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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended:SEPTEMBER 30, 2000
Commission File Number:0-10306
INDEPENDENCE HOLDING COMPANY
(Exact name of registrant as specified in its charter)
Delaware | 58- 1407235 |
(State of Incorporation) | (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. YesX. No _.
7,888,295 SHARES OF COMMON STOCK, $1.00 PAR VALUE
Common stock outstanding as of November 8, 2000
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION | PAGE NO. |
| | |
Consolidated Balance Sheets - | |
| | September 30, 2000 (unaudited) and December 31, 1999......... | | 3 |
| | |
Consolidated Statements of Operations - | |
| | Three Months and Nine Months Ended September 30, 2000 | |
| | and 1999 (unaudited)......................... | | 4 |
| | |
Consolidated Statements of Cash Flows - | |
| | Nine Months Ended September 30, 2000 and 1999 (unaudited)........ | | 5 |
| | |
Notes to Consolidated Financial Statements (unaudited).......... | | 6 - | 9 |
| | |
Management's Discussion and Analysis of Results of Operations and | |
| | Financial Condition......................... | | 10 - | 15 |
| | |
PART II - OTHER INFORMATION | |
| | |
Item 6 - Exhibits and Reports on Form 8- K............... | | 16 |
| | |
Signatures............................. | | 17 |
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS | | |
| SEPTEMBER 30, | DECEMBER 31, |
| 2000 | 1999 |
| (UNAUDITED) | |
ASSETS: | | |
| Cash and cash equivalents | $ | 10,533,000 | $ | 6,689,000 |
| Investments: | | |
| Short-term investments | 6,460,000 | 9,668,000 |
| Securities purchased under agreements | | |
| to resell | 16,228,000 | 14,952,000 |
| Fixed maturities | 366,618,000 | 339,646,000 |
| Equity securities | 24,599,000 | 15,613,000 |
| Other investments | | 64,689,000 | | 61,373,000 |
| | Total investments | 478,594,000 | 441,252,000 |
| Due from brokers | 10,173,000 | 416,000 |
| Deferred acquisition costs | 27,831,000 | 32,537,000 |
| Due and unpaid premiums | 10,664,000 | 14,645,000 |
| Due from reinsurers | 141,609,000 | 134,764,000 |
| Notes and other receivables | 6,638,000 | 37,548,000 |
| Other assets | | 10,825,000 | | 10,500,000 |
| | |
| $ | 696,867,000 | $ | 678,351,000 |
| | |
LIABILITIES AND STOCKHOLDERS' EQUITY: | | |
| LIABILITIES: | | |
| Future insurance policy benefits | $ | 293,731,000 | $ | 289,689,000 |
| Unearned premiums | 23,780,000 | 21,557,000 |
| Funds on deposit | 174,951,000 | 185,936,000 |
| Policy claims | 7,121,000 | 7,062,000 |
| Other policyholders' funds | 4,859,000 | 5,014,000 |
| Financial instruments sold, but not | | |
| yet purchased | 19,000 | - |
| Due to brokers | 27,444,000 | 9,593,000 |
| Due to reinsurers | 8,744,000 | 16,012,000 |
| Accounts payable, accruals and other | | |
| | liabilities | 20,984,000 | 20,424,000 |
| Income taxes | 3,675,000 | 4,513,000 |
| Long-term debt | | 15,000,000 | | 15,000,000 |
| | |
| TOTAL LIABILITIES | | 580,308,000 | | 574,800,000 |
| | |
STOCKHOLDERS' EQUITY: | | |
| Preferred stock (none issued) | - | - |
| Common stock, 7,898,295 and 7,897,195 | | |
| shares issued and outstanding, net of | | |
| 1,764,324 and 1,764,424 shares | | |
| in treasury, respectively | 7,898,000 | 7, 897,000 |
| Paid-in- capital | 80,310,000 | 80,309,000 |
| Accumulated other comprehensive loss | (7,139,000) | (11,028,000) |
| Retained earnings | | 35,490,000 | | 26,373,000 |
| | |
| TOTAL STOCKHOLDERS' EQUITY | | 116,559,000 | | 103,551,000 |
| TOTAL LIABILITIES AND | | |
| STOCKHOLDERS' EQUITY | $ | 696,867,000 | $ | 678,351,000 |
See Accompanying Notes to Consolidated Financial Statements.
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED) | THREE MONTHS ENDED | NINE MONTHS ENDED |
| SEPTEMBER 30, | SEPTEMBER 30, |
| 2000 | 1999 | 2000 | 1999 |
| | | | |
REVENUES: | | | | |
| Premiums earned | $ | 23,322,000 | $ | 20,392,000 | $ | 65,506,000 | $ | 59,489,000 |
| Net investment income | 9,056,000 | 7,522,000 | 27,072,000 | 19,757,000 |
| Net realized and | | | | |
| unrealized gains (losses) | 441,000 | (78,000) | (365,000) | 95,000 |
| Other income | | 1,916,000 | | 2,090,000 | | 4,002,000 | | 6,406,000 |
| | | | |
| | 34,735,000 | | 29,926,000 | | 96,215,000 | | 85,747,000 |
| | | | |
EXPENSES: | | | | |
| Insurance benefits, claims | | | | |
| | and reserves | 18,148,000 | 16,700,000 | 50,775,000 | 45,765,000 |
| Amortization of deferred | | | | |
| | acquisition costs | 2,033,000 | 1,889,000 | 4,681,000 | 4,380,000 |
| Selling, general and | | | | |
| | administrative expenses | 9,119,000 | 7,895,000 | 26,237,000 | 24,942,000 |
| Interest expense on | | | | |
| long-term debt | | 335,000 | | - | | 952,000 | | - |
| | | | |
| | 29,635,000 | | 26,484,000 | | 82,645,000 | | 75,087,000 |
| | | | |
| Operating income before | | | | |
| | income taxes | 5,100,000 | 3,442,000 | 13,570,000 | 10,660,000 |
| Income tax expense | | 1,785,000 | | 922,000 | | 4,440,000 | | 2,985,000 |
| | | | |
NET INCOME | $ | 3,315,000 | $ | 2,520,000 | $ | 9,130,000 | $ | 7,675,000 |
| | | | |
BASIC INCOME PER | | | | |
| COMMON SHARE | $ | .42 | $ | .32 | $ | 1.16 | $ | .96 |
| | | | |
WEIGHTED AVERAGE | | | | |
| COMMON SHARES | | | | |
| | OUTSTANDING | | 7,898,000 | | 7,918,000 | | 7,898,000 | | 8,018,000 |
| | | | |
DILUTED INCOME PER | | | | |
| COMMON SHARE | $ | .41 | $ | .31 | $ | 1.14 | $ | .94 |
| | | | |
WEIGHTED AVERAGE | | | | |
| DILUTIVE SHARES | | | | |
| | OUTSTANDING | | 8,006,000 | | 8,032,000 | | 7,986,000 | | 8,140,000 |
See Accompanying Notes to Consolidated Financial Statements.
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, | 2000 | 1999 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
| Net income | $ | 9,130,000 | $ | 7,675,000 |
| Adjustments to reconcile net income to net cash | | |
| provided by operating activities: | | |
| Amortization of deferred policy acquisition | | |
| costs | 4,681,000 | 4,380,000 |
| Realized losses (gains) on sales of | | |
| | investments | 553,000 | (76,000) |
| Unrealized gains on trading securities | (188,000) | (19,000) |
| Equity income | (243,000) | (263,000) |
| Depreciation | 665,000 | 442,000 |
| Deferred tax (benefit) expense | (719,000) | 148,000 |
| Other | (649,000) | (760,000) |
| Changes in assets and liabilities: | | |
| Net sales of trading securities | 335,000 | (582,000) |
| (Decrease) Increase in insurance liabilities | (2,997,000) | 38,499,000 |
| Additions to deferred acquisition costs | (581,000) | (4,847,000) |
| Change in net amounts due from and to | | |
| | reinsurers | (14,111,000) | 916,000 |
| Change in income tax liability | (220,000) | (313,000) |
| Change in due and unpaid premiums | 3,981,000 | (5,544,000) |
| Other | | 442,000 | | (5,530,000) |
| | | |
| Net cash provided by operating activities | | 79,000 | | 34,126,000 |
| | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | |
| Change in net amount due from and to brokers | 8,094,000 | (2,589,000) |
| Sales and maturities of short-term investments | 66,406,000 | 68,370,000 |
| Purchases of short-term investments | (61,019,000) | (45,733,000) |
| Net purchases of resale agreements | (1,276,000) | (10,598,000) |
| Sales of fixed maturities | 399,824,000 | 302,337,000 |
| Purchases of fixed maturities | (424,056,000) | (336,203,000) |
| Sales of equity securities | 57,349,000 | 38,204,000 |
| Purchases of equity securities | (66,793,000) | (44,851,000) |
| Proceeds on sale of other investments | 5,859,000 | 4,829,000 |
| Additional investments in other investments, net | | |
| | of distributions | (8,931,000) | (8,945,000) |
| Cash received from coinsurance/assumption | | |
| reinsurance transactions | - | 3,112,000 |
| Net change in notes receivable | 28,312,000 | 1,602,000 |
| Other | | 2,181,000 | | (1,362,000) |
| | |
| Net cash provided (used) by investing activities | | 5,950,000 | | (31,827,000) |
| | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | |
| Exercise of common stock options | 2,000 | 80,000 |
| Payments of investment-type insurance | | |
| | contracts | (1,818,000) | (1,818,000) |
| Repurchase of common stock | - | (2,704,000) |
| Dividends paid | | (369,000) | | (368,000) |
| | |
| Net cash used by financing activities | | (2,185,000) | | (4,810,000) |
| | | | | |
| Increase (decrease) in cash and cash | | |
| | equivalents | 3,844,000 | (2,511,000) |
| Cash and cash equivalents, beginning of year | | 6,689,000 | | 7,889,000 |
| Cash and cash equivalents, end of period | $ | 10,533,000 | $ | 5,378,000 |
See Accompanying Notes to Consolidated Financial Statements.
5
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(A) BUSINESS AND ORGANIZATION
Independence Holding Company ("IHC") is a holding company engaged principally in the life and health insurance business through its wholly-owned subsidiaries, Standard Security Life Insurance Company of New York ("Standard Life"), Madison National Life Insurance Company, Inc. ("Madison Life"), First Standard Security Insurance Company ("First Standard"), IndependenceCare Holdings LLC ("IndependenceCare") and their subsidiaries (collectively, the "Insurance Group"). IHC and its subsidiaries (including the Insurance Group) are collectively referred to as the "Company."
Geneve Holdings, Inc., a diversified financial holding company, and its affiliated entities hold approximately 57% of IHC's outstanding common stock.
(B) PRINCIPLES OF CONSOLIDATION AND PREPARATION OF
FINANCIAL STATEMENTS
The consolidated financial statements have been prepared in accordance with the requirements for quarterly reports on Form 10-Q. In the opinion of management, all adjustments (consisting only of normal recurring accruals) that are necessary for a fair presentation of the consolidated results of operations for the interim periods have been included. The consolidated results of operations for the three months and nine months ended September 30, 2000 are not necessarily indicative of the results to be anticipated for the entire year. The consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes included in IHC's Annual Report on Form 10-K for the year ended December 31, 1999. Certain amounts in the prior year's consolidated financial statements and notes thereto have been restated to conform to the 2000 presentation.
The preparation of financial statements in conformity with generally accepted accounting principles 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.
(C) 10% STOCK DIVIDEND
On August 28, 2000, the Company paid a 10% special stock dividend to shareholders of record as of August 14, 2000. Fractional shares were paid in cash in lieu of stock. Accordingly, the number of shares of common stock outstanding, common stock options, the number of shares issuable pursuant to the Warrants and all per share calculations has been restated to reflect such stock dividend.
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 2. OTHER INVESTMENTS
The Company had invested $24,109,000 and $21,227,000 at September 30, 2000 and December 31, 1999, respectively, in Dolphin Limited Partnership-A ("DLP-A"), a limited partnership which invests in relatively "market neutral" strategies, such as merger arbitrage, convertible arbitrage and distressed situations. The condensed statements of operations for DLP-A for the three months and nine months ended September 30, 2000 and 1999 are as follows:
| | THREE MONTHS ENDED | NINE MONTHS ENDED |
| | 2000 | 1999 | 2000 | 1999 |
| | (IN THOUSANDS) |
| | | | | |
Revenues | $ | 4,661 | $ | 3,384 | $ | 11,947 | $ | 9,906 |
Net income | $ | 3,676 | $ | 2,304 | $ | 9,398 | $ | 7,072 |
| | | | | |
IHC's share of | | | | |
| net income | $ | 1,103 | $ | 813 | $ | 2,882 | $ | 2,558 |
NOTE 3. INCOME PER COMMON SHARE
Included in the diluted earnings per share calculation for September 30, 2000 and 1999, respectively, are 108,000 and 114,000, and 88,000 and 122,000 shares for the three months and nine months, respectively, from the assumed exercise of options using the treasury stock method. Net income does not change as a result of the assumed dilution of options. Share Purchase Warrants (the "Warrants") to purchase 2,074,058 shares of common stock at $14.89 per share through June 30, 2001 were not included in the computation of diluted earnings per share because the Warrants' strike price was greater than the average market price of the common shares during the three months and nine months ended September 30, 2000 and 1999.
NOTE 4. INCOME TAXES
The provision for income taxes shown in the consolidated statements of operations was computed based on the Company's estimate of the effective tax rates expected to be applicable for the current year, including the expected tax impact of the life/nonlife consolidation.
The income tax expense for the nine months ended September 30, 2000 allocated to stockholders' equity for unrealized losses on investment securities was $100,000, representing the change in the deferred tax asset of $8,000 at September 30, 2000 from $108,000 at December 31, 1999.
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 5. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for income taxes were $5,235,000 and $2,548,000 for the nine months ended September 30, 2000 and 1999, respectively. Cash payments for interest were $570,000 for the nine months ended September 30, 2000.
NOTE 6. COMPREHENSIVE INCOME
The components of comprehensive income include net income and certain amounts previously reported directly in equity.
Comprehensive income for the three months and nine months ended September 30, 2000 and 1999 is as follows:
| | THREE MONTHS ENDED | NINE MONTHS ENDED |
| | 2000 | 1999 | 2000 | 1999 |
| | (IN THOUSANDS) |
| | |
Net income | $ | 3,315 | $ | 2,520 | $ | 9,130 | $ | 7,675 |
Unrealized (losses) gains, on | | |
| | available-for-sale securities | | 3,153 | | (2,506) | | 3,889 | | (8,719) |
Comprehensive income (loss) | $ | 6,468 | $ | 14 | $ | 13,019 | $ | (1,044) |
NOTE 7. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and in June 2000 issued SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities." The requirements for SFAS No. 133 were delayed by SFAS No. 137, "Deferral of the Effective Date of SFAS Statement No. 133." Both SFAS Nos. 133 and 138 are effective for financial statements for periods beginning after June 15, 2000. The Company has evaluated the impact of SFAS Nos. 133 and 138 and they will not have a material impact on the Company.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. The Company is currently evaluating the impact of SFAS No. 140, but does not expect it to have a material impact on the Company.
NOTE 8. SEGMENT REPORTING
The Insurance Group engages principally in the life and health insurance business. Interest expense, taxes, and general expenses associated with parent company activities are included in Corporate. Information by business segment for the three months and nine months ended September 30, 2000 and 1999 is as follows:
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 8. SEGMENT REPORTING (CONTINUED)
| THREE MONTHS ENDED | NINE MONTHS ENDED |
| 2000 | 1999 | 2000 | 1999 |
| | (IN THOUSANDS) | |
REVENUES: | | | | |
| | | | |
Medical Stop- Loss | $ | 7,484 | $ | 6,558 | $ | 20,576 | $ | 20,452 |
DBL | 5,019 | 4,745 | 14,797 | 15,058 |
Group Term Disability and Term Life | | | | |
| Term Life | 3,820 | 3,325 | 12,073 | 9,676 |
Credit Life and Disability | 3,916 | 5,522 | 12,116 | 15,898 |
Managed Health Care | 1,731 | 673 | 4,495 | 1,982 |
Special Disability | 191 | 81 | 463 | 124 |
Acquired Blocks/Other | | | | |
| Business b | 11,598 | 8,244 | 30,515 | 20,094 |
Corporate | | 535 | | 856 | | 1,545 | | 2,368 |
| 34,294 | 30,004 | 96,580 | 85,652 |
Net Realized and | | | | |
| Unrealized Gains | | | | |
| (Losses) | | 441 | | (78) | | (365) | | 95 |
| $ | 34,735 | $ | 29,926 | $ | 96,215 | $ | 85,747 |
| | |
OPERATING INCOME: | | | | |
| | | | |
Medical Stop- Loss | $ | 1,287 | $ | (46) | $ | 3,793 | $ | (308) |
DBL | 504 | 1,051 | 1,391 | 3,255 |
Group Term Disability and Term Life | | | | |
| Term Life | 334 | 278 | 373 | 313 |
Credit Life and Disability | 247 | 451 | 427 | 1,889 |
Managed Health Care | 83 | (13) | 131 | 843 |
Special Disability | 203 | 181 | 517 | 372 |
Acquired Blocks/ | | | | |
| Other Business | 2,847 | 1,838 | 9,245 | 4,350 |
Corporate | | (846) | | (220) | | (1,942) | | (149) |
| 4,659 | 3,520 | 13,935 | 10,565 |
Net Realized and | | | | |
| Unrealized Gains | | | | |
| (Losses) | | 441 | | (78) | | (365) | | 95 |
| | $ | 5,100 | $ | 3,442 | $ | 13,570 | $ | 10,660 |
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Independence Holding Company, a Delaware corporation ("IHC"), is a holding company engaged principally in the life and health insurance business through its wholly-owned subsidiaries, Standard Security Life Insurance Company of New York ("Standard Life"), Madison National Life Insurance Company, Inc. ("Madison Life"), First Standard Security Insurance Company ("First Standard"), IndependenceCare Holdings LLC ("IndependenceCare") and their subsidiaries (collectively, the "Insurance Group"). IHC and its subsidiaries (including the Insurance Group) are collectively referred to as the "Company." All remaining income, principally income from parent company liquidity (cash, cash equivalents, resale agreements, marketable securities and partnership investments) and expense items associated with parent company activities, the Company's remaining real estate holdings and certain other investments of the Company, are included in Corporate.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1999
The Company's operating income was $5.1 million, for the period ended September 30, 2000 compared to $3.4 million for the three months ended September 30, 1999. The Company had net realized and unrealized gains of $.4 million in 2000 and losses of $.1 million in 1999. Decisions to sell securities are based on cash flow needs, investment opportunities and economic and market conditions, thus creating fluctuations in gains (losses) from year to year. Excluding net realized and unrealized gains, operating income increased 32% to $4.7 million in 2000 as compared to $3.5 million in 1999 primarily due to an increase in income from acquisitions and the stop-loss line of business, offset by an increase in interest expense (see Note 8 of Notes to Consolidated Financial Statements). Net income was $3.3 million, or $.41 per share, diluted, for the quarter ended September 30, 2000 and $2.5 million or $.31 per share, diluted, for the quarter ended September 30, 1999.
Insurance Group
The Insurance Group's operating income increased $2.3 million to $5.9 million in 2000 from $3.6 million in 1999. Operating income includes net realized and unrealized gains of $.4 million in 2000 compared to losses of $.1 million in 1999. Operating income excluding net realized and unrealized losses was $5.5 million in 2000 compared to $3.7 million in 1999.
Premium revenues increased $2.9 million to $23.3 million in 2000 from $20.4 million in 1999; premium revenues increased $1.3 million at Madison Life and $1.6 million at Standard Life. Madison Life had a $.6 million increase in long-term disability ("LTD") premiums as a result of an increase in premiums written in 2000; a $.1 million increase in group term life and a $2.4 million increase in ordinary life and individual accident and health premiums due to the acquisitions made in the fourth quarter of 1999; such increases were offset by: a $1.4 million decrease in the credit line of business, primarily due to the runoff of acquisitions of two single premium blocks of business effective in 1997; a decrease of $.2 million in dental premiums and a $.2 million decrease in other life and health lines of business. The increase at Standard Life is comprised of: a $1.3 million increase in stop-loss due to an increase in premium volume and rates; a $.3 million increase in the point of service line; and a $.3 million increase in its DBL line offset by a $.3 million decrease in all other lines.
Total net investment income increased $1.8 million primarily due to an increase in assets due to the acquisitions in 1999 and a slightly higher yield in the third quarter of 2000. The annualized return on investments of the Insurance Group in the third quarter of 2000 was 7.2% compared to 6.9% in the third quarter of 1999.
Other income decreased $.2 million due to a decrease of $.6 million in fee income earned at Madison Life, offset by an increase of $.2 million at Standard Life and an increase of $.2 million in fee income earned at IndependenceCare.
Insurance benefits, claims and reserves increased $1.4 million, reflecting an increase of $1.7 million at Madison Life and a decrease of $.3 million at Standard Life. Madison Life's increase resulted from: a $1.9 million increase in interest on annuity policies and a $1.0 million increase in ordinary life and individual A & H reserves resulting from the 1999 acquisitions; a $.2 million increase in group term life reserves due to higher loss ratios, and a $.5 million increase in LTD claims and reserves due to an increase in premium volume and higher loss ratios; such increases were offset by a $1.1 million decrease in the credit line of business; a $.4 million decrease in dental reserves due to the runoff of this line; and a $.4 million decrease in claims and reserves in other life and health lines of business. The change at Standard Life is comprised of: a $.4 million increase in DBL claims and reserves due to higher claims; partially offset by a $.4 million decrease in interest expense and group annuity and life reserves; and a $.3 million decrease in stop- loss reserves due to lower loss ratios.
Amortization of deferred acquisition costs and general and administrative expenses for the Insurance Group increased $1.3 million. Madison Life's expenses increased $.6 million due to an increase in salary and related benefits and administrative costs associated with the 1999 acquisitions. Standard Life's expenses increased $.7 million due to an increase in state insurance taxes and commission expense. IndependenceCare's expenses remained constant.
Corporate
Operating income for the quarter ended September 30, 2000 decreased by $.6 million to a loss of $.8 million for the third quarter of 2000 from a loss of $.2 million for the third quarter of 1999. This decrease in operating income is a result of an increase in interest expense of $.3 million attributable to the borrowing of $15.0 million during the fourth quarter of 1999 and a decrease in investment income of $.3 million due to lower returns on certain equity investments.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1999
The Company's operating income was $13.5 million, for the period ended September 30, 2000 and $10.7 million for the period ended September 30, 1999. The Company had net realized and unrealized losses of $.4 million in 2000 and gains of $.1 million in 1999. Excluding net realized and unrealized gains, operating income increased 32% to $13.9 million in 2000 as compared to $10.6 million in 1999 primarily from an increase in income from acquisitions, an increase in the stop loss line of business and an increase in yields on investable assets offset by an increase in interest expense (see Note 8 of Notes to Consolidated Financial Statements). Net income was $9.1 million, or $1.14 per share, diluted, for the period ended September 30, 2000 and was $7.7 million or $.94 per share, diluted, for the period ended September 30, 1999.
Insurance Group
The Insurance Group's operating income increased $4.8 million to $15.5 million in 2000 from $10.7 million in 1999. Operating income includes net realized and unrealized losses of $.4 million in 2000 compared to gains of $.1 million in 1999. Operating income excluding net realized and unrealized losses was $15.9 million in 2000 compared to $10.7 million in 1999.
Premium revenues increased $6.0 million to $65.5 million in 2000 from $59.5 million in 1999; premium revenues increased $3.5 million at Madison Life and $2.5 million at Standard Life. The increase at Madison Life is comprised of: a $1.7 million increase in LTD as a result of an increase in premiums written in 2000; and a $6.2 million increase in ordinary life and individual accident and health premiums due to the 1999 acquisitions; such increases were offset by: a $3.3 million decrease in the credit line of business, primarily due to the runoff of acquisitions of two single premium blocks of business effective in 1997; a $.9 million decrease in dental premiums due to the runoff of this block; and a $.2 million decrease in other life and health lines of business. The increase at Standard Life is comprised of: a $.7 million increase in its provider excess line due to increased retention; a $1.0 million increase in the stop-loss line due to an increase in premium volume and rates; a $.6 million increase in the point of service line and a $.4 million increase in all other lines; such increases are offset by: a $.2 million decrease in DBL due to a rate reduction.
Total net investment income increased $8.1 million primarily due to higher yields on fixed income securities and an increase in assets due to the acquisitions in 1999. The annualized return on investments of the Insurance Group for the first nine months of 2000 was 7.3% compared to 6.8% for the first nine months of 1999.
Other income decreased $2.3 million due to $.9 million less fee income earned by Madison Life and; a $1.8 million decrease at Standard Life due primarily to an increase in coinsurance reserves due to the surrender by a large group of policyholders in a modified coinsurance treaty; partially offset by an increase of $.4 million in fee income earned at IndependenceCare.
Insurance benefits, claims and reserves increased $5.0 million, reflecting an increase of $5.9 million at Madison Life and a decrease of $.9 million at Standard Life. Madison Life's increase resulted from: a $3.1 million increase in ordinary life and individual accident and health reserves, claims and surrenders and a $3.6 million increase in interest on annuity policies, resulting from the 1999 acquisitions; a $.2 increase in group term life premiums; and a $1.9 million increase in LTD claims and reserves due to the increase in premium volume and an increase in loss ratios; such increases were offset by: a $1.5 million decrease in the credit line of business due to the runoff of the 1997 acquisitions; a $1.1 million decrease in dental reserves due to the runoff of this line; and a $.3 million decrease in claims and reserves in other life and health lines of business. The change at Standard Life is comprised of: a $2.8 million decrease in stop-loss reserves due to lower loss ratios; and a $1.3 million decrease in the closed block of ordinary life business due to the surrender by a large group of policyholders; such increases were offset by: a $1.6 million increase in DBL claims and reserves due to higher loss ratios; a $.3 million increase in interest expense and group annuity and life reserves due to an acquisition in 1999; a $.9 million increase in point of service claims due to the increase in premiums; and a $.4 million increase in all other lines.
Amortization of deferred acquisition costs and general and administrative expenses for the Insurance Group increased $1.6 million. Madison Life's expenses increased $.6 million representing an increase in salaries and related benefits and administrative fees arising from the 1999 acquisitions. Standard Life's expenses increased $.8 million due to an increase in commission expense and consulting fees. IndependenceCare's expenses increased .2 million.
Corporate
Operating income for the quarter ended September 30, 2000 decreased by $1.9 million from being flat in 1999 to a loss of $1.9 million. Operating income includes a realized gain of $.1 million in 1999. Excluding realized gains, operating income decreased by $1.8 million due to an increase in interest expense of $1.0 million attributable to the borrowing of $15.0 million during the fourth quarter of 1999, a decrease of $.7 million in investment income due to lower returns on certain equity investments and an increase of $.1 million in general and administrative expenses.
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 income securities; and (iii) earnings on investments. Such cash flow is used partially to finance liabilities for insurance policy benefits. These liabilities represent long-term and short-term obligations which are calculated using certain assumed interest rates.
Asset Quality
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. Of the aggregate carrying value of the Insurance Group's investment assets, approximately 85% was invested in investment grade fixed income securities, resale agreements, policy loans and cash and cash equivalents at September 30, 2000. Also at such date, approximately 97.8% of the Insurance Group's fixed maturities were investment grade. These investments carry less risk and, therefore, lower interest rates than other types of fixed maturity investments. At September 30, 2000, approximately 2.2% of the carrying value of fixed maturities was invested in diversified non-investment grade fixed income securities (investments in such securities have different risks than investment grade securities, including greater risk of loss upon default, and thinner trading markets). Less than .1% of the carrying value of the Company's total investments was represented by real estate and mortgage loans. The Company has no non-performing fixed maturities.
Risk Management
The Company manages interest rate risk by seeking to maintain a portfolio with a duration and average life that falls within the band of the duration and average life of the applicable liabilities, and may utilize options 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.
The expected change in fair value of the Company's fixed income portfolio at September 30, 2000 given a 100 to 300 basis point rise or decline in interest rates is not materially different than the expected change at December 31, 1999. In the Company's analysis of the asset-liability model, a 100 to 300 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. The risk to the Company is mitigated since a large portion of the Insurance Group's interest sensitive policies are annuities and universal life policies that come from liquidated companies which tend to exhibit lower surrender rates than such policies of continuing companies and carry charges to help offset the Company's costs associated with surrenders. 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. With respect to its investments, the Company employs (from time to time as warranted) investment strategies to mitigate interest rate and other market exposures.
Balance Sheet
The increase in fixed maturities is offset by a decrease in notes receivable as a portion of guaranty association notes (which were received in connection with the 1999 acquisitions) were paid-down. Also offsetting the increase in total investments and due from brokers is an increase in due to brokers due to the timing of a securities trade that settled after September 30, 2000.
The Company had net receivables from reinsurers of $132.9 million at September 30, 2000. Substantially all of the business ceded to such reinsurers is of short duration. All of such receivables are either due from highly rated companies or are adequately secured. Accordingly, no allowance for doubtful accounts was necessary at September 30, 2000.
Corporate
Corporate derives its funds principally from: (i) dividends and interest income 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 and statutory accounting rules have provisions relating to the ability of the parent company to use cash or income generated by the Insurance Group.
Total corporate liquidity (cash, cash equivalents, resale agreements and marketable securities) amounted to $13.3 million at September 30, 2000.
Capital Resources
Due to its superior 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, including the remaining $15.0 million availability under its credit facility. 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.
In accordance with Statement of Financial Accounting Standards No. 115, the Company may carry its portfolio of fixed income securities either as held to maturity (carried at amortized cost), as trading securities (carried at fair market value) or as available-for-sale (carried at fair market value); the Company has chosen to carry all of its debt securities as available-for-sale. The Company experienced a decrease in unrealized losses of $3.9 million, net of deferred tax expense and deferred policy acquisition costs, in accumulated other comprehensive loss, reflecting unrealized losses of $7.1 million at September 30, 2000 versus $11.0 million at December 31, 1999. From time to time, as warranted, the Company employs investment strategies to mitigate interest rate and other market exposures.
Some of the statements included within Management's Discussion and Analysis may be considered to be forward looking statements which are subject to certain risks and uncertainties. Factors which could cause the actual results to differ materially from those suggested by such statements are described from time to time in the Company's Annual Report on Form 10-K and other filings with the Securities and Exchange Commission.
PART II. OTHER INFORMATION
Item 6.Exhibits and Reports on Form 8- K
a) 1) Exhibit 11. Statement re: computation of per share earnings.
2) Exhibit 27. Financial Data Schedule. For submission in electronic filing only.
b) No report on Form 8-K was filed during the quarter ended September 30, 2000.
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
(THE REGISTRANT)
By:/s/ Teresa A. Herbert
Teresa A. Herbert
Vice President and
Dated: November 10, 2000 Chief Financial Officer
