Corp.

 

 

 

12

 

1

 

 

 

 

 

13

 

(36)

 

(23)

Common stock dividend

 

 

 

 

 

 

 

 

 

(11)

 

(11)

 

-

 

(11)

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

expenses and related

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

tax benefits

 

6

 

58

 

 

 

 

 

 

 

64

 

-

 

64

Distributions to noncontrolling

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

interests

 

 

 

 

 

 

 

 

 

 

 

-

 

(191)

 

(191)

Other capital transactions

 

 

 

9

 

 

 

 

 

 

 

9

 

3

 

12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MARCH  31, 2012

$

18,457

$

126,377

$

8,270

$

(3,747)

$

115,675

$

265,032

$

15,218

$

280,250

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 













See the accompanying Notes to Condensed Consolidated Financial Statements.



7




INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 (In thousands)

 

 

 

Three Months Ended March 31,

 

 

2012

 

 

2011

CASH FLOWS PROVIDED BY (USED BY) OPERATING ACTIVITIES:

 

 

 

 

 

 

Net income

$

4,330 


$

3,800 

 

Adjustments to reconcile net income to net change in cash from

 

 


 

 

 

 operating  activities:

 

 


 

 

 

Amortization of deferred acquisition costs

 

1,594 


 

1,691 

 

Net realized investment (gains) losses

 

(1,137)


 

202 

 

Other-than-temporary impairment losses

 

83 


 

303 

 

Equity income from equity method investments

 

(458)


 

(542)

 

Depreciation and amortization

 

990 


 

1,123 

 

Share-based compensation expenses

 

478 


 

138 

 

Deferred tax (benefit) expense

 

1,789 


 

(605)

 

Other

 

1,782 


 

878 

  Changes in assets and liabilities:

 

 


 

 

 

Net sales (purchases) of trading securities

 

(928)


 

 

Change in insurance liabilities

 

803 


 

279 

 

Additions to deferred acquisition costs, net

 

(1,776)


 

(1,722)

 

Change in net amounts due from and to reinsurers

 

(142,652)


 

(2,181)

 

Change in premium and claim funds

 

3,410 


 

(2,112)

 

Change in current income tax liability

 

1,013 


 

(1,621)

 

Change in due and unpaid premiums

 

(1,749)


 

2,748 

 

Change in other assets

 

(155)


 

(1,122)

 

Change in other liabilities

 

(6,260)


 

1,279 

 

 

 

 


 

 

 

Net change in cash from operating activities

 

(138,843)


 

2,536 

 

 

 


 

 

CASH FLOWS PROVIDED BY (USED BY) INVESTING ACTIVITIES:

 

 


 

 

 

Change in net amount due from and to securities brokers

 

4,126 


 

(20,947)

 

Net sales of securities under resale and repurchase agreements

 

146 


 

20,303 

 

Sales of equity securities

 

4,928 


 

14,993 

 

Purchases of equity securities

 

(2,001)


 

(19,015)

 

Sales of fixed maturities

 

246,167 


 

89,904 

 

Maturities and other repayments of fixed maturities

 

12,797 


 

17,799 

 

Purchases of fixed maturities

 

(133,450)


 

(103,417)

 

Additional investments in other investments, net of distributions

 

3,185 


 

(617)

 

Change in notes and other receivables

 

(4,292)


 

(481)

 

Other investing activities

 

(896)


 

(372)

 

 

 


 

 

 

Net change in cash from investing activities

 

130,710 


 

(1,850)

 

 

 


 

 

CASH FLOWS PROVIDED BY (USED BY)  FINANCING ACTIVITIES:

 

 


 

 

 

Repurchases of common stock

 

(457)


 

 

Excess tax expense from expired stock options

 

(57)


 

(117)

 

Cash paid in acquisitions of noncontrolling interests

 

(267)


 

(1,000)

 

Proceeds  of investment-type insurance contracts

 

392 


 

803 

 

Dividends paid

 

(421)


 

(381)

 

Other capital transactions

 


 

21 

 

 

 


 

 

 

Net change in cash from financing activities

 

(808)


 

(674)

 

 

 


 

 

Net change in cash and cash equivalents

 

(8,941)


 

12 

Cash and cash equivalents, beginning of year

 

18,227 


 

11,426 

 

 

 


 

 

Cash and cash equivalents, end of period

$

9,286


$

11,438 








See the accompanying Notes to Condensed Consolidated Financial Statements.



8


INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)


Note 1.  

Significant Accounting Policies and Practices


(A)

Business and Organization


Independence Holding Company, a Delaware corporation (“IHC”), is a holding company principally engaged in the life and health insurance business through: (i) its insurance companies, Standard Security Life Insurance Company of New York ("Standard Security Life"),  Madison National Life Insurance Company, Inc. ("Madison National Life"), and Independence American Insurance Company (“Independence American”); and (ii) its marketing and administrative companies, including IHC Risk Solutions, LLC (“Risk Solutions”), IHC Health Solutions, Inc. (“Health Solutions”), and Actuarial Management Corporation ("AMC").  These companies are sometimes collectively referred to as the “Insurance Group”, and IHC and its subsidiaries (including the Insurance Group) are sometimes collectively referred to as the "Company." IHC also owns a significant equity interest in a managing general underwriter (“MGU”) that writes medical stop-loss for Standard Security Life. At March 31, 2012, the Company also owned a 78.5% interest in American Independence Corp. (“AMIC”).

 

Geneve Corporation, a diversified financial holding company, and its affiliated entities held approximately 50.7% of IHC's outstanding common stock at March 31, 2012.


(B)

Basis of Presentation


The Condensed Consolidated Financial Statements have been prepared in conformity with U.S. generally accepted accounting principles ("GAAP") for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The Condensed Consolidated Financial Statements include the accounts of IHC and its consolidated subsidiaries. All significant intercompany transactions have been eliminated in consolidation. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect:  (i) the reported amounts of assets and liabilities; (ii) the disclosure of contingent assets and liabilities at the date of the financial statements; and (iii) the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. IHC’s annual report on Form 10-K as filed with the Securities and Exchange Commission should be read in conjunction with the accompanying Condensed Consolidated Financial Statements.


In February 2012, IHC declared a special 10% stock dividend to shareholders of record on February 17, 2012 with a distribution date of March 5, 2012. All references to number of common shares and earnings per share amount have been adjusted retroactively for all periods presented to reflect the change in capital structure.


In the opinion of management, all adjustments (consisting only of normal recurring accruals) that are necessary for a fair presentation of the consolidated financial position and results of operations for the interim periods have been included. The condensed consolidated results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results to be anticipated for the entire year.




9


(C)

Recent Accounting Pronouncements


Recently Adopted Accounting Standards


In September 2011, the FASB issued guidance related to evaluating goodwill for impairment.  The new guidance provides entities with the option to perform a qualitative assessment of whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount before applying the quantitative two-step goodwill impairment test.  If an entity concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it would not be required to perform the quantitative two-step goodwill impairment test.  Entities also have the option to bypass the assessment of qualitative factors for any reporting unit in any period and proceed directly to performing the first step of the quantitative two-step goodwill impairment test, as was required prior to the issuance of this new guidance.  An entity may begin or resume performing the qualitative assessment in any subsequent period.  This guidance was effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  The adoption of this guidance, effective January 1, 2012, did not have a material effect on the Company’s consolidated financial statements.


In June and December 2011, the FASB issued guidance that requires all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. For public entities, the amendments were effective for fiscal years and interim periods within those years, beginning after December 15, 2011 and should be applied retrospectively.  This standard only affected the Company’s presentation of comprehensive income and did not affect the Company’s consolidated financial statements.


In May 2011, the FASB issued guidance to achieve common fair value measurement and disclosure requirements in U.S. GAAP and IFRS. Some of the amendments in this update clarify the FASB’s intent about the application of certain existing fair value measurement requirements and other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. None of the amendments in this update require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. For public entities, this guidance was effective during interim and annual periods beginning after December 15, 2011. The adoption of this guidance, effective January 1, 2012, did not have a material effect on the Company’s consolidated financial statements.


In April 2011, the FASB issued guidance that amends existing standards with regards to transfers of financial assets under repurchase and other agreements that entitle and obligate the transferor to repurchase or redeem the assets prior to maturity. Specifically, with respect to assessing effective control in such agreements, the criteria that the transferor must have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even upon the transferee's default, has been eliminated; as has the corresponding criterion calling for the transferor to have obtained cash or other sufficient collateral to purchase replacement assets from a third party, which was required to demonstrate such ability. This guidance was effective for the first interim or annual period beginning after December 15, 2011. The adoption of this guidance, effective January 1, 2012, did not have a material effect on the Company’s consolidated financial statements.


In October 2010, the FASB issued guidance that specifies the accounting treatment for the costs incurred by insurance entities when acquiring new and renewal insurance contracts. The guidance was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The adoption of this guidance, which was applied prospectively January 1, 2012, had a negligible impact on the Company’s consolidated financial statements.




10



Recently Issued Accounting Standards Not Yet Adopted


In December 2011, the FASB issued guidance to amend the disclosure requirements on offsetting financial instruments and related derivatives. Entities are required to provide both net and gross information for these assets and liabilities in order to enhance comparability between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of International Financial Reporting Standards (“IFRS”). The amendments in this Update are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.


In July 2011, the FASB issued guidance specifying that the liability for the fees paid to the Federal Government by health insurers as a result of recent healthcare reform legislation should be estimated and recorded in full once the entity provides qualifying health insurance in the applicable calendar year in which the fee is payable with a corresponding deferred cost that is amortized to expense using a straight-line method of allocation unless another method better allocates the fee over the calendar year that it is payable. The amendments in this Update are effective for calendar years beginning after December 31, 2013, when the fee initially becomes effective. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.


Note 2.

 

American Independence Corp.


AMIC is an insurance holding company engaged in the insurance and reinsurance business. AMIC does business with the Insurance Group, including reinsurance treaties under which, in 2011, Standard Security Life and Madison National Life ceded to Independence American an average of 20% of their medical stop-loss business, 9% of a majority of their fully insured health business and 20% of their New York Statutory Disability business.


During the first quarter of 2012, IHC acquired an aggregate 5,124 shares of AMIC common stock from noncontrolling interests for an aggregate of $23,000 cash consideration. As a result of these transactions, the Company: (i) recorded a $12,000 credit to paid-in capital representing the difference between the fair  value of the consideration paid and the carrying value of the noncontrolling interest; and (ii) increased its ownership interest in AMIC to 78.5%.


Note 3.

Income Per Common Share


Included in the diluted income per share calculations for the three months ended March 31, 2012 and 2011 are 147,000 and 4,000, respectively, of incremental shares from the assumed exercise of dilutive stock options and the assumed vesting of dilutive restricted stock, computed using the treasury stock method.




11



Note  4.

Investments


The cost (amortized cost with respect to certain fixed maturities), gross unrealized gains, gross unrealized losses and fair value of investment securities are as follows:


 

 

March 31, 2012

 

 

 

 

GROSS

 

GROSS

 

 

 

 

AMORTIZED

 

UNREALIZED

 

UNREALIZED

 

FAIR

 

 

COST

 

GAINS

 

LOSSES

 

VALUE

 

 

(In thousands)

FIXED MATURITIES

 

 

 

 

 

 

 

 

 

AVAILABLE-FOR-SALE:

 

 

 

 

 

 

 

 

 

Corporate securities

$

343,552

$

5,446

$

(3,283)

$

345,715

 

CMOs- residential (1)

 

22,419

 

5,114

 

(735)

 

26,798

 

CMOs - commercial

 

1,448

 

-

 

(915)

 

533

 

U.S. Government obligations

 

21,671

 

627

 

(4)

 

22,294

 

Agency MBS - residential (2)

 

499

 

43

 

-

 

542

 

GSEs (3)

 

60,395

 

510

 

(162)

 

60,743

 

States and political subdivisions

 

253,358

 

7,558

 

(732)

 

260,184

 

 

 

 

 

 

 

 

 

 

 

Total fixed maturities

$

703,342

$

19,298

$

(5,831)

$

716,809

 

 

 

 

 

 

 

 

 

EQUITY SECURITIES

 

 

 

 

 

 

 

 

 

AVAILABLE-FOR-SALE:

 

 

 

 

 

 

 

 

 

Common stocks

$

3,001

$

84

$

(5)

$

3,080

 

Preferred stock - perpetual

 

16,349

 

406

 

-

 

16,755

 

Preferred stock - with maturities

 

8,051

 

1,577

 

-

 

9,628

 

 

 

 

 

 

 

 

 

 

Total equity securities

$

27,401

$

2,067

$

(5)

$

29,463

 

 

 

 

 

 

 

 

 



 

 

December 31, 2011

 

 

 

 

GROSS

 

GROSS

 

 

 

 

AMORTIZED

 

UNREALIZED

 

UNREALIZED

 

FAIR

 

 

COST

 

GAINS

 

LOSSES

 

VALUE

 

 

(In thousands)

FIXED MATURITIES

 

 

 

 

 

 

 

 

 

AVAILABLE-FOR-SALE:

 

 

 

 

 

 

 

 

 

Corporate securities

$

319,343

$

5,873

$

(2,076)

$

323,140

 

CMOs - residential (1)

 

33,119

 

5,200

 

(1,544)

 

36,775

 

CMOs - commercial

 

1,448

 

-

 

(910)

 

538

 

U.S. Government obligations

 

164,807

 

1,775

 

-

 

166,582

 

Agency MBS - residential (2)

 

539

 

46

 

-

 

585

 

GSEs (3)

 

59,633

 

379

 

(161)

 

59,851

 

States and political subdivisions

 

250,361

 

5,692

 

(651)

 

255,402

 

 

 

 

 

 

 

 

 

 

 

Total fixed maturities

$

829,250

$

18,965

$

(5,342)

$

842,873

 

 

 

 

 

 

 

 

 

EQUITY SECURITIES

 

 

 

 

 

 

 

 

 

AVAILABLE-FOR-SALE:

 

 

 

 

 

 

 

 

 

Common stocks

$

6,537

$

311

$

(149)

$

6,699

 

Preferred stock - perpetual

 

21,767

 

422

 

(451)

 

21,738

 

Preferred stock - with maturities

 

8,051

 

1,136

 

(83)

 

9,104

 

 

 

 

 

 

 

 

 

 

Total equity securities

$

36,355

$

1,869

$

(683)

$

37,541


(1)

Collateralized mortgage obligations (“CMOs”).

(2)

Mortgage-backed securities (“MBS”).

(3)

Government-sponsored enterprises (“GSEs”) which are the Federal Home Loan Mortgage Corporation, Federal National Mortgage Association and Federal Home Loan Banks. GSEs are private enterprises established and chartered by the Federal Government.



12




The unrealized gains (losses) on certain available-for-sale securities (residential CMO’s and certain preferred stocks with maturities) at March 31, 2012 and December 31, 2011 include $1,897,000 and $2,625,000, respectively, of the non-credit related component of other-than-temporary impairment losses, pretax, that were recognized in accumulated other comprehensive income.


The amortized cost and fair value of fixed maturities available-for-sale at March 31, 2012, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The average life of mortgage-backed securities is affected by prepayments on the underlying loans and, therefore, is materially shorter than the original stated maturity.


 

 

 

 

 

 

 

 

% OF

 

 

 

AMORTIZED

 

 

FAIR

 

TOTAL FAIR

 

 

 

COST

 

 

VALUE

 

VALUE

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

10,495

 

$

10,694

 

1.5%

Due after one year through five years

 

 

153,663

 

 

156,083

 

21.8%

Due after five years through ten years

 

 

173,812

 

 

175,236

 

24.4%

Due after ten years

 

 

283,493

 

 

289,001

 

40.3%

 

 

 

621,463

 

 

631,014

 

88.0%

CMO and MBS

 

 

 

 

 

 

 

 

 

15 year

 

 

39,228

 

 

42,781

 

6.0%

 

20 year

 

 

813

 

 

830

 

.1%

 

30 year

 

 

41,838

 

 

42,184

 

5.9%

 

 

 

 

 

 

 

 

 

 

 

$

703,342

 

$

716,809

 

100.0%


The following tables summarize, for all available-for-sale securities in an unrealized loss position at March 31, 2012 and December 31, 2011, respectively, the aggregate fair value and gross unrealized loss by length of time those securities that have continuously been in an unrealized loss position:



 

 

Less than 12 Months

 

 

12 Months or Longer

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

Unrealized

March 31, 2012

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

Losses

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate securities

$

137,266

 

$

(2,950)

 

$

19,630

 

$

(333)

 

$

156,896

$

(3,283)

CMOs - residential

 

200

 

 

(134)

 

 

8,726

 

 

(601)

 

 

8,926

 

(735)

CMO's - commercial

 

-

 

 

-

 

 

533

 

 

(915)

 

 

533

 

(915)

U.S. Government obligations

 

1,238

 

 

(4)

 

 

-

 

 

-

 

 

1,238

 

(4)

Agency MBS residential

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

-

GSEs

 

13,356

 

 

(89)

 

 

3,336

 

 

(73)

 

 

16,692

 

(162)

States and political

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

subdivisions

 

52,214

 

 

(494)

 

 

18,831

 

 

(238)

 

 

71,045

 

(732)

Total fixed maturities

 

204,274

 

 

(3,671)

 

 

51,056

 

 

(2,160)

 

 

255,330

 

(5,831)

Common stocks

 

851

 

 

(5)

 

 

-

 

 

-

 

 

851

 

(5)

Preferred stocks-perpetual

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

-

Total temporarily

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

impaired securities

$

205,125

 

$

(3,676)

 

$

51,056

 

$

(2,160)

 

$

256,181

$

(5,836)




13




 

 

 

 

 

 

 

 

 

 

 

Less than 12 Months

 

 

12 Months or Longer

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

Unrealized

December 31, 2011

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

Losses

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate securities

$

128,820

 

$

1,989

 

$

9,451

 

$

87

 

$

138,271

$

2,076

CMOs - residential

 

1,396

 

 

176

 

 

14,597

 

 

1,368

 

 

15,993

 

1,544

CMOs - commercial

 

-

 

 

-

 

 

538

 

 

910

 

 

538

 

910

GSEs

 

15,134

 

 

131

 

 

2,367

 

 

30

 

 

17,501

 

161

States and political subdivisions

 

43,978

 

 

291

 

 

20,929

 

 

360

 

 

64,907

 

651

Total fixed maturities

 

189,328

 

 

2,587

 

 

47,882

 

 

2,755

 

 

237,210

 

5,342

Common stocks

 

1,724

 

 

149

 

 

-

 

 

-

 

 

1,724

 

149

Preferred stocks-perpetual

 

-

 

 

-

 

 

4,968

 

 

451

 

 

4,968

 

451

Preferred stocks-with maturities

 

1,644

 

 

83

 

 

-

 

 

-

 

 

1,644

 

83

Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

$

192,696

 

$

2,819

 

$

52,850

 

$

3,206

 

$

245,546

$

6,025



At March 31, 2012 and December 31, 2011, a total of 60 and 53 fixed maturities available-for-sale, respectively, and 4 and 5 equity securities available-for-sale, respectively, were in a continuous unrealized loss position for less than 12 months. At both March 31, 2012 and December 31, 2011 a total of 29 fixed maturities available-for-sale, and nil and 1 equity security available-for-sale, respectively, had continuous unrealized losses for 12 months or longer. 


Substantially all of the unrealized losses on fixed maturities available-for-sale at March 31, 2012 and December 31, 2011 relate to investment grade securities and are attributable to changes in market interest rates and general disruptions in the credit market subsequent to purchase. The unrealized loss on corporate securities and state and political subdivisions are due to wider spreads. Spreads have widened as investors shifted funds to US Treasuries in response to the current market turmoil.  Because the Company does not intend to sell, nor is it more likely than not that the Company will have to sell such investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2012.


At March 31, 2012, the Company had $12,868,000 invested in whole loan CMOs backed by Alt-A mortgages. Of this amount, 21.3% were in CMOs that originated in 2005 or earlier and 78.7% were in CMOs that originated in 2006. The unrealized losses on all other CMO’s relate to prime rate CMO’s and are primarily attributed to general disruptions in the credit market subsequent to purchase. The Company’s mortgage security portfolio has no exposure to sub-prime mortgages.


Other-Than-Temporary Impairment Evaluations


The Company reviews its investment securities regularly and determines whether other-than- temporary impairments have occurred. The factors considered by management in its regular review to identify and recognize other-than-temporary impairment losses on fixed maturities include, but are not limited to:  the length of time and extent to which the fair value has been less than cost; the Company's intent to sell, or be required to sell, the debt security before the anticipated recovery of its remaining amortized cost basis; the financial condition and near-term prospects of the issuer; adverse changes in ratings announced by one or more rating agencies; subordinated credit support; whether the issuer of a debt security has remained current on principal and interest payments; current expected cash flows; whether the decline in fair value appears to be issuer specific or, alternatively, a reflection of general market or industry conditions including the effect of changes in market interest rates. If the Company intends to sell a debt security, or it is more likely than not that it would be required to sell a debt security before the recovery of its amortized cost basis, the entire difference between the security's amortized cost basis and its fair value at the balance sheet date would be recognized by a charge to total other-than-temporary impairment losses in



14



the Condensed Consolidated Statement of Operations.  If a decline in fair value of a debt security is judged by management to be other-than-temporary and; (i) the Company does not intend to sell the security; and (ii) it is not more likely than not that it will be required to sell the security prior to recovery of the security’s amortized cost, the Company assesses whether the present value of the cash flows to be collected from the security is less than its amortized cost basis. To the extent that the present value of the cash flows generated by a debt security is less than the amortized cost basis, a credit loss exists. For any such security, the impairment is bifurcated into (a) the amount of the total impairment related to the credit loss, and (b) the amount of the total impairment related to all other factors. The amount of the other-than-temporary impairment related to the credit loss is recognized by a charge to total other-than-temporary impairment losses in the Condensed Consolidated Statement of Operations, establishing a new cost basis for the security. The amount of the other-than-temporary impairment related to all other factors is recognized in other comprehensive income in the Condensed Consolidated Statement of Comprehensive Income. It is reasonably possible that further declines in estimated fair values of such investments, or changes in assumptions or estimates of anticipated recoveries and/or cash flows, may cause further other-than-temporary impairments in the near term, which could be significant.


In assessing corporate debt securities for other-than-temporary impairment, the Company evaluates the ability of the issuer to meet its debt obligations and the value of the company or specific collateral securing the debt position. For mortgage-backed securities where loan level data is not available, the Company uses a cash flow model based on the collateral characteristics. Assumptions about loss severity and defaults used in the model are primarily based on actual losses experienced and defaults in the collateral pool. Prepayment speeds, both actual and estimated, are also considered. The cash flows generated by the collateral securing these securities are then determined with these default, loss severity and prepayment assumptions. These collateral cash flows are then utilized, along with consideration for the issue’s position in the overall structure, to determine the cash flows associated with the mortgage-backed security held by the Company. In addition, the Company evaluates other asset-backed securities for other-than-temporary impairment by examining similar characteristics referenced above for mortgage-backed securities.  The Company evaluates U.S. Treasury securities and obligations of U.S. Government corporations, U.S. Government agencies, and obligations of states and political subdivisions for other-than-temporary impairment by examining the terms and collateral of the security.


Equity securities may experience other-than-temporary impairment in the future based on the prospects for full recovery in value in a reasonable period of time and the Company’s ability and intent to hold the security to recovery. If a decline in fair value is judged by management to be other-than-temporary or management does not have the intent or ability to hold a security, a loss is recognized by a charge to total other-than-temporary impairment losses in the Condensed Consolidated Statement of Operations. For the purpose of other-than-temporary impairment evaluations, preferred stocks with maturities are treated in a manner similar to debt securities. Declines in the creditworthiness of the issuer of debt securities with both debt and equity-like features requires the use of the equity model in analyzing the security for other-than-temporary impairment.


Subsequent increases and decreases, if not an other-than-temporary impairment, in the fair value of available-for-sale securities that were previously impaired, are included in other comprehensive income.




15



Based on management’s review of the portfolio, which considered these factors, the Company recorded the following losses for other-than-temporary impairments in the Condensed Consolidated Statements of Operations for the three months ended March 31, 2012 and 2011 (in thousands):


 

 

Three Months Ended

 

 

March 31,

 

 

2012

 

2011

 

 

 

 

 

Other-than-temporary impairments:

 

 

 

 

 

Fixed maturities

$

83

$

303


For the three months ended March 31, 2012 and 2011 other-than-temporary impairments on fixed maturities of $83,000 and $303,000, respectively, consist of credit losses recorded as a result of expected cash flows on certain debt securities less than their amortized cost. No losses for other-than-temporary impairments were recognized in other comprehensive income for the three months ended March 31, 2012 or 2011.


For the three months ended March 31, 2012 and 2011, cumulative credit losses for other-than-temporary impairments recorded on securities for which a portion of an other-than-temporary impairment was recognized in other comprehensive income were as follows (in thousands):


 

 

 

2012

 

 

2011

 

 

 

 

 

 

 

Balance at beginning of year

 

$

2,555 

 

$

1,763 

Credit portion of other-than-temporary

 

 

 

 

 

 

   impairment losses recognized during period

 

 

 

 

Securities sold

 

 

(576)

 

 

 

 

 

 

 

 

 

Balance at end of period

 

$

1,979 

 

$

1,763 

 

 

 

 

 

 

 


Further deterioration in credit quality of the companies backing the securities, further deterioration in the condition of the financial services industry, a continuation of the current imbalance in liquidity that exists in the marketplace, a continuation or worsening of the current economic recession, or additional declines in real estate values may further affect the fair value of these securities and increase the potential that certain unrealized losses be designated as other-than-temporary in future periods and the Company may incur additional write-downs.


Note 5.

Derivative Instruments


In connection with its outstanding $10,000,000 amortizing term loan, a subsidiary of IHC entered into an interest rate swap on July 1, 2011 with the commercial bank lender, for a notional amount equal to the debt principal amount, under which the Company receives a variable rate equal to the rate on the debt and pays a fixed rate (1.60%) in order to manage the risk in overall changes in cash flows attributable to forecasted interest payments. As a result of the interest rate swap, interest payments on this debt are fixed at 4.95%. There was no hedge ineffectiveness on this interest rate swap which was accounted for as a cash flow hedge.  The fair value of the interest rate swap was $530,000 and $494,000 at March 31, 2012 and December 31, 2011, respectively, which is included in other liabilities on the accompanying Condensed Consolidated Balance Sheets. See Note 7 for further discussion on the valuation techniques utilized to determine the fair value of the interest rate swap. For the three months ended March 31, 2012, the Company recorded losses of $22,000 (net of related tax benefits of $14,000), representing the after-tax change in fair value of the interest rate swap, in other comprehensive income on the accompanying Condensed Consolidated Statement of Comprehensive Income.




16



Note 6.

Net Realized Investment Gains (Losses)


Net realized investment gains (losses) for the three months ended March 31, 2012 and 2011 are as follows (in thousands):


 

 

Three Months Ended

 

 

March 31,

 

 

2012

 

2011

 

 

 

 

 

Sales of available-for-sale securities:

 

 

 

 

 

Fixed maturities

$

1,241 

$

(1,495)

 

Common stocks

 

 

(45)

 

Preferred stocks

 

(491)

 

1,338 

 

Total sales of available-for-sale securities

 

750 

 

(202)

 

 

 

 

 

 

Sales of trading securities

 

256 

 

 

Total realized gains (losses)

 

1,006

 

(202)

 

 

 

 

 

Unrealized gains (losses) on trading securities:

 

 

 

 

 

Available-for-sale securities transferred

 

 

 

 

 

to trading category on January 1, 2012

 

138 

 

 

Change in unrealized gains (losses) on trading securities

 

(7)

 

 

Total unrealized gains (losses)  on trading securities

 

131 

 

 

 

 

 

 

 

Net realized investment gains (losses)

$

1,137 

$

(202)


For the three months ended March 31, 2012, the Company realized gross gains of $3,290,000 and realized gross losses of $2,540,000 on sales of available-for-sale securities. For the three months ended March 31, 2011, the Company realized gross gains of $3,532,000 and realized gross losses of $3,734,000 on sales of available-for-sale securities.


On January 1, 2012, the Company transferred equity securities previously classified as available-for-sale into the trading category and, as a result, recognized $287,000 of gross gains and $149,000 of gross losses in net realized investment gains on the accompanying Condensed Consolidated Statement of Operations. These gains and losses were previously included in accumulated other comprehensive income on the accompanying Condensed Consolidated Balance Sheet at December 31, 2011.


Note 7.

Fair Value Disclosures of Financial Instruments


For all financial and non-financial assets and liabilities accounted for at fair value on a recurring basis, the Company utilizes valuation techniques based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market expectations. These two types of inputs create the following fair value hierarchy:


Level 1 - Quoted prices for identical instruments in active markets.


Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.


Level 3 - Instruments where significant value drivers are unobservable.




17



The following section describes the valuation methodologies we use to measure different assets at fair value.

  

Investments in fixed maturities and equity securities:

  

Available-for-sale securities included in Level 1 are equities with quoted market prices. Level 2 is primarily comprised of our portfolio of government securities, agency mortgage-backed securities, corporate fixed income securities, collateralized mortgage obligations, municipals, GSEs and certain preferred stocks that were priced with observable market inputs. Level 3 securities consist of CMO securities, primarily Alt-A mortgages.  For these securities, we use industry-standard pricing methodologies, including discounted cash flow models, whose inputs are based on management’s assumptions and available market information. Further we retain independent pricing vendors to assist in valuing certain instruments.

    

  The following tables present our financial assets and liabilities measured at fair value on a recurring basis, at March 31, 2012 and December 31, 2011, respectively (in thousands):


March 31, 2012

 

 

 

 

 

 

 

 

 

 

 

Level 1

 

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

FINANCIAL ASSETS:

 

 

 

 

 

 

 

 

 

Fixed maturities available-for-sale:

 

 

 

 

 

 

 

 

 

 

Corporate securities

$

-

 

$

345,715

$

-

$

345,715

 

CMOs - residential

 

-

 

 

13,448

 

13,350

 

26,798

 

CMOs - commercial

 

-

 

 

-

 

533

 

533

 

US Government obligations

 

-

 

 

22,294

 

-

 

22,294

 

Agency MBS - residential

 

-

 

 

542

 

-

 

542

 

GSEs

 

-

 

 

60,743

 

-

 

60,743

 

States and political subdivisions

 

-

 

 

257,541

 

2,643

 

260,184

 

Total fixed maturities

 

-

 

 

700,283

 

16,526

 

716,809

 

 

 

 

 

 

 

 

 

 

Equity securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

Common stocks

 

3,080

 

 

-

 

-

 

3,080

 

Preferred stocks - perpetual

 

16,755

 

 

-

 

-

 

16,755

 

Preferred stocks - with maturities

 

9,628

 

 

-

 

-

 

9,628

 

Total equity securities

 

29,463

 

 

-

 

-

 

29,463

 

 

 

 

 

 

 

 

 

 

Trading securities:

 

 

 

 

 

 

 

 

 

 

Common stocks

 

6,851

 

 

-

 

-

 

6,851

 

Total trading securities

 

6,851

 

 

-

 

-

 

6,851

 

 

 

 

 

 

 

 

 

 

 

 

Total Financial Assets

$

36,314

 

$

700,283

$

16,526

$

753,123

 

 

 

 

 

 

 

 

 

 

 

FINANCIAL LIABILITIES:

 

 

 

 

 

 

 

 

 

 

Interest rate swap

$

-

 

$

530

$

-

$

530




18




December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

Level 1

 

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

FINANCIAL ASSETS:

 

 

 

 

 

 

 

 

 

Fixed maturities available-for-sale:

 

 

 

 

 

 

 

 

 

 

Corporate securities

$

-

 

$

323,140

$

-

$

323,140

 

CMOs - residential

 

-

 

 

14,648

 

22,127

 

36,775

 

CMOs - commercial

 

-

 

 

-

 

538

 

538

 

US Government obligations

 

-

 

 

166,582

 

-

 

166,582

 

Agency MBS - residential

 

-

 

 

585

 

-

 

585

 

GSEs

 

-

 

 

59,851

 

-

 

59,851

 

States and political subdivisions

 

-

 

 

255,402

 

-

 

255,402

 

Total fixed maturities

 

-

 

 

820,208

 

22,665

 

842,873

 

 

 

 

 

 

 

 

 

 

Equity securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

Common stocks

 

6,699

 

 

-

 

-

 

6,699

 

Preferred stocks - perpetual

 

21,738

 

 

-

 

-

 

21,738

 

Preferred stocks - with maturities

 

9,104

 

 

-

 

-

 

9,104

 

Total equity securities

 

37,541

 

 

-

 

-

 

37,541

 

 

 

 

 

 

 

 

 

 

 

Total Financial Assets

$

37,541

 

$

820,208

$

22,665

$

880,414

 

 

 

 

 

 

 

 

 

 

FINANCIAL LIABILITIES:

 

 

 

 

 

 

 

 

 

 

Interest rate swap

$

-

 

$

494

$

-

$

494


It is the Company’s policy to recognize transfers of assets and liabilities between levels of the fair value hierarchy at the end of a reporting period. At March 31, 2012, there were no transfers of assets and liabilities between Level 1 and Level 2 of the fair value hierarchy. No securities were transferred out of Level 2 and into the Level 3 category at March 31, 2012. The Company does not transfer out of Level 3 and into Level 2 until such time as observable inputs become available and reliable or the range of available independent prices narrow. No securities were transferred out of the Level 3 category in 2012. The changes in the carrying value of Level 3 assets and liabilities for the three months ended March 31, 2012 are summarized as follows (in thousands):


 

 

March 31, 2012

 

 

CMOs

 

 

 

 

 

 

 

 

 

States and Political

 

 

 

 

Residential

 

Commercial

 

Subdivisions

 

Total

 

 

 

 

 

 

 

 

 

Beginning balance

$

22,127

$

538

$

-

$

22,665

 

 

 

 

 

 

 

 

 

Purchases of securities

 

-

 

-

 

2,135

 

2,135

 

 

 

 

 

 

 

 

 

Gains(losses) included in earnings:

 

 

 

 

 

 

 

 

 

Net realized investment losses

 

(1,212)

 

-

 

-

 

(1,212)

 

Other-than-temporary impairments

 

(83)

 

-

 

-

 

(83)

 

 

 

 

 

 

 

 

 

Net unrealized gains (losses) included in

 

 

 

 

 

 

 

 

 

accumulated other comprehensive loss

 

671

 

(5)

 

496

 

1,162

 

 

 

 

 

 

 

 

 

Sales of securities

 

(7,087)

 

-

 

-

 

(7,087)

Repayments and amortization of

 

 

 

 

 

 

 

 

 

fixed maturities

 

(1,065)

 

-

 

11

 

(1,054)

 

 

 

 

 

 

 

 

 

Balance at end of period

$

13,351

$

533

$

2,642

$

16,526




19



The following methods and assumptions were used to estimate the fair value of financial instruments not disclosed elsewhere in the Notes to Condensed Consolidated Financial Statements:


(A)

Policy Loans


The fair value of policy loans included in level 2 of the fair value hierarchy is estimated by projecting aggregate loan cash flows to the end of the expected lifetime period of the life insurance business at the average policy loan rates, and discounting them at a current market interest rate.


(B)

Funds on Deposit


The Company has two types of funds on deposit. The first type is credited with a current market interest rate, resulting in a fair value which approximates the carrying amount. The second type carries fixed interest rates which are higher than current market interest rates. The fair value of these deposits was estimated by discounting the payments using current market interest rates. The Company's universal life policies are also credited with current market interest rates, resulting in a fair value which approximates the carrying amount. Both types of funds on deposit are included in level 2 of the fair value hierarchy.


(C)

Debt


The fair value of debt with variable interest rates approximates its carrying amount and is included in level 2 of the fair value hierarchy.


The estimated fair values of financial instruments not disclosed elsewhere in the Notes to Condensed Consolidated Financial Statements are as follows:


 

 

 

March  31, 2012

 

December 31, 2011

 

 

 

Carrying

 

 

Fair

 

Carrying

 

 

Fair

 

 

 

Amount

 

 

Value

 

Amount

 

 

Value

 

 

 

(In thousands)

FINANCIAL ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

Policy loans

 

$

22,951

 

$

29,342

$

23,109

 

$

29,511

 

 

 

 

 

 

 

 

 

 

 

 

FINANCIAL

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

Funds on deposit

 

$

421,796

 

$

424,596

$

417,310

 

$

418,823

 

Debt and junior

 

 

 

 

 

 

 

 

 

 

 

 

subordinated debt

 

 

 

 

 

 

 

 

 

 

 

 

securities

 

$

48,146

 

$

48,146

$

48,146

 

$

48,146


  The following tables present the categorization by level of the fair value hierarchy for items above that are not carried at fair value in the Condensed Consolidated Financial Statements, at March 31, 2012 and December 31, 2011, respectively (in thousands):


March 31, 2012

 

 

 

 

 

 

 

 

 

 

 

Level 1

 

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

FINANCIAL ASSETS:

 

 

 

 

 

 

 

 

 

 

Policy loans

$

-

 

$

29,342

$

-

$

29,342

 

 

 

 

 

 

 

 

 

 

 

FINANCIAL LIABILITIES:

 

 

 

 

 

 

 

 

 

 

Funds on deposit

$

-

 

$

424,596

$

-

$

424,596

 

Debt and junior subordinated

 

 

 

 

 

 

 

 

 

 

debt securities

$

-

 

$

48,146

$

-

$

48,146




20




December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

Level 1

 

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

FINANCIAL ASSETS:

 

 

 

 

 

 

 

 

 

 

Policy loans

$

-

 

$

29,511

$

-

$

29,511

 

 

 

 

 

 

 

 

 

 

 

FINANCIAL LIABILITIES:

 

 

 

 

 

 

 

 

 

 

Funds on deposit

$

-

 

$

418,823

$

-

$

418,823

 

Debt and junior subordinated

 

 

 

 

 

 

 

 

 

 

debt securities

$

-

 

$

48,146

$

-

$

48,146


Note 8.

Goodwill and Other Intangible Assets


The change in the carrying amount of goodwill and other intangible assets (included in other assets in the Condensed Consolidated Balance Sheets) for the first quarter of 2012 is as follows (in thousands):


 

 

 

 

Other Intangible Assets

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

Other

 

 

 

 

Definitive

 

Indefinite

 

Intangible

 

 

Goodwill

 

Lives

 

Lives

 

Assets

 

 

 

 

 

 

 

 

 

Balance at December 31, 2011

$

50,318

$

9,738

$

7,977

$

17,715

 

 

 

 

 

 

 

 

 

Fully insured:

 

 

 

 

 

 

 

 

 

Acquired CPR

 

-

 

325

 

-

 

325

Capitalized software development

 

-

 

91

 

-

 

91

Amortization expense

 

-

 

(610)

 

-

 

(610)

 

 

 

 

 

 

 

 

 

Balance at March 31, 2012

$

50,318

$

9,544

$

7,977

$

17,521


In February 2012, the Company acquired the net assets of CPR Risk Management, Inc. for (“CPR”) an aggregate purchase price of $275,000. The Company recorded other intangible assets of $325,000 representing customer relationships, which is being amortized over a weighted average period of 5.0 years.


Note 9.

Common Stock


IHC issued 1,638,849 shares of common stock, net of treasury shares, in connection with a special 10% stock dividend payable to shareholders of record on February 17, 2012 with a distribution date of March 5, 2012. Accordingly, IHC charged retained earnings $15,799,000, representing the fair value of such shares on the distribution date, and recorded a credit to common stock for the par value of such shares and a credit to paid-in capital for the remaining difference. Fractional shares were paid in cash in-lieu of stock. All references to number of common shares and earnings per share amounts have been adjusted retroactively for all periods presented to reflect the change in capital structure.


In February 2012, IHC announced it will increase its annual dividend from $.05 to $.07 per share.


Note 10.

Share-Based Compensation


IHC and AMIC each have share-based compensation plans. The following is a summary of the activity pertaining to each of these plans.




21



A)  IHC Share-Based Compensation Plans


Total share-based compensation was $470,000 and $122,000 for the three months ended March 31, 2012 and 2011, respectively. Related tax benefits of $188,000 and $49,000 were recognized for the three months ended March 31, 2012 and 2011, respectively.


Under the terms of IHC’s stock-based compensation plans, option exercise prices are more than or equal to the quoted market price of the shares at the date of grant; option terms range from five to ten years; and vesting periods are three years for employee options.  The Company may also grant shares of restricted stock, share appreciation rights (“SARs”) and share-based performance awards. Restricted shares are valued at the quoted market price of the shares at the date of grant and have a three year vesting period. Exercise prices of SARs are more than or equal to the quoted market price of IHC shares at the date of the grant and have three year vesting periods. At March 31, 2012, there were 387,867 shares available for future stock-based compensation grants under IHC’s stock incentive plans.


Stock Options


The Company’s stock option activity for the three months ended March 31, 2012 is as follows:


 

 

Shares

 

Weighted- Average

 

 

Under Option

 

Exercise Price

 

 

 

 

 

December 31, 2011

 

758,714

 

$

9.71

Expired

 

(24,200)

 

19.54

March 31, 2012

 

734,514

 

$

9.39


The following table summarizes information regarding outstanding and exercisable options as of March 31, 2012:


 

 

Outstanding

 

Exercisable

 

 

 

 

 

Number of options

 

734,514

 

565,187

Weighted average exercise price per share

$

9.39

$

9.48

Aggregate intrinsic value for all options

$

441

$

294

Weighted average contractual term remaining

 

2.2 years

 

2.0 years


The fair value of an option award is estimated on the date of grant using the Black-Scholes option valuation model. No options were granted during the three months ended March 31, 2012 or 2011.


Compensation expense of $61,000 and $110,000 was recognized in the three months ended March 31, 2012 and 2011, respectively, for the portion of the grant-date fair value of stock options vesting during that period.


No options were exercised during the three months ended March 31, 2012 or 2011.


As of March 31, 2012, the total unrecognized compensation expense related to non-vested stock options was $182,000 which is expected to be recognized over the remaining requisite weighted-average service period of .75 years.


Restricted Stock


At March 31, 2012 and December 31, 2011, there were 9,900 unvested shares of restricted stock outstanding with a weighted average grant-date fair value of $8.95 per share. Restricted stock expense was $9,000 and $5,000, respectively, for the three months ended March 31, 2012 and 2011, respectively. No



22



shares of restricted stock were issued by the Company, or vested, during the first three months of 2012 or 2011.


As of March 31, 2012, the total unrecognized compensation expense related to non-vested restricted stock awards was $62,000 which is expected to be recognized over the remaining requisite weighted-average service period of 2.0 years.


SARs and Share-Based Performance Awards


IHC had 274,450 and 230,450 SAR awards outstanding at March 31, 2012 and December 31, 2011, respectively. During the first quarters of 2012 and 2011, the Company granted 44,000 and 96,800 SARs, respectively. The fair value of SARs is calculated using the Black-Scholes valuation model at the grant date and each subsequent reporting period until settlement. Compensation cost is based on the proportionate amount of the requisite service that has been rendered to date. Once fully vested, changes in fair value of the SARs continue to be recognized as compensation expense in the period of the change until settlement. For the three months ended March 31, 2012 and 2011, IHC recorded $393,000 and $16,000, respectively, of compensation costs for these awards.  No SARs were exercised during the three months ended March 31, 2012 or 2011. Included in Other Liabilities in the Company’s Condensed Consolidated Balance Sheets at March 31, 2012 and December 31, 2011 are liabilities of $680,000 and $288,000, respectively, pertaining to SARs.


 Other outstanding awards include share-based performance awards. Compensation costs for these awards are recognized and accrued as performance conditions are met, based on the current share price. For the three months ended March 31, 2012 and 2011, IHC recorded $9,000 and $(9,000), respectively, of compensation costs for these awards.  The intrinsic value of share-based performance awards issued during the first quarter of 2012 was $52,000. There were no payments related to these awards in the first quarter of 2011. Included in the other liabilities on the Company’s Condensed Consolidated Balance Sheets at March 31, 2012 and December 31, 2011 are liabilities of $21,000 and $65,000, respectively, pertaining to share-based performance awards.


B)

AMIC Share-Based Compensation Plans


Total AMIC share-based compensation expense was $8,000 and $16,000 for the three months ended March 31, 2012 and 2011, respectively.  Related tax benefits of $3,000 and $5,000 were recognized for the three months ended March 31, 2012 and 2011, respectively.


Under the terms of the AMIC’s stock-based compensation plan, option exercise prices are equal to the quoted market price of the shares at the date of grant; option terms are ten years; and vesting periods range from three to four years.  AMIC may also grant shares of restricted stock, stock appreciation rights and share-based performance awards.  Restricted shares are valued at the quoted market price of the shares at the date of grant, and have a three year vesting period.


Stock Options


The following table summarizes information regarding AMIC’s outstanding and exercisable options for the three months ended March 31, 2012:


 

 

Shares

 

Weighted- Average

 

 

Under Option

 

Exercise Price

 

 

 

 

 

December 31, 2011

 

333,956

 

$

10.43

Expired

 

-

 

-

Exercised

 

-

 

-

March 31, 2012

 

333,956

 

$

10.43



23



The following table summarizes information regarding AMIC’s outstanding and exercisable options as of March 31, 2012:


 

 

Outstanding

 

Exercisable

 

 

 

 

 

Number of options

 

333,956

 

311,733

Weighted average exercise price per share

$

10.43

$

10.80

Aggregate intrinsic value for all options

$

-

$

-

Weighted average contractual term remaining

 

2.87 years

 

2.44 years


The fair value of an option award is estimated on the date of grant using the Black-Scholes option valuation model. No options were granted during the three months ended March 31, 2012 or 2011.


Compensation expense of $8,000 and $12,000 was recognized for the three months ended March 31, 2012 and 2011, respectively, for the portion of the grant-date fair value of AMIC’s stock options vesting during the period.


No options were exercised during the three months ended March 31, 2012. AMIC received cash proceeds of $21,000 upon the exercise of 4,722 options with an intrinsic value of $2,000 during the three months ended March 31, 2011.


As of March 31, 2012, the total unrecognized compensation expense related to AMIC’s non-vested options was $72,000 which will be recognized over the remaining requisite service periods.


Restricted Stock


AMIC issued 12,000 restricted stock awards in the second quarter of 2008, with a weighted average grant-date fair value of $6.92 per share.  No restricted stock awards have been issued since then. AMIC had no unvested restricted stock awards outstanding at March 31, 2012 and December 31, 2011. Restricted stock expense was $4,000 for the three months ended March 31, 2011.


Note 11.

 Income Taxes


The provision for income taxes shown in the Condensed Consolidated Statements of Operations was computed based on the Company's actual results which approximate the effective tax rate expected to be applicable for the balance of the current fiscal year in accordance with consolidated life/non-life group income tax regulations. Such regulations adopt a subgroup method in determining consolidated taxable income, whereby taxable income is determined separately for the life insurance company group and the non-life insurance company group.


The deferred income tax expense for the three months ended March 31, 2012 allocated to stockholders' equity (principally for net unrealized gains on investment securities) was $286,000, representing the increase in the related deferred tax liability from $3,768,000 at December 31, 2011 to 4,054,000 at March 31, 2012.


Included in the $1,900,000 benefit for income taxes recorded for the three months ended March 31, 2011 is a deferred income tax benefit of $2,319,000 associated with IHC’s investment in AMIC. As the result of management’s intention to adopt tax planning strategies to recover IHC’s investment in AMIC in a tax-free manner, the cumulative Federal and State deferred income tax liabilities established as of December 31, 2010 for temporary differences between IHC’s book value and tax basis in AMIC became permanent. Accordingly, IHC released its previously recorded deferred income tax liabilities and will not record deferred income taxes in future periods for any earnings or stockholders’ equity adjustments relating to IHC’s investment in AMIC.




24



At March 31, 2012, AMIC, had net operating loss carryforwards of approximately $273,600,000 for federal income tax purposes which expire between 2019 and 2029. The net deferred tax asset relative to AMIC included in other assets on IHC’s Condensed Consolidated Balance Sheets at March 31, 2012 and December 31, 2011 was $7,478,000 and $8,030,000, respectively. AMIC continues to file its own separate income tax return and is not included in the consolidated tax return of IHC.


Note 12.

Reinsurance


Effective January 26, 2012, Standard Security Life entered into a coinsurance agreement with an unaffiliated reinsurer to cede group annuity reserves. In accordance with the agreement, Standard Security Life transferred $143,537,000 of cash in the first quarter of 2012 and recorded a corresponding amount as due from reinsurers. Subsequent to March 31, 2012, the Company received final approval from the New York State Insurance Department to convert the transfer from a coinsurance to an assumption agreement.  When complete, the assumption will contractually relieve Standard Security Life of liability with regards to the policies.


Note 13.

Supplemental Disclosures of Cash Flow Information


Tax refunds, net of tax payments, were $915,000 and $(157,000) during the three months ended March 31, 2012 and 2011.


Cash payments for interest were $532,000 and $464,000 during the three months ended March 31, 2012 and 2011, respectively.  


Note 14.

Other Comprehensive Income (Loss)


The components of other comprehensive income (loss) include: (i) the after-tax net unrealized gains and losses on investment securities available for sale, including the subsequent increases and decreases in fair value of available-for-sale securities previously impaired; (ii) the non-credit related component of other-than-temporary impairments of fixed maturities, net of tax; and (iii) the after-tax gains and losses from derivative instruments designated and qualifying as a cash flow hedge.


The tax effect on each component of other comprehensive income (loss) for three months ended March 31, 2012 and 2011 is as follows:


 

 

Before

 

 

Tax

 

 

Net of

 

 

Tax

 

 

Effect

 

 

Tax

 

(In thousands)

2012

 

 

 

 

 

 

 

 

Net unrealized gains (losses) on available-for-sale securities

$

719 

 

$

300 

 

$

419 

Other-than-temporary impairment losses

 

 

 

 

 

Allocation to deferred acquisition costs

 

(14)

 

 

 

 

(14)

Unrealized gains (losses) on derivatives

 

(36)

 

 

(14)

 

 

(22)

 

Other comprehensive income (loss)

$

669 

 

$

286 

 

$

383 

 

 

 

 

 

 

 

 

 

2011

 

 

 

 

 

 

 

 

Net unrealized gains (losses) on available-for-sale securities

$

(264)

 

$

(57)

 

$

(207)

Other-than-temporary impairment losses

 

 

 

 

 

Allocation to deferred acquisition costs

 

82

 

 

 

 

82

Unrealized gains (losses) on derivatives

 

 

 

 

 

 

Other comprehensive income (loss)

$

(182)

 

$

(57)

 

$

(125)

 

 

 

 

 

 

 

 

 



25



Note 15.

 Segment Reporting


The Insurance Group principally engages in the life and health insurance business. Information by business segment for the three months ended March 31, 2012 and 2011 is presented below (in thousands):


 

 

Three Months Ended

 

 

March 31,

 

 

2012

 

2011

Revenues:

 

 

 

 

Medical Stop-Loss

$

35,260

$

30,635 

Fully Insured Health

 

38,667

 

43,239 

Group disability, life, annuities and DBL

 

12,915

 

15,257 

Individual life, annuities and other

 

13,790

 

15,143 

Corporate

 

470

 

550 

 

 

101,102

 

104,824 

Net realized investment gains

 

1,137

 

(202)

Other-than-temporary impairment losses

 

(83)

 

(303)

 

$

102,156

$

104,319 

Income from continuing operations

 

 

 

 

 

before income taxes:

 

 

 

 

Medical Stop-Loss

$

6,085

$

(27)

Fully Insured Health(A)

 

1,152

 

3,363 

Group disability, life, annuities and DBL

 

(31)

 

(184)

Individual life, annuities and other

 

370

 

14 

Corporate

 

(1,675)

 

(268)

 

 

5,901

 

2,898 

Net realized investment gains

 

1,137

 

(202)

Other-than-temporary impairment losses

 

(83)

 

(303)

Interest expense

 

(539)

 

(457)

 

$

6,416

$

1,936 



(A)

The Fully Insured Health segment includes amortization of intangible assets recorded as a result of acquisition accounting. Total amortization expense was $595,000 and $607,000 for the three months ended March 31, 2012 and 2011, respectively. Amortization expense for the other segments is insignificant.




26



ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS


The following discussion of the financial condition and results of operations of Independence Holding Company ("IHC") and its subsidiaries (collectively, the "Company") should be read in conjunction with, and is qualified in its entirety by reference to, the Consolidated Financial Statements of the Company and the related Notes thereto appearing in our annual report on Form 10-K for the fiscal year ended December 31, 2011, as filed with the Securities and Exchange Commission, and our unaudited Condensed Consolidated Financial Statements and related Notes thereto appearing elsewhere in this quarterly report.


Overview


Independence Holding Company, a Delaware corporation (“IHC”), is a holding company principally engaged in the life and health insurance business through: (i) its insurance companies, Standard Security Life Insurance Company of New York ("Standard Security Life"),  Madison National Life Insurance Company, Inc. ("Madison National Life"), and Independence American Insurance Company (“Independence American”); and (ii) its marketing and administrative companies, including IHC Risk Solutions, LLC (“Risk Solutions”), IHC Health Solutions, Inc. (“Health Solutions”), and Actuarial Management Corporation ("AMC").  These companies are sometimes collectively referred to as the “Insurance Group”, and IHC and its subsidiaries (including the Insurance Group) are sometimes collectively referred to as the "Company." IHC also owns a significant equity interest in a managing general underwriter (“MGU”) that writes medical stop-loss for Standard Security Life. At March 31, 2012, the Company also owned a 78.5% interest in American Independence Corp. (“AMIC”).


While management considers a wide range of factors in its strategic planning and decision-making, underwriting profit is consistently emphasized as the primary goal in all decisions as to whether or not to increase our retention in a core line, expand into new products, acquire an entity or a block of business, or otherwise change our business model.  Management's assessment of trends in healthcare and morbidity, with respect to medical stop-loss, fully insured medical, disability and New York State short-term statutory disability benefit product ("DBL"); mortality rates with respect to life insurance; and changes in market conditions in general play a significant role in determining the rates charged, deductibles and attachment points quoted, and the percentage of business retained. IHC also seeks transactions that permit it to leverage its vertically integrated organizational structure by generating fee income from production and administrative operating companies as well as risk income for its carriers and profit commissions.  Management has always focused on managing the costs of its operations and providing its insureds with the best cost containment tools available.




27



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


The results of operations for the three months ended March 31, 2012 and 2011 are summarized as follows (in thousands):

 

 

Three Months Ended

 

 

March 31,

 

 

2012

 

2011

 

 

 

 

 

Revenues

$

102,156

$

104,319 

Expenses

 

95,740

 

102,383 

 

 

 

 

 

Income from operations  before income taxes

 

6,416

 

1,936 

Income taxes (benefits)

 

2,086

 

(1,864)

 

 

 

 

 

Net income

 

4,330

 

3,800 

 

 

 

 

 

Less: income from noncontrolling interests in subsidiaries

 

(408)

 

(616)

 

 

 

 

 

 

Net income attributable to IHC

$

3,922

$

3,184 

 

 

 

 

 

o

Net income from operations of $.22 per share, diluted, for the three months ended March 31, 2012, compared to $.19 per share, diluted, for the three months ended March 31, 2011;


o

Consolidated investment yields (on an annualized basis) of 4.0% for the three months ended March 31, 2012 compared to 4.4% for the comparable period in 2011;


o

Declared a special 10% stock dividend to IHC shareholders of record on February 17, 2012 with a distribution date of March 5, 2012. As a result, IHC issued 1.6 million shares of its common stock, net of treasury shares, with a fair value of $15.8 million and paid cash in-lieu of fractional shares;  


o

Announced IHC will increase its annual dividend from $.05 to $.07 per share; and


o

Book value of $14.72 per common share, an increase of $.26 per common share from $14.46 at December 31, 2011.




28



The following is a summary of key performance information by segment:


o

The Medical Stop-Loss segment reported income before taxes of $6.1 million for the first quarter of 2012 compared to break-even results for the three months ended March 31, 2011. The increase is primarily due to increased volume and improved loss ratios in 2012;


o

Premiums earned increased $4.8 million for the three months ended March 31, 2012 when compared to the same period in 2011. The increase in premiums earned is due to increased volume and retention.


o

Underwriting experience for the Medical Stop-Loss segment, as indicated by its GAAP Combined Ratios, are as follows for the periods indicated (in thousands):


 

 

Three Months Ended

 

 

March 31,

 

 

2012

 

2011

 

 

 

 

 

Premiums Earned

$

32,651

$

27,895

Insurance Benefits, Claims & Reserves

 

18,407

 

20,894

Expenses

 

9,524

 

8,251

 

 

 

 

 

Loss Ratio(A)

 

56.4%

 

74.9%

Expense Ratio (B)

 

29.1%

 

29.6%

Combined Ratio (C)

 

85.5%

 

104.5%

 

 

 

 

 

















o

Loss ratios for the three months ended March 31, 2012 decreased due to improved underwriting results in both the direct and assumed business.


(A)

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

(B)

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

(C)

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


·

The Fully Insured Health segment reported $1.2 million of income before taxes for the three months ended March 31, 2012 as compared to $3.4 million for the comparable period in 2011.


o

Premiums earned decreased $4.7 million for the three months ended March 31, 2012 over the comparable 2011 period primarily due to decreased volume and retentions in certain lines of the business.


o

Underwriting experience, as indicated by its GAAP Combined Ratios, for the Fully Insured segment for the three months ended March 31, 2012  and 2011 is as follows (in thousands):



29





 

 

Three Months Ended

 

 

March 31,

 

 

2012

 

2011

 

 

 

 

 

Premiums Earned

$

32,085

$

36,795

Insurance Benefits, Claims & Reserves

 

21,012

 

21,544

Expenses

 

9,409

 

11,557

 

 

 

 

 

Loss Ratio

 

65.5%

 

58.6%

Expense Ratio

 

29.3%

 

31.4%

Combined Ratio

 

94.8%

 

90.0%

 

 

 

 

 






o

The increase in the loss ratio was primarily attributable to an increase in the claims experience on major medical business for groups and individuals and dental businesses in the first quarter of 2012.


o

The underwriting expense ratio decreased for the three months ended March 31, 2012, primarily as a result of a decrease in general expenses.


·

Income before taxes from the Group disability, life, annuities and DBL segment increased $.2 million for the three months ended March 31, 2012 compared to the three months ended March 31, 2011 primarily as a result of better loss ratios in the group term life and LTD lines;


·

Income before taxes from the Individual life, annuities and other segment increased $.4 million for the three months ended March 31, 2012 compared to the same period in 2011 due to a decrease in claims;


·

Income before taxes from the Corporate segment decreased $1.4 million for the three months ended March 31, 2012, primarily due to an increase in corporate overhead;


·

Net realized investment gains were $1.1 million for the three months ended March 31, 2012 compared to net realized investment losses of $.2 million for the three months ended March 31, 2011. Other-than-temporary impairment losses for the three months ended March 31, 2012 and 2011 were $.1 million and $.3 million, respectively; and


·

Premiums by principal product for the three months ended March 31, 2012 and 2011 are as follows (in thousands):


 

Three Months Ended

 

March 31,

 

 

 

Gross Direct and Assumed

 

 

 

Earned Premiums:

 

2012

 

2011

 

 

 

Medical Stop-Loss

$

39,552

$

35,175

Fully Insured Health

52,447

51,922

Group disability, life, annuities and DBL

22,805

24,359

Individual, life, annuities and other

 

8,160

 

8,714

 

 

 

 

$

122,964

$

120,170




30




 

Three Months Ended

 

March 31,

 

 

 

Net Premiums Earned:

 

2012

 

2011

 

 

 

Medical Stop-Loss

$

32,651

$

27,895

Fully Insured Health

32,085

36,795

Group disability, life, annuities and DBL

12,176

13,068

Individual, life, annuities and other

 

6,862

 

8,115

 

 

 

 

$

83,774

$

85,873




CRITICAL ACCOUNTING POLICIES


The accounting and reporting policies of the Company conform to U.S. generally accepted accounting principles ("GAAP"). The preparation of the Condensed Consolidated Financial Statements in conformity with GAAP requires the Company's management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. A summary of the Company's significant accounting policies and practices is provided in Note 1 of the Notes to the Consolidated Financial Statements included in Item 8 of the Annual Report on Form 10-K for the fiscal year ended December 31, 2011. Management has identified the accounting policies related to Insurance Premium Revenue Recognition and Policy Charges, Insurance Reserves, Deferred Acquisition Costs, Investments, Goodwill and Other Intangible Assets, and Deferred Income Taxes as those that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of the Company's Consolidated Financial Statements and this Management's Discussion and Analysis. A full discussion of these policies is included under the heading, “Critical Accounting Policies” in Item 7 of the Annual Report on Form 10-K for the fiscal year ended December 31, 2011.  During the three months ended March 31, 2012, there were no additions to or changes in the critical accounting policies disclosed in the 2011 Form 10-K except for the recently adopted accounting standards discussed in Note 1(C) of the Notes to Condensed Consolidated Financial Statements.



31



Results of Operations for the Three Months Ended March 31, 2012 Compared to the Three Months Ended March 31, 2011


Information by business segment for the three months ended March 31, 2012 and 2011 is as follows:


 

 

 

 

Benefits,

Amortization

Selling,

 

 

 

Net

Fee and

Claims

of  Deferred

General

 

 

Premiums

Investment

Other

and

Acquisition

And

 

March 31, 2012

Earned

Income

Income

Reserves

Costs

Administrative

Total

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Medical Stop-Loss

$

32,651

1,354

1,255

18,407

-

10,768

$

6,085

Fully Insured Health

32,085

329

6,253

21,012

6

16,497

 

1,152

Group disability,

 

 

 

 

 

 

 

 

 

life, annuities

 

 

 

 

 

 

 

 

 

and DBL

12,176

677

62

8,839

-

4,107

 

(31)

Individual life,

 

 

 

 

 

 

 

 

 

annuities and other

6,862

5,921

1,007

8,877

1,588

2,955

 

370

Corporate

-

470

-

-

-

2,145

 

(1,675)

Sub total

$

83,774

$

8,751

$

8,577

$

57,135

$

1,594

$

36,472

 

5,901

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net realized investment gains

 

 

 

 

1,137

Other-than-temporary impairment losses

 

 

 

 

 

(83)

Interest expense on debt

 

 

 

 

 

(539)

Income from operations before income taxes

 

 

 

 

6,416

Income taxes

 

 

 

 

 

2,086

Net income

 

 

 

 

$

4,330



 

 

 

 

Benefits,

Amortization

Selling,

 

 

 

Net

Fee and

Claims

of  Deferred

General

 

 

Premiums

Investment

Other

and

Acquisition

And

 

March 31, 2011

Earned

Income

Income

Reserves

Costs

Administrative

Total

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Medical Stop-Loss

$

27,895

1,290

1,450

20,894

-

9,768

$

(27)

Fully Insured Health

36,795

353

6,091

21,544

7

18,325

 

3,363

Group disability,

 

 

 

 

 

 

 

 

 

life, annuities

 

 

 

 

 

 

 

 

 

and DBL

13,068

2,143

46

11,386

131

3,924

 

(184)

Individual life,

 

 

 

 

 

 

 

 

 

annuities and other

8,115

5,780

1,248

10,425

1,553

3,151

 

14

Corporate

-

550

-

-

-

818

 

(268)

Sub total

$

85,873

$

10,116

$

8,835

$

64,249

$

1,691

$

35,986

 

2,898

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net realized investment losses

 

 

 

 

(202)

Other-than-temporary impairment losses

 

 

 

 

 

(303)

Interest expense on debt

 

 

 

 

 

(457)

Income from operations before income taxes

 

 

 

 

1,936

Income tax benefits

 

 

 

 

 

(1,864)

Net income

 

 

 

 

$

3,800












32



 Premiums Earned


In the first quarter of 2012, premiums earned decreased $2.1 million over the comparable period of 2011. The decrease is primarily due to: (i) the Fully Insured Health segment which had a $4.7 million decrease in premiums primarily as a result of decreased retentions and volume in the short term medical business,  major medical business for groups and individuals and dental lines of business; (ii) a decrease of $1.3 million of earned premiums in the Individual life, annuities and other segment primarily as a result of the transfer of certain group annuity contracts in the fourth quarter of 2011and decreased premium volume from other lines in run-off; and (iii) a $.9 million decrease in the Group disability, life, annuities and DBL segment primarily due to decreased premiums from the LTD line due in part to reduced production sources; partially offset by (iv) a $4.8 million increase in the Medical Stop-Loss segment due to increased volume and retention of business in 2012.


Net Investment Income


Total net investment income decreased $1.3 million.  The overall annualized investment yields were 4.0% and 4.4% (approximately 4.1% and 4.6%, on a tax advantaged basis) in the first quarter of 2012 and 2011, respectively. The overall decrease was primarily a result of a decrease in investment income on bonds, equities and short-term investments due to lower yields and the shorter duration of our portfolio.  The annualized investment yields on bonds, equities and short-term investments were 3.7% and 4.0% in the first quarter of 2012 and 2011, respectively. IHC has approximately $135.2 million in highly rated shorter duration securities earning on average 1.7%. A portfolio that is shorter in duration enables us, if we deem prudent, the flexibility to reinvest in much higher yielding longer-term securities, which would significantly increase investment income.


Net Realized Investment Gains and Other-Than-Temporary Impairment Losses, Net


The Company had net realized investment gains of $1.1 million in 2012 compared to net realized investment losses of $.2 million in 2011. These amounts include gains and losses from sales of fixed maturities and equity securities available-for-sale and other investments. Decisions to sell securities are based on management's ongoing evaluation of investment opportunities and economic and market conditions, thus creating fluctuations in gains and losses from period to period.


For the three months ended March 31, 2012 and 2011, the Company recorded $.1 million and $.3 million, respectively, of other-than-temporary impairment losses, pre-tax. Other-than-temporary impairment losses in both 2012 and 2011 consist of credit losses resulting from expected cash flows of debt securities that are less than the debt securities’ amortized cost.


Fee Income and Other Income


No significant change in fee income for the three months ended March 31, 2012 compared to the three months ended March 31, 2011.  


Total other income decreased $.3 million in the three months ended March 31, 2012 to $1.2 million from $1.5 million in the three months ended March 31, 2011.


Insurance Benefits, Claims and Reserves


In the first quarter of 2012, insurance, benefits, claims and reserves decreased $7.1 million over the comparable period in 2011. The decrease is primarily attributable to: (i)  a decrease of $2.5 million in the Medical Stop-Loss segment as a result of improved loss ratios offset by an increase in premium volume; (ii) an decrease of $.5 million in the Fully Insured Health segment, principally due to the decrease in premiums on the major medical business for groups and individuals, short term medical and dental lines of business, partially offset by higher loss ratios on the major medical business for groups and individuals and dental



33



lines; (iii) a $2.6 million decrease in the Group disability, life, annuities and DBL segment as a result of the transfer of certain group annuity contracts in the fourth quarter of 2011; and (iv) a $1.5 million decrease in the Individual life, annuity and other segment primarily resulting from the transfer of certain group annuity contracts in the fourth quarter of 2011 and decreased premium volume from other lines in run-off.


Amortization of Deferred Acquisition Costs


Amortization of deferred acquisition costs decreased $.1 million primarily as a result of the write-off, in the fourth quarter of 2011, of certain deferred acquisition costs in connection with a coinsurance agreement.

 

Selling, General and Administrative Expenses


Selling, general and administrative expenses increased $.5 million. The increase is primarily due to: (i) a $1.0 million increase in commissions and other general expenses in the Medical Stop-Loss segment due to an increase in volume as a result of increased production and retention; and (ii) an increase of $1.3 million in corporate overhead expenses; partially offset by (iii) a $1.8 million decrease in the Fully Insured Health segment largely due to decreased volume of business in the major medical business for groups and individuals, short term medical and dental lines of business in 2012.


Income Taxes


The effective tax rate for the three months ended March 31, 2012 was 32.5%. In 2011, IHC eliminated $2.3 million of previously recorded deferred income taxes due to management’s intention to adopt tax planning strategies to recover its investment in AMIC in a tax-free manner.  Excluding this transaction, the effective tax rate for the three months ended March 31, 2011 was 23.5%.  The lower effective tax rate in 2011 was due to a higher benefit from tax advantaged securities as a percentage of income due to lower income in 2011.


 LIQUIDITY


Insurance Group


The Insurance Group normally provides cash flow from: (i) operations; (ii) the receipt of scheduled principal payments on its portfolio of fixed maturities; and (iii) earnings on investments. Such cash flow is partially used to fund liabilities for insurance policy benefits. These liabilities represent long-term and short-term obligations.


Corporate


Corporate derives its funds principally from: (i) dividends from the Insurance Group; (ii) management fees from its subsidiaries; and (iii) investment income from Corporate liquidity. Regulatory constraints historically have not affected the Company's consolidated liquidity, although state insurance laws have provisions relating to the ability of the parent company to use cash generated by the Insurance Group. The insurance group declared and paid $3.0 million of cash dividends to Corporate in the first quarter of 2012. No dividends were declared or paid by the Insurance Group in the three months ended March 31, 2011.


Cash Flows


The Company had $9.3 million and $18.2 million of cash and cash equivalents as of March 31, 2012 and December 31, 2011, respectively.


In February 2012, Standard Security Life transferred $143.5 million cash to an unaffiliated



34



reinsurer in connection with a coinsurance agreement, representing a significant portion of the $138.8 million decrease in cash from operating activities. Cash provided by investing activities of $130.7 million consists primarily of proceeds from the net sales of investments in preparation for such transfer of funds.


The Company has $453.1 million of insurance reserves that it expects to ultimately 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. For the three months ended March 31, 2012, cash received from the maturities and other repayments of fixed maturities was $12.8 million.


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


The Company had net receivables from reinsurers of $262.3 million at March 31, 2012 compared to $119.7 million at December 31, 2011. The increase is primarily due to a coinsurance agreement with an unaffiliated reinsurer to transfer approximately $143.5 million of group annuity reserves. All of such reinsurance receivables are with highly rated companies or are adequately secured. No allowance for doubtful accounts was necessary at March 31, 2012.


The Company's health reserves by segment are as follows (in thousands):


 

 

Total Health Reserves

 

 

March 31,

 

December 31,

 

 

2012

 

2011

 

 

 

 

 

Medical Stop-Loss

$

52,226

$

58,741

Fully Insured Health

 

31,950

 

32,508

Group Disability

 

95,152

 

93,278

Individual A&H and Other

 

8,227

 

8,460

 

 

 

 

 

 

$

187,555

$

192,987


Major factors that affect the Projected Net Loss Ratio assumption in reserving for medical stop-loss relate to: (i) frequency and severity of claims; (ii) changes in medical trend resulting from the influences of underlying cost inflation, changes in utilization and demand for medical services, the impact of new medical technology and changes in medical treatment protocols; and (ii) the adherence by the MGUs that produce and administer this business to the Company's underwriting guidelines. Changes in these underlying factors are what determine the reasonably likely changes in the Projected Net Loss Ratio.


The primary assumption in the determination of fully insured reserves is that historical claim development patterns tend to be representative of future claim development patterns. Factors which may affect this assumption include changes in claim payment processing times and procedures, changes in product design, changes in time delay in submission of claims, and the incidence of unusually large claims. The reserving analysis includes a review of claim processing statistical measures and large claim early notifications; the potential impacts of any changes in these factors are minimal. The time delay in submission of claims tends to be stable over time and not subject to significant volatility. Since our analysis considered a variety of outcomes related to these factors, the Company does not believe that any reasonably likely change in these factors will have a material effect on the Company’s financial condition, results of operations, or liquidity.


The $3.9 million increase in IHC’s stockholders' equity in the first three months of 2012 is primarily due to $3.9 million of net income.  



35




Asset Quality and Investment Impairments


The nature and quality of insurance company investments must comply with all applicable statutes and regulations, which have been promulgated primarily for the protection of policyholders. Although the Company's gross unrealized losses on available-for-sale securities totaled $5.8 million at March 31, 2012, approximately 98.3% of the Company’s fixed maturities were investment grade and continue to be rated on average AA. The Company marks all of its available-for-sale securities to fair value through accumulated other comprehensive income or loss. These investments tend to carry less default risk and, therefore, lower interest rates than other types of fixed maturity investments. At March 31, 2012, approximately 1.7% (or 7.9 million) of the carrying value of fixed maturities was invested in non-investment grade fixed maturities (primarily mortgage securities) (investments in such securities have different risks than investment grade securities, including greater risk of loss upon default, and thinner trading markets). The Company does not have any non-performing fixed maturities at March 31, 2012.


The Company reviews its investments regularly and monitors its investments continually for impairments. For the three months ended March 31, 2012 and 2011, the Company recorded $.1 and $.3 million of losses for other-than-temporary impairments in earnings. No losses for other-than-temporary impairments were recognized in other comprehensive income for the three months ended March 31, 2012 and 2011. The following table summarizes the carrying value of securities with fair values less than 80% of their amortized cost at March 31, 2012 by the length of time the fair values of those securities were below 80% of their amortized cost (in thousands):


 

 

 

 

Greater than

 

Greater than

 

 

 

 

 

 

 

 

3 months,

 

6 months,

 

 

 

 

 

 

Less than

 

less than

 

less than

 

Greater than

 

 

 

 

3 months

 

6 months

 

12 months

 

12 months

 

Total

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities

$

134

$

-

$

-

$

915

$

1,049


The unrealized losses on all remaining available-for-sale securities have been evaluated in accordance with the Company's impairment policy and were determined to be temporary in nature at March 31, 2012. In 2012, the Company experienced an increase in net unrealized gains of $.7 million which was offset by $.3 million of deferred taxes and a negligible amount of deferred policy acquisition costs. From time to time, as warranted, the Company may employ investment strategies to mitigate interest rate and other market exposures. Further deterioration in credit quality of the companies backing the securities, further deterioration in the condition of the financial services industry, a continuation of the current imbalances in liquidity that exist in the marketplace, a continuation or worsening of the current economic recession, or additional declines in real estate values may further affect the fair value of these securities and increase the potential that certain unrealized losses be designated as other-than-temporary in future periods and the Company may incur additional write-downs.


CAPITAL RESOURCES


Due to its strong capital ratios, broad licensing and excellent asset quality and credit-worthiness, the Insurance Group remains well positioned to increase or diversify its current activities. It is anticipated that future acquisitions or other expansion of operations will be funded internally from existing capital and surplus and parent company liquidity. In the event additional funds are required, it is expected that they would be borrowed or raised in the public or private capital markets to the extent determined to be necessary or desirable.


IHC enters into a variety of contractual obligations with third parties in the ordinary course of its operations, including liabilities for insurance reserves, funds on deposit, debt and operating lease obligations.  However, IHC does not believe that its cash flow requirements can be fully assessed based



36



solely upon an analysis of these obligations.  Future cash outflows, whether they are contractual obligations or not, also will vary based upon IHC’s future needs.  Although some outflows are fixed, others depend on future events. The maturity distribution of the Company’s obligations, as of March 31, 2012, is not materially different from that reported in the schedule of such obligations at December 31, 2011 which was included in Item 7 of the Company’s Annual Report on Form 10-K.  



OUTLOOK


For 2012, we will continue to emphasize:

·

 Adapting to health care reform by continuing to proactively adjust our distribution strategies and mix of Fully Insured Health products to take advantage of changing market demands.

·

Leveraging our strategy of directly distributing our Medical Stop-Loss products through Risk Solutions to organically generate or acquire additional Medical Stop-Loss business while maintaining the profitability of the block.

·

Closely monitoring the experience in our Group disability, life annuities and DBL business.

·

Continuing to increase the efficiency of our administrative companies.


The Company remained highly liquid in 2012 with a shorter duration portfolio. As a result, the yields on our investment portfolio were, and continue to remain, lower than in prior years and investment income may continue to be depressed for the balance of the year. IHC has approximately $135 million in highly rated shorter maturity securities earning on average 1.7%; our portfolio as a whole is rated, on average, AA. The low duration of our portfolio enables us, if we deem prudent, the flexibility to reinvest in much higher yielding longer-term securities, which would significantly increase investment income.  A low duration portfolio such as ours also mitigates the adverse impact of potential inflation.  IHC will continue to monitor the financial markets and invest accordingly.


In the fourth quarter of 2011, Standard Security Life entered into a coinsurance agreement with an unaffiliated reinsurer effective January 26, 2012 and transferred approximately $143.4 million of group annuity reserves in the first quarter of 2012.


At March 31, 2012, IHC owned approximately 78.5% of the outstanding common stock of AMIC.


We will continue to focus on our strategic objectives, including expanding our distribution network.  However, the success of a portion of our Fully Insured Health business may be affected by the passage of the Patient Protection and Affordable Care and Education Reconciliation Act of 2010 signed by President Obama in March 2010, and its subsequent interpretations by state and federal regulators and the review of its Constitutionality by the United States Supreme Court. The National Association of Insurance Commissioners has now issued its proposed regulations. The regulations proposed to-date (including those mandating minimum loss ratios) seem to have validated our strategy of pursuing niche lines of business across many states utilizing multiple carriers. We have begun a comprehensive review of all the options for IHC and we are continuing a thorough evaluation of our options for those health insurance products that may be affected.  Although the law will generally require insurers to operate with a lower expense structure for major medical plans in the small employer and individual markets, the law appears to make exceptions for carriers, such as ours, that have a minimal presence in any one state. “Non-essential” lines of business and Medical Stop-Loss have been impacted by health care reform minimally or not at all.


Our results depend on the adequacy of our product pricing, our underwriting and the accuracy of our reserving methodology, returns on our invested assets and our ability to manage expenses.  Therefore, factors affecting these items, including unemployment and global financial markets, may have a material adverse effect on our results of operations and financial condition.  





37



ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


The Company manages interest rate risk by seeking to maintain an investment portfolio with a duration and average life that falls within the band of the duration and average life of the applicable liabilities. Options may be utilized to modify the duration and average life of such assets.


The Company monitors its investment portfolio on a continuous basis and believes that the liquidity of the Insurance Group will not be adversely affected by its current investments. This monitoring includes the maintenance of an asset-liability model that matches current insurance liability cash flows with current investment cash flows. This is accomplished by first creating an insurance model of the Company's in-force policies using current assumptions on mortality, lapses and expenses. Then, current investments are assigned to specific insurance blocks in the model using appropriate prepayment schedules and future reinvestment patterns.


The results of the model specify whether the investments and their related cash flows can support the related current insurance cash flows. Additionally, various scenarios are developed changing interest rates and other related assumptions. These scenarios help evaluate the market risk due to changing interest rates in relation to the business of the Insurance Group.


The expected change in fair value as a percentage of the Company's fixed income portfolio at March 31, 2012 given a 100 to 200 basis point rise or decline in interest rates is not materially different than the expected change at December 31, 2011 included in Item 7A of the Company’s Annual Report on Form 10-K.


 In the Company's analysis of the asset-liability model, a 100 to 200 basis point change in interest rates on the Insurance Group's liabilities would not be expected to have a material adverse effect on the Company. With respect to its liabilities, if interest rates were to increase, the risk to the Company is that policies would be surrendered and assets would need to be sold. This is not a material exposure to the Company since a large portion of the Insurance Group's interest sensitive policies are burial policies that are not subject to the typical surrender patterns of other interest sensitive policies, and many of the Insurance Group's universal life and annuity policies were acquired from liquidated companies which tend to exhibit lower surrender rates than such policies of continuing companies. Additionally, there are charges to help offset the benefits being surrendered. If interest rates were to decrease substantially, the risk to the Company is that some of its investment assets would be subject to early redemption. This is not a material exposure because the Company would have additional unrealized gains in its investment portfolio to help offset the future reduction of investment income. With respect to its investments, the Company employs (from time to time as warranted) investment strategies to mitigate interest rate and other market exposures.


ITEM 4.

CONTROLS AND PROCEDURES


IHC’s Chief Executive Officer and Chief Financial Officer supervised and participated in IHC’s evaluation of its disclosure controls and procedures as of the end of the period covered by this report.  Disclosure controls and procedures are controls and procedures designed to ensure that information required to be disclosed in IHC’s periodic reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.  Based upon that evaluation, IHC’S Chief Executive Officer and Chief Financial Officer concluded that IHC’s disclosure controls and procedures are effective.

 

     There has been no change in IHC’s internal control over financial reporting during the fiscal quarter ended March 31, 2012 that has materially affected, or is reasonably likely to materially affect, IHC's internal control over financial reporting.





38



PART II.  OTHER INFORMATION


ITEM 1.

LEGAL PROCEEDINGS


We are involved in legal proceedings and claims that arise in the ordinary course of our businesses. We have established reserves that we believe are sufficient given information presently available related to our outstanding legal proceedings and claims. We do not anticipate that the result of any pending legal proceeding or claim will have a material adverse effect on our financial condition or cash flows, although there could be such an effect on our results of operations for any particular period.


ITEM 1A.   

RISK FACTORS


There were no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 in Item 1A to Part 1 of Form 10-K.


ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS


Share Repurchase Program


IHC has a program, initiated in 1991, under which it repurchases shares of its common stock. In January 2010, the Board of Directors authorized the repurchase of up to 500,000 shares of IHC’s common stock, inclusive of prior authorizations, under the 1991 plan. As of March 31, 2012, 135,164 shares were still authorized to be repurchased under the plan. Share repurchases during the first quarter of 2012 are summarized as follows:


2012

 

 

 

 

Maximum Number

 

 

Average Price

Of Shares Which

 

 

Month of

Shares

of Repurchased

Can be

 

Repurchase

 

Repurchased

 

Shares

 

Repurchased

 

 

 

 

 

January

14,823

$

9.23

166,580

 

February

15,480

$

10.11

151,100

 

March

15,936

$

9.31

135,164

 

 

 

 



ITEM 3.

DEFAULTS UPON SENIOR SECURITIES


Not applicable



ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS


Not applicable



ITEM 5.

OTHER INFORMATION


Not applicable





39



ITEM 6.

EXHIBITS


31.1

Certification of the Chief Executive Officer and President Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


31.2

Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


32.1

Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


32.2

Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.









40



SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



INDEPENDENCE HOLDING COMPANY

(REGISTRANT)




By:

/s/Roy T. K. Thung                                    

Date:

May 10, 2012

Roy T.K. Thung

Chief Executive Officer, President

and Chairman





 By:

/s/Teresa A. Herbert                                    

Date:

May 10, 2012

             Teresa A. Herbert

Senior Vice President and

   

Chief Financial Officer




41



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