Independence Holding 10K 2011 Annual report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2011

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)

(203) 358-8000

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

NONE

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, $1.00 PAR VALUE PER SHARE

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ___

No X

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ___ No X

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ]

Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a 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 Act). Yes ___ No X

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, as of June 30, 2011 was $70,618,000.

18,009,664 shares of common stock were outstanding as of March 9, 2012.

Documents Incorporated by Reference

Portions of the Registrant’s definitive proxy statement to be delivered (or made available, pursuant to applicable regulations) to stockholders in connection with the 2011 annual meeting of stockholders to be held in June 2012 are incorporated by reference in response to Part III of this Report.

FORM 10-K CROSS REFERENCE INDEX


PART I				PAGE

	Item 1.	Business		4
	Item 1A.	Risk Factors		17
	Item 1B.	Unresolved Staff Comments		25
	Item 2.	Properties		25
	Item 3.	Legal Proceedings		25
	Item 4.	Mine Safety Disclosures		25

PART II
	Item 5.	Market for Registrant's Common Equity, Related Stockholder
			Matters and Issuer Purchases of Equity Securities	26
	Item 6.	Selected Financial Data		29
	Item 7.	Management's Discussion and Analysis of Financial Condition
			and Results of Operations	29
	Item 7A.	Quantitative and Qualitative Disclosures about Market Risk		54
	Item 8.	Financial Statements and Supplementary Data		55
	Item 9.	Changes in and Disagreements with Accountants on Accounting
			and Financial Disclosure	55
	Item 9A.	Controls and Procedures		56
	Item 9B.	Other Information		57

PART III
	Item 10.	Directors, Executive Officers and Corporate Governance		57
	Item 11.	Executive Compensation		57
	Item 12.	Security Ownership of Certain Beneficial Owners and Management
			and Related Stockholder Matters	57
	Item 13.	Certain Relationships, Related Transactions and Director
			Independence	57
	Item 14.	Principal Accounting Fees and Services		57

PART IV
	Item 15.	Exhibits and Financial Statement Schedules		58

Forward-Looking Statements

This report on Form 10−K 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 this report.

Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of these assumptions, and, therefore, 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. In light of these risks, uncertainties and assumptions, any forward-looking event discussed in this report may not occur. Our forward-looking statements speak only as of the date made, and we undertake no obligation to update or review any forward-looking statement, whether as a result of new information, future events or other developments, unless the securities laws require us to do so.

PART I

ITEM 1. BUSINESS

Business Overview

Independence Holding Company is a Delaware corporation (NYSE: IHC) that was formed in 1980. We are a holding company principally engaged in the life and health insurance business with principal executive offices located at 96 Cummings Point Road, Stamford, Connecticut 06902. At December 31, 2011, we own a 78% controlling interest in American Independence Corp. (NASDAQ:AMIC), which owns Independence American Insurance Company ("Independence American"), IHC Risk Solutions LLC (“Risk Solutions”), its full service direct writer of medical stop-loss insurance for self-insured employer groups, and controlling interests in two agencies.

Our website is located at www.ihcgroup.com. Detailed information about IHC, its corporate affiliates and insurance products and services can be found on our website. In addition, we make our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to such reports available, free of charge, through our website, as soon as reasonably practicable after they are filed with or furnished to the SEC. The information on our website, however, is not incorporated by reference in, and does not form part of, this Annual Report on Form 10-K.

IHC provides specialized life and health coverage and related services to commercial customers and individuals. We focus on niche products and/or narrowly defined distribution channels in the United States. Our wholly owned insurance company subsidiaries, Standard Security Life Insurance Company of New York ("Standard Security Life") and Madison National Life Insurance Company, Inc. ("Madison National Life") market their products through independent and affiliated brokers, producers and agents. Independence American also distributes through these sources as well as to consumers through a dedicated controlled distribution company.

Madison National Life, Standard Security Life and Independence American are sometimes collectively referred to as the "Insurance Group." IHC and its subsidiaries (including the Insurance Group) are sometimes collectively referred to as the "Company", or "IHC", or are implicit in the terms "we", "us" and "our".

IHC retains much of the risk that it underwrites, and focuses on the following lines of business:

Medical excess (or "stop-loss")

Multiple fully insured health lines, including pet insurance beginning in 2012

Group disability and life

Individual life, primarily through block acquisitions

Standard Security Life, Madison National Life and Independence American are each rated A- (Excellent) by A.M. Best Company, Inc. ("Best"). Standard Security Life is domiciled in New York and licensed as an insurance company in all 50 states, the District of Columbia, the Virgin Islands and Puerto Rico. Madison National Life is domiciled in Wisconsin, licensed to sell insurance products in 49 states, the District of Columbia, the Virgin Islands and Guam, and is an accredited reinsurer in New York. Independence American is domiciled in Delaware and licensed to sell insurance products in 49 states and the District of Columbia. We have been informed by Best that a Best rating is assigned after an extensive quantitative and qualitative evaluation of a company's financial condition and operating performance and is also based upon factors relevant to policyholders, agents, and intermediaries, and is not directed toward protection of investors. Best ratings are not recommendations to buy, sell or hold any of our securities.

Our administrative companies underwrite, market, administer and/or price life and health insurance business for our owned and affiliated carriers, and, to a lesser extent, for non-affiliated

insurance companies. They receive fees for these services and do not bear any of the insurance risk of the companies to which they provide services, other than through profit commissions or profit slides. In the second quarter of 2011, AMIC consolidated its wholly owned managing general underwriter (“MGU”) subsidiaries and changed the name of the merged entity to IHC Risk Solutions LLC (“Risk Solutions”). During 2011, our principal administrative companies were: (i) IHC Health Solutions Inc. (“Health Solutions”), a full-service marketing, management and administrative services company that operates in the individual and small employer markets; (ii) Risk Solutions, a full-service direct writer of medical stop-loss insurance for self-insured employer groups; and (iii) Actuarial Management Corporation ("AMC"), an actuarial consulting firm providing product development and valuation services to the small carrier marketplace.

In addition, AMIC owns controlling interests in Independent Producers of America, LLC ("IPA") and Healthinsurance.org LLC. IPA is a national, career agent marketing organization. Healthinsurance.org LLC is an online marketing company that owns www.healthinsurance.org, a lead generation site for individual health insurance, including in 2011 those over age 65. Our general agencies earn commissions for selling life and health insurance products underwritten by IHC’s owned and affiliated insurance companies and also by unaffiliated carriers.

For information pertaining to the Company's business segments, reference is made to Note 22 of the Notes to Consolidated Financial Statements included in Item 8 of this report.

Our Philosophy

Our business strategy consists of maximizing underwriting profits through a variety of niche life and health insurance products and through distribution channels that enable us to access specialized or underserved markets in which we believe we have a competitive advantage. Historically, our carriers have focused on establishing preferred relationships with producers who seek an alternative to larger, more bureaucratic health insurers, and on providing these producers with personalized service and unique rewards programs. A growing portion of our business comes from direct-to-consumer initiatives. While our 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. We seek relationships that will generate fee income and profit commissions for our administrative companies as well as risk income for our insurance carriers thereby permitting us to leverage IHC's vertically integrated organizational structure.

As a result of our increased control of distribution through corporate acquisitions, we have strengthened our ability to respond to market cycles in the health insurance sector by deploying our insurance underwriting activity across a larger number of business lines. In recent years, we have emphasized writing stop-loss business through Risk Solutions and only a few select managing general underwriters (“MGUs”) with whom we have done business for many years, including TRU Services, LLC (“TRU”), in which we have an equity interest. This has allowed us to be more selective in order to achieve better stop-loss underwriting results by terminating all under-performing non-owned programs. While we have always focused on smaller self-funded groups, we have recently focused on developing stop-loss solutions for plans with 100 or fewer employees. These plans are increasingly looking for affordable health-financing alternatives as a result of federal health care reform. We have a substantial minority ownership interest in an MGU that is led by executives who previously had built a large, profitable premium block in this niche for one of our competitors in several states whose health care laws were the models for federal health care reform.

As a result of focusing on the most profitable business niches and distribution partnerships, we have seen a decrease in our gross written stop-loss premiums and have marginally increased our gross written fully insured health premiums. Net earned premiums have increased primarily due to a reduction in reinsurance. While we have benefitted from fee income generated by our administrative and sales companies in recent years, which is generally not subject to insurance risk, we have seen a decrease in

these fees in the current year as a result of a lower volume of premiums administered. At the same time, we expect to experience decreases in administrative costs in both our Fully Insured Health and Stop-Loss segments resulting from the consolidation and efficiency initiatives implemented in the last several years.

DISTRIBUTION

Medical Stop-Loss

We market medical stop-loss primarily through Risk Solutions and to a much less extent through independent MGUs. Standard Security Life is the primary carrier for our employer medical stop-loss products, although we also write business for Madison National Life, Independence American and for unaffiliated carriers. During 2011, IHC owned two managing general underwriters, Majestic Underwriters LLC ("Majestic") and Alliance Underwriters, LLC (“AU”), which transferred their stop-loss blocks and employees to Risk Solutions as of January 1, 2012 in exchange for fee income based on the business transferred. MGUs are non-salaried contractors that receive administrative fees. They are responsible for underwriting accounts in accordance with guidelines formulated and approved by us, billing and collecting premiums, paying commissions to agents, third party administrators ("TPAs") and/or brokers, and processing claims. With respect to those select MGUs with which we do business, we establish underwriting guidelines, maintain approved policy forms and oversee claims for reimbursement, as well as appropriate accounting procedures and reserves. In order to accomplish this, we audit the MGUs' underwriting, claims and policy issuance practices to assure compliance with our guidelines, provide the MGUs with access to our medical management and cost containment expertise, and review cases that require referral based on our underwriting guidelines. MGUs receive fee income, generally a percentage of gross premiums produced by them on behalf of the insurance carriers they represent, and typically are entitled to additional income based on underwriting results.

Standard Security Life, Madison National Life and Independence American write approximately 72% of their medical stop-loss business through Risk Solutions and TRU.

The agents and brokers that produce this business are non-salaried contractors that receive commissions.

Fully Insured Health

The Fully Insured Health Segment includes the following lines of business (major medical health plans for small groups, individuals and families, dental/vision, short-term medical ("STM"), limited medical, pet insurance, and ancillary benefits, such as accident and critical illness plans) that are sold in the majority of states through multiple and varied distribution strategies. The largest line of business in this segment continues to be major medical for small employer groups (defined as employers with between two and fifty employees). The majority of our business in this segment is written (i) directly to agents through the Health Solutions telesales unit, (ii) through private-label arrangements managed by Health Solutions with non-affiliated carriers, (iii) through AMIC's captive agency relationships, and (iv) direct to consumers through company-owned websites. We also market through general agents, agents and brokers.

We entered the Fully Insured Health Segment as a result of several strategic acquisitions and partnerships starting in 2005. We have built a controlled platform to write small-group major medical, major medical health plans for individuals and families, dental/vision, short-term medical limited medical, pet insurance and ancillary benefits. Our senior management team has extensive experience in these lines of business and the majority of our current fully insured health block was previously administered (on behalf of other carriers) by the companies we have acquired. The acquisition in 2007 of AMC not only brought in-house the actuarial expertise necessary to maintain the profitability of our fully insured business, but also added another source of fee income and potential profit commissions. The

acquisition of Health Solutions, also in 2007, has provided us with a marketing company specializing in alternative distribution methods and strategic partnerships.

In January 2010, in order to improve efficiency and service to our clients, we combined the operations of GroupLink and HPA, along with the medical management and marketing services of Insurers Administrators Corporation (“IAC”), into those of Health Solutions, and the claims processing and administrative function of IAC was rebranded as IHC Administrative Services, Inc. (“IHC Administrative Services”). As a result of these changes, all marketing, sales, underwriting and administrative functions have been collected under Health Solutions.

The Fully Insured Health Segment has approximately 330 salaried employees performing all aspects of underwriting, risk selection and pricing, policy administration and management of fully insured group and individual health insurance on behalf of IHC and other carriers, and management of approximately $250 million of individual and group health and life premiums and premium equivalents for multiple insurers.

The agents and brokers who produce the Fully Insured Health business are non-salaried contractors who receive commissions.

Other Products

Our other products are primarily distributed by general agents, agents and brokers. The short-term statutory disability benefit product in New York State ("DBL") is marketed primarily through independent general agents who are paid commissions based upon the amount of premiums produced. Madison National Life's disability and group life products are primarily sold in the Midwest to school districts, municipalities and hospital employer groups through a managing general agent that specializes in these target markets. Beginning in 2012, Madison National Life will also reinsure and begin writing life, disability and health products serving the needs of expatriates, third-country nationals and local nationals.

For a number of years Madison National Life has sold a whole-life product with an annuity rider to military personnel and civil service employees. As a result of this experience, in 2008 Madison National Life formed a subsidiary, IHC Financial Group, Inc. (“IHC Financial Group”), to recruit agents to sell life and annuity products to state and federal employees. Since these products are currently not available through IHC’s carriers, IHC Financial Group has contracted with highly rated insurance companies to sell their life and annuity products to these individuals. The income for IHC Financial Group is derived completely from commissions on the sale of the products of these other companies. The agents and brokers who produce this business are non-salaried contractors who receive commissions. We did not earn significant income from this subsidiary in 2010, but earned approximately $140,000 in 2011 and we do anticipate increased growth as we continue to recruit new agents. We wrote about $5.7 million of annualized premiums from our whole-life and annuity products in 2011 and expect to write about $6.2 million of annualized premium in 2012. In the last quarter of 2010, Madison National Life began selling a final expense whole life product. It is expected to write about $3.7 million of annualized premium in 2012.

PRINCIPAL PRODUCTS

Medical Stop-Loss

The Company is a leading writer nationally of excess or stop-loss insurance for self-insured employer groups that desire to manage the risk of large medical claims ("Medical Stop-Loss"). Standard Security Life was one of the first carriers to market Medical Stop-Loss insurance, starting in 1987, and the Insurance Group is now one of the largest writers of this product in the United States. Medical Stop-Loss insurance provides coverage to public and private entities that elect to self-insure their employees' medical coverage for losses within specified ranges, which permits such groups to manage the risk of excessive health insurance costs by limiting specific and aggregate losses to predetermined amounts. This coverage is available on either a specific or a specific and aggregate basis, although the majority of the Insurance Group's policies cover both specific and aggregate claims. Plans are designed to fit the identified needs of the self-insured employer by offering a variety of deductibles (i.e., the level of claims after which the medical stop-loss benefits become payable).

IHC experienced a reduction in premiums in the Medical Stop-Loss line of business in 2011 due to the termination of several independent MGUs. As a result of the reorganization of Risk Solutions into a direct writer, we have seen significant increases in production in each of the past three months, and we expect this trend to continue throughout 2012.

Fully Insured Health Products

Group Major Medical

The Company began selling group major medical insurance (including CDHPs) primarily to small employers (two to 50 covered lives) during 2005, and significantly expanded its book of business in 2006-2007. IHC markets this product in the majority of states. It is fully insured major medical coverage that is principally designed to work with health reimbursement accounts ("HRA") and health savings accounts ("HSA") which are implemented by employers that wish to provide this benefit as part of an employee welfare benefit plan. These plans are offered primarily as preferred provider organizations ("PPO") plans, and provide a variety of cost-sharing options, including deductibles, coinsurance and co-payment. CDHPs are designed to provide participants with economic incentives to be informed consumers of healthcare.

In addition to small group, the Company offers a unique group medical plan to employers (small and large) who are contractors working on government-funded projects under the Davis-Bacon and Service Contract Acts (the “Acts"), much of which is associated with current and future U.S. infrastructure improvements. This plan helps contractors meet the provisions of a "bona fide" fringe benefit for their hourly workers as required in the Acts.

The Company experienced a $14.0 million increase in net retained premiums in the small group line in 2011due to increased retentions. Gross premiums decreased primarily as a result of fewer groups purchasing major medical coverage and fewer participants in each group as a result of recessionary economic conditions, and stricter underwriting guidelines.

Short-Term Medical

IHC sells short-term major medical products ("STM") in the majority of states. STM is designed specifically for people with transient needs for health coverage. Typically, STM products are written as major medical coverage with a defined duration, which is twelve months or less. Among the typical purchasers of STM products are self-employed professionals, recent college graduates, persons between jobs, employed individuals not currently eligible for group insurance, and others who need insurance for a specified period of time.

IHC’s gross premium declined in this line of business in 2011 due to the termination of several non-owned distributors. Underwriting profits increased significantly. We anticipate modest growth in this line of business.

Dental/Vision

IHC sells group and individual dental products in the majority of states. We administer the majority of IHC's dental business and are also the primary distribution source of this line of business. The dental portfolio includes indemnity and PPO plans for employer groups of two or more lives and for individuals within affinity groups. Beginning in 2012, we reached an agreement with Aetna to offer their network rates in many key states. Employer plans are offered on both employer paid and employee voluntary bases. As part of the distribution of our dental products, we also offer vision benefits. Vision plans will offer a flat reimbursement amount for exams and materials. Life plans are available on scheduled or percentage of salary basis and short-term disability is offered as a percentage of salary or flat amount.

Standard Security Life writes vision policies in the State of New York on behalf of national vision providers. IHC does not control the distribution or underwriting of this product, and therefore it does not retain its normal share of the risk and does not earn administrative fee income, other than the carrier fee.

Gross dental premiums declined in 2011 due to pricing action, but net premiums increased slightly due to higher retention. We would like to write more dental business in 2012 through new distribution relationships and possible block acquisitions. We experienced growth in the vision line of business in 2011 and anticipate modest growth in 2012

Major Medical for Individuals and Families

The Company markets major medical plans for individuals and families that include CDHP products which are approved in the majority of states. The Company believes that the demand for individual medical products is growing steadily, due in large part, to employers reducing the number of employees eligible for group coverage, and to an increase in the number of self-employed individuals. Many of these plans are Federally Qualified High Deductible Health Plans that allow the policy or certificate holder to establish an HSA. For these products, each application is individually underwritten for consideration of coverages.

The Company anticipates growth in this line of business in 2012 as a result of new distribution sources and more focus on individual products by the telesales unit of Health Solutions.

Hospital Income Plans (“HIP”)

The Company began to market scheduled benefit HIP plans through its captive distribution in late 2010. The product is offered as both a supplement to a major medical and as a practical solution for uninsured consumers. In 2011, the Company recorded less than $1.5 million of gross written premium but expects to write about $4.0 million in 2012, through its own captive distribution and through other carefully selected distribution partners.

Limited Medical

Standard Security Life issues a limited medical policy that offers affordable health coverage to hourly, part-time and/or seasonal employees, which is currently approved in a majority of states. Limited medical plans are a low cost alternative to major medical insurance for those Americans who cannot afford traditional health insurance. Employers are using these plans to recruit and retain employees, save

costs and compete more effectively. These plans also permit employees who do not otherwise have health insurance to begin to participate in the healthcare system.

In 2011, the Company recorded $14.1 million of gross premiums and projects continued growth in 2012. Beginning in 2011, the Company began to issue limited medical plans to uninsured consumers who pay for their own health insurance which are included in the above mentioned gross premiums. Less than $1.0 million was written in 2011. It is expected to grow to roughly $2.0 million in 2012 through carefully selected distribution sources.

Ancillary Benefits

In 2011, the Company recorded about $1.0 million of ancillary benefit premiums, mostly accident plans for the self-employed that are marketed through two national associations. In late 2011, the Company began to write critical illness plans for individuals. In 2012, it is expected that the Ancillary Benefits will record about $2.5 million in premium through carefully selected distribution partners.

Final Expense

In the last quarter of 2010, the Company began marketing a whole life product commonly referred to as a final expense life policy. This whole life product is sold to people in the 50 to 85 years old range. The face amounts can range from $2,500 to $50,000. We are currently averaging about $13,500 per policy. This product is marketed through an exclusive arrangement with a large national marketing company.

Group Disability; Life, Annuities and DBL

Group Long-Term and Short-Term Disability

The Company sells group long-term disability ("LTD") products to employers that wish to provide this benefit to their employees. Depending on an employer's requirements, LTD policies (i) cover between 40% and 90% of insurable salary; (ii) have elimination periods (i.e., the period between the commencement of the disability and the start of benefit payments) of between 30 and 730 days; and (iii) terminate after two, five or ten years, or extend to age 65 or the employee's Social Security normal retirement date. Benefit payments are reduced by social security, workers compensation, pension benefits and other income replacement payments. Optional benefits are available to employees, including coverage for partial or residual disabilities, survivor benefits and cost of living adjustments. The Company also markets short-term disability ("STD") policies that provide a weekly benefit to disabled employees until the earlier of: recovery from disability, eligibility for long-term disability benefits or the end of the STD benefit period.

The Company experienced a decrease in sales to school districts and municipalities in 2011 as compared to 2010. We expect a slight increase in premiums in 2012.

New York Short-Term Disability (DBL)

Standard Security Life markets DBL. All companies with more than one employee in New York State are required to provide DBL insurance for their employees. DBL coverage provides temporary cash payments to replace wages lost as a result of disability due to non-occupational injury or illness. The DBL policy provides for (i) payment of 50% of salary to a maximum of $170 per week; (ii) a maximum of 26 weeks in a consecutive 52 week period; and (iii) benefit commencement on the eighth consecutive day of disability. Policies covering fewer than 50 employees have fixed rates approved by the New York State Insurance Department. Policies covering 50 or more employees are individually underwritten. Standard Security Life's DBL premiums declined in 2011 due to rate reductions on its large cases due to

favorable loss experience as well as a decrease in case size due to the reduction in employees as a result of the current economic environment. The Company anticipates premiums will be relatively flat in 2012.

Group Term Life and Annuities

Madison National Life and Standard Security Life sell group term life products, including group term life, accidental death and dismemberment ("AD&D"), supplemental life and supplemental AD&D and dependent life. As with its group disability business, IHC anticipates modest growth in this line of business through expansion of its sales of these group term life products through existing distribution sources.

Individual Life, Annuities and Other

This category includes: (i) insurance products that are in runoff as a result of the Insurance Group's decision to discontinue writing such products; (ii) blocks of business that were acquired from other insurance companies; (iii) individual life and annuities written through Madison National Life's military and civilian government employee division and through its final expense distribution agency; (iv) blanket accident insurance sold through a specialized general agent; and (v) certain miscellaneous insurance products.

The following lines of Standard Security Life's in-force business are in runoff: individual accident and health, individual life, single premium immediate annuities, disability income, accidental medical, accidental death and AD&D insurance for athletes, executives and entertainers, and miscellaneous insurance business. Madison National Life's runoff in this category consists of existing blocks of individual life, including pre-need (i.e., funeral expense) coverage, traditional and interest-sensitive life blocks which were acquired in prior years, individual accident and health products, annual and single premium deferred annuity contracts and individual annuity contracts.

LIFE INSURANCE IN-FORCE

The following table summarizes the aggregate life insurance in-force of the Insurance Group excluding the credit life and disability segment which is discontinued operations (in thousands):


					2011		2010		2009

LIFE INSURANCE IN-FORCE:
		Group		$	9,690,436	$	9,615,359	$	9,800,776
		Individual term			450,314		501,123		531,854
		Individual permanent			1,418,437		1,428,283		1,462,126

	TOTAL LIFE INSURANCE IN-
			FORCE (1), (2)	$	11,559,187	$	11,544,765		11,794,756

NEW LIFE INSURANCE:
		Group		$	446,640	$	1,070,815	$	3,820,519
		Individual term			10,343		25,402		26
		Individual permanent			153,394		83,463		77,734

	TOTAL NEW LIFE INSURANCE			$	610,377	$	1,179,680	$	3,898,279


NOTES:

(1)	Includes participating insurance	$	153,492	$	157,651	$	170,840

(2)	Before ceded reinsurance of:
	Group	$	5,692,074	$	5,248,587	$	5,624,680
	Individual		515,311		548,856		548,879

	Total ceded reinsurance	$	6,207,385	$	5,797,443	$	6,173,559

In 2009, there was a large increase in group term life insurance in-force as a result of new distribution sources.

ACQUISITIONS OF POLICY BLOCKS

In addition to its core life and health lines of business distributed as described above, IHC’s acquisition group has acquired blocks of existing life insurance, annuity and disability policies from other insurance companies, guaranty associations and liquidators. Most of the acquired blocks have been primarily life, annuities or disability policies. Not only have these transactions yielded a healthy rate of return on the investment, but the overall long-term nature of the policies acquired serves as a counterbalance to the bulk of the policies currently being written which are short-term in nature.

The Company did not acquire any significant policy blocks in 2011 or in 2009, and does not expect to in 2012. During 2010, Madison National Life acquired a block of life insurance policies with approximately $1.6 million of life reserves.

During 2008, Madison National Life acquired a block of life insurance policies with approximately $64.4 million of life reserves. The block consists of approximately $32.2 million of older, traditional life reserves and $32.2 million of annuity reserves.

REINSURANCE AND POLICY RETENTION LIMITS

The Company's average retention of gross and assumed Medical Stop-Loss exposure was 78% in 2011 and 75% in 2010. In 2009, prior to the acquisition of AMIC, the Company’s average retention of Medical Stop-Loss exposure was 56.7%. Standard Security Life and Madison National Life ceded, on average, 23.0% in 2009 of their Medical Stop-Loss business to their affiliate, Independence American. Standard Security Life retained 80% of DBL premium with the balance ceded to Independence American.

In 2011, IHC retained approximately 68% of gross and assumed Fully Insured Health exposure, up from approximately 58% in 2010. Retentions on other lines of business remained relatively constant in 2011. The Company purchases quota share reinsurance and excess reinsurance in amounts deemed appropriate by its risk committee. The Company monitors its retention amounts by product line, and has the ability to adjust its retention as appropriate.

Reinsurance is used to reduce the potentially adverse financial impact of large individual or group risks, and to reduce the strain on statutory income and surplus related to new business. By using reinsurance, the Insurance Group is able to write policies in amounts larger than it could otherwise accept. The amount reinsured is the portion of each policy in excess of the retention limit on a particular policy.

Maximum net retention limits for Standard Security Life are: (i) $210,000 per life on individual life and corresponding disability waiver of premium; (ii) no retention on accidental death benefits provided by rider to individual life policies; (iii) up to $1,250,000 on any one medical stop-loss claim;

(iv) $5,000 of monthly benefits on disability income policies; and (v) up to $1,250,000 for fully insured medical in a calendar year. Standard Security Life also maintains catastrophe reinsurance in order to protect against particularly adverse mortality which might occur with respect to its overall life business. Maximum net monthly retention limits on any one life for Madison National Life are: (i) $8,600 per month on group long-term disability insurance; (ii) $1,500 per week on group short-term disability insurance; (iii) $125,000 per individual on group term life, accidental death benefits, including supplemental life and accidental death and dismemberment; (iv) $125,000 on substandard ordinary life, group family life and individual ordinary life; (v) up to $1,250,000 on any one medical stop-loss claim; (vi) individual monthly benefits from 1,000 to $2,500 depending on recipient age and length of benefit period for individual accident and health insurance; and (vii) up to 1,250,000 for fully insured medical in a calendar year. Maximum net retention limits for Independence American are: (i) up to $1,250,000 on any one medical stop-loss claim; and (ii) up to $1,250,000 for fully insured medical in a calendar year.

Effective April 1, 2009, Madison National Life entered into a reinsurance treaty with an unaffiliated reinsurer to cede $48.8 million of life reserves.

The following reinsurers represent approximately 85% of the total ceded premium for the year ended December 31, 2011:


Munich Re America, Inc.		28%
Union Security Insurance Company		22%
Fidelity Security Life Insurance Company		18%
National Insurance Company of Wisconsin, Inc.		6%
Gerber Life Insurance Company		6%
American Fidelity Assurance Company		5%

		85%

The Insurance Group remains liable with respect to the insurance in-force which has been reinsured in the unlikely event that the assuming reinsurers are unable to satisfy their obligations. The Insurance Group cedes business (i) to individual reinsurance companies that are rated "A-" or better by Best or (ii) upon provision of adequate security. The ceding of reinsurance does not discharge the primary liability of the original insurer to the insured. Since the risks under the Insurance Group's business are primarily short-term, there would be limited exposure as a result of a change in a reinsurer's creditworthiness during the term of the reinsurance. At December 31, 2011 and 2010, the Insurance Group's ceded reinsurance in-force (excluding the credit life and disability segment which is discontinued operations) was $6.2 billion and $5.8 billion, respectively.

For further information pertaining to reinsurance, reference is made to Note 21 of Notes to Consolidated Financial Statements included in Item 8.

INVESTMENTS AND RESERVES

More than 99% of the Company's cash, cash equivalents and securities portfolio are managed by employees of IHC and its affiliates, and ultimate investment authority rests with IHC's in-house investment group. The remaining $3.2 million is invested with independent investment managers. As a result of the nature of IHC's insurance liabilities, IHC endeavors to maintain a significant percentage of its assets in investment grade securities, cash and cash equivalents. At December 31, 2011, approximately 97.6% of the fixed maturities were investment grade and continue to be rated on average AA. The internal investment group provides a summary of the investment portfolio and the performance thereof at the meetings of the Company's board of directors.

As required by insurance laws and regulations, the Insurance Group establishes reserves to meet obligations on policies in-force. These reserves are amounts which, with additions from premiums expected to be received and with interest on such reserves at certain assumed rates, are calculated to be sufficient to meet anticipated future policy obligations. Premiums and reserves are based upon certain assumptions with respect to mortality, morbidity on health insurance, lapses and interest rates effective at the time the polices are issued. The Insurance Group also establishes appropriate reserves for substandard business, annuities and additional policy benefits, such as waiver of premium and accidental death. Standard Security Life and Madison National Life are also required by law to have an annual asset adequacy analysis, which, in general, projects the amount and timing of cash flows to the estimated maturity date of liabilities, prepared by the certifying actuary for each insurance company. Standard Security Life, Madison National Life and Independence American invest their respective assets, which support the reserves and other funds in accordance with applicable insurance law, under the supervision of their respective board of directors. The Company manages interest rate risk 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. The Company occasionally utilizes options to modify the duration and average life of the assets.

Under Wisconsin insurance law, there are restrictions relating to the percentage of an insurer's admitted assets that may be invested in a specific issuer or in the aggregate in a particular type of investment. With respect to the portion of an insurer's assets equal to its liabilities plus a statutorily-determined security surplus amount, a Wisconsin insurer cannot, for example, invest more than a certain percentage of its assets in non-amortizable evidences of indebtedness, securities of any one person (other than a subsidiary and the United States government), or common stock of any corporation and its affiliates (other than a subsidiary).

Under New York insurance law, there are restrictions relating to the percentage of an insurer's admitted assets that may be invested in a specific issuer or in the aggregate in a particular type of investment. For example, a New York life insurer cannot invest more than a certain percentage of its admitted assets in common or preferred shares of any one institution, obligations secured by any one property (other than those issued, guaranteed or insured by the United States or any state government or agency thereof), or medium and lower grade obligations. In addition, there are certain qualitative investment restrictions.

Under Delaware insurance law, there are restrictions relating to the percentage of an insurer's admitted assets that may be invested in a specific issuer or in the aggregate in a particular type of investment. In addition, there are qualitative investment restrictions.

The following table reflects the asset value in dollars (in thousands) and as a percentage of total investments of the Company as of December 31, 2011:


					CARRYING	% OF TOTAL
INVESTMENTS BY TYPE					VALUE	INVESTMENTS

Fixed maturities:
	United States Government and
		government agencies and authorities		$	167,167	17.9%
	Government-sponsored enterprise				59,851	6.4%
	States, municipalities and political
		Subdivisions			255,402	27.4%
	All other debt securities				360,453	38.6%

			Total fixed maturities		842,873	90.3%

Equity securities:
	Common stocks				6,699	.7%
	Non-redeemable preferred stocks				30,842	3.3%

		Total equity securities			37,541	4.0%

Short-term investments					50	-
Securities purchased under agreements
	to resell				17,258	1.9%
Investment partnership interests					4,139	.5%
Operating partnership interests					6,829	.7%
Policy loans					23,109	2.5%
Investment in trust subsidiaries					1,146	.1%

		Total investments		$	932,945	100.0%

The Company's total pre-tax investment performance for each of the last three years is summarized below, including amounts recognized in net income and unrealized gains and losses recognized in stockholders' equity as accumulated other comprehensive income or loss:


			2011		2010		2009
			(In thousands)

Consolidated Statements of Operations
Net investment income		$	39,788	$	41,801	$	43,520
Net realized investment gains			8,670		4,646		8,789
Other-than-temporary impairments in earnings			(1,523)		(3,819)		(29,991)

Consolidated Balance Sheets
Net unrealized gains			14,029		15,107		87,488
Other-than-temporary impairments
	in other comprehensive income		(948)		-		-

Total pre-tax investment performance		$	60,016	$	57,735	$	109,806

The above net unrealized gains, which have been recognized in the Consolidated Balance Sheets, represent the net change in unrealized gains and losses on available-for-sale securities that occurred during the year, including the increase or decrease in fair value of securities that were previously

impaired, but prior to adjustments for deferred acquisition costs and deferred income taxes. The Company does not have any non-performing fixed maturity investments at December 31, 2011.

COMPETITION AND REGULATION

We compete with many large insurance companies, small regional health insurers and managed care organizations. Although most life insurance companies are stock companies, mutual companies also write life insurance in the United States. Mutual companies may have certain competitive advantages since profits inure directly to the benefit of the policyholders.

The health insurance industry tends to be cyclical, and excess products, such as medical stop-loss, tend to be more volatile than fully insured health products. During a “soft” market cycle, a larger number of companies offer insurance on a certain line of business, which causes premiums in that line to trend downward. In a “hard” market cycle, insurance companies limit their writings in certain lines of business following periods of excessive losses and insurance and reinsurance companies redeploy their capital to lines that they believe will achieve higher margins.

IHC is an insurance holding company; and as such, IHC and its subsidiary carriers and administrative companies are subject to regulation and supervision by multiple state insurance regulators, including the New York State Insurance Department (Standard Security Life's domestic regulator), the Wisconsin Department of Insurance (Madison National Life's domestic regulator) and the Office of the Insurance Commissioner of the State of Delaware (Independence American’s domestic regulator). Each of Standard Security Life, Madison National Life and Independence American is subject to regulation and supervision in every state in which it is licensed to transact business. These supervisory agencies have broad administrative powers with respect to the granting and revocation of licenses to transact business, the licensing of agents, the approval of policy forms, the approval of commission rates, the form and content of mandatory financial statements, reserve requirements and the types and maximum amounts of investments which may be made. Such regulation is primarily designed for the benefit of policyholders rather than the stockholders of an insurance company or insurance holding company.

Certain transactions within the IHC holding company system are also subject to regulation and supervision by such regulatory agencies. All such transactions must be fair and equitable. Notice to or prior approval by the applicable insurance department is required with respect to transactions affecting the ownership or control of an insurer and of certain material transactions, including dividend declarations, between an insurer and any person in its holding company system. Under New York, Wisconsin and Delaware insurance laws, "control" is defined as the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person. Under New York law, control is presumed to exist if any person, directly or indirectly, owns, controls or holds, with the power to vote ten percent or more of the voting securities of any other person. In Wisconsin, control is presumed if any person, directly or indirectly, owns, controls or holds with the power to vote more than ten percent of the voting securities of another person. In Delaware, control is presumed if any person, directly or indirectly, owns, controls or holds with the power to vote ten percent or more of the voting securities of any other person. In all three states, the acquisition of control of a domestic insurer needs to be approved in advance by the Commissioner of Insurance. See Note 23 of Notes to Consolidated Financial Statements included in Item 8 for information as to restrictions on the ability of the Company's insurance subsidiaries to pay dividends.

Risk-based capital requirements are imposed on life and property and casualty insurance companies. The risk-based capital ratio is determined by dividing an insurance company's total adjusted capital, as defined, by its authorized control level risk-based capital. Companies that do not meet certain minimum standards require specified corrective action. The risk-based capital ratios for each of Standard Security Life and Madison National Life exceed such minimum ratios.

DISCONTINUED OPERATIONS

Effective December 31, 2007, the Company sold its credit life and disability segment by entering into a 100% coinsurance agreement with an unaffiliated insurer. The Company recorded income (loss) from discontinued operations of $(.3) million and $.3 million for the years ended December 31, 2010 and 2009, respectively, net of taxes, representing expenses and changes in claims and reserves related to the insurance liabilities for claims incurred prior to the aforementioned sale. No income (loss) from discontinued operations was recorded during the year ended December 31, 2011.

EMPLOYEES

At December 31, 2011, the Company, including its direct and indirect majority or wholly owned subsidiaries, collectively had approximately 580 employees.

ITEM 1A.

RISK FACTORS

Many of the factors that affect our business and operations involve risk and uncertainty. The risks and uncertainties described below are not the only ones that we face, but are those that we have identified as being the most significant factors. Additional risks and uncertainties that we do not know about, or that we deem less significant than those identified below, may also materially and adversely affect our business, financial condition or results of operations and the trading price of our common stock.

Risks related to our Business

Our investment portfolio is subject to various risks that may result in realized investment losses. In particular, decreases in the fair value of fixed maturities may greatly reduce the value of our investments, and as a result, our financial condition may suffer.

We are subject to credit risk in our investment portfolio. Defaults by third parties in the payment or performance of their obligations under these securities could reduce our investment income and realized investment gains or result in the continued recognition of investment losses. The value of our investments may be materially adversely affected by increases in interest rates, downgrades in the preferred stocks and bonds included in our portfolio and by other factors that may result in the continued recognition of other-than-temporary impairments. Each of these events may cause us to reduce the carrying value of our investment portfolio.

In particular, at December 31, 2011, fixed maturities represented $842.9 million or 90.3% of our total investments of $932.9 million. The fair value of fixed maturities and the related investment income fluctuates depending on general economic and market conditions. The fair value of these investments generally increases or decreases in an inverse relationship with fluctuations in interest rates, while net investment income realized by us will generally increase or decrease in line with changes in market interest rates. In addition, actual net investment income and/or cash flows from investments that carry prepayment risk, such as mortgage-backed and other asset-backed securities, may differ from those anticipated at the time of investment as a result of interest rate fluctuations. An investment has prepayment risk when there is a risk that the timing of cash flows that result from the repayment of principal might occur earlier than anticipated because of declining interest rates or later than anticipated because of rising interest rates. The impact of value fluctuations affects our Consolidated Financial Statements. Because all of our fixed maturities are classified as available for sale, changes in the fair value of our securities are reflected in our stockholders' equity (accumulated other comprehensive income or loss). No similar adjustment is made for liabilities to reflect a change in interest rates. Therefore, interest rate fluctuations and economic conditions could adversely affect our stockholders' equity, total comprehensive income and/or cash flows. For mortgage-backed securities, credit risk exists if mortgagees

default on the underlying mortgages. Although at December 31, 2011, approximately 97.6% of the fixed maturities were investment grade and continue to be rated on average AA, all of our fixed maturities are subject to credit risk. If any of the issuers of our fixed maturities suffer financial setbacks, the ratings on the fixed maturities could fall (with a concurrent fall in fair value) and, in a worst case scenario, the issuer could default on its financial obligations. If the issuer defaults, we could have realized losses associated with the impairment of the securities.

We regularly monitor our investment portfolio to ensure that investments that are other-than-temporarily impaired are identified in a timely fashion, properly valued and any impairment is charged against earnings in the proper period. Assessment factors include, but are not limited to, the length of time and the extent to which the market value has been less than cost, the financial condition and rating of the issuer, whether any collateral is held and the Company's intent to sell, or be required to sell, debt securities before the anticipated recovery of its remaining amortized cost basis. However, the determination that a security has incurred an other-than-temporary decline in value requires the judgment of management. Inherently, there are risks and uncertainties involved in making these judgments. Therefore, changes in facts and circumstances and critical assumptions could result in management’s decision that further impairments have occurred. This could lead to additional losses on investments, particularly those that management has the intent and ability to hold until recovery in value occurs.

Our earnings could be materially affected by an impairment of goodwill.

Goodwill represented $50.3 million of our $1.4 billion in total assets as of December 31, 2011. We review our goodwill annually for impairment or more frequently if indicators of impairment exist. We regularly assess whether any indicators of impairment exist, which requires a significant amount of judgment. Such indicators may include: a sustained significant decline in our share price and market capitalization; a decline in our expected future cash flows; a significant adverse change in the business climate; and/or slower growth rates, among others. Any adverse change in one of these factors could have a significant impact on the recoverability of these assets and could have a material impact on our consolidated financial statements. If we experience a sustained decline in our results of operations and cash flows, or other indicators of impairment exist, we may incur a material non-cash charge to earnings relating to impairment of our goodwill, which could have a material adverse effect on our results.

If rating agencies downgrade our insurance companies, our results of operations and competitive position in the industry may suffer.

Ratings have become an increasingly important factor in establishing the competitive position of insurance companies. Standard Security Life and Madison National Life are both rated "A-" (Excellent) by A.M. Best Company, Inc. Best's ratings reflect its opinions of an insurance company's financial strength, operating performance, strategic position, and ability to meet its obligations to policyholders and are not evaluations directed to investors. The ratings of Standard Security Life and Madison National Life are subject to periodic review by Best. If Best reduces either or both Madison National Life's or Standard Security Life's ratings from its current levels, our business would be adversely affected.

Our loss reserves are based on an estimate of our future liability, and if actual claims prove to be greater than our reserves, our results of operations and financial condition may be adversely affected.

We maintain loss reserves to cover our estimated liability for unpaid losses and loss adjustment expenses, where material, including legal and other fees, and costs not associated with specific claims but related to the claims payment functions for reported and unreported claims incurred as of the end of each accounting period. Because setting reserves is inherently uncertain, we cannot be sure that current reserves will prove adequate. If our reserves are insufficient to cover our actual losses and loss adjustment expenses, we would have to augment our reserves and incur a charge to our earnings, and these charges could be material. Reserves do not represent an exact calculation of liability. Rather, reserves represent

an estimate of what we expect the ultimate settlement and administration of claims will cost. These estimates, which generally involve actuarial projections, are based on our assessment of known facts and circumstances. Many factors could affect these reserves, including economic and social conditions, frequency and severity of claims, medical trend resulting from the influences of underlying cost inflation, changes in utilization and demand for medical services, and changes in doctrines of legal liability and damage awards in litigation. Many of these items are not directly quantifiable in advance. Additionally, there may be a significant reporting lag between the occurrence of the insured event and the time it is reported to us. The inherent uncertainties of estimating reserves are greater for certain types of liabilities, particularly those in which the various considerations affecting the type of claim are subject to change and in which long periods of time may elapse before a definitive determination of liability is made. Reserve estimates are continually refined in a regular and ongoing process as experience develops and further claims are reported and settled and are reflected in the results of the periods in which such estimates are changed.

Our inability to assess underwriting risk accurately could reduce our net income.

Our success is dependent on our ability to assess accurately the risks associated with the businesses on which we retain risk. If we fail to assess accurately the risks we retain, we may fail to establish the appropriate premium rates and our reserves may be inadequate to cover our losses, requiring augmentation of the reserves, which in turn would reduce our net income.

Our agreements with our producers (including independent MGUs) require that each producer follow underwriting guidelines published by us and amended from time to time. Failure to follow these guidelines may result in termination or modification of the agreement. We perform periodic audits to confirm adherence to the guidelines, but it is possible that we would not detect a breach in the guidelines for some time after the infraction, which could result in a material impact on the Net Loss Ratio (defined as insurance benefits, claims and reserves divided by the difference between premiums earned and underwriting expenses) for that producer and could have an adverse impact on our operating results.

We may be unsuccessful in competing against larger or better-established business rivals.

We compete with a large number of other companies in our selected lines of business. We face competition from specialty insurance companies and HMOs, and from diversified financial services companies and insurance companies that are much larger than we are and that have far greater financial, marketing and other resources. Some of these competitors also have longer experience and more market recognition than we do in certain lines of business. In addition to competition in the operation of our business, we face competition from a variety of sources in attracting and retaining qualified employees. We cannot assure you that we will maintain our current competitive position in the markets in which we operate, or that we will be able to expand operations into new markets. If we fail to do so, our results of operations and cash flows could be materially adversely affected.

We rely on reinsurance arrangements to help manage our business risks, and failure to perform by the counterparties to our reinsurance arrangements may expose us to risks we had sought to mitigate.

We utilize reinsurance to mitigate our risks in various circumstances. Reinsurance does not relieve us of our direct liability to our policyholders, even when the reinsurer is liable to us. Accordingly, we bear credit risk with respect to our reinsurers. Our reinsurers may be unable or unwilling to pay the reinsurance recoverable owed to us now or in the future or on a timely basis. A reinsurer’s insolvency, inability or unwillingness to make payments under the terms of its reinsurance agreement with us could have an adverse effect on our financial condition, results of operations and cash flows.

We may be required to accelerate the amortization of deferred acquisition costs, which would increase our expenses and reduce profitability.

Deferred acquisition costs, or DAC, represent certain costs which vary with and are primarily related to the sale and issuance of our insurance policies and investment contracts and are deferred and amortized over the estimated life of the related insurance policies and contracts. These costs include commissions in excess of ultimate renewal commissions and certain other sales incentives, solicitation and printing costs, sales material and other costs, such as underwriting and contract and policy issuance expenses. Under U.S. generally accepted accounting principles ("GAAP"), DAC is amortized through operations over the lives of the underlying contracts in relation to the anticipated recognition of premiums or gross profits.

Our amortization of DAC generally depends upon anticipated profits from investments, surrender and other policy and contract charges, mortality, morbidity and maintenance and expense margins. Unfavorable experience with regard to expected expenses, investment returns, mortality, morbidity, withdrawals or lapses may cause us to increase the amortization of DAC, resulting in higher expenses and lower profitability.

We regularly review our DAC asset balance to determine if it is recoverable from future income. The portion of the DAC balance deemed to be unrecoverable, if any, is charged to expense in the period in which we make this determination. For example, if we determine that we are unable to recover DAC from profits over the life of a book of business of insurance policies or annuity contracts, or if withdrawals or surrender charges associated with early withdrawals do not fully offset the unamortized acquisition costs related to those policies or annuities, we would be required to recognize the additional DAC amortization as a current-period expense. In general, we limit our deferral of acquisition costs to costs assumed in our pricing assumptions.

The failure to maintain effective and efficient information systems could adversely affect our business.

Our business depends significantly on effective information systems, and we have different information systems for our various businesses. We have committed and will continue to commit significant resources to develop, maintain and enhance our existing information systems and develop new information systems in order to keep pace with continuing changes in information processing technology, evolving industry and regulatory standards, and changing customer preferences. Our failure to maintain effective and efficient information systems could have a material adverse effect on our financial condition and results of operations.

Failure to protect our policyholders' confidential information and privacy could adversely affect our business.

In the conduct of our business, we are subject to privacy regulations and to confidentiality obligations. For example, the collection and use of patient data in our health insurance operations is the subject of national and state legislation, including the Health Insurance Portability and Accountability Act of 1996, or HIPAA, and certain other activities we conduct are subject to the privacy regulations of the Gramm-Leach-Bliley Act. We also have contractual obligations to protect certain confidential information we obtain from our existing vendors, partners and policyholders. These obligations generally include protecting such confidential information in the same manner and to the same extent as we protect our own confidential information. If we do not properly comply with privacy regulations and protect confidential information, we could experience adverse consequences, including regulatory sanctions, such as penalties, fines and loss of license, as well as loss of reputation and possible litigation.

Risks Related to our Industry

Our industry is highly regulated and changes in regulations affecting our businesses may reduce our profitability and limit our growth.

Our insurance subsidiaries are subject to state insurance laws and regulated by the insurance departments of the various states in which they are domiciled and licensed, which, among other things, conduct periodic examination of insurance companies. State laws grant insurance regulatory authorities broad administrative powers with respect to various aspects of our insurance businesses, including:



	•	licensing companies and agents to transact business and regulating their respective conduct in the market;
	•	approving policy forms and premium rates;

	•	requiring certain methods of accounting and prescribing the form and content of records of financial condition required to be filed;

	•	calculating the value of assets to determine compliance with statutory requirements;

	•	establishing statutory capital and reserve requirements, such as for unearned premiums and losses;

	•	regulating certain premium rates and requiring deposits for the benefit of policyholders;

	•	establishing maximum interest rates on insurance policy loans and minimum rates for guaranteed crediting rates on life insurance policies;
	•	establishing standards of solvency, including risk-based capital measurements, which are a measure developed by the National Association of Insurance Commissioners (NAIC) and used by state insurance regulators to identify insurance companies that potentially are inadequately capitalized;
	•	mandating certain insurance benefits and restricting the size of risks insurable under a single policy;

	•	regulating unfair trade and claims practices, including the imposition of restrictions on marketing and sales practices, distribution arrangements and payment of inducements;

	•	requiring the filing of annual and other reports relating to the financial condition of insurance companies, holding company issues and other matters;

	•	approving changes in control of insurance companies;

	•	restricting transactions between insurance companies and their affiliates, including the payment of dividends to affiliates; and

	•	regulating the nature or types, concentration or amounts, quality and valuation of investments.

Currently, the U.S. federal government does not directly regulate the business of insurance. However, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which was signed into law in July 2010 by President Obama, created a Federal Insurance Office. While the office will not directly regulate domestic insurance business, it is tasked with studying the potential efficiency and consequences of federal insurance regulation. The Dodd-Frank Act also created the Consumer Financial Protection Bureau (“CFPB”). While the CFPB does not have direct jurisdiction over insurance products, it is possible that regulations promulgated by the CFPB may extend its authority more broadly to cover certain insurance products and thereby may adversely affect our results of operations. Additionally, federal legislation and administrative policies in other areas can significantly and adversely affect insurance companies, including general financial services regulation, securities regulation, privacy regulation, tort reform legislation, and taxation.

Compliance with applicable laws and regulations is time consuming and personnel-intensive, and changes in these laws and regulations may materially increase our direct and indirect compliance efforts and other expenses of doing business.

Federal healthcare reform may adversely affect our business, cash flows, financial condition and results of operations.

Although health insurance is generally regulated at the state level, recent legislative actions were taken at the federal levels that impose added restrictions on our business. The Patient Protection and Affordable Care Act (“PPACA”) was signed into law by President Obama in March 2010. Provisions of the PPACA and related reforms have and will become effective at various dates over the next several years and will make sweeping and fundamental changes to the U.S. health care system that are expected to significantly affect the health insurance industry. Although we cannot predict or quantify the precise effects of the PPACA on our business, the effects on our Company will include, in particular, a requirement that we pay rebates to customers if the loss ratios for some of our products lines are less than specified percentages; the need to reduce commissions and the consequent risk that insurance producers may sell less of our products than they have in the past; limits on lifetime and annual benefit maximums; a prohibition from imposing any pre-existing condition exclusion; limits on our ability to rescind coverage except for intentional fraud; increased costs to modify and/or sell our products; intensified competitive pressures that limit our ability to increase rates due to state insurance exchanges; significant risk of customer loss; new and higher taxes and fees to generate the revenues to implement the PPACA; and the need to operate with a lower expense structure at both the business segment and enterprise level.

The consequences of these significant coverage expansions on the sales of our products are unknown and speculative at this point. A number of state governors have strenuously opposed certain of the PPACA'’s provisions, and initiated lawsuits challenging its constitutionality. These challenges are pending final adjudication in several jurisdictions, including the U.S. Supreme Court. The U.S. Congress has also proposed a number of legislative initiatives, including possible repeal of the PPACA. At this time, it remains unclear whether there will be any changes made to the PPACA, whether to certain provisions or its entirety. We expect that the PPACA, as well as other federal or state health care reform measures that may be adopted in the future, could have a material adverse effect on our industry generally and our ability to successfully commercialize our products.

We will continue to monitor the implementation of PPACA and reassess our business strategies accordingly. We have made, and are continuing to make, significant changes to our operations, products and strategy to adapt to the new environment. However, if our plans for operating in the new environment are unsuccessful or if there is less demand than we expect for our products in the new environment, our results could be adversely affected.

Changes in state regulations, or the application thereof, may adversely affect our business, financial condition and results of operations.

Some states have imposed time limits for the payment of uncontested covered claims and require health care and dental service plans to pay interest on uncontested claims not paid promptly within the required time period. Some states have also granted their insurance regulatory agencies additional authority to impose monetary penalties and other sanctions on health and dental plans engaging in certain unfair payment practices. If we were unable, for any reason, to comply with these requirements, it could result in substantial costs to us and could materially adversely affect our results of operations and financial condition.

In addition, a number of states are contemplating significant reform of their health insurance markets affecting both public programs and privately financed health insurance arrangements. State insurance regulators and the NAIC regularly re-examine existing laws and regulations applicable to insurance companies and their products. Changes in these laws and regulations or in interpretations thereof, are often made for the benefit of the consumer at the expense of the insurer and thus could have an adverse effect on our business. We cannot predict what impact, if any, the results of these studies or other such proposals, if enacted, may have on our financial condition, results of operations and cash flows.

If we fail to comply with extensive state and federal regulations, we will be subject to penalties, which may include fines and suspension and which may adversely affect our results of operations and financial condition.

A large portion of our business depends on our compliance with applicable laws and regulations and our ability to maintain valid licenses and approvals for our operations. Regulatory authorities have broad discretion to grant, renew, revoke or deny licenses and approvals. In some instances, we follow practices based on our interpretations of regulations, or interpretations that we believe to be generally followed by the industry, which may be different from the requirements or interpretations of regulatory authorities. If we do not have the requisite licenses and approvals and do not comply with applicable regulatory requirements, the insurance regulatory authorities could preclude or temporarily suspend us from carrying on some or all of our insurance-related activities or otherwise penalize us. That type of action could have a material adverse effect on our business. Also, changes in the level of regulation of the insurance industry (whether federal, state or foreign), or changes in laws or regulations themselves or interpretations by regulatory authorities, could have a material adverse effect on our business.

Legal and regulatory investigations and actions are increasingly common in the insurance business and may result in financial losses and harm our reputation.

We face a significant risk of litigation and regulatory investigations and actions in the ordinary course of operating our businesses, including the risk of class action lawsuits and individual lawsuits relating, among other things, to sales or underwriting practices, payment of contingent or other sales commissions, claims payments and procedures, product design, disclosure, administration, additional premium charges for premiums paid on a periodic basis, interest crediting practices, denial or delay of benefits and breaches of fiduciary or other duties to customers. Plaintiffs in class action and other lawsuits against us may seek very large or indeterminate amounts, including punitive and treble damages, which may remain unknown for substantial periods of time. We are also subject to various regulatory inquiries, such as information requests, subpoenas, market conduct exams and books and record examinations, from state and federal regulators and other authorities, which may result in fines, recommendations for corrective action or other regulatory actions. Even if we ultimately prevail in the litigation, regulatory action or investigation, we could suffer significant reputational harm, which could have an adverse effect on our business.

The effects of emerging claim and coverage issues on our business are uncertain.

As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended liability for claims and coverage may emerge. These changing conditions may adversely affect our business by either extending coverage beyond our underwriting intent or by increasing the number or size of claims. In some instances, these changes may not become apparent until some time after we have issued insurance or reinsurance contracts that are affected by the changes. As a result, the full extent of liability under our insurance or reinsurance contracts may not be known for a significant period after a contract is issued, and our financial position and results of operations may be materially adversely affected.

Our results may fluctuate as a result of factors generally affecting the insurance and reinsurance industry.

The results of companies in the insurance and reinsurance industry historically have been subject to significant fluctuations and uncertainties. The industry and our financial condition and results of operations may be affected significantly by:

Fluctuations in interest rates, inflationary pressures and other changes in the investment environment, which affect returns on invested capital;

Rising levels of actual costs that are not known by companies at the time they price their products;

Losses related to epidemics, terrorist activities, random acts of violence or declared or undeclared war;

Development of judicial interpretations relating to the scope of insurers' liability;

The overall level of economic activity and the competitive environment in the industry;

Greater than expected use of health care services by members;

New mandated benefits or other regulatory changes that change the scope of business or increase our costs; and

Failure of MGUs to adhere to underwriting guidelines as required by us in our MGU agreements.

The occurrence of any or a combination of these factors, which is beyond our control, could have a material adverse effect on our results.

We may experience periods with excess underwriting capacity and unfavorable premium rates because the insurance and reinsurance business is historically cyclical, which could cause our results to fluctuate.

The insurance and reinsurance business historically has been a cyclical industry characterized by periods of intense price competition due to excessive underwriting capacity, as well as periods when shortages of capacity permitted an increase in pricing and, thus, more favorable premium levels. An increase in premium levels is often, over time, offset by an increasing supply of insurance and reinsurance capacity, either by capital provided by new entrants or by the commitment of additional capital by existing insurers or reinsurers, which may cause prices to decrease. Any of these factors could lead to a significant reduction in premium rates, less favorable policy terms and fewer opportunities to underwrite insurance risks, which could have a material adverse effect on our results of operations and cash flows.

Failures elsewhere in the insurance industry could obligate us to pay assessments through guaranty associations.

Virtually all states require insurers licensed to do business in that state to bear a portion of the loss suffered by some insureds as the result of impaired or insolvent insurance companies. When an insurance company becomes insolvent, state insurance guaranty associations have the right to assess other insurance companies doing business in their state for funds to pay obligations to policyholders of the insolvent company, up to the state-specific limit of coverage. The total amount of the assessment is based on the number of insured residents in each state, and each company’s portion is based on its proportionate share of premium volume in the relevant lines of business. The future failure of a large life, health or annuity insurer could trigger assessments which we would be obligated to pay. Further, amounts for historical insolvencies may be assessed over many years, and there can be significant uncertainty around the total obligation for a given insolvency. Existing liabilities may not be sufficient to fund the ultimate obligations of a historical insolvency, and we may be required to increase our liability, which could have an adverse effect on our results of operations.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

ITEM 2.

PROPERTIES

IHC

IHC has entered into a renewable short-term arrangement with Geneve Corporation, an affiliate, for the use of 6,750 square feet of office space as its corporate headquarters in Stamford, Connecticut.

Standard Security Life

Standard Security Life leases 13,000 square feet of office space in New York, New York as its corporate headquarters.

Madison National Life

Madison National Life leases 28,060 square feet of space in Madison, Wisconsin as its corporate headquarters.

IHC Administrative Services

IHC Administrative Services leases 49,117 square feet of office space in Phoenix, Arizona as its corporate headquarters.

ITEM 3.

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 relating 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 4.

MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5.

MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED

STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

The Company's common stock trades under the symbol IHC on the New York Stock Exchange. The following table shows for the periods indicated the high and low sales prices for IHC's common stock as reported by the New York Stock Exchange.


			HIGH		LOW
QUARTER ENDED:
	December 31, 2011	$	9.10	$	6.81
	September 30, 2011		11.10		6.81
	June 30, 2011		10.89		7.50
	March 31, 2011		8.79		7.60

QUARTER ENDED:
	December 31, 2010	$	8.75	$	7.04
	September 30, 2010		7.40		5.72
	June 30, 2010		10.00		5.83
	March 31, 2010		9.97		5.84

IHC's stock price closed at $8.13 on December 31, 2011.

Holders of Record

At March 9, 2012 the number of record holders of IHC's common stock was 1,847. The number of record owners was determined from the Company’s stockholder records maintained by the Company’s transfer agent.

Dividends

IHC declared a cash dividend of $.025 per share on its common stock on each of June 24, 2011 and December 27, 2011 for a total annual dividend of $.05 per share.

IHC declared a cash dividend of $.025 per share on its common stock on each of June 24, 2010 and December 28, 2010 for a total annual dividend of $.05 per share.

IHC declared a cash dividend of $.025 per share on its common stock on each of June 26, 2009 and December 23, 2009 for a total annual dividend of $.05 per share.

Private Placements

In 2011, IHC acquired an aggregate 900,325 shares of AMIC common stock from noncontrolling interests in exchange for the issuance of an aggregate 600,218 shares of IHC’s common stock in various private placements of unregistered securities under Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”). Accordingly, the shares are "restricted securities", subject to a legend and will not be freely tradable in the United States until the shares are registered for resale under the Securities Act, or to the extent they are tradable under Rule 144 promulgated under the Securities Act or any other available exemption.

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 December 31, 2011, 181,403 shares were still authorized to be repurchased under the plan. Share repurchases during the fourth quarter of 2011 are summarized as follows:


2011
						Maximum Number
				Average Price		Of Shares Which
	Month of	Shares		of Repurchased		Can be
	Repurchase		Repurchased		Shares		Repurchased

	October	49,200		$	7.84	184,586
	November	600		$	8.23	183,986
	December		2,583	$	8.49	181,403

Performance Graph

Set forth below is a line graph comparing the five year cumulative total return of IHC’s common stock with that of the Russell 2000 Index and the S & P SmallCap Life & Health Insurance index. The graph assumes that dividends were reinvested and is based on a $100 investment on December 31, 2006. Indices data was obtained from Research Data Group, Inc. The performance graph represents past performance and should not be considered to be an indication of future performance.

[ihc4q2011_10k002.gif]

ITEM 6.

SELECTED FINANCIAL DATA

The following is a summary of selected consolidated financial data of the Company for each of the last five years.



						Year Ended December 31,

				2011		2010		2009		2008		2007
				(In thousands, except per share data)
Income Data:
	Total revenues		$	417,996	$	435,368	$	354,838	$	353,687	$	402,322
	Income (loss) from continuing
		operations		14,766		23,669		(7,433)		(24,578)		1,565
Balance Sheet Data:
	Total investments			932,945		919,727		831,081		761,093		776,059
	Total assets			1,358,859		1,361,792		1,304,476		1,273,894		1,306,955
	Insurance liabilities			927,746		920,581		927,212		951,590		895,169
	Debt and junior subordinated
		debt securities		48,146		45,646		47,146		48,146		50,646
	IHC stockholders' equity			261,077		230,628		202,967		162,702		222,851
Per Share Data:
	Cash dividends declared per
		common share		.05		.05		.05		.05		.05
	Basic income (loss) per common share
		from continuing operations		.81		1.44		(.48)		(1.59)		.10
	Diluted income (loss) per common
		share from continuing operations		.81		1.44		(.48)		(1.59)		.10
	Book value per common share			15.91		15.14		13.16		10.56		14.63

The Selected Financial Data should be read in conjunction with the accompanying Consolidated Financial Statements and Notes thereto included in Item 8 of this report.

ITEM 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Independence Holding Company, a Delaware corporation (NYSE: 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"), Independence American Insurance Company (“Independence American”); and (iii) 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.

IHC’s health insurance products serve niche sectors of the commercial market through multiple classes of business and varied distribution channels. Medical Stop-Loss is marketed to large employer groups that self-insure their medical risks; in 2011 the Company’s average case size was 250 covered employee lives. This niche is expected to grow as result of federal health care reform. The small-group major medical product is purchased by employers with between two and 50 covered lives. With regard to those persons in the growing individual market, IHC’s products offer major medical coverage for individuals and families and persons with short-term medical needs, and limited medical and scheduled benefit plans through select distribution partners. Beginning in 2012, Independence American entered the

pet insurance market through a national distributor with a long history in this niche. Standard Security Life’s limited medical product is primarily purchased by hourly workers and others who are generally not eligible for coverage under their employer’s group medical plan. Madison National Life and Independence American offer limited and scheduled benefit plans primarily to uninsured consumers. The dental and vision products are marketed to large and small groups as well as individuals. With respect to IHC’s life and disability business, Madison National Life has historically sold almost all of this business through one distribution source specializing in serving school districts and municipalities. The Company has a large, minority position in a MGU that specializes in marketing stop-loss plans to the fewer than 100 employee market. The leadership team of this MGU has years of experience in marketing similar plans for a competitor in certain states whose health care laws were a model for federal health reform.

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 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 costs of its operations and providing its insureds with the best cost containment tools available.

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

On March 5, 2010, IHC acquired a controlling interest in AMIC. Upon achieving control AMIC’s income and expense amounts became consolidated with IHC’s results. Accordingly, the individual line items on the Consolidated Statement of Operations for 2011 and 2010 reflect the operations of AMIC with no corresponding amounts for 2009.

The results of operations for the years ended December 31, 2011, 2010 and 2009, are summarized as follows (in thousands):


		2011		2010		2009

Revenues	$	417,996	$	435,368	$	354,838
Expenses		399,498		399,116		372,940

Income (loss) from continuing operations before income taxes		18,498		36,252		(18,102)
Income taxes (benefits)		3,732		12,583		(10,669)

Income (loss) from continuing operations		14,766		23,669		(7,433)

Discontinued operations:
Income (loss) from discontinued operations		-		(256)		301

Net income (loss)		14,766		23,413		(7,132)
(Income) loss from noncontrolling interests in subsidiaries		(1,763)		(1,676)		10

Net income (loss) attributable to IHC	$	13,003	$	21,737	$	(7,122)

Income from continuing operations of $.81 per share, diluted, for the year ended December 31, 2011, compared to $1.44 per share, diluted, for the year ended December 31, 2010. Net income for 2010 includes a $16.7 million after-tax gain on the bargain purchase of AMIC;

Consolidated investment yield (on an annualized basis) of 4.3% in 2011 compared to 4.6% in 2010;

Released $2.3 million of deferred income taxes relative to its investment in AMIC based on the Company’s intention to adopt tax planning strategies to recover its investment in AMIC in a tax-free manner;

Increased ownership interest in AMIC to 78.4%;

In the fourth quarter of 2011, Standard Security Life entered into a coinsurance agreement effective in January 2012 and transferred approximately $143 million of group annuity reserves in the first quarter of 2012. For the year ended December 31, 2011, net realized investment gains were $8.7 million of which a significant portion resulted from sales of invested assets in anticipation of the transfer of assets in accordance with the terms of such agreement in the first quarter of 2012. As a result of such agreement, the Company wrote-off $4.6 million of deferred acquisition costs at December 31, 2011, which was more than offset by these net realized investment gains.

Book value of $15.91 per common share, an increase of 5.1% per common share from December 31, 2010. The increase is primarily a result of current period net income, the buy-back of IHC shares, and the acquisition of noncontrolling interests in AMIC, offset by 1,302,520 shares of IHC common stock issued during the period, primarily in exchanges for shares of AMIC.

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

The Medical Stop-Loss segment reported income from continuing operations before taxes of $9.0 million and $1.9 million for the years ended December 31, 2011 and 2010, respectively. The increase is primarily due to improved underwriting results in 2011 despite decrease in premiums earned;

Premiums earned decreased $6.7 million for the year ended December 31, 2011 when compared to 2010. The decrease in premiums earned is due to the cancellation of certain non-owned managing general underwriters in 2010;

The Company recorded a decrease in the loss ratio in the medical stop-loss line of business for the year ended December 31, 2011. The medical stop-loss results for 2011 have begun to show improved profit margins primarily as a result of business written in 2010 and 2011 performing better than that written in the prior periods and the run-out of poorly performing business by non-owned MGUs which were previously cancelled;

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


		2011		2010		2009

Premiums Earned	$	114,478	$	121,156	$	127,724
Insurance Benefits, Claims & Reserves		75,490		89,968		92,899
Expenses		34,047		32,404		34,069

Loss Ratio^(A)		65.9%		74.3%		72.7%
Expense Ratio ^(B)		29.8%		26.7%		26.7%
Combined Ratio ^(C)		95.7%		101.0%		99.4%

(A)

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

(B)

Expense ratio represents net 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 expenses ratio.

The Fully Insured Health segment reported $7.7 million of income from continuing operations before taxes for the year ended December 31, 2011 as compared to $3.1 million for the year ended December 31, 2010;

Premiums earned increased $20.5 million year ended December 31, 2011 over the comparable periods in 2010. The increase is primarily due to increased retentions in certain lines of this business;

In 2009, this segment wrote-off $5.1 million of previously capitalized software. The Company had been working with a software developer on this project for a number of years in order to improve the Company’s administrative efficiency as it sought in prior years to quickly expand its premiums under management. During testing of the software, it was determined that the system was not capable of administering the Company’s lines of business as is and it would take a substantial additional investment to implement. As a result of our decision to reduce the speed of our expansion in this segment, the Company determined not to continue to expend capital on this software. The termination of this project did not impact the Company’s ability to service its business;

Underwriting experience as indicated by its GAAP Combined Ratios, for the Fully Insured segment is as follows (in thousands):


		2011		2010		2009

Premiums Earned	$	141,322	$	120,818	$	84,698
Insurance Benefits, Claims & Reserves		89,040		81,676		58,500
Expenses		44,535		35,192		25,634

Loss Ratio		63.0%		67.6%		69.1%
Expense Ratio		31.5%		29.1%		30.2%
Combined Ratio		94.5%		96.7%		99.3%

The decrease in the loss ratio was primarily attributable to improved underwriting results due to a shift to more limited plans, lower utilization and claims and less exposure to large groups.

The underwriting expense ratio increased primarily as a result of an increase in general expenses.

Income before taxes from the Group disability, life, annuities and DBL segment decreased $4.9 million for the year ended December 31, 2011 compared to 2010 primarily as a result of the write-off of deferred acquisition costs in connection with the sale of group annuity contracts, offset by better loss ratios in the group term life line;

Income before taxes from the Individual life, annuities and other segment decreased $1.8 million for the year ended December 31, 2011 compared to the prior year primarily due to lower investment income;

Income before taxes from the Corporate segment decreased $29.0 million for the year ended December 31, 2011 compared to the prior year primarily due to the inclusion, in 2010, of a $27.8 million pre-tax gain as a result of the March 2010 acquired controlling interest in AMIC;

Net realized investment gains were $8.7 million for the year ended December 31, 2011 compared to $4.6 million in 2010. A significant portion of the net realized investment gains in 2011 resulted from sales of invested assets in anticipation of a transfer of assets in the first quarter of 2012 in accordance with the terms of a coinsurance agreement at December 31, 2011.

Other-than-temporary impairment losses recognized in earnings for the years ended December 31, 2011 and 2010 were $1.5 million and $3.8 million, respectively. In 2009, the Company recorded a $29.2 million pre-tax loss resulting from an other-than-temporary related to the Company’s investment in AMIC due to the length of time, and the magnitude of the amount by which the quoted market price of AMIC has been below IHC’s carrying value; and

Premiums by principal product for the years indicated are as follows (in thousands):


Gross Direct and Assumed
Earned Premiums:		2011		2010		2009

Medical Stop-Loss	$	146,209	$	161,530	$	202,056
Fully Insured Health		209,174		207,409		190,895
Group disability; life, annuities and DBL		94,688		102,986		103,499
Individual life, annuities and other		35,470		34,549		31,096

	$	485,541	$	506,474	$	527,546


Net Premiums Earned:		2011		2010		2009

Medical Stop-Loss	$	114,478	$	121,156	$	127,724
Fully Insured Health		141,322		120,818		84,698
Group disability; life, annuities and DBL		50,698		55,828		54,896
Individual life, annuities and other		29,916		28,344		27,481

	$	336,414	$	326,146	$	294,799

Information pertaining to the Company's business segments is provided in Note 22 of Notes to Consolidated Financial Statements included in Item 8.

CRITICAL ACCOUNTING POLICIES

The accounting and reporting policies of the Company conform to U.S. GAAP. The preparation of the 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 this report. Management has identified the accounting policies described below 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.

Insurance Premium Revenue Recognition and Policy Charges

Life

Traditional life insurance products consist principally of products with fixed and guaranteed premiums and benefits, primarily term and whole life insurance products. Premiums from these products are recognized as revenue when due.

Annuities and interest-sensitive life contracts, such as universal life and interest-sensitive whole life, are contracts whose terms are not fixed and guaranteed. Premiums from these policies are reported as funds on deposit. Policy charges consist of fees assessed against the policyholder for cost of insurance (mortality risk), policy administration and early surrender. These revenues are recognized when assessed against the policyholder account balance.

Policies that do not subject the Company to significant risk arising from mortality or morbidity are considered investment contracts. Deposits received from such contracts are reported as other policyholder funds. Policy charges for investment contracts consist of fees assessed against the policyholder account for maintenance, administration and surrender of the policy prior to contractually specified dates, and are recognized when assessed against the policyholder account balance.

Health

Premiums for short-duration medical insurance contracts are intended to cover expected claim costs resulting from insured events that occur during a fixed period of short duration. The Company has the ability to cancel the annual contract or to revise the premium rates at the beginning of each annual contract period to cover future insured events. Insurance premiums from annual health contracts are collected monthly and are recognized as revenue evenly as insurance protection is provided.

Premiums related to long-term and short-term disability contracts are recognized on a pro rata basis over the applicable contract term.

Insurance Reserves

The Company maintains loss reserves to cover its estimated liability for unpaid losses and loss adjustment expenses, where material, (including legal, other fees, and costs not associated with specific claims but related to the claims payment function) for reported and unreported claims incurred as of the end of each accounting period. These loss reserves are based on actuarial assumptions and are maintained at levels that are in accordance with GAAP. The Company’s estimate of loss reserves represents management’s best estimate of the Company’s liability at the balance sheet date.

Loss reserves differ for short-duration and long-duration insurance policies, including annuities. Reserves are based on approved actuarial methods, but necessarily include assumptions about expenses, mortality, morbidity, lapse rates and future yield on related investments.

All of the Company’s short-duration contracts are generated from its accident and health business, and are accounted for based on actuarial estimates of the amount of loss inherent in that period’s claims, including losses incurred for which claims have not been reported. Short-duration contract loss estimates rely on actuarial observations of ultimate loss experience for similar historical events.

Management believes that the Company's methods of estimating the liabilities for insurance reserves provided appropriate levels of reserves at December 31, 2011. Changes in the Company's reserve estimates are recorded through a charge or credit to its earnings.

Life

For traditional life insurance products, the Company computes insurance reserves primarily using the net premium method based on anticipated investment yield, mortality, and withdrawals. These methods are widely used in the life insurance industry to estimate the liabilities for insurance reserves. Inherent in these calculations are management and actuarial judgments and estimates that could significantly impact the ending reserve liabilities and, consequently, operating results. Actual results may differ, and these estimates are subject to interpretation and change.

Policyholder funds represent interest-bearing liabilities arising from the sale of products, such as universal life, interest-sensitive life and annuities. Policyholder funds are comprised primarily of deposits received and interest credited to the benefit of the policyholder less surrenders and withdrawals, mortality charges and administrative expenses.

Interest Credited

Interest credited to policyholder funds represents interest accrued or paid on interest-sensitive life policies and investment policies. Amounts charged to operations (including interest credited and benefit claims incurred in excess of related policyholder account balances) are reported as insurance benefits, claims and reserves-life and annuity. Credit rates for certain annuities and interest-sensitive life policies are adjusted periodically by the Company to reflect current market conditions, subject to contractually guaranteed minimum rates.

Health

The Company believes that its recorded insurance reserves are reasonable and adequate to satisfy its ultimate liability. The Company primarily uses its own loss development experience, but will also supplement that with data from its outside actuaries, reinsurers and industry loss experience as warranted. To illustrate the impact that Loss Ratios have on the Company’s loss reserves and related expenses, each hypothetical 1% change in the Loss Ratio for the health business (i.e., the ratio of insurance benefits, claims and settlement expenses to earned health premiums) for the year ended December 31, 2011, would increase reserves (in the case of a higher ratio) or decrease reserves (in the case of a lower ratio) by approximately $3.0 million with a corresponding increase or decrease in the pre-tax expense for insurance benefits, claims and reserves in the Consolidated Statement of Operations. Depending on the circumstances surrounding a change in the Loss Ratio, other pre-tax amounts reported in the Consolidated Statement of Operations could also be affected, such as amortization of deferred acquisition costs and commission expense.

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


			December 31, 2011
			Claim		Policy		Total Health
			Reserves		Claims		Reserves

Medical Stop-Loss		$	58,741	$	-	$	58,741
Fully Insured Health			32,508		-		32,508
Group Disability			79,571		13,707		93,278
Individual Accident and Health
	and Other		8,222		238		8,460
		$	179,042	$	13,945	$	192,987


			December 31, 2010
			Claim		Policy		Total Health
			Reserves		Claims		Reserves

Medical Stop-Loss		$	64,221	$	117	$	64,338
Fully Insured Health			34,540		-		34,540
Group Disability			74,675		15,958		90,633
Individual Accident and Health
	and Other		8,011		446		8,457
		$	181,447	$	16,521	$	197,968

Medical Stop-Loss

All of the Company’s Medical Stop-Loss policies are short-duration and are accounted for based on actuarial estimates of the amount of loss inherent in that period’s claims or open claims from prior periods, including losses incurred for claims that have not been reported (“IBNR”). Short-duration contract loss estimates rely on actuarial observations of ultimate loss experience for similar historical events.

The two “primary” assumptions underlying the calculation of loss reserves for Medical Stop-Loss business are (i) projected Net Loss Ratio, and (ii) claim development patterns. The projected Net Loss Ratio is set at expected levels consistent with the underlying assumptions (“Projected Net Loss Ratio”). Claim development patterns are set quarterly as reserve estimates are developed and are based on recent claim development history (“Claim Development Patterns”). The Company uses the Projected Net Loss Ratio to establish reserves until developing losses provide a better indication of ultimate results and it is feasible to set reserves based on Claim Development Patterns. The Company has concluded that a reasonably likely change in the Projected Net Loss Ratio assumption could have a material effect on the Company’s financial condition, results of operations, or liquidity (“Material Effect”) but a reasonably likely change in the Claim Development Pattern would not have a Material Effect.

Projected Net Loss Ratio

Generally, during the first twelve months of an underwriting year, reserves for Medical Stop-Loss are first set at the Projected Net Loss Ratio, which is set using assumptions developed using completed prior experience trended forward. The Projected Net Loss Ratio is the Company’s best estimate of future performance until such time as developing losses provide a better indication of ultimate results.

While the Company establishes a best estimate of the Projected Net Loss Ratio, actual experience may deviate from this estimate. This was the case with the 2008, 2009 and 2010 underwriting years which deviated by 2.6, 0.6 and 0.3 Net Loss Ratio points, respectively. After the recorded reserve increase, it is reasonably likely that the actual experience will fall within a range up to five Net Loss Ratio points above or below the expected Projected Net Loss Ratio for the 2011 underwriting year at December 31, 2011. The impact of these reasonably likely changes at December 31, 2011, would be an increase in net reserves (in the case of a higher ratio) or a decrease in net reserves (in the case of a lower ratio) of up to approximately $2.7 million with a corresponding increase or decrease in the pre-tax expense for insurance benefits, claims and reserves in the 2011 Consolidated Statement of Operations.

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 (iii) 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 as discussed above.

Claim Development Patterns

Subsequent to the first twelve months of an underwriting year, the Company’s developing losses provide a better indication of ultimate losses. At this point, claims have developed to a level where Claim Development Patterns can be applied to generate reasonably reliable estimates of ultimate claim levels. Development factors based on historical patterns are applied to paid and reported claims to estimate fully developed claims. Claim Development Patterns are reviewed quarterly as reserve estimates are developed and are based on recent claim development history. The Company must determine whether changes in development represent true indications of emerging experience or are simply due to random claim fluctuations.

The Company also establishes its best estimates of claim development factors to be applied to more developed treaty year experience. While these factors are based on historical Claim Development Patterns, actual claim development may vary from these estimates. The Company does not believe that reasonably likely changes in its actual claim development patterns would have a Material Effect.

Predicting ultimate claims and estimating reserves in Medical Stop-Loss is more complex than fully insured medical and disability business due to the “excess of loss” nature of these products with very high deductibles applying to specific claims on any individual claimant and in the aggregate for a given group. The level of these deductibles makes it more difficult to predict the amount and payment pattern of such claims. Fluctuations in results for specific coverage are primarily due to the severity and frequency of individual claims, whereas fluctuations in aggregate coverage are largely attributable to frequency of underlying claims rather than severity. Liabilities for first dollar medical reserves and disability coverages are computed using completion factors and expected Net Loss Ratios derived from actual historical premium and claim data.

Due to the short-term nature of Medical Stop-Loss, redundancies or deficiencies will typically emerge during the course of the following year rather than over a number of years. For Employer Stop-Loss, as noted above, the Company maintains its reserves based on underlying assumptions until it determines that an adjustment is appropriate based on emerging experience from all of its MGUs for prior underwriting years.

Fully Insured Health

Reserves for fully insured medical and dental business are established using historical claim development patterns. Claim development by number of months elapsed from the incurred month is studied each month and development factors are calculated. These claim development factors are then

applied to the amount of claims paid to date for each incurred month to estimate fully complete claims. The difference between fully complete claims and the claims paid to date is the estimated reserve. Total reserves are the sum of the reserves for all incurred months.

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.

Group Disability

The Company’s Group Disability segment is comprised of Long Term Disability (“LTD”) and Disability Benefits Law (“DBL”). The two “primary” assumptions on which Group Disability reserves are based are: (i) morbidity levels; and (ii) recovery rates. If morbidity levels increase, for example due to an epidemic or a recessionary environment, the Company would increase reserves because there would be more new claims than expected. In regard to the assumed recovery rate, if disabled lives recover more quickly than anticipated then the existing claims reserves would be reduced; if less quickly, the existing claims reserves would be increased. Advancements in medical treatments could affect future recovery, termination, and mortality rates. With respect to LTD only, other assumptions are: (i) changes in market interest rates; (ii) changes in offsets; (iii) advancements in medical treatments; and (iv) cost of living. Changes in market interest rates could change reserve assumptions since the payout period could be as long as 40 years. Changes in offsets such as Social Security benefits, retirement plans and state disability plans also impact reserving. As a result of the forgoing assumptions, it is possible that the historical trend may not be an accurate predictor of the future development of the block. As with most long term insurance reserves that require judgment, the reserving process is subject to uncertainty and volatility and fluctuations may not be indicative of the claim development overall.

While the Company believes that larger variations are possible, the Company does not believe that reasonably likely changes in its “primary” assumptions would have a Material Effect.

Individual Accident and Health and Other

This segment is a combination of closed lines of business as well as certain small existing lines. While the assumptions used in setting reserves vary between these different lines of business, the assumptions would generally relate to the following: (i) the rate of disability; (ii) the morbidity rates on specific diseases; and (iii) accident rates. The reported reserves are based on management’s best estimate for each line within this segment. General uncertainties that surround all insurance reserving methodologies would apply. However, since the Company has so few policies of this type, volatility may occur due to the small number of claims.

Deferred Acquisition Costs

Costs that vary with and are primarily related to acquiring insurance policies and investment type contracts are deferred and recorded as deferred policy acquisition costs ("DAC"). These costs are principally broker fees, agent commissions, and the purchase prices of the acquired blocks of insurance policies and investment type contracts. DAC is amortized to expense and reported separately in the Consolidated Statements of Operations. All DAC within a particular product type is amortized on the same basis using the following methods:

For traditional life insurance and other premium paying policies amortization of DAC is charged to expense over the related premium revenue recognition period. Assumptions used in the amortization of DAC are determined based upon the conditions as of the date of policy issue or assumption and are not generally revised during the life of the policy.

For long duration type contracts, such as annuities and universal life business, amortization of DAC is charged to expense over the life of the underlying contracts based on the present value of the estimated gross profits ("EGPs") expected to be realized. EGPs consist of margins based on expected mortality rates, persistency rates, interest rate spreads, and other revenues and expenses. The Company regularly evaluates its EGPs to determine if actual experience or other evidence suggests that earlier estimates should be revised. If the Company determines that the current assumptions underlying the EGPs are no longer the best estimate for the future due to changes in actual versus expected mortality rates, persistency rates, interest rate spreads, or other revenues and expenses, the future EGPs are updated using the new assumptions and prospective unlocking occurs. These updated EGPs are utilized for future amortization calculations. The total amortization recorded to date is adjusted through a current charge or credit to the Consolidated Statement of Operations.

Internal replacements of insurance and investment contracts determined to result in a replacement contract that is substantially changed from the original contract, will be accounted for as an extinguishment of the original contract, resulting in a release of the unamortized deferred acquisition costs, unearned revenue, and deferred sales inducements associated with the replaced contract.

Investments

The Company has classified all of its investments as either available-for-sale or trading securities. These investments are carried at fair value with unrealized gains and losses reported in accumulated other comprehensive income (loss) in the Consolidated Balance Sheets for available-for-sale securities or as unrealized gains or losses in the Consolidated Statements of Operations for trading securities. Fixed maturities and equity securities available-for-sale totaled $880.4 million and $841.7 million at December 31, 2011 and 2010, respectively. Premiums and discounts on debt securities purchased at other than par value are amortized and accreted, respectively, to interest income in the Consolidated Statements of Operations, using the constant yield method over the period to maturity. Net realized gains and losses on investments are computed using the specific identification method and are reported in the Consolidated Statements of Operations.

Fair value is determined using quoted market prices when available. In some cases, we use quoted market prices for similar instruments in active markets and/or model-derived valuations where inputs are observable in active markets. When there are limited or inactive trading markets, we use industry-standard pricing methodologies, including discounted cash flow models, whose inputs are based on management assumptions and available current market information. Further, we retain independent pricing vendors to assist in valuing certain instruments, primarily all the securities in our portfolio classified in Level 2 or Level 3 in the Fair Value Hierarchy.

instances, management will assess the quality of the data sources, the underlying assumptions and the reasonableness of the broker quotes based on the current market information available. To determine if an exception represents an error, management will often have to exercise judgment. Procedures to resolve an exception vary depending on the significance of the security and its related class, the frequency of the exception, the risk of material misstatement, and the availability of information for the security. These procedures include, but are not limited to; (i) a price challenge process with the vendor; (ii) pricing from a different vendor; (iii) a reasonableness review; (iv) a change in price based on better information, such as an actual market trade, among other things. Management considers all facts and relevant information obtained during the above procedures to determine the proper classification of each security in the Fair Value Hierarchy.

Declines in value of securities available-for-sale that are judged to be other-than-temporary are determined based on the specific identification method. 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 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. For fixed maturities, if the Company intends to sell a security, or it is more likely than not that it will be required to sell the security prior to recovery of the security’s amortized cost basis, the entire difference between the security’s amortized cost basis and its fair value at the balance sheet date is recognized by a charge to total other-than-temporary impairment losses in the 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 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 Consolidated Balance Sheet.

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 and ability to hold a security, a loss is recognized by a charge to total other-than-temporary impairment losses in the Consolidated Statements 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 require the use of the equity model in analyzing the security for other-than-temporary impairment.

Goodwill and Other Intangible Assets

Goodwill carrying amounts are evaluated for impairment, at least annually, at the reporting unit level which is equivalent to an operating segment. If the fair value of a reporting unit is less than its carrying amount, further evaluation is required to determine if a write-down of goodwill is required. In determining the fair value of each reporting unit, we used an income approach, applying a discounted

cash flow method which included a residual value. Based on historical experience, we make assumptions as to: (i) expected future performance and future economic conditions, (ii) projected operating earnings, (iii) projected new and renewal business as well as profit margins on such business, and (iv) a discount rate that incorporated an appropriate risk level for the reporting unit. Any impairment of goodwill would be charged to expense. No impairment charge for goodwill was required in 2011 or 2010. At December 31, 2009, the Company wrote-off $4.2 million of goodwill in connection with an other-than-temporary impairment loss related to its then equity method investment in AMIC. During 2010, the Company obtained a controlling interest in AMIC. See Note 2 in the Notes to Consolidated Financial Statements included in Item 8 of this report for further information.

Other intangible assets are amortized to expense over their estimated useful lives and are subject to impairment testing. Any impairment write-down of other intangible assets would be charged to expense. For the year ended December 31, 2009, selling, general and administrative expenses include the write-off of $5.1 million of previously capitalized software. See Note 11 in the Notes to Consolidated Financial Statements included in Item 8 of this report for further information regarding the impairment loss in 2009. No impairment charges for intangible assets were required in 2011 or 2010.

If we experience a sustained decline in our results of operations and cash flows, or other indicators of impairment exist, we may incur a material non-cash charge to earnings relating to impairment of our goodwill, which could have a material adverse effect on our results.

Deferred Income Taxes

The provision for deferred income taxes is based on the asset and liability method of accounting for income taxes. Under this method, deferred income taxes are recognized by applying enacted statutory tax rates to temporary differences between amounts reported in the Consolidated Financial Statements and the tax bases of existing assets and liabilities. A valuation allowance is recognized for the portion of deferred tax assets that, in management's judgment, is not likely to be realized. The effect on deferred income taxes of a change in tax rates or laws is recognized in income tax expense in the period that includes the enactment date. The Company has certain tax-planning strategies that were used in determining that a valuation allowance was not necessary on its deferred taxes.

RESULTS OF OPERATIONS

Acquisition of AMIC

On March 5, 2010, IHC acquired a controlling interest in AMIC as a result of the purchase of AMIC common stock in the open market. In determining the bargain purchase gain with regard to the acquisition of the controlling interest in AMIC, IHC first recognized a gain of $2.2 million as a result of re-measuring its equity interest in AMIC to its fair value of $22.0 million immediately before the acquisition based on the closing market price of AMIC's common stock. Then, upon the acquisition of a controlling interest on March 5, 2010, the Company consolidated the net assets of AMIC. Accordingly, the Company determined the fair value of the identifiable assets acquired and liabilities assumed from AMIC on such date. The fair value of the net assets acquired exceeded the sum of: (i) the fair value of the consideration paid; (ii) the fair value of IHC’s equity investment prior to the acquisition; and (iii) the fair value of the noncontrolling interests in AMIC, resulting in a bargain purchase gain of $25.6 million. The total gain, amounting to $27.8 million pre-tax, is included in gain on bargain purchase of AMIC on the Company’s Consolidated Statement of Operations. This gain is a result of the quoted market price of AMIC being significantly less than the fair value of the net assets of AMIC. This disparity is due to the

low trading volume in AMIC shares, and a discount on the shares traded due to a lack of control by minority shareholders. The fair value of the noncontrolling interests in AMIC was based on the closing market price of AMIC’s common stock.

Prior to obtaining control, IHC recorded its investment in AMIC using the equity method. IHC recorded changes in its investment in AMIC in the “Equity income from AMIC” line in the Consolidated Statements of Operations. Upon achieving control, on March 5, 2010, AMIC’s income and expense amounts became consolidated with IHC’s results. Accordingly, the individual line items on the Consolidated Statement of Operations for 2010 reflect approximately ten months of the operations of AMIC and no corresponding amounts for 2009.

Results of Operations for the Year Ended December 31, 2011 Compared to the Year Ended December 31, 2010

Information by business segment for the year ended December 31, 2011 and 2010 is as follows:


							Equity					Benefits,				Amortization			Selling,
December 31,					Net		Income		Fee and			Claims				of Deferred			General
	2011	Premiums			Investment		From		Other			and				Acquisition			and
(In thousands)		Earned			Income		AMIC		Income			Reserves				Costs			Administrative			Total

Medical stop-loss		$	114,478		4,399		-		4,620			75,490				-			39,024			$	8,983
Fully Insured		141,322			1,429		-		25,149			89,040				21			71,147				7,692
Group disability,
	life, annuities
	and DBL	50,698			9,495		-		183			37,946				5,099			15,598				1,733
Individual life,
	annuities
	and other	29,916			23,492		-		4,695			36,386				6,449			14,879				389
Corporate		-			973		-		-			-				-			6,454				(5,481)
Sub total		$	336,414		$	39,788	$	-	$	34,647		$		238,862		$	11,569		$		147,102		13,316

Net realized investment gains																							8,670
Other-than-temporary impairment losses																							(1,523)
Interest expense																							(1,965)
Income from continuing operations before income taxes																							18,498
Income taxes																							3,732
Income from continuing operations																						$	14,766


							Equity				Benefits,				Amortization			Selling,
December 31,					Net		Income		Fee and		Claims				of Deferred			General
	2010	Premiums			Investment		From		Other		and				Acquisition			and
(In thousands)		Earned			Income		AMIC		Income		Reserves				Costs			Administrative				Total

Medical stop-loss		$		121,156	4,080		14		5,404		89,968				-			38,808				$	1,878
Fully Insured		120,818			1,454		244		28,168		81,676				28			65,854					3,126
Group disability,
	life, annuities
	and DBL	55,828			9,668		22		454		41,440				497			17,389					6,646
Individual life,
	annuities
	and other	28,344			25,839		-		4,458		38,234				5,718			12,472					2,217
Corporate		-			760		-		27,830		-				-			5,120					23,470
Sub total		$		326,146	$	41,801	$	280	$	66,314	$		251,318		$		6,243	$		139,643			37,337

Net realized investment losses																							4,646
Other-than-temporary impairment losses																							(3,819)
Interest expense																							(1,912)
Income from continuing operations before income taxes																							36,252
Income taxes																							12,583
Income from continuing operations																						$	23,669

Premiums Earned

Premiums in 2011 include twelve months of earned premiums from AMIC of $72.4 million compared to ten months of earned premiums from AMIC of $61.6 million in 2010. Excluding these amounts, earned premiums decreased $.5 million. The decrease is primarily due to: (i) a $15.6 million net increase of premiums earned in the Fully Insured Health segment in 2011 primarily as a result of increased retentions in the major medical business for groups and individuals, short term medical and limited medical lines of business and increased volume in the major medical business for groups and individuals and limited medical lines, partially offset by a decrease in the student accident line as a result of the cancellation of a producer of this product; (ii) an increase of $1.6 million of earned premiums in the Individual life, annuities and other segment primarily as a result of the ceding of certain ordinary life and annuity business during 2010, in part offset by reduced production of annuity contracts; more than offset by (iii) a $12.3 million decrease in the Medical Stop-Loss segment primarily due to the cancellation of non-owned managing general underwriters in 2010; and (iv) a $5.4 million decrease in the Group disability, life, annuities and DBL segment primarily due to lower production and reduced rates in the DBL line and the discontinuance of the point of service line.

Net Investment Income

Total net investment income decreased $2.0 million. The overall annualized investment yields were 4.3% and 4.6% (approximately 4.4% and 4.8%, on a tax advantaged basis) for 2011 and 2010, 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. IHC has approximately $273.3 million in highly rated shorter duration securities earning on average 1.5%. 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 $8.7 million in 2011 compared to $4.6 million in 2010. 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. A significant portion of the net realized investment gains in 2011 resulted from sales of invested assets in anticipation of a transfer of assets in the first quarter of 2012 in accordance with the terms of a coinsurance agreement at December 31, 2011. Net realized investment gains in 2010 were reduced by an additional loss of $3.3 million resulting from discussions in the fourth quarter of 2010 with the trustee in bankruptcy pertaining to the resolution of claims related to the non-affiliate broker-dealer that managed the trading accounts of the Company in 2008. The $3.3 million pre-tax loss consisted of: (i) the reversal of $.5 million of anticipated SIPC recoveries initially recorded by a subsidiary of IHC; (ii) the reversal of $.5 million of anticipated SIPC recoveries initially recorded by AMIC; and (iii) an additional $2.3 million of withdrawals by IHC and AMIC deemed subject to return. See Note 8 in the Notes to Consolidated Financial Statements included in the Item 8 of this report for more information about net realized investment gains and losses.

For the year ended December 31, 2011 and 2010, the Company recorded $1.5 million and $3.8 million, respectively, of other-than-temporary impairment losses in earnings, pre-tax. In 2011, other-than-temporary impairment losses recognized in earnings consist of $1.3 million of credit losses resulting from expected cash flows of debt securities that are less than the debt securities’ amortized cost and $.2 million of losses resulting from the Company’s intent to sell certain corporate debt securities prior to the recovery of their amortized cost bases. In 2010, other-than-temporary impairment losses recognized in earnings consist of $3.1million of credit losses resulting from expected cash flows of debt securities that are less than the debt securities’ amortized cost and $.7 million resulting from the Company’s intent to sell certain municipal debt securities prior to the recovery of their amortized cost bases.

Fee Income and Other Income

Fee income decreased $4.1 million primarily as a result of the lower volume of business in the Medical Stop-Loss segment and certain lines of the Fully Insured Health segment.

Total other income for 2011 remained comparable to other income for 2010.

Insurance Benefits, Claims and Reserves

Benefits, claims and reserves in 2011 includes twelve months of benefits, claims and reserves from AMIC of $47.8 million compared to ten months of benefits, claims and reserves from AMIC of $42.0 million in 2010. Excluding these amounts, benefits, claims and reserves decreased $18.2 million. The decrease is primarily attributable to: (i) a decrease of $16.4 million in the Medical Stop-Loss segment, largely resulting from a decrease in premiums earned and improved loss ratios; (ii) a $3.7 million decrease in the Group disability, life, annuities and DBL segment largely as a result of lower loss ratios on the GTL line of business and a decrease in the point of service line which has been discontinued; and (iii) a $1.8 million decrease in the Individual life, annuity and other segment primarily resulting from a decrease in individual annuity contracts in 2011; partially offset by (iv) an increase of $3.7 million in the Fully Insured Health segment, principally due to the increase in premiums on the major medical business for groups and individuals and the limited medical line of business, partially offset by a decrease in short term medical business due to improved experience and a decrease in the student accident line resulting from a lower volume of business due to the cancellation of a producer of this product.

Amortization of Deferred Acquisition Costs

On December 31, 2011, the Company wrote-off $4.6 million of deferred acquisition costs in connection with a coinsurance agreement that is effective in the first quarter of 2012. Excluding this write-off, amortization of deferred acquisition costs increased $.8 million.

Selling, General and Administrative Expenses

Selling, general and administrative expenses in 2011 include twelve months of expenses from AMIC of $28.0 million compared to ten months of expenses from AMIC of $23.1 million in 2010. Excluding these amounts, selling, general and administrative expenses increased $2.6 million. The increase is primarily due to: (i) a $3.2 million decrease in commissions and other general expenses in the Medical Stop-Loss segment due to a decrease in volume as a result of reduced production; (ii) a $1.9 million decrease in the Group disability, life, annuities and DBL segment; more than offset by (iii) a $4.5 million increase in the Fully Insured Health segment largely due to an increase in commissions as a result of increased retentions in the major medical business for groups and individuals, short term medical and limited medical lines of business in 2011 combined with administrative expenses resulting from the increased volume of major medical business for groups and individuals and limited medical business; (iv) a $2.4 million increase in the Individual life, annuity and other segment related to the increase in premium volume of the ordinary life and annuity business; and (v) a net increase of $.8 million in corporate selling, general and administrative expenses.

Income Taxes

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. In addition, under the above assumptions, IHC did not record deferred taxes in 2011 relative to its share of earnings from its investment in AMIC, as it had in prior years, also resulting in a lower effective tax rate in the current year. Excluding this transaction, the effective tax rate for the year ended December 31, 2011 was 32.4% compared to 34.8% in 2010. The high effective tax rate in 2010 is

primarily attributable to higher jurisdictional tax rates on the gain related to the AMIC acquisition in 2010.

Results of Operations for the Year Ended December 31, 2010 Compared to the Year Ended December 31, 2009

Information by business segment for the years ended December 31, 2010 and 2009 is as follows:


						Equity				Benefits,		Amortization		Selling,
December 31,				Net		Income		Fee and		Claims		of Deferred		General
	2010	Premiums		Investment		From		Other		and		Acquisition		and
(In thousands)		Earned		Income		AMIC		Income		Reserves		Costs		Administrative		Total

Medical stop-loss		$	121,156	4,080		14		5,404		89,968		-		38,808		$	1,878
Fully Insured		120,818		1,454		244		28,168		81,676		28		65,854			3,126
Group disability,
	life, annuities
	and DBL	55,828		9,668		22		454		41,440		497		17,389			6,646
Individual life,
	annuities
	and other	28,344		25,839		-		4,458		38,234		5,718		12,472			2,217
Corporate		-		760		-		27,830		-		-		5,120			23,470
Sub total		$	326,146	$	41,801	$	280	$	66,314	$	251,318	$	6,243	$	139,643		37,337

Net realized investment gains																	4,646
Other-than-temporary impairment losses																	(3,819)
Interest expense																	(1,912)
Income from continuing operations before income taxes																	36,252
Income taxes																	12,583
Income from continuing operations																$	23,669


						Equity					Benefits,			Amortization			Selling,
				Net		Income		Fee and			Claims			of Deferred			General
December 31,		Premiums		Investment		From		Other			and			Acquisition			and
	2009	Earned		Income		AMIC		Income			Reserves			Costs			Administrative		Total
(In thousands)

Medical stop-loss		$	127,724	3,690		786		921			92,899			-			36,513		$	3,709
Fully Insured		84,698		789		387		30,101			58,500			28			65,255			(7,808)
Group disability,
	life, annuities
	and DBL	54,896		9,657		116		323			39,270			364			18,251			7,107
Individual life,
	annuities and other	27,481		28,070		-		5,087			34,565			5,127			14,644			6,302
Corporate		-		1,314		-		-			-			-			4,707			(3,393)
Sub total		$	294,799	$	43,520	$	1,289		$	36,432		$	225,234		$	5,519	$	139,370		5,917

Net realized investment gains																				8,789
Other-than-temporary impairment losses																				(29,991)
Interest expense																				(2,817)
Loss from continuing operations before income tax benefits																				(18,102)
Income tax benefits																				(10,669)
Loss from continuing operations																			$	(7,433)

Premiums Earned

Premiums earned in 2010 include $61.6 million of earned premiums related to the consolidation of AMIC with no comparable amounts in 2009. Excluding these amounts, earned premiums in 2010 decreased by $30.3 million compared to 2009. The decrease is primarily due to: (i) a $39.5 million decrease in the Medical Stop-Loss segment primarily due to reduced production from the termination of certain non-owned managing general underwriters and market conditions; and (ii) a $1.8 million decrease in the Group disability, life, annuities and DBL segment primarily resulting from a $1.3 million decrease in group term life business, a $1.8 million net decrease in point of service and other lines of this segment, offset by an increase of 1.3 million in the LTD line due to new business written; partially offset by (iii) a $10.1 million increase in premiums earned in the Fully Insured Health segment comprised primarily of a

$4.0 million increase in dental premiums and a $4.4 million increase in small group premiums as a result of both increased production and increased retention, and a $4.2 million net increase in other lines of this segment due to increased production, principally in the limited medical and vision lines, offset by a $2.5 million decrease in student accident premiums as a result of the cancellation of a producer of this product; and (iv) a $.9 million increase in premiums earned in the Individual life, annuities and other segment.

Net Investment Income

Total net investment income decreased $1.7 million. The overall annualized investment yields were 4.6% and 5.1% (approximately 4.8% and 5.3%, on a tax advantaged basis) for 2010 and 2009, respectively. The annualized investment yields on bonds, equities and short-term investments were 4.5% and 4.9% in 2010 and 2009, respectively. The decrease in investment income is due to a decrease in yields and the shorter duration of our portfolio. IHC has approximately $164.5 million in highly rated shorter duration securities earning on average 1.4%. A portfolio that is shorter in duration enables us, if we deem prudent, the flexibility to reinvest in higher yielding longer-term securities in an increasing interest rate environment.

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

Net realized investment gains decreased $4.2 million in 2010. These amounts include gains and losses from sales of fixed maturities and equity securities available-for-sale, trading securities 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. Net realized investment gains in 2010 were reduced by an additional loss of $3.3 million resulting from discussions in the fourth quarter of 2010 with the trustee in bankruptcy pertaining to the resolution of claims related to the non-affiliate broker-dealer that managed the trading accounts of the Company in 2008. The $3.3 million pre-tax loss consisted of: (i) the reversal of $.5 million of anticipated SIPC recoveries initially recorded by a subsidiary of IHC; (ii) the reversal of $.5 million of anticipated SIPC recoveries initially recorded by AMIC; and (iii) an additional $2.3 million of withdrawals by IHC and AMIC deemed subject to return. A settlement agreement was entered into with the trustee in the first quarter of 2011 and payment by the Company is expected to be made on or before July, 15, 2011. See Note 8 in the Notes to Consolidated Financial Statements included in the Item 8 of this report for more information about net realized investment gains and losses.

Other-than-temporary impairment losses in 2010 consist of $3.1 million of credit losses resulting from expected cash flows of debt securities that are less than the debt securities’ amortized cost and $.7 million resulting from the Company’s intent to sell certain municipal debt securities prior to the recovery of their amortized cost bases. Other-than-temporary impairment losses in 2009 consist of $29.2 million related to an other-than-temporary impairment of the Company’s investment in AMIC due to the length of time, and the magnitude of the amount by which the quoted market price of AMIC was below IHC’s carrying value and $.8 million resulting from the Company’s intent to sell certain securities prior to the recovery of their amortized cost bases. See the discussion above related to the offsetting bargain purchase gain related to the acquisition of AMIC in March 2010.

Fee Income and Other Income

Fee income in 2010 includes $5.8 million of fee income related to the consolidation of AMIC with no comparable amounts in 2009. Excluding these amounts, fee income in 2010 decreased by $2.4 million compared to 2009. The decrease is primarily a result of decreased profit commissions and a lower volume of other fully-insured business administered by IHC Administrative Services.

Excluding amounts generated by AMIC, other income in 2010 decreased by $1.4 million compared to 2009. In 2009, other income includes income resulting from the commutation of a block of business.

Insurance Benefits, Claims and Reserves

Benefits, claims and reserves in 2010 include $42.0 million of benefits, claims and reserves related to the consolidation of AMIC with no comparable amounts in 2009. Excluding these amounts, benefits, claims and reserves in 2010 decreased by $15.9 million compared to 2009. The decrease is primarily attributable to: (i) a $26.8 million decrease in the Medical Stop-Loss segment, largely resulting from a decrease in premiums earned; partially offset by (ii) an increase of $6.6 million in the Fully Insured Health segment, principally due to increases in claims and reserves on dental, small group, short term medical, limited medical and vision lines of business partially offset by a decrease in student accident reserves as a result of a lower volume of business; (iii) a $3.7 million increase in the Individual life, annuity and other segment primarily resulting from an increase in individual annuity contracts in 2010 and an increase in ordinary life and annuities over 2009 levels due to the commutation of reserves in 2009; and (iv) an increase of $.6 million in the Group disability, life, annuities and DBL segment largely as a result of higher claims on the group term life line of business offset by a decrease in the point of service line.

Amortization of Deferred Acquisition Costs

Amortization of deferred acquisition costs increased $.7 million.

Interest Expense on Debt

Interest expense decreased $.9 million primarily as a result of principal repayments and lower interest rates.

Selling, General and Administrative Expenses

Selling, general and administrative expenses in 2010 include $23.1 million of AMIC related expenses with no comparable amounts in 2009. Excluding AMIC expenses, total selling, general and administrative expenses in 2010 decreased by $22.9 million compared to 2009. The decrease is primarily due to: (i) an $8.6 million decrease in commissions and other general expenses in the Medical Stop-Loss segment due to a decrease in volume as a result of reduced production; (ii) an $9.6 million decrease in the Fully Insured Health segment largely due to a decrease in general expenses as a result of lower business volume and a reduction in work force, (iii) a $1.6 million decrease in the Group disability, life, annuities and DBL segment primarily due to decreased premiums in the group term life and point of service lines; (iv) a $2.2 million decrease in commission, other general and administrative expenses associated with the Individual life, annuities and other segment, partially related to the ceding of a block of life and annuity business in 2009; and (v) a $.9 million decrease in corporate general and administrative expenses.

Income Taxes

Income tax expense increased primarily as the result of the gain recorded on the acquisition of a controlling interest in AMIC in the first quarter of 2010. The effective tax rate was 34.8% for the year ended 2010 compared to (59.0%) for the year ended 2009. In 2009, the effective tax rate is the result of (i) tax expense on pre-tax income generated by the life companies; more than offset by (ii) tax benefits derived from tax exempt interest and dividend received deductions as a result of the Company's investments in both state and political subdivisions and preferred securities; and (iii) tax benefits on pre-tax losses from the non-life businesses which have higher effective rates due to state tax benefits.

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. In the fourth quarter of 2011, the Insurance Group was reorganized such that Madison National Life and Standard Security Life became sister companies under a common Corporate parent company, whereas prior Standard Security Life was a wholly owned subsidiary of Madison National Life. The Insurance Group declared and paid $2,000,000, $3,450,000 and $3,000,000 of cash dividends to Corporate in 2011, 2010 and 2009, respectively.

In 2011, the Company amended its amortizing term loan increasing it by $2.5 million to $10.0 million.

Corporate utilizes cash primarily for the payment of general overhead expenses, common stock dividends, common stock repurchases and debt repayment.

Cash Flows

As of December 31, 2011, the Company had $18.2 million of cash and cash equivalents compared with $11.4 million as of December 31, 2010.

For the year ended December 31, 2011, operating activities provided net cash of $27.9 million which was offset by the $24.2 million of net cash used by investing activities.

The Company has $458.7 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 year ended December 31, 2011, cash received from the maturities and other repayments of fixed maturities was $158.7 million.

Financing activities for the year ended December 31, 2011 provided $3.1 million, primarily consisting of proceeds from debt and investment-type insurance contracts, net of dividends paid, repurchases of common stock and cash used to purchase additional noncontrolling interests in majority-owned subsidiaries, among other items.

The Company believes it has sufficient cash to meet its currently anticipated business requirements over the next twelve months including working capital requirements and capital investments.

BALANCE SHEET

Total investments increased $13.2 million during the year ended December 31, 2011 largely due to $13.1 million in pre-tax unrealized gains on available-for-sale securities.

The Company had net receivables from reinsurers of $119.7 million at December 31, 2011. All of such reinsurance receivables are either due from highly rated companies or are adequately secured. No allowance for doubtful accounts was necessary at December 31, 2011.

On December 31, 2011, the Company wrote-off $4.6 million of deferred acquisition costs in connection with a coinsurance agreement effective in the first quarter of 2012.

Other assets decreased $11.2 million primarily as a result of a decrease in tax assets.

In 2011, the Company amended its amortizing term loan increasing it by $2.5 million to $10.0 million.

The increase in total equity is primarily the result of net income and the net change in unrealized gains on investment securities. In 2011, the Company acquired shares of AMIC, in multiple transactions, from noncontrolling interests with an aggregate value of $12.6 million, in exchange for the aggregate issuance of IHC common stock valued at $11.5 million and $1.0 million cash. These AMIC transactions, in addition to other less significant capital transactions, resulted in an increase to IHC’s stockholders’ equity and a decrease in the equity attributable to noncontrolling interests.

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 $5.3 million at December 31, 2011, approximately 97.6% 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 December 31, 2011, approximately 2.4% (or $20.2 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 maturity investments at December 31, 2011.

At December 31, 2011, the Company had $19,430,000 invested in whole loan CMOs backed by Alt-A mortgages. Of this amount, 44% were in CMOs that originated in 2005 or earlier and 56% were in CMOs that originated in 2006. The Company’s mortgage security portfolio has no direct exposure to sub-prime mortgages. The unrealized losses for the equity securities was primarily due to wider spreads from preferred stocks issued by financial institutions following the disruption in credit markets since the time of their acquisition. Some of these financial institutions have exposure to sub-prime mortgages.

Approximately 1.9% of fixed maturities, primarily municipal obligations, in our investment portfolio are insured by financial guaranty insurance companies. The purpose of this insurance is to increase the credit quality of the fixed maturities and their credit ratings. If the obligations of these financial guarantors ceased to be valuable, either through a credit rating downgrade or default, these debt securities would likely receive lower credit ratings by the rating agencies that would reflect the creditworthiness of the various obligors as if the fixed maturities were uninsured. The following table

summarizes the credit quality of our fixed maturity portfolio as rated, and as rated if the fixed maturities were uninsured, at December 31, 2011:


		As Rated
Bond Ratings	As Rated	If Uninsured

AAA	20.3%	19.7%
AA	55.6%	55.5%
A	19.6%	19.6%
BBB	2.1%	2.8%

Total Investment Grade	97.6%	97.6%

BB or lower	2.4%	2.4%

Total Fixed Maturities	100.0%	100.0%

Changes in interest rates, credit spreads, and investment quality ratings may cause the market value of the Company’s investments to fluctuate. The Company does not have the intent to sell nor is it more likely than not that the Company will have to sell debt securities in unrealized loss positions that are not other-than-temporarily impaired before recovery. In the event that the Company’s liquidity needs require the sale of fixed maturity securities in unfavorable interest rate, liquidity or credit spread environments, the Company may realize investment losses.

The Company reviews its investments regularly and monitors its investments continually for impairments, as discussed in Note 1(E) (vi) of the Notes to Consolidated Financial Statements in Item 8 of this report. For the years ended December 31, 2011 and 2010 the Company recorded losses of $2.5 million and $3.8 million, respectively, for other-than-temporary impairments on available-for-sale securities. Of those impairment losses, $1.5 million and $3.8 million, respectively, were recognized in earnings for the years ended December 31, 2011 and 2010. In 2011, $.9 million of impairment losses were recognized in other comprehensive income. The following table summarizes the carrying value of securities with fair values less than 80% of their amortized cost at December 31, 2011 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	$	-	$	-	$	262	$	910	$	1,172
Equity securities		-		-		-		-
Total	$	-	$	-	$	262	$	910	$	1,172

The unrealized losses on all available-for-sale securities have been evaluated in accordance with the Company's impairment policy and were determined to be temporary in nature at December 31, 2011. In 2011, the Company experienced $13.1 million of unrealized gains (including $.9 million of other-than-temporary impairment losses recorded in other comprehensive income during the year), which was offset by $3.4 million of deferred taxes and $2.5 million of allocated 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.

Goodwill

Goodwill represents the excess of the amount we paid to acquire subsidiaries and other businesses over the fair value of their net assets at the date of acquisition. The Company tests goodwill for impairment at least annually and between annual tests if an event or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Goodwill is considered impaired when the carrying amount of goodwill exceeds its implied fair value.

All goodwill carrying amounts are evaluated for impairment at the reporting unit level which is equivalent to an operating segment. Goodwill was allocated to each reporting unit or operating segment at the time of acquisition. At December 31, 2011, total goodwill was $50.3 million, of which $44.6 million was attributable to the Fully Insured Health segment and $5.7 million to the Medical Stop Loss segment.

Based upon the goodwill impairment testing performed at December 31, 2011, the fair value of each reporting unit exceeded its carrying value and no impairment charge was required. Fair value exceeded carrying value by 10% or more in both the Fully Insured Health and the Medical Stop Loss segments.

In determining the fair value of each reporting unit, we used an income approach, applying a discounted cash flow method which included a residual value. Based on historical experience, we made assumptions as to: (i) expected future performance and future economic conditions, (ii) projected operating earnings, (iii) projected new and renewal business as well as profit margins on such business, and (iv) a discount rate that incorporated an appropriate risk level for the reporting unit.

Management uses a significant amount of judgment in estimating the fair value of the Company’s reporting units. The key assumptions underlying the fair value process are subject to uncertainty and change. The following represent some of the potential risks that could impact these assumptions and the related expected future cash flows: (i) increased competition; (ii) an adverse change in the insurance industry and overall business climate; (iii) changes in state and federal regulations; (iv) rating agency downgrades of our insurance companies; and (v) a sustained and significant decrease in our share price and market capitalization. As a result of the global economic crisis that began in 2008, we experienced a significant decline in our stock price. Due to this significant decline, our market capitalization as of December 31, 2011 was significantly below the sum of our reporting units’ fair values. As a result, the Company assessed the factors contributing to the performance of IHC stock in 2011, and concluded that the market capitalization does not represent the fair value of the Company. The Company noted several factors that have led to a difference between the market capitalization and the fair value of the Company, including (i) the Company’s stock is thinly traded and a sale of even a small number of shares can have a large percentage impact on the price of the stock, (ii) Geneve Corporation and insiders own approximately 56% of the outstanding shares, which has had a significant adverse impact on the number of shares available for sale and therefore the trading potential of IHC stock, and (iii) lack of analyst coverage of the Company. The Company will continue to monitor IHC’s book value against market capitalization to determine whether an interim test of goodwill is warranted. If we experience a sustained decline in our results of operations and cash flows, or other indicators of impairment exist, we may incur a material non-cash charge to earnings relating to impairment of our goodwill, which could have a material adverse effect on our results.

Health Reserves

The following table summarizes the prior year net favorable amount incurred in 2011 according to the year to which it relates, together with the opening reserve balance (net of reinsurance recoverable) to which it relates (in thousands):


	Reserves at		Prior Year Amount
		January 1, 2011		Incurred in 2011
Total Reserves
2010	$	82,841	$	(8,701)
2009		12,408		(1,193)
2008		4,628		125
2007 and Prior		15,367		2,277

Total	$	115,244	$	(7,492)

The following sections describe, for each segment, the unfavorable (favorable) development experienced in 2011, together with the key assumptions and changes therein affecting the reserve estimates.

Medical Stop-Loss

The Company experienced net favorable development of $2.6 million in the Medical Stop-Loss segment. The favorable development was the result of on-going analysis of recent loss development trends primarily attributable to improvements on the direct written business in the 2009 treaty year and the business assumed from other carriers in the 2007 treaty year.

Fully Insured Health

The Fully Insured Health segment had a favorable development of $2.3 million. The Company experienced a $1.7 million favorable variance related to 2010 reserves primarily on the group major medical business.

Group Disability

The Group Disability segment had a favorable development of $2.4 million. This amount consists of a favorable development of $4.5 million on the 2010 reserves, primarily due to DBL ($.9 million) and LTD ($3.4 million), and a net unfavorable development of $.9 million for all other years.

Due to the long-term nature of LTD, in establishing loss reserves the Company must make estimates for case reserves, incurred but not reported reserves (“IBNR”), and reserves for Loss Adjustment Expenses (“LAE”). Case reserves generally equal the actuarial present value of the liability for future benefits to be paid on claims incurred as of the balance sheet date. The IBNR reserve is established based upon historical trends of existing incurred claims that were reported after the balance sheet date. The LAE reserve is calculated based on an actuarial expense study. Since the LTD block of policies is relatively small, with the potential for very large claims on individual policies, results can vary from year to year. If a small number of claimants with large claim reserves were to recover or several very large claims were incurred, the results could distort the Company’s reserve estimates from year to year. However, there were no individual factors in 2011 that caused the favorable development in LTD. With respect to DBL, reserves for the most recent quarter of earned premium are established using a Net Loss Ratio methodology. The Net Loss Ratio is determined by applying the completed prior four quarters of historical Net Loss Ratios to the last quarter of earned premium. Reserves associated with the premium earned prior to the last quarter are established using a completion factor methodology. The

completion factors are developed using the historical payment patterns for DBL. The favorable development in the DBL line is due to lower than expected claims.

There were normal fluctuations to the Company's experience factor. The IBNR factors were updated to reflect the current experience. The reserving process used by management was consistent from 2010 to 2011.

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. In November 2004, December 2003 and March 2003, the Company borrowed $15.0 million, $12.0 million and $10.0 million, respectively, through pooled trust preferred issuances by unconsolidated subsidiary trusts. In August 2009, the outstanding line of credit was cancelled and converted into an amortizing term loan. In 2011 the term loan was amended and increased from $7.5 million to $10.0 million. See Note 14 of the Notes to Consolidated Financial Statements in Item 8 of this report.

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 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 chart below reflects the maturity distribution of IHC’s contractual obligations at December 31, 2011 (in thousands):


					Junior								Funds
					Subordinated		Interest				Insurance			on
			Debt		Debt		On Debt		Leases		Reserves		Deposit			Total

2012		$	2,000	$	-	$	2,103	$	3,237	$	137,199	$	35,129		$	179,668
2013			2,000		-		2,004		2,620		39,471		33,241			79,336
2014			2,000		-		1,905		2,370		31,918		31,490			69,683
2015			2,000		-		1,806		2,313		28,053		29,606			63,778
2016			2,000		-		1,707		2,037		26,057		28,016			59,817
2017 and
Thereafter			-		38,146		28,452		1,254		195,980		259,828			523,660
	Totals	$	10,000	$	38,146	$	37,977	$	13,831	$	458,678	$	417,310		$	975,942

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 continuing to improve the profitability of the block. In addition, we will retain all the risk written by our carriers through Risk Solutions, subject to customary excess

coverage. This increase in net retained premiums has been made possible by our increased capital base.

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 2011 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 $273.3 million in highly rated shorter maturity securities earning on average 1.5%; 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.

At December 31, 2011, IHC owned approximately 78% 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 its possible revision by the newly-elected Congress. 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.

ITEM 7A.

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 following summarizes the estimated pre-tax change in fair value (based upon hypothetical parallel shifts in the U.S. Treasury yield curve) of the fixed income portfolio assuming immediate changes in interest rates at specified levels at December 31, 2011:


		Change in Interest Rates

		200 basis point rise		100 basis point rise		Base scenario		100 basis point decline		200 basis point decline

Corporate securities	$	293,734	$	307,856	$	323,140	$	337,261	$	346,115
CMO’s		35,130		36,178		37,313		38,458		39,152
U.S. Government obligation		146,325		155,987		166,582		177,009		184,239
Agency MBS		554		569		585		596		596
GSE		52,340		55,853		59,851		64,406		69,583
State & Political Subdivision		219,288		236,579		255,402		270,880		276,831

Total Estimated fair value	$	747,371	$	793,022	$	842,873	$	888,610	$	916,516

Estimated change in value	$	(95,502)	$	(49,851)			$	45,737	$	73,643

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.

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 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Index to Consolidated Financial Statements and Schedules on page 60.

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON

ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.

CONTROLS AND PROCEDURES

Evaluation of Disclosure 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 (the “Securities Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC'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.

Management Report on Internal Control Over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(b) and 15d-15(f) promulgated under the Securities Exchange Act as a process designed by, or under the supervision of IHC's principal executive and principal financial officers and effected by IHC's board, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP and includes those policies and procedures that:

pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;

provide reasonable assurance that the transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP and that receipts and expenditures of the Company are being made only in accordance with authorization of management and directors of the Company; and

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of human error and the circumvention or overriding of controls, material misstatements may not be prevented or detected on a timely basis. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes and conditions or that the degree of compliance with policies or procedures may deteriorate. Accordingly, even internal controls determined to be effective can provide only reasonable assurance that information required to be disclosed in and reports filed under the Securities Exchange Act is recorded, processed, summarized and represented within the time periods required.

This annual report does not include an attestation report of IHC's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by IHC's registered public accounting firm pursuant to rules of the SEC that permit IHC to provide only management's report in this annual report.

Changes in Internal Control Over Financial Reporting

There has been no change in IHC's internal control over financial reporting during the year ended December 31, 2011 that materially affected, or is reasonably likely to materially affect, IHC's internal control over financial reporting.

The Report of Management on Internal Control Over Financial Reporting is included in Item 8 of this Form 10-K.

ITEM 9B.

OTHER INFORMATION

None.

PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE

GOVERNANCE

The information required by this Item is hereby incorporated by reference from our definitive proxy statement relating to the annual meeting of IHC’s stockholders to be held in June 2012, which definitive proxy statement will be filed with the Securities and Exchange Commission (“SEC”).

Our written Code of Business Ethics and Corporate Code of Conduct may be found on our website, www.ihcgroup.com, under the Corporate Information / Corporate Governance tabs. Both Codes apply to all of our directors, officers and employees, including our principal executive officer and our senior financial officers. Any amendment to or waiver from either of the Codes will be posted to the same location on our website, to the extent such disclosure is legally required.

ITEM 11.

EXECUTIVE COMPENSATION

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

ITEM 13.

CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

PART IV

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) (1) and (2)

See Index to Consolidated Financial Statements and Schedules on page 60.

(a) (3) EXHIBITS

See Exhibit Index on page 119.

SIGNATURES

Pursuant to the requirements of Section 13 or Section 15(d) 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, on March 15, 2012.

INDEPENDENCE HOLDING COMPANY

REGISTRANT

By:

/s/ Roy T. K. Thung

Roy T.K. Thung

President and

Chief Executive Officer

(Principal Executive Officer)

By:

/s/ Teresa A. Herbert

Teresa A. Herbert

Senior Vice President and

Chief Financial Officer

(Principal Financial and Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated as of the 15^th day of March, 2012.


/s/ Larry R. Graber	/s/ Steven B. Lapin
Larry R. Graber	Steven B. Lapin
Director and Senior Vice President	Director and Vice Chairman


/s/ Allan C. Kirkman	/s/ James G. Tatum
Allan C. Kirkman	James G. Tatum
Director	Director


/s/ David T. Kettig	/s/ Roy T.K. Thung
David T. Kettig	Roy T.K. Thung
Director, Chief Operating Officer and	Chief Executive Officer, President and Chairman
Senior Vice President	(Principal Executive Officer)


/s/ John L. Lahey
John L. Lahey
Director

INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES


		PAGE

Report of Management on Internal Control Over Financial Reporting		61

CONSOLIDATED FINANCIAL STATEMENTS:

Report of Independent Registered Public Accounting Firm		62

Consolidated Balance Sheets at December 31, 2011 and 2010		63

Consolidated Statements of Operations for the years ended
	December 31, 2011, 2010 and 2009	64

Consolidated Statements of Changes in Stockholders' Equity for the years
	ended December 31, 2011, 2010 and 2009	65

Consolidated Statements of Cash Flows for the years ended
	December 31, 2011, 2010 and 2009	66

Notes to Consolidated Financial Statements		67

SCHEDULES:*

Summary of investments - other than investments in related parties at
	December 31, 2011 (Schedule I)	114

Condensed financial information of parent company (Schedule II)		115

Supplementary insurance information (Schedule III)		118

*All other schedules have been omitted as they are not applicable or not required, or the information is included in the Consolidated Financial Statements or Notes thereto.

Report of Management on Internal Control Over Financial Reporting

The Board of Directors and Stockholders

Independence Holding Company:

The management of Independence Holding Company ("IHC") is responsible for establishing and maintaining adequate internal control over financial reporting. IHC's internal control system is a process designed to provide reasonable assurance to the Company's management and board of directors regarding the reliability of financial reporting and fair presentation of published financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of IHC's internal control over financial reporting as of December 31, 2011. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control-Integrated Framework. Based on our assessment we concluded that, as of December 31, 2011, IHC's internal control over financial reporting is effective.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Independence Holding Company:

We have audited the accompanying consolidated balance sheets of Independence Holding Company and subsidiaries (the "Company") as of December 31, 2011 and 2010, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2011. In connection with our audits of the consolidated financial statements, we have also audited financial statement schedules I to III. These consolidated financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and schedules based on our audits.

We conducted our audits in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Independence Holding Company and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

/s/ KPMG LLP

New York, New York

March 15, 2012

INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31,



						2011		2010
ASSETS:						(In thousands, except share data)
	Investments:
		Short-term investments			$	50	$	53
		Securities purchased under agreements to resell				17,258		41,081
		Fixed maturities, available-for-sale				842,873		793,656
		Equity securities, available-for-sale				37,541		48,073
		Other investments				35,223		36,864

			Total investments			932,945		919,727

	Cash and cash equivalents					18,227		11,426
	Due from securities brokers					12,106		15,022
	Deferred acquisition costs					37,101		43,465
	Due and unpaid premiums					37,341		48,586
	Due from reinsurers					159,729		154,243
	Premium and claim funds					43,604		37,646
	Notes and other receivables					15,500		16,766
	Goodwill					50,318		51,713
	Other assets					51,988		63,198

		TOTAL ASSETS			$	1,358,859	$	1,361,792

LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
	Insurance reserves-health				$	179,042	$	181,447
	Insurance reserves-life and annuity					279,636		278,000
	Funds on deposit					417,310		408,566
	Unearned premiums					4,319		4,043
	Policy claims-health					13,945		16,521
	Policy claims-life					11,948		11,809
	Other policyholders' funds					21,546		20,195
	Due to securities brokers					383		32,469
	Due to reinsurers					40,030		31,554
	Accounts payable, accruals and other liabilities					66,410		70,497
	Liabilities related to discontinued operations					-		771
	Debt					10,000		7,500
	Junior subordinated debt securities					38,146		38,146

		TOTAL LIABILITIES				1,082,715		1,101,518

STOCKHOLDERS' EQUITY:
	Preferred stock (none issued)					-		-
	Common stock $1.00 par value, 20,000,000 shares
				authorized; 16,774,540 and 15,472,020 shares issued,
				16,412,488 and 15,232,865 shares outstanding		16,775		15,472
	Paid-in capital					111,814		101,003
	Accumulated other comprehensive income					7,853		633
	Treasury stock, at cost; 362,052 and 239,155 shares					(2,928)		(1,917)
	Retained earnings					127,563		115,437

		TOTAL IHC STOCKHOLDERS’ EQUITY				261,077		230,628
		NONCONTROLLING INTERESTS IN SUBSIDIARIES				15,067		29,646

				TOTAL EQUITY		276,144		260,274

				TOTAL LIABILITIES AND EQUITY	$	1,358,859	$	1,361,792

See accompanying notes to consolidated financial statements.

INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31,


						2011		2010		2009
					(In thousands, except per share data)
REVENUES:
	Premiums earned:
		Health			$	298,546	$	289,586	$	258,099
		Life and annuity				37,868		36,560		36,700
	Net investment income					39,788		41,801		43,520
	Fee income					28,632		32,741		29,322
	Net realized investment gains					8,670		4,646		8,789
			Total other-than-temporary impairment losses			(2,471)		(3,819)		(29,991)
			Portion of losses recognized in other comprehensive income			948		-		-
	Net impairment losses recognized in earnings					(1,523)		(3,819)		(29,991)
	Equity income from AMIC					-		280		1,289
	Gain on bargain purchase of AMIC					-		27,830		-
	Other income					6,015		5,743		7,110
						417,996		435,368		354,838
EXPENSES:
	Insurance benefits, claims and reserves:
	Health					190,213		201,136		180,265
	Life and annuity					48,649		50,182		44,969
	Selling, general and administrative expenses					147,102		139,643		139,370
	Amortization of deferred acquisition costs					11,569		6,243		5,519
	Interest expense on debt					1,965		1,912		2,817
						399,498		399,116		372,940

Income (loss) from continuing operations before income taxes (benefits)						18,498		36,252		(18,102)
Income taxes (benefits)						3,732		12,583		(10,669)
Income (loss) from continuing operations						14,766		23,669		(7,433)

Discontinued operations:
	Income (loss) from discontinued operations					-		(256)		301

Net income (loss)						14,766		23,413		(7,132)
(Income) loss from noncontrolling interests in subsidiaries						(1,763)		(1,676)		10

	NET INCOME (LOSS) ATTRIBUTABLE TO IHC				$	13,003	$	21,737	$	(7,122)

Basic income (loss) per common share:
	Income (loss) from continuing operations				$	.81	$	1.44	$	(.48)
	Income (loss) from discontinued operations					-		(.02)		.02
				Basic income (loss) per common share	$	.81	$	1.42	$	(.46)

WEIGHTED AVERAGE SHARES OUTSTANDING						15,979		15,268		15,418

Diluted income (loss) per common share:
	Income (loss) from continuing operations				$	.81	$	1.44	$	(.48)
	Income (loss) from discontinued operations					-		(.02)		.02
				Diluted income (loss) per common share	$	.81	$	1.42	$	(.46)

WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING						15,985		15,270		15,418

See accompanying notes to consolidated financial statements.


INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011 (In thousands, except share data)								ACCUMULATED									NON-
								OTHER							TOTAL IHC		CONTROLLING
		COMMON STOCK				PAID-IN		COMPREHENSIVE	TREASURY STOCK, AT COST				RETAINED		STOCKHOLDERS'		INTERESTS IN		TOTAL
		SHARES		AMOUNT		CAPITAL		INCOME (LOSS)	SHARES		AMOUNT		EARNINGS		EQUITY		SUBSIDIARIES		EQUITY

BALANCE AT DECEMBER 31, 2008		15,434,891		15,435		101,086		(54,291)	(32,755)		(326)		100,798		162,702		248		162,950
Cumulative effect of adjustment on April 1, 2009 due to
	new accounting guidance, net of $852 tax							(1,591)					1,591		-		-		-
Net loss													(7,122)		(7,122)		(10)		(7,132)
Net change in unrealized gains (losses) on
	available-for-sale securities							48,778							48,778		-		48,778
	Total comprehensive income (loss)														41,656		(10)		41,646
Acquisition of Wisconsin Underwriting Associates, LLC															-		400		400
Acquisition of GroupLink, Inc noncontrolling interests						(426)									(426)		(74)		(500)
Common stock dividend ($.05 per share)													(771)		(771)		-		(771)
Share-based compensation expense and related tax benefits		24,503		25		(248)									(223)		-		(223)
Other capital transactions		326		-		35							(6)		29		(24)		5

BALANCE DECEMBER 31, 2009		15,459,720		15,460		100,447		(7,104)	(32,755)		(326)		94,490		202,967		540		203,507
Net income													21,737		21,737		1,676		23,413
Net change in unrealized gains (losses) on
	available-for-sale securities							7,737							7,737		244		7,981
	Total comprehensive income														29,474		1,920		31,394
Repurchase of common stock									(206,400)		(1,591)				(1,591)		-		(1,591)
Acquisition of MedWatch															-		480		480
Acquisition of HBA															-		480		480
Acquisition of American Independence Corp						(4)									(4)		26,960		26,956
Common stock dividend ($.05 per share)													(762)		(762)		-		(762)
Share-based compensation expense and related tax benefits		12,300		12		514									526		-		526
Contributions from noncontrolling interests															-		109		109
Distributions to noncontrolling interests															-		(863)		(863)
Other capital transactions						46							(28)		18		20		38

BALANCE DECEMBER 31, 2010		15,472,020	$	15,472	$	101,003	$	633	(239,155)	$	(1,917)	$	115,437	$	230,628	$	29,646	$	260,274
Net income													13,003		13,003		1,763		14,766
Net change in unrealized gains (losses) on
	available-for-sale securities							7,100							7,100		343		7,443
	Total comprehensive income														20,103		2,106		22,209
Repurchase of common stock									(122,897)		(1,011)				(1,011)		-		(1,011)
Acquire noncontrolling interest in American Independence Corp		1,293,446		1,294		10,128		120							11,542		(12,603)		(1,061)
Acquire noncontrolling interest in Wisconsin Underwriting Assoc						391									391		(391)		-
Sales of certain majority owned subsidiaries															-		(1,097)		(1,097)
Common stock dividend ($.05 per share)													(807)		(807)		-		(807)
Share-based compensation expense and related tax benefits		9,074		9		201									210		-		210
Distributions to noncontrolling interests															-		(818)		(818)
Other capital transactions						91							(70)		21		(1,776)		(1,755)
BALANCE AT DECMEBER 31, 2011		16,774,540	$	16,775	$	111,814	$	7,853	(362,052)	$	(2,928)	$	127,563	$	261,077	$	15,067	$	276,144

See accompanying notes to consolidated financial statements.

INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31,


							2011		2010		2009
							(In thousands)
Cash Flows Provided By (Used By) Operating Activities:
	Net income (loss)					$	14,766	$	23,413	$	(7,132)
	Adjustments to reconcile net loss to net change in cash from
		operating activities:
			Gain on bargain purchase of AMIC				-		(27,830)		-
			(Income) loss from discontinued operations				-		256		(301)
			Amortization of deferred acquisition costs				11,569		6,243		5,519
			Net realized investment gains				(8,670)		(4,646)		(8,789)
			Net impairment losses recognized in earnings				1,523		3,819		29,991
			Equity income from equity method investments				(1,591)		(974)		(2,015)
			Depreciation and amortization				4,153		4,650		5,379
			Share-based compensation expenses				616		734		518
			Deferred tax expense (benefits)				(1,188)		15,101		(12,449)
			Other				4,951		2,328		5,512
	Changes in assets and liabilities:
			Net purchases of trading securities				-		(1,619)		-
			Change in insurance liabilities				963		(34,787)		(25,676)
			(Additions) reductions to deferred acquisition costs				(7,659)		(8,343)		1,079
			Change in net amounts due from and to reinsurers				2,990		24,985		(38,421)
			Change in premium and claim funds				(5,958)		10,363		8,508
			Change in current income tax liability				7,612		(4,320)		77
			Change in due and unpaid premiums				11,245		9,946		6,932
			Change in other assets				(2,595)		1,379		3,545
			Change in other liabilities				(4,842)		(15,007)		2,265
				Net change in cash from operating activities of continuing operations			27,885		5,691		(25,458)
				Net change in cash from operating activities of discontinued operations			-		(1,196)		(2,568)
					Net change in cash from operating activities		27,885		4,495		(28,026)

Cash Flows Provided By (Used By) Investing Activities:
			Change in net amount due from and to securities brokers				(29,171)		14,490		5,207
			Net sales of securities under resale and repurchase agreements				23,823		2,930		18,115
			Sales of equity securities				71,183		123,178		18,696
			Purchases of equity securities				(61,743)		(105,637)		(4,718)
			Sales of fixed maturities				596,651		614,588		463,932
			Maturities and other repayments of fixed maturities				158,650		129,876		170,613
			Purchases of fixed maturities				(786,560)		(778,153)		(643,435)
			Distributions from other investments, net of additional investments				3,231		1,719		808
			Cash acquired in acquisition of AMIC, net of cash paid				-		4,562		-
			Cash paid in acquisitions of companies, net of cash acquired				-		(3,469)		(775)
			Cash received in acquisitions of policy blocks				-		1,192		-
			Change in notes and other receivables				969		1,170		2,472
			Other investing activities				(1,259)		(1,869)		(2,095)
					Net change in cash from investing activities		(24,226)		4,577		28,820

Cash Flows Provided By (Used By) Financing Activities:
		Proceeds from issuance of common stock					-		-		1
		Repurchases of common stock					(1,011)		(1,591)		-
		Excess tax expense from expired stock options
				and vesting of restricted stock			(164)		(51)		(720)
		Cash paid in acquisitions of noncontrolling interests					(1,587)		-		-
		Proceeds (withdrawals) of investment-type insurance contracts					5,433		(1,117)		1,298
		Proceeds of debt					2,500		-		-
		Repayment of debt					-		(1,500)		(1,000)
		Dividends paid					(777)		(767)		(746)
		Other capital transactions					(1,252)		(14)		-
					Net change in cash from financing activities		3,142		(5,040)		(1,167)

Net change in cash and cash equivalents							6,801		4,032		(373)
Cash and cash equivalents, beginning of year							11,426		7,394		7,767

Cash and cash equivalents, end of year						$	18,227	$	11,426	$	7,394

See accompanying notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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"), Independence American Insurance Company (“Independence American”); and (iii) 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 December 31, 2011, the Company also owned a 78% interest in American Independence Corp. ("AMIC").

Geneve Corporation, a diversified financial holding company, and its affiliated entities, held 50.6% of IHC's outstanding common stock at December 31, 2011.

(B)

Basis of Presentation

The Consolidated Financial Statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) and 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.

(C)

Cash Equivalents and Short-Term Investments

Cash equivalents are carried at cost which approximates fair value and include principally interest-bearing deposits at brokers, money market instruments and U.S. Treasury securities with original maturities of less than 91 days. Investments with original maturities of 91 days to one year are considered short-term investments and are carried at cost which approximates fair value.

(D)

Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase

Securities purchased under agreements to resell ("resale agreements") and securities sold under agreements to repurchase ("repurchase agreements") are carried at the amounts at which the securities will be subsequently resold or repurchased as specified in the agreements.

(E)

Investment Securities

(i) Investments in fixed maturities, redeemable preferred securities, equity securities and derivatives (options and options on futures contracts) are accounted for as follows:

(a) Securities which are held for trading purposes are carried at estimated fair value ("fair value"). Changes in fair value are credited or charged, as appropriate, to net realized investment gains (losses) in the Consolidated Statements of Operations.

(b) Securities not held for trading purposes which may or may not be held to maturity ("available-for-sale securities") are carried at fair value. Unrealized gains and losses deemed temporary, net of deferred income taxes and adjustments to deferred policy acquisition costs, are credited or charged, as appropriate, directly to accumulated other comprehensive income or loss (a component of stockholders' equity). Premiums and discounts on debt securities purchased at other than par value are amortized and accreted, respectively, to interest income in the Consolidated Statements of Operations, using the constant yield method over the period to maturity. Net realized gains and losses on sales of available-for-sale securities are credited or charged to net realized investment gains (losses) in the Consolidated Statements of Operations.

(ii) Financial instruments sold, but not yet purchased, represent obligations to replace borrowed securities that have been sold. Such transactions occur in anticipation of declines in the fair value of the securities. The Company's risk is an increase in the fair value of the securities sold in excess of the consideration received, but that risk is mitigated as a result of relationships to certain securities owned. Unrealized gains or losses on open transactions are credited or charged, as appropriate, to net realized investments gains in the Consolidated Statements of Operations. While the transaction is open, the Company will also incur an expense for any accrued dividends or interest payable to the lender of the securities. When the transaction is closed, the Company realizes a gain or loss in an amount equal to the difference between the price at which the securities were sold and the cost of replacing the borrowed securities. There were no such transactions outstanding at December 31, 2011 and 2010.

(iii) Gains or losses on sales of securities are determined on the basis of specific identification.

(iv) The Company enters into derivative transactions, such as put and call option contracts and options on interest rate futures contracts, to minimize losses on portions of the Company's fixed income portfolio in a rapidly changing interest rate environment. Equity index options are entered into to offset price fluctuations in the equity markets. These derivative financial instruments are all readily marketable and are carried on the Consolidated Balance Sheets at their current fair value with changes in fair value (unrealized gains and losses), credited or charged, as appropriate, to net realized investment gains (losses) in the Consolidated Statements of Operations (hedge accounting is not applied to these derivatives). There were no such derivative transactions outstanding at December 31, 2011 and 2010.

(v) Fair value is determined using quoted market prices when available. In some cases, we use quoted market prices for similar instruments in active markets and/or model-derived valuations where inputs are observable in active markets. When there are limited or inactive trading markets, we use industry-standard pricing methodologies, including discounted cash flow models, whose inputs are based on management assumptions and available current market information. Further, we retain independent pricing vendors to assist in valuing certain instruments, primarily all the securities in our portfolio classified in Level 2 or Level 3 in the Fair Value Hierarchy.

The Company periodically reviews and assesses the vendor’s qualifications and the design and appropriateness of its pricing methodologies. Management will on occasion challenge pricing information on certain individual securities and, through communications with the vendor, obtain information about the assumptions, inputs and methodologies used in pricing those securities, and corroborate it against documented pricing methodologies. Validation procedures are in place to determine completeness and accuracy of pricing information, including, but not limited to: (i) review of exception reports that (a) identify any zero or un-priced securities; (b) identify securities with no price change; and (c) identify securities with significant price changes; (ii) performance of trend analyses; (iii) periodic comparison of pricing to alternative pricing sources; and (iv) comparison of pricing changes to expectations based on rating changes, benchmarks or control groups. In certain circumstances, pricing is unavailable from the vendor and broker pricing information is used to determine fair value. In these instances, management will assess the quality of the data sources, the underlying assumptions and the reasonableness of the broker quotes based on the current market information available. To determine if an exception represents an error, management will often have to exercise judgment. Procedures to resolve an exception vary depending on the significance of the security and its related class, the frequency of the exception, the risk of material misstatement, and the availability of information for the security. These procedures include, but are not limited to; (i) a price challenge process with the vendor; (ii) pricing from a different vendor; (iii) a reasonableness review; (iv) a change in price based on better information, such as an actual market trade, among other things. Management considers all facts and relevant information

obtained during the above procedures to determine the proper classification of each security in the Fair Value Hierarchy.

(vi) 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 the 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 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 Consolidated Balance Sheet. 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 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 in the Consolidated Balance Sheet.

(F)

Investment in American Independence Corp.

IHC acquired a controlling interest in AMIC on March 5, 2010. Prior to obtaining control, the Company carried its investment in AMIC on the equity method, with the Company's share of equity income or loss credited or charged, as appropriate, to the Consolidated Statements of Operations with a corresponding change to the investment in AMIC. As an equity method investment, the Company’s investment in AMIC, including related goodwill, was reviewed, at least annually, to determine whether an other-than-temporary impairment occurred. Upon achieving control on March 5, 2010, AMIC’s income and expense amounts became consolidated with IHC’s results. The Consolidated Balance Sheets at December 31, 2010 and 2011 include the consolidated assets and liabilities of AMIC. See Note 2 for further information regarding the Company’s investment in AMIC.

(G)

Other Investments

Investment partnership interests relate to limited investment partnerships that have relatively "market neutral" arbitrage strategies, or strategies that are relatively insensitive to interest rates. All securities held by these partnerships are carried at fair value. The Company's investment partnership interests are carried at a value which approximates the Company's equity in the underlying net assets of the partnerships or the equivalent of the net asset value per share. Operating partnership interests relate to insurance related limited operating partnerships. The Company's operating partnership interests are carried on the equity method which approximates the Company's equity in the underlying net assets of the partnership. Equity income or loss on all partnership interests are credited or charged, as appropriate, to the Consolidated Statements of Operations.

Policy loans are stated at their aggregate unpaid balances.

(H)

Deferred Acquisition Costs ("DAC")

Costs that vary with and are primarily related to acquiring insurance policies and investment type contracts are deferred and recorded as deferred policy acquisition costs ("DAC"). These costs are principally broker fees, agent commissions, and the purchase prices of the acquired blocks of insurance policies and investment type policies. DAC is amortized to expense and reported separately in the Consolidated Statements of Operations. All DAC within a particular product type is amortized on the same basis using the following methods:

For traditional life insurance and other premium paying policies, amortization of DAC is charged to expense over the related premium revenue recognition period. Assumptions used in the amortization of DAC are determined based upon the conditions as of the date of policy issue or assumption and are not generally revised during the life of the policy.

For long duration type contracts, such as annuities and universal life business, amortization of DAC is charged to expense over the life of the underlying contracts based on the present value of the estimated gross profits ("EGPs") expected to be realized over the life of the book of contracts. EGPs consist of margins based on expected mortality rates, persistency rates, interest rate spreads, and other revenues and expenses. The Company regularly evaluates its EGPs to determine if actual experience or other evidence suggests that earlier estimates should be revised. If the Company determines that the current assumptions underlying the EGPs are no longer the best estimate for the future due to changes in actual versus expected mortality rates, persistency rates, interest rate spreads, or other revenues and expenses, the future EGPs are updated using the new assumptions and prospective unlocking occurs.

These updated EGPs are utilized for future amortization calculations. The total amortization recorded to date is adjusted through a current charge or credit to the Consolidated Statements of Operations.

Internal replacements of insurance and investment contracts determined to result in a replacement contract that is substantially changed from the original contract will be accounted for as an extinguishment of the original contract, resulting in a release of the unamortized deferred acquisition costs, unearned revenue, and deferral of sales inducements associated with the replaced contract.

Deferred acquisition costs have been decreased by $2,453,000, 3,042,000 and $11,559,000 in 2011, 2010 and 2009 respectively, representing the portion of unrealized gains on investment securities available-for-sale that have been allocated to deferred acquisition costs on interest sensitive products rather than to stockholders' equity as a component of other comprehensive income or loss.

(I)

Property and Equipment

Property and equipment of $3,231,000 and $4,206,000 are included in other assets at December 31, 2011 and 2010, respectively, net of accumulated depreciation and amortization of $12,971,000 and $12,698,000, respectively. Improvements are capitalized while repair and maintenance costs are charged to operations as incurred. Depreciation of property and equipment has been provided on the straight-line method over the estimated useful lives of the respective assets. Amortization of leasehold improvements has been provided on the straight-line method over the shorter of the lease term or the estimated useful life of the asset.

(J)

Insurance Reserves

The Company maintains loss reserves to cover its estimated liability for unpaid losses and loss adjustment expenses, where material, including legal, other fees, and costs not associated with specific claims but related to the claims payment function), for reported and unreported claims incurred as of the end of each accounting period. These loss reserves are based on actuarial assumptions and are maintained at levels that are in accordance with U.S. generally accepted accounting principles. Many factors could affect these reserves, including economic and social conditions, frequency and severity of claims, medical trend resulting from the influences of underlying cost inflation, changes in utilization and demand for medical services, and changes in doctrines of legal liability and damage awards in litigation. Therefore, the Company’s reserves are necessarily based on estimates, assumptions and analysis of historical experience. The Company’s results depend upon the variation between actual claims experience and the assumptions used in determining reserves and pricing products. Reserve assumptions and estimates require significant judgment and, therefore, are inherently uncertain. The Company cannot determine with precision the ultimate amounts that will be paid for actual claims or the timing of those payments. The Company's estimate of loss represents management's best estimate of the Company's liability at the balance sheet date.

Health

Medical Stop-Loss

Liabilities for insurance reserves on medical stop-loss coverages are computed using completion factors and expected Net Loss Ratios derived from actual historical premium and claim data. Reserves for medical stop-loss insurance are more volatile in nature than those for fully insured medical insurance. This is primarily due to the excess nature of medical stop-loss, with very high deductibles applying to specific claims on any individual claimant and in the aggregate for a given group. The level of these deductibles makes it more difficult to predict the amount and payment pattern of such claims. Furthermore, these excess claims are highly sensitive to changes in factors such as medical trend, provider contracts and medical treatment protocols, adding to the difficulty in predicting claim values and estimating reserves. Also, because medical stop-loss is in excess of an underlying benefit plan, there is an additional layer of claim reporting and processing that can affect claim payment patterns. Finally, changes in the distribution of business by effective month can affect reserve estimates due to the timing of claim occurrences and the time required to accumulate claims against the stop-loss deductible.

The two “primary” or “key” assumptions underlying the calculation of loss reserves for Medical Stop-Loss business are (i) projected Net Loss Ratio, and (ii) claim development patterns. The projected Net Loss Ratio is set at expected levels consistent with the underlying assumptions (“Projected Net Loss Ratio”). Claim development patterns are set quarterly as reserve estimates are developed and are based on recent claim development history (“Claim Development Patterns”). The Company uses the Projected Net Loss Ratio to establish reserves until developing losses provide a better indication of ultimate results and it is feasible to set reserves based on Claim Development Patterns. The Company has concluded that a reasonably likely change in the Projected Net Loss Ratio assumption could have a material effect on the Company’s financial condition, results of operations, or liquidity (“Material Effect”) but a reasonably likely change in the Claim Development Pattern would not have a Material Effect.

Projected Net Loss Ratio

Claim Development Patterns

Predicting ultimate claims and estimating reserves in Medical Stop-Loss is more complex than first dollar medical and disability business due to the “excess of loss” nature of these products with very high deductibles applying to specific claims on any individual claimant and in the aggregate for a given group. The level of these deductibles makes it more difficult to predict the amount and payment pattern of such claims. Fluctuations in results for specific coverage are primarily due to the severity and frequency of individual claims, whereas fluctuations in aggregate coverage are largely attributable to frequency of underlying claims rather than severity.

Due to the short-term nature of Medical Stop-Loss, redundancies or deficiencies will typically emerge during the course of the following year rather than over a number of years. The Company typically maintains its reserves based on underlying assumptions until it determines that an adjustment is appropriate based on emerging experience from all of its MGUs for prior underwriting years.

Fully Insured Health

Reserves for Fully Insured Health business are established to provide for the liability for incurred but not paid claims. Reserves are calculated using standard actuarial methods and practices. The “primary” assumption in the determination of Fully Insured Health reserves is that historical Claim Development Patterns are representative of future Claim Development Patterns. Factors which may affect this assumption include changes in claim payment processing times and procedures, changes in time delay in submission of claims, and the incidence of unusually large claims. Liabilities for fully insured medical reserves and disability coverages are computed using completion factors and expected Net Loss Ratios derived from actual historical premium and claim data. 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 not material. The delay in submission of claims tends to be stable over time and not subject to significant volatility.

While these calculations are based on standard methodologies, they are estimates based on historical patterns. To the extent that actual claim payment patterns differ from historical patterns, such estimated reserves may be redundant or inadequate. The effects of such deviations are evaluated by considering claim backlog statistics and reviewing the reasonableness of projected claim ratios. Other factors which may affect the accuracy of reserve estimates include the proportion of large claims which may take longer to adjudicate, changes in billing patterns by providers and changes in claim management practices such as hospital bill audits.

Long Term Disability

The Company’s long term disability reserves are developed using actuarial principles and assumptions that consider, among other things, future offsets and recoveries, elimination periods, interest rates, probability of rehabilitation or mortality, incidence and termination rates based on the Company’s experience. The loss reserve is made up of case reserves, incurred but not reported reserves, reopen reserves, and loss adjustment expense. Incurred but not reported and reopen reserves are calculated by a hind-sight study, which takes historical experience and develops the reserve as a percentage of premiums from prior years.

The two “primary” assumptions on which long term disability reserves are based are: (i) morbidity levels; and (ii) recovery rates. If morbidity levels increase, for example due to an epidemic or a recessionary environment, the Company would increase reserves because there would be more new claims than expected. In regard to the assumed recovery rate, if disabled lives recover more quickly than

anticipated then the existing claims reserves would be reduced; if less quickly, the existing claims reserves would be increased.

Life

Policyholder funds represent interest-bearing liabilities arising from the sale of products, such as universal life, interest-sensitive life and annuities. Policyholder funds are primarily comprised of deposits received and interest credited to the benefit of the policyholder less surrenders and withdrawals, mortality charges and administrative expenses.

Interest Credited

Management believes that the Company's methods of estimating the liabilities for insurance reserves provided appropriate levels of reserves at December 31, 2011 and 2010. Changes in the Company's reserve estimates are recorded through a charge or credit to its earnings.

(K)

Funds on Deposit

Funds received (net of mortality and expense charges) for certain long-duration contracts (principally deferred annuities and universal life policies) are credited directly to a policyholder liability account, funds on deposit. Withdrawals are recorded directly as a reduction of respective policyholders' funds on deposit. Amounts on deposit were credited at annual rates ranging from 2.7% to 5.8% in 2011, and 2.9% to 6.5% in 2010 and 1.7% to 6.5% in 2009. The average credited rate was 4.1% in 2011, 4.1% in 2010, and 4.2% in 2009.

(L)

Insurance Premium Revenue Recognition and Policy Charges

Health

Premiums from short-duration medical insurance contracts are intended to cover expected claim costs resulting from insured events that occur during a fixed period of short duration. The Company has the ability to not renew the contract or to revise the premium rates at the end of each annual contract period to cover future insured events. Insurance premiums from annual health contracts are collected monthly and are recognized as revenue evenly as insurance protection is provided.

Premiums related to long-term and short-term disability contracts are recognized on a pro rata basis over the applicable contract term.

Life

Traditional life insurance products consist principally of products with fixed and guaranteed premiums and benefits, primarily term and whole life insurance products. Revenue from these products are recognized as premium when due.

Annuities and interest-sensitive life contracts, such as universal life and interest sensitive whole life, are contracts whose terms are not fixed and guaranteed. Premiums from these policies are reported as funds on deposit. Policy charges consist of fees assessed against the policyholder for cost of insurance (mortality risk), policy administration and early surrender. These revenues are recognized when assessed against the policyholder account balance.

Policies that do not subject the Company to significant risk arising from mortality or morbidity are considered investment contracts. Deposits received for such contracts are reported as other policyholder funds. Policy charges for investment contracts consist of fees assessed against the policyholder account for maintenance, administration and surrender of the policy prior to contractually specified dates, and are recognized when assessed against the policyholder account balance.

(M)

Participating Policies

Participating policies represent 11.3%, 11.4% and 11.8% of the individual life insurance in-force and 9.3%, 11.3% and 14.4% of the net life and annuity premiums earned, as of and for the years ended December 31, 2011, 2010 and 2009, respectively, and provide for the payment of dividends. Dividends to policyholders are determined annually and are payable only upon declaration by the Board of Directors of the insurance companies.

(N)

Deferred Income Taxes

Interest and penalties are classified as other interest expense and are included in selling, general and administrative expenses in the Consolidated Statements of Operations.

(O)

Income Per Common Share

Included in the diluted earnings per share calculation for 2011 and 2010 are 6,000 and 2,000 incremental common shares, respectively, from the assumed exercise of dilutive stock options and from the assumed vesting of dilutive restricted stock, computed using the treasury stock method. For the year ended December 31, 2009, such shares were deemed anti-dilutive.

(P)

Reinsurance

Amounts paid for or recoverable under reinsurance contracts are included in total assets or total liabilities as due from reinsurers or due to reinsurers. The cost of reinsurance related to long-duration contracts is accounted for over the life of the underlying reinsured policies using assumptions consistent with those used to account for the underlying policies.

(Q)

Share-Based Compensation

Compensation costs for equity awards, such as stock options and non-vested stock, are measured based on grant-date fair value and are recognized in the Consolidated Statements of Operations over the requisite service period (which is usually the vesting period). For such awards with only service conditions, the Company recognizes the compensation cost on a straight-line basis over the requisite service period for the entire award.

Compensation costs for liability-classified awards, such as share appreciation rights (“SARs”) and share-based performance awards, are measured and accrued each reporting period in the Consolidated Statements of Operations as the requisite service or performance conditions are met.

(R)

Goodwill and Other Intangible Assets

Goodwill carrying amounts are evaluated for impairment at the reporting unit level, which is equivalent to an operating segment, at least annually. If the fair value of a reporting unit is less than its carrying amount, further evaluation is required to determine if a write-down of goodwill is required. In determining the fair value of each reporting unit, we used an income approach, applying a discounted cash flow method which included a residual value. Based on historical experience, we make assumptions as to: (i) expected future performance and future economic conditions, (ii) projected operating earnings, (iii) projected new and renewal business as well as profit margins on such business, and (iv) a discount rate that incorporated an appropriate risk level for the reporting unit. Any impairment write-down of goodwill would be charged to expense.

(S)

Derivative Instruments

All derivatives, whether designated in hedging relationships or not, are required to be recorded in the balance sheet as assets or liabilities at fair value. Hedge accounting is permitted only if certain criteria are met, including a requirement that a highly effective relationship exist between the derivative instrument and the hedged item, both at inception of the hedge and on an ongoing basis. Results of effective hedges are recognized in other comprehensive income for cash flow hedges and in current earnings for fair value hedges. The ineffective portions of hedge results are recognized in current earnings.

At December 31, 2011, the Company had an interest rate swap agreement designated and effective as a cash flow hedge. The objective of the swap is to reduce the variability in cash flows associated with the re-pricing of interest rates on certain variable rate debt. Changes in fair value of the swap were recorded in accumulated other comprehensive income or loss and reclassified to net income as earnings were affected by the variability in the interest payments on the hedged debt.

(T)

Recent Accounting Pronouncements

Recently Adopted Accounting Standards

In December 2010, the Financial Accounting Standards Board (“FASB”) issued guidance that clarifies the existing requirements for pro forma revenue and earnings disclosures, and expands the supplemental pro forma revenue and earnings disclosures, for public companies that have completed business acquisitions. The amendments in this guidance were effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The adoption of this guidance, effective January 1, 2011, did not have a material effect on the Company’s consolidated financial statements.

In December 2010, the FASB issued guidance that amends existing goodwill impairment test standards to include a requirement that entities perform Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts if it is more likely than not that an impairment exists. This guidance was effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. The adoption of this guidance, effective January 1, 2011, did not have a material effect on the Company’s consolidated financial statements.

In January 2010, the FASB issued standards requiring entities to provide the activity of Level 3 security purchases, sales, issuances, and settlements on a gross basis, which was effective for fiscal years beginning after December 15, 2010. The adoption of this guidance, effective January 1, 2011, did not have a material effect on the Company's consolidated financial statements.

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 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 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. 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.

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 are effective for fiscal years and interim periods within those years, beginning after December 15, 2011. The adoption of this guidance is not expected to have a material effect on 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 is effective during interim and annual periods beginning after December 15, 2011. The adoption of this guidance is not expected to 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 is effective for the first interim or annual period beginning after December 15, 2011. The adoption of this guidance is not expected to 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 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011 and should be applied prospectively upon adoption. 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.

In January 2011, a subsidiary of IHC acquired 200,000 shares of AMIC common stock from a noncontrolling interest for $1,000,000 cash. In February and March 2011, IHC acquired an aggregate 900,325 shares of AMIC common stock from noncontrolling interests in exchange for the issuance of an aggregate 600,218 shares of IHC’s common stock in various private placements of unregistered securities under Section 4(2) of the Securities Act of 1933, as amended. Accordingly, the shares are "restricted securities", subject to a legend and will not be freely tradable in the United States until the shares are registered for resale under the Securities Act, or to the extent they are tradable under Rule 144 promulgated under the Securities Act or any other available exemption. As a result of these transactions, the Company: (i) recorded a $95,000 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 63.0%.

On July 15, 2011, IHC commenced an offer to exchange up to 908,085 shares of its common stock for properly tendered and accepted shares of common stock of AMIC (the “Exchange Offer”). IHC filed a Registration Statement on Form S-4 in connection with the Exchange Offer that was declared effective by the Securities and Exchange Commission on July 15, 2011 and expired on Friday, August 12, 2011. Pursuant to the Exchange Offer, IHC acquired 1,109,225 shares of AMIC common stock in consideration of 693,228 newly issued shares of IHC common stock plus a de minimis amount of cash paid in-lieu of fractional shares. As a result of the exchange, the Company (i) recorded a $196,000 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 76.0%.

In the fourth quarter of 2011, AMIC purchased 251,370 shares of its own common stock and IHC purchased an additional 15,981 shares of AMIC common stock in the open market thereby increasing IHC’s ownership interest in AMIC to 78.4% as of December 31, 2011.

In 2011, AMIC acquired an additional 38% ownership interest in its subsidiary, Independent Producers of America, LLC (“IPA”) from noncontrolling interests for an aggregate cash consideration of $525,000, thereby increasing its ownership in IPA to 89.6%. As a result of this transaction, and giving effect to noncontrolling interests in AMIC, the Company (i) reduced noncontrolling interests by $1,568,000; and (ii) recorded a $1,043,000 credit to paid-in capital representing the difference between the fair value of the consideration paid and the carrying value of the noncontrolling interests.

Acquisition of AMIC

In March 2010, IHC acquired a controlling interest in AMIC as a result of the purchase of AMIC common stock in the open market. The principal reasons for acquiring control were: (i) the low market price of the AMIC stock; (ii) the improved financial presentation for IHC resulting from the consolidation of financial reporting; and (iii) a closer relationship that will create greater long-term value for both companies. The acquisition furthers IHC's goal of creating efficiencies by integrating the back office operations of our MGUs and marketing companies. Share purchases of 27,668 shares, or $141,000, through March 5, 2010 (the "Acquisition Date"), totaling 0.33% of voting equity interest, brought the total of AMIC shares owned by the Company to more than 50% of AMIC's outstanding common stock and as a result, IHC has included AMIC’s consolidated assets and liabilities and results of operations subsequent to the Acquisition Date in its consolidated financial results as of and for the periods ended December 31, 2010 and 2011.

In determining the bargain purchase gain with regard to the acquisition of the controlling interest in AMIC, IHC first recognized a gain of $2,201,000 as a result of re-measuring its equity interest in AMIC to its fair value of $22,013,000 immediately before the acquisition based on the closing market price of AMIC's common stock. Then, upon the acquisition of a controlling interest on March 5, 2010, the Company consolidated the net assets of AMIC. Accordingly, the Company determined the fair value of the identifiable assets acquired and liabilities assumed from AMIC on the Acquisition Date. The fair value of the net assets acquired exceeded the sum of: (i) the fair value of the consideration paid; (ii) the fair value of IHC’s equity investment prior to the acquisition; and (iii) the fair value of the noncontrolling interests in AMIC, resulting in a bargain purchase gain of $25,629,000. The total gain, amounting to $27,830,000, pre-tax, is included in gain on bargain purchase of AMIC on the Company’s Consolidated Statement of Operations. This gain is a result of the quoted market price of AMIC being significantly less than the fair value of the net assets of AMIC. This disparity is due to the low trading volume in AMIC shares, and a discount on the shares traded due to a lack of control by minority shareholders. The fair value of the noncontrolling interests in AMIC was based on the closing market price of AMIC’s common stock on the Acquisition Date.

In connection with the acquisition, the Company recorded $12,200,000 of intangible assets. Of this amount, $1,700,000 represents the fair value of agent and marketing contracts and relationships, $1,000,000 represents the fair value of a domain name, and $2,000,000 represents the fair value of customer lists and all are amortizable over the life of the respective intangible asset. The remaining $7,500,000 represents non-amortizable intangible assets consisting of the fair value of insurance licenses with indefinite lives. As the AMIC acquisition was accounted for as a bargain purchase, the Company did not record goodwill in connection with the transaction.

The following table presents the identifiable assets acquired and liabilities assumed in the acquisition of AMIC on the Acquisition Date based on their respective fair values (in thousands).



Investments				$	58,418
Cash and cash equivalents					4,761
Identifiable intangible assets					12,200
Deferred tax assets, net					10,654
Other assets					31,127

		Total identifiable assets			117,160

Insurance liabilities					27,671
Other liabilities					19,023

			Total liabilities		46,694

Net identifiable assets acquired					70,466

Purchase consideration					(71)
Fair value of equity investment prior to the acquisition					(22,013)
Noncontrolling interests in AMIC					(22,065)
Elimination of the fair value adjustment related to AMIC’s
	investment in Majestic				(688)

	Gain on bargain purchase				25,629
	Gain on fair value of equity investment prior to the acquisition				2,201

	Total gain on bargain purchase of AMIC, pretax				27,830

	Deferred income taxes				11,097

	Total gain on bargain purchase of AMIC, after tax			$	16,733

For the period from the Acquisition Date to December 31, 2010, the Company’s Consolidated Statement of Operations includes revenues and net income of $74,187,000 and $2,711,000, respectively, from AMIC.

Presented below are the Company’s consolidated revenues and net income had the acquisition date been January 1, 2009. The pro forma information presented is not indicative of the results of operations in future periods, nor does it necessarily reflect the results of operations that would have resulted had the acquisition been completed as of the beginning of the prior period presented.


		Year Ended
		2010		2009
		(In thousands)

Revenues	$	421,139	$	480,164

Net Income	$	7,193	$	11,244

For the purpose of the pro forma disclosures above, the gain resulting from the bargain purchase transaction has been excluded from the revenues and net income for 2010. Instead, the gain is included in the revenues and net income for 2010 and has been adjusted to reflect the reversal of the other-than-temporary impairment the Company recorded during the fourth quarter of 2010 as it related to the Company’s equity method investment in AMIC. Other pro forma adjustments to revenues principally reflect the elimination of intercompany fee income and the elimination of the Company’s equity income related to AMIC. Other pro forma adjustments to net income principally reflect the elimination of intercompany fee income and the corresponding administrative expenses, in addition to the elimination of the Company’s equity income related to AMIC.

Subsequent to the Acquisition Date, IHC purchased an additional 9,537shares of AMIC common stock for a total consideration of $58,000 through December 31, 2010.

Equity Investment in AMIC

Prior to the acquisition in March 2010, IHC owned 49.7% of AMIC's outstanding common stock which was purchased in various transactions from 2002 through 2008 and accounted for its investment in AMIC under the equity method. In the fourth quarter of 2009, under the equity method of accounting, due to the length of time, and the magnitude of the amount by which the quoted market price of AMIC had been below IHC’s carrying value, the Company recorded an other-than-temporary impairment loss of $29,198,000 on its investment in AMIC, which net of $12,446,000 of deferred taxes, reduced earnings in 2009 by $16,752,000. This loss was significantly offset by the gain on the bargain purchase of AMIC common shares discussed above.

During the period from January 1, 2010 to the Acquisition Date (the “Stub Period”) IHC recorded $280,000 of equity income from its investment in AMIC. During the year ended December 31, 2009, IHC recorded $1,289,000 of equity income from its investment in AMIC. These amounts represent IHC's proportionate share of income based on its ownership interests during those periods. AMIC paid no dividends on its common stock during the Stub Period in 2010 or during the year ended December 31, 2009.

The following disclosures summarize the effects of certain transactions between IHC and its subsidiaries with AMIC during the Stub Period and other periods prior to the Acquisition Date. Subsequent to the Acquisition Date, the effects of these transactions are eliminated in consolidation. IHC and its subsidiaries recorded income of $208,000 during the Stub Period in 2010 and $1,083,000, for the year ended December 31, 2009 from service agreements with AMIC and its subsidiaries. These are reimbursements to IHC and its subsidiaries, at agreed upon rates including an overhead factor, for management services provided by IHC and its subsidiaries, including accounting, legal, compliance, underwriting and claims. The Company ceded premiums to AMIC of $5,867,000 during the Stub Period in 2010 and $45,519,000 for the year ended December 31, 2009. Benefits to policyholders on business ceded to AMIC were $3,020,000 during the Stub Period in 2010 and $31,009,000, for the year ended December 31, 2009. Additionally, AMIC subsidiaries market, underwrite and provide administrative

services (including premium collection, medical management and claims adjudication) for a substantial portion of the Medical Stop-Loss business written by the insurance subsidiaries of IHC. IHC recorded gross premiums of $8,452,000 during the Stub Period in 2010 and $62,259,000 for the year ended December 31, 2009 and IHC recorded net commission expense of $326,000 during the Stub Period in 2010 and $2,567,000 for the year ended December 31, 2009 for these services. The Company also contracts for several types of insurance coverage (e.g. directors and officers and professional liability coverage) jointly with AMIC. The cost of this coverage is allocated between the Company and AMIC according to the type of risk, and IHC’s portion is recorded in Selling, General and Administrative Expenses.

AMIC's condensed operating results for the year ended December 31, 2009 were as follows:


					2009

Revenues				$	104,247
Expenses					99,609

Income from continuing operations before
	income taxes				4,638
Provision for income taxes					1,472

Income from continuing operations					3,166
Loss from discontinued operations					-

Net income					3,166
Net income attributable to non-
		controlling interests			(554)

			Net income attributable to AMIC	$	2,612


Net income attributable to AMIC
	per common share:

		Basic	$	.31
		Diluted	$	.31

Note 3.

Securities Purchased Under Agreements to Resell

Securities purchased under agreements to resell are utilized to invest excess funds on a short-term basis. At December 31, 2011, the Company had $17,258,000 in resale agreements outstanding, all of which settled on January 3, 2012 and were subsequently reinvested. The Company maintains control of securities purchased under resale agreements, values the collateral on a daily basis and obtains additional collateral, if necessary, to protect the Company in the event of default by the counterparties.

Note 4.

Investment Securities

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:


				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 ⁽¹⁾ - residential			33,119		5,200		(1,544)		36,775
	CMOs ⁽¹⁾ - commercial			1,448		-		(910)		538
	U.S. Government obligations			164,807		1,775		-		166,582
	Agency MBS ⁽²⁾ residential			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 stocks-perpetual			21,767		422		(451)		21,738
	Preferred stocks-with maturities			8,051		1,136		(83)		9,104

		Total equity securities	$	36,355	$	1,869	$	(683)	$	37,541


				December 31, 2010
						GROSS		GROSS
				AMORTIZED		UNREALIZED		UNREALIZED		FAIR
				COST		GAINS		LOSSES		VALUE
				(In thousands)
FIXED MATURITIES
	AVAILABLE-FOR-SALE:
	Corporate securities		$	272,061	$	3,595	$	(3,661)	$	271,995
	CMOs ⁽¹⁾ - residential			58,829		6,662		(1,847)		63,644
	CMOs ⁽¹⁾ - commercial			1,447		-		(639)		808
	U.S. Government obligations			16,617		351		-		16,968
	Agency MBS ⁽²⁾ residential			10,069		206		(51)		10,224
	GSEs ⁽³⁾			70,199		510		(182)		70,527
	States and political subdivisions			365,578		2,070		(8,158)		359,490

		Total fixed maturities	$	794,800	$	13,394	$	(14,538)	$	793,656

EQUITY SECURITIES
	AVAILABLE-FOR-SALE:
	Common stocks		$	4,600	$	167	$	(98)	$	4,669
	Preferred stocks-perpetual			31,530		1,065		(315)		32,280
	Preferred stocks-with maturities			9,790		1,334		-		11,124

		Total equity securities	$	45,920	$	2,566	$	(413)	$	48,073

(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.

The unrealized gains (losses) on certain available-for-sale securities (residential CMO’s and certain preferred stocks with maturities) at December 31, 2011 and 2010 include $2,625,000 and $1,763,000, 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 at December 31, 2011, 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.


			AMORTIZED		FAIR	% OF TOTAL FAIR
			COST		VALUE	VALUE
			(In thousands)

Due in one year or less		$	5,094	$	5,139	.6%
Due after one year through five years			220,680		223,003	26.4%
Due after five years through ten years			228,277		231,758	27.5%
Due after ten years			283,349		288,071	34.2%
			737,400		747,971	88.7%
CMO and MBS
	15 year		50,159		52,935	6.3%
	20 year		830		839	.1%
	30 year		40,861		41,128	4.9%
		$	829,250	$	842,873	100.0%

The following table summarizes, for all securities in an unrealized loss position at December 31, 2011 and 2010, respectively, the aggregate fair value and gross unrealized loss by length of time those securities had continuously been in an unrealized loss position:


			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 ⁽¹⁾ - residential			1,396		176		14,597		1,368		15,993			1,544
CMOs ⁽¹⁾ - commercial			-		-		538		910		538			910
GSE			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


			Less than 12 Months				12 Months or Longer					Total
			Fair		Unrealized		Fair		Unrealized		Fair			Unrealized
December 31, 2010			Value		Losses		Value		Losses		Value			Losses
			(In thousands)
Corporate securities		$	103,247	$	3,404	$	12,253	$	257	$	115,500		$	3,661
CMOs ⁽¹⁾- residential			12,494		476		16,979		1,371		29,473			1,847
CMOs ⁽¹⁾- commercial			-		-		808		639		808			639
Agency MBS ⁽²⁾ residential			5,085		51		-		-		5,085			51
GSE			32,481		170		1,389		12		33,870			182
States and political
	subdivisions		195,589		5,292		37,655		2,866		233,244			8,158
Total fixed maturities			348,896		9,393		69,084		5,145		417,980			14,538
Common stocks			999		98		-		-		999			98
Preferred stocks-perpetual			14,845		315		-		-		14,845			315
Total temporarily impaired
	securities	$	364,740	$	9,806	$	69,084	$	5,145	$	433,824		$	14,951

At December 31, 2011 and 2010, a total of 53 and 117 fixed maturities, respectively, and 5 and 13 equity securities, respectively, were in a continuous unrealized loss position for less than 12 months. At December 31, 2011 and 2010, a total of 29 and 27 fixed maturities, respectively, and 1 and nil equity securities, respectively, had continuous unrealized losses for 12 months or longer.

Substantially all of the unrealized losses on fixed maturities at December 31, 2011 and 2010 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 is 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 December 31, 2011.

At December 31, 2011, the Company had $19,430,000 invested in whole loan CMOs backed by Alt-A mortgages. Of this amount, 44% were in CMOs that originated in 2005 or earlier and 56% were in CMOs that originated in 2006. The unrealized losses on all other CMO’s relate to prime rate CMO’s and are primarily attributable to general disruptions in the credit market subsequent to purchase. The Company’s mortgage security portfolio has no direct exposure to sub-prime mortgages.

Other-Than-Temporary-Impairments

Based on management's review of the portfolio, which considered the various factors described in Note 1 (E) (vi) and Note 1 (F), the Company recorded the following losses for other-than-temporary impairments for the years ended December 31, 2011, 2010 and 2009 (in thousands):


							2011		2010		2009
Impairment losses recognized in earnings:
			Fixed maturities			$	1,523	$	3,819	$	522
			Preferred stocks				-		-		271
				Available-for-sale securities:			1,523		3,819		793

			Investment in AMIC				-		-		29,198
					Total impairment losses recognized in earnings		1,523		3,819		29,991

Impairment losses recognized in other
	comprehensive income:
		Fixed maturities					948		-		-
					Total other-than-temporary impairment losses	$	2,471	$	3,819	$	29,991

For the year ended December 31, 2011, the amount of other-than-temporary impairment losses on fixed maturities recognized in earnings consist of $1,346,000 of credit losses recorded as a result of expected cash flows of certain securities less than the securities’ amortized cost and $177,000 of losses recorded as a result of the Company's intent to sell certain corporate debt securities prior to the recovery of their amortized cost bases. For the year ended December 31, 2010, the amount of other-than-temporary impairments on fixed maturities consist of $3,087,000 of credit losses recorded as a result of expected cash flows of certain securities less than the securities’ amortized cost and $732,000 of losses recorded as a result of the Company's intent to sell certain municipal debt securities prior to the recovery of their amortized cost bases.

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):


			2011		2010		2009

Balance at beginning of year		$	1,763	$	2,394	$	-
Adoption of new accounting standards			-		-		2,394
Credit portion of other-than-temporary impairment
	losses recognized during period		878		-		-
Securities sold			(86)		(631)		-

Balance at end of year		$	2,555	$	1,763	$	2,394

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 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.

Refer to Note 2 for information regarding the other-than-temporary impairment recorded in connection with the Company’s investment in AMIC in 2009.

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. At December 31, 2011, the fair value of interest rate swap was $494,000 which is included in other liabilities on the accompanying Consolidated Balance Sheet. See Note 6 for further discussion on the valuation techniques utilized to determine the fair value of the interest rate swap. For the year ended December 31, 2011, the Company recorded $297,000 of losses, representing the change in fair value of the interest rate swap, in accumulated other comprehensive income on the accompanying Consolidated Balance Sheet, net of related tax benefits of $197,000. At December 31, 2010, the Company held no derivative instruments.

Note 6.

Fair Value Disclosures

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.

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

Investments in fixed maturities and equity securities:

Available-for-sale securities included in Level 1 are equity securities 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.

Interest rate swap:

The financial liability included in Level 2 consists of an interest rate swap on IHC debt. It is valued using market observable inputs including market price, interest rate, and volatility within a Black Scholes model.

The following tables present our assets and liabilities measured at fair value on a recurring basis, at December 31, 2011 and 2010, respectively (in thousands):


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	$	37,541	$	820,208	$	22,665	$	880,414

FINANCIAL LIABILITIES:
	Interest rate swap		$	-	$	494	$	-	$	494


December 31, 2010
				Level 1		Level 2		Level 3		Total
ASSETS:
Fixed maturities available-for-sale:
	Corporate securities		$	-	$	271,995	$	-	$	271,995
	CMOs - residential			-		26,187		37,457		63,644
	CMOs - commercial					-		808		808
	US Government obligations			-		16,968		-		16,968
	Agency MBS - residential			-		10,224		-		10,224
	GSEs			-		70,527		-		70,527
	States and political subdivisions			-		359,490		-		359,490
		Total fixed maturities		-		755,391		38,265		793,656

Equity securities available-for-sale:
	Common stocks			4,669		-		-		4,669
	Preferred stocks - perpetual			32,280		-		-		32,280
	Preferred stocks - with maturities			11,124		-		-		11,124
		Total equity securities		48,073		-		-		48,073

		Total	$	48,073	$	755,391	$	38,265	$	841,729

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. For the year ending December 31, 2011, 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 as a result of limited or inactive markets during 2011. 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 2011. The changes in the carrying value of Level 3 assets and liabilities for the year ended December 31, 2011 are summarized as follows (in thousands):


				December 31, 2011
				CMOs
				Residential		Commercial		Total

Beginning balance			$	37,457	$	808	$	38,265

Gains (losses) included in earnings:
		Net realized investment losses		(32)		-		(32)
		Other-than-temporary impairments		(1,346)		-		(1,346)

Net unrealized gains (losses) included in
	accumulated other comprehensive loss			466		(271)		195
Non-credit portion of other-than-temporary
		impairments included in other comprehensive income		(948)		-		(948)

Sales of securities				(9,556)		-		(9,556)

Repayments and amortization of fixed maturities				(3,914)		1		(3,913)

Balance at end of period			$	22,127	$	538	$	22,665

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

(A)

Policy Loans

The fair value of policy loans 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.

(C)

Debt

The fair value of debt with variable interest rates approximates its carrying amount.

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


				December 31, 2011				December 31, 2010
				Carrying		Fair		Carrying		Fair
				Amount		Value		Amount		Value
				(In thousands)
FINANCIAL ASSETS:
	Policy loans		$	23,109	$	29,511	$	23,216	$	28,298

FINANCIAL
	LIABILITIES:
	Funds on deposit		$	417,310	$	418,823	$	406,366	$	411,036
	Debt and junior
		subordinated debt
		securities		48,146		48,146		45,646		45,646

Note 7.

Net Investment Income

Major categories of net investment income for the years ended December 31, 2011, 2010 and 2009 are summarized as follows:


			2011		2010			2009
			(In thousands)

Fixed maturities		$	33,161	$	34,022	$	36,037
Equity securities			2,749		4,661		3,750
Short-term investments			63		311		110
Policy loans			1,587		1,598		1,789
Equity income (loss):
	Investment partnerships		677		684		1,344
	Operating partnerships		1,591		694		726
Other			175		160		44
Investment expenses			(215)		(329)		(280)

Net investment income		$	39,788	$	41,801	$	43,520

Note 8.

Net Realized Investment Gains and Losses

Net realized investment gains (losses) for the years ended December 31, 2011, 2010 and 2009 are as follows:


			2011		2010		2009
			(In thousands)
Net realized investment gains (losses):
	Fixed maturities	$	9,086	$	8,407	$	8,253
	Common stocks		(874)		654		43
	Preferred stocks		749		413		493
			8,961		9,474		8,789


Sales of trading securities			-		(1,619)		-
Other gains (losses)			(291)		63		-
Other trading account losses, net			-		(3,272)		-

Net realized investment gains (losses)		$	8,670	$	4,646	$	8,789

For the years ended December 31, 2011, 2010 and 2009, the company realized gross gains of $18,661,000, $14,848,000 and $11,785,000, respectively, and gross losses of $9,700,000, $5,374,000 and $2,996,000, respectively, on sales of available-for-sale securities.

In the fourth quarter of 2008, the Company became aware of certain activities engaged in by the non-affiliate broker-dealer that managed the trading accounts of the Company. The broker-dealer is now in bankruptcy. The Company filed a claim to recover the $500,000 maximum amount available from the Securities Investor Protection Corporation (“SIPC”). Based on discussions with the trustee in bankruptcy in the fourth quarter of 2010 pertaining to the resolution of these claims, the Company recorded an additional $3,272,000 of pre-tax losses consisting of: (i) the reversal of $500,000 of anticipated SIPC recoveries initially recorded by a subsidiary of IHC; (ii) the reversal of $500,000 of anticipated SIPC recoveries initially recorded by AMIC; and (iii) an additional $2,272,000 of withdrawals by IHC and AMIC deemed subject to return. A settlement agreement was entered into with the trustee in the first quarter of 2011 and payment by the Company was made in July 2011.

Note 9.

Other Investments

Other investments consist of the following at December 31, 2011 and 2010:


		2011		2010
		(In thousands)

Policy loans	$	23,109	$	23,216
Investment partnership interests		4,139		6,364
Operating partnership interests		6,829		6,138
Investment in trust subsidiaries		1,146		1,146

	$	35,223	$	36,864

The Company had invested a total of $3,152,000 and $5,177,000 at December 31, 2011 and 2010, respectively, in a domestic feeder fund of Dolphin Limited Partnership III, L.P. (“Dolphin III"). Dolphin III operates as a private investment partnership to act as the “master fund” in a master-feeder fund structure. Dolphin III generally seeks significant investment stakes in publicly traded North American companies with a market value of equity plus debt of approximately $2 billion or less. In the fourth quarter of 2011, the Company withdrew 50% of its investment in Dolphin III, amounting to $2,901,000. The Company's net investment income from Dolphin III for the years ended December 31, 2011, 2010 and 2009 was $876,000, $659,000, and $1,174,000, respectively.

With respect to its investment in Dolphin III, the Company is permitted to withdraw all, or a portion of, its capital account, excluding designated investments subject to lock-up, on any May 31 or November 30, upon 120 days prior written notice. A partner may not withdraw capital corresponding to such designated investments for up to three years from when the investment becomes a designated investment, subject to extension for one additional year. Unless waived by the general partner, the amount of aggregate withdrawals by limited partners as of any withdrawal date shall be limited, on a proportionate basis, so that no more than 25% of the fund's aggregate net asset value is withdrawn as of such date. If withdrawing more than 90% of its capital, the partner shall receive at least 90% of the estimated withdrawal proceeds no later than 45 days following the withdrawal date with the balance settled no later than 30 days after completion of the audit of Dolphin III. As of December 31, 2011, Dolphin III did not have any designated investments subject to lock-up and the Company had no unfunded commitments pertaining to Dolphin III.

Note 10.

Acquisitions

The Company completed the following acquisitions in 2010, and 2009. There were no acquisitions in 2011. The results of operations of the acquired companies are included in IHC's Consolidated Financial Statements from the respective acquisition dates. None of the goodwill recognized in these acquisitions is deductible for income tax purposes. With the exception of AMIC, the effect of the following acquisitions were not material, therefore pro forma results of operations for 2010 and 2009, as though these acquisitions had been completed at the beginning of those years, have not been presented.

(A)

American Independence Corp.

Refer to Note 2 for the discussion pertaining to the acquisition of a controlling interest in AMIC in March 2010 and subsequent acquisitions of non-controlling interests.

(B) Alliance Underwriters, LLC

In January 2010, the Company acquired the assets of a managing general underwriter, Alliance Underwriters, LLC (“AU”) for a $2,500,000 purchase price. The Company recorded goodwill of $1,459,000 and other intangible assets of $1,100,000, for the fair value of customer relationships, which is being amortized over a weighted average period of 8.0 years.

(C) MedWatch, LLC

In January 2010, IHC Health Holdings Corp., a wholly owned subsidiary of the Company (“IHC Health Holdings”), acquired a 51% interest in the stock of MedWatch, LLC (“MedWatch”) for a $500,000 purchase price. The Company recorded goodwill of $581,000 and other intangible assets of $360,000, primarily for the fair value of customer relationships, which is being amortized over a weighted average period of 7.5 years. MedWatch provides utilization review and medical management services to fully insured and self-funded health plans. In the fourth quarter of 2011, the Company realized a loss of $9,000 on the Consolidated Statement of Operations resulting from the sale of its 51% interest in MedWatch.

(D) Hospital Bill Analysis, LLC

In January 2010, IHC Health Holdings acquired a 51% interest in the stock of Hospital Bill Analysis, LLC (“HBA”), a hospital bill review company, for a $500,000 purchase price. The Company recorded goodwill of $814,000 and other intangible assets of $200,000, primarily for the fair value of customer relationships, which is being amortized over a weighted average period of 7.0 years. In the fourth quarter of 2011, the Company realized a loss of $284,000 on the Consolidated Statement of Operations resulting from the sale of its 51% interest in HBA.

(E)

Wisconsin Underwriting Associates, Inc.

In January 2009, Wisconsin Underwriting Associates, Inc., a newly formed wholly owned subsidiary of IHC Health Holdings Corp. ("IHC Health Holdings") acquired the assets of Wisconsin Underwriting Associates, LLC ("WUA") in exchange for $300,000 and 49% of its capital stock. The addition of $750,000 of goodwill represents the excess fair value of the consideration transferred over the total fair value of the net assets of WUA acquired. In January 2011, the Company acquired the remaining 49% noncontrolling interest. The difference between the fair value of the consideration paid and the amount of the non-controlling interest resulted in a credit of $391,000 to additional paid-in capital attributable to IHC Health Holdings.

(F) GroupLink

On July 1, 2009, IHC Health Holdings acquired the remaining non-controlling interest in GroupLink, effectively making the administrative company a wholly owned subsidiary as of such date. The non-controlling interest, consisting of 250 shares of GroupLink common stock, was purchased from a senior officer of GroupLink for a purchase price of $500,000. The difference between the fair value of the consideration paid and the amount of the non-controlling interest resulted in a charge of $426,000 to additional paid-in capital attributable to IHC Health Holdings.

Note 11.

Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill by business segment are as follows for the years ended December 31, 2011 and 2010:


			2011		2010
			(In thousands)

Balance at beginning of year		$	51,713	$	48,859
Fully Insured:
	Acquisition of AU		-		1,459
	Acquisition (sale) of MedWatch		(581)		581
	Acquisition (sale) of HBA		(814)		814

Balance at end of year		$	50,318	$	51,713

See Note 22 for goodwill carrying amounts by segment as of December 31, 2011 and 2010.

At December 31, 2009, the Company wrote-off $4,222,000 of goodwill in connection with an other-than-temporary impairment loss related to its then equity method investment in AMIC. The Company obtained a controlling interest in AMIC in 2010. See Note 2 for further information regarding the impairment loss in 2009.

At December 31, 2011, the Company’s market capitalization was less than its book value indicating a potential impairment of goodwill. As a result, the Company assessed the factors contributing to the performance of IHC stock in 2011, and concluded that the market capitalization does not represent the fair value of the Company. The Company noted several factors that have led to a difference between the market capitalization and the fair value of the Company, including (i) the Company’s stock is thinly traded and a sale of even a small number of shares can have a large percentage impact on the price of the stock, (ii) Geneve Corporation and insiders own approximately 56% of the outstanding shares, which has had a significant adverse impact on the number of shares available for sale and therefore the trading potential of IHC stock, and (iii) lack of analyst coverage of the Company. The Company will continue to monitor IHC’s book value against market capitalization to determine whether an interim test of goodwill is warranted. If we experience a sustained decline in our results of operations and cash flows, or other indicators of impairment exist, we may incur a material non-cash charge to earnings relating to impairment of our goodwill, which could have a material adverse effect on our results.

At December 31, 2011 and 2010, the Company had other intangible assets of $17,715,000 and $20,078,000, respectively, net of accumulated amortization of $10,324,000 and $12,082,000, respectively, which are included in other assets in the Consolidated Balance Sheets. These intangible assets principally represent the estimated fair value of acquired agent and broker relationships. At December 31, 2011 and 2010, other intangible assets include $7,997,000 of intangible assets, primarily the estimated fair value of insurance licenses with indefinite lives, which are not subject to amortization.

The changes in the carrying amount of intangible assets by business segment are as follows for the years ended December 31, 2011 and 2010:


			2011		2010
			(In thousands)

Balance at beginning of year		$	20,078	$	8,262
Medical Stop-Loss:
	Acquisition of AMIC		-		12,200
Fully Insured:
	Acquisition of AU		-		1,100
	Acquisition (sale) of MedWatch		(218)		360
	Acquisition (sale) of HBA		(117)		200
	Capitalized software development		233		229
Amortization expense			(2,261)		(2,273)

Balance at end of year		$	17,715	$	20,078

In connection with the acquisition of a controlling interest in AMIC discussed in Note 2, the Company recorded $12,200,000 of intangible assets. Of this amount, $1,700,000 represents the fair value of agent and marketing contracts and relationships, which is being amortized over a weighted average period of 7.6 years, $1,000,000 represents the fair value of a domain name being amortized over a 10 year period, and $2,000,000 represents the fair value of customer lists, which are being amortized over a period of 5.0 years. The remaining $7,500,000 represents non-amortizable intangible assets consisting of the fair value of insurance licenses with indefinite lives. The AMIC acquisition was accounted for as a bargain purchase and accordingly, the Company did not record goodwill in connection with the transaction.

In the fourth quarter of 2009, the Fully-Insured segment wrote-off $5,077,000 of previously capitalized software, net of $210,000 of accumulated amortization. The Company had been working with a software developer on this project for a number of years in order to improve the Company’s administrative efficiency as it sought in prior years to quickly expand its premiums under management. The software was delivered to the Company in the fourth quarter of 2009. During testing of the software, it was determined that the system was not capable of administering the Company’s lines of business as is and it would take a substantial additional investment to implement. As the Company is not willing to incur the additional investment to make the software functional, the carrying value was fully written off. The expense is included in selling, general and administrative expenses on the Consolidated Statement of Operations for the year ended December 31, 2009.

Estimated amortization expense for each of the next five years is as follows:


		Amortization
Year		Expense
(In thousands)

2012	$	2,534
2013		2,427
2014		2,009
2015		1,097
2016		821

Note 12.

Sale of Credit Life and Disability Segment

The Company sold its credit life and disability segment by entering into a 100% coinsurance agreement with an unaffiliated insurer effective December 31, 2007. In accordance with the terms of such coinsurance agreement, the Company continued to administer this block of business through June 30, 2008. As a result of the subsequent assumption reinsurance agreement, the Company transferred the unearned premium reserves of this block to such insurer effective December 31, 2010.

The Company recorded income (loss) in 2010 and 2009 from discontinued operations representing expenses and changes in claims and reserves related to insurance liabilities for claims incurred prior to the sale on December 31, 2007 as follows:


		2011		2010		2009

Pretax loss from discontinued operations	$	-	$	(394)	$	(572)
Tax benefits allocated to discontinued operations		-		(138)		(873)

Income (loss) from discontinued operations	$	-	$	(256)	$	301

The Company did not record any expenses or changes in claims and reserves related discontinued operations in 2011. In 2009, tax benefits include a $673,000 deferred benefit resulting from a capital loss associated with the difference in the tax basis of certain net assets sold.

Net liabilities related to the discontinued operations at December 31, 2010 on the accompanying Consolidated Balance Sheets, consisting of the claims liabilities for claims incurred prior to the sale, were $771,000. The net liability was reduced in 2011 by claim payments made during the year. Due to its immateriality, the residual balance is included in insurance reserves and policy claims liabilities on the accompanying Consolidated Balance Sheets at December 31, 2011.

Note 13.

Insurance Policy Claims and Reserves

The liabilities for unpaid claims and claim adjustment expenses and insurance reserves-health represent amounts necessary to provide for the estimated cost of settling claims relating to insured events that have been incurred prior to the balance sheet date which have not yet been settled.

Changes in the liability for reserves, unpaid claims and claim adjustment expenses for the Insurance Group's health and disability coverages for the years ended December 31, 2011, 2010 and 2009 are summarized below.


				2011		2010		2009
				(In thousands)

Balance at beginning of year			$	197,968	$	202,801	$	211,318
Less: reinsurance recoverable				82,724		100,711		104,076
Net balance at beginning of year				115,244		102,090		107,242

Gross reserves of AMIC acquired				-		27,373		-
Less: reinsurance recoverable				-		10,296		-
Net reserves of AMIC acquired				-		17,077		-

Amount incurred:
	Current year			197,705		203,602		180,015
	Prior years			(7,492)		(2,466)		250

		Total		190,213		201,136		180,265

Amount paid, related to:
	Current year			123,702		137,953		108,438
	Prior years			71,905		67,106		76,979

		Total		195,607		205,059		185,417

Net balance at end of year				109,850		115,244		102,090
Plus: reinsurance recoverable				83,137		82,724		100,711
Balance at end of year			$	192,987	$	197,968	$	202,801

The preceding schedule reflects: (i) the due and unpaid; (ii) claims in the course of settlement; (iii) estimated incurred but not reported reserves; and (iv) the present value of amounts not yet due on claims. The incurred and paid data above reflects all activity for the year. The net favorable development in 2011 for prior years of $7,492,000 is primarily the result of $2,622,000 of net favorable developments in Medical Stop-Loss reserves, $2,276,000 in the Fully Insured reserves, $2,397,000 in the group disability reserves and $197,000 in all other reserves. The net favorable development in 2010 for prior years of $2,466,000 is primarily the result of favorable development of $4,299,000 in the group disability reserves offset by $1,258,000 incurred in Medical Stop-Loss reserves and $575,000 incurred on all other reserves. The amount incurred in 2009 for prior years of $250,000 is primarily the result of $2,586,000 of Medical Stop-Loss reserves and favorable development of $1,905,000 in the group disability reserves and $431,000 on all other reserves.

These changes in reserve estimates are generally the result of on-going analysis of recent loss development trends. Medical stop-loss business is excess coverage with a short duration. Predicting ultimate claims and estimating reserves in medical stop-loss is especially complicated due to the “excess of loss” nature of these products with very high deductibles applying to specific claims on any individual claimant and in the aggregate for a given group. Fluctuations in results for specific coverage are primarily due to the severity and frequency of individual claims. Due to the short-term nature of medical stop-loss, redundancies and deficiencies will typically emerge during the following year rather than over a number of years.

Note 14.

Debt and Junior Subordinated Debt Securities

(A)

Debt

On July 1, 2011, a subsidiary of IHC amended its amortizing term loan with a commercial bank and increased its outstanding debt to $10,000,000. The amortizing term loan, as amended: (i) matures on July 1, 2016; (ii) bears a variable interest rate of Libor plus 3.35%; and (iii) requires annual principal payments in the amount of $2,000,000 commencing on July 1, 2012 through maturity. The Company simultaneously entered into an interest rate swap with the commercial bank lender effectively fixing the rate at 4.95%. See Note 5 for further discussion pertaining to the interest rate swap. As to such subsidiary, the line of credit (i) contains restrictions with respect to, among other things, the creation of additional indebtedness, the consolidation or merger with or into certain corporations, the payment of dividends and the retirement of capital stock; (ii) requires the maintenance of minimum amounts of net worth, as defined, certain financial ratios, and certain investment restrictions; and (iii) is secured by the stock of Madison National Life, Standard Security Life and the assets of such subsidiary of IHC. At December 31, 2011 and 2010, there was $10,000,000 and $7,500,000, respectively, of outstanding debt under this amortizing term loan.

(B)

Junior Subordinated Debt Issued to Trust Preferred Subsidiaries

Junior subordinated debt consisted of the following at both December 31, 2011 and 2010 (in thousands):


Independence Preferred Trust I - Trust Preferred			$	10,000
Independence Preferred Trust I - Common Stock				310
	Junior subordinated debt security -Trust I			10,310

Independence Preferred Trust II -Trust Preferred				12,000
Independence Preferred Trust II - Common Stock				372
	Junior subordinated debt security - Trust II			12,372

Independence Preferred Trust III – Trust Preferred				15,000
Independence Preferred Trust III – Common Stock				464
	Junior subordinated debt security – Trust III			15,464

		Total junior subordinated debt securities	$	38,146

The Company has three statutory business trusts that were formed for the purpose of issuing trust preferred securities, totaling $37,000,000, to institutional investors in pooled issuances. Although the Company owns all of the trusts' common securities, it is not the primary beneficiary and, therefore, the trusts are unconsolidated subsidiaries for financial reporting purposes. As a result, the Company recognized liabilities of $38,146,000 for junior subordinated debt and assets of $1,146,000 for the investments in trust subsidiaries at both December 31, 2011 and 2010. The Company's subordinated debt securities, which are the sole assets of the subsidiary trusts, are unsecured obligations of the Company and are subordinate and junior in right of payment to all present and future senior indebtedness of the Company. The Company has provided a full and unconditional guarantee of amounts due on the trust preferred securities. The terms of the junior subordinated debt securities, including interest rates and maturities, are the same as the related trust preferred securities.

The distributions payable on the capital securities are cumulative and payable quarterly in arrears. The Company has the right, subject to events of default, to defer payments of interest for a period not to exceed 20 consecutive quarters, provided that no extension period may extend beyond the maturity dates which range from April 2033 to December 2034. The Company has no current intention to exercise its

right to defer interest payments. The rates on the capital securities are as follows: Independence Preferred Trust I, 400 basis points over the three-month LIBOR, (4.4% at December 31, 2011); Independence Preferred Trust II, 390 basis points over the three-month LIBOR, (4.3% at December 31, 2011); and Independence Preferred Trust III, 350 basis points over the three-month LIBOR (4.0% at December 31, 2011).

The capital securities are mandatorily redeemable upon maturity. The Company has the right to redeem the capital securities, in whole or in part without penalties with respect to Independence Preferred Trust I, Independence Preferred Trust II and Independence Preferred Trust III. The redemption price would be 100% (without penalty) of the principal amount plus accrued and unpaid interest.

Cash payments for interest on debt and junior subordinated debt securities were $1,943,000 $1,908,000 and $2,999,000 for the years ended December 31, 2011, 2010 and 2009, respectively.

Note 15.

Preferred Stock

IHC has 100,000 authorized shares of preferred stock, par value $1.00 per share, none of which was issued as of December 31, 2011 and 2010.

Note 16.

Common Stock

In 2011, IHC issued of an aggregate 600,218 shares of IHC’s common stock in various private placements of unregistered securities under Section 4(2) of the Securities Act of 1933, as amended, in connection with the acquisition of an aggregate 900,325 shares of AMIC common stock. See Note 2 regarding AMIC share acquisitions. Accordingly, the shares are "restricted securities", subject to a legend and will not be freely tradable in the United States until the shares are registered for resale under the Securities Act, or to the extent they are tradable under Rule 144 promulgated under the Securities Act or any other available exemption.

In August 2011, pursuant to the Exchange Offer discussed in Note 2, IHC issued 693,228 shares of its common stock, plus a de minimis amount of cash paid in-lieu, in exchange for 1,109,225 shares of AMIC common stock.

In 1991, IHC initiated a program of repurchasing 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. Through December 31, 2011, the Company has repurchased 6,302,644 common shares at a cumulative cost of $40,468,000. This total includes repurchases of 112,197 shares and 206,400 shares in 2011 and 2010, respectively. No shares were repurchased in 2009. All of the repurchased shares have been either retired, reissued, or have become treasury shares. At December 31, 2011, there were 181,403 shares still authorized to be repurchased under the plan authorized by the Board of Directors.

In February 2012, IHC announced a special 10% stock dividend to shareholders with a distribution date in March 2012. Refer to note 23 for more information about IHC dividends.

Note 17.

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. AMIC disclosures reflect activity subsequent to the Acquisition Date.

IHC Share-Based Compensation Plans

In June 2003, the stockholders approved the Independence Holding Company 2003 Stock Incentive Plan (the "2003 Plan") under which, 630,000 shares of common stock were reserved for options and other common stock awards. The final option grants under the 2003 Plan were made during 2006.

In June 2006, the stockholders approved the Independence Holding Company 2006 Stock Incentive Plan (the “2006 Plan") under which, 1,300,000 shares of common stock were reserved for options and other common stock awards.

Under the terms of the Company’s share-based compensation plans, option exercise prices are equal to the quoted market price of the shares at the date of grant or higher; 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 unvested stock, SARs and share-based performance awards. Restricted unvested 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 equal to the quoted market price of IHC shares at the date of grant, or higher, and have three year vesting periods. There were 677,509 shares available for future stock-based compensation grants under these plans at December 31, 2011.

Total share-based compensation expense recorded for the years ended December 31, 2011, 2010 and 2009 was $573,000, $672,000 and $518,000, respectively, and the related tax benefits recognized for the years ended December 31, 2011, 2010 and 2009 were $228,000, $268,000 and $207,000, respectively.

Stock Options

The Company’s stock option activity for the year ended December 31, 2011 was as follows:


	No. of Shares	Weighted-Average
	Under Option	Exercise Price

December 31, 2010	756,480	$	11.68
Expired	(66,740)		21.94

December 31, 2011	689,740		10.68

The following table summarizes information regarding outstanding and exercisable options as of December 31, 2011:


		Outstanding		Exercisable

Number of shares under option		689,740		381,872
Weighted average exercise price per share	$	10.68	$	11.24
Aggregate intrinsic value	$	-	$	-
Weighted average contractual term remaining		2.4 years		1.9 years

The fair value of an option award is estimated on the date of grant using the Black-Scholes option valuation model. The weighted average grant-date fair value of options granted during the year ended December 31, 2010 was $1.57 per share. No options were granted in 2011 or 2009. The assumptions set forth in the table below were used to value these grants:


			2010

Weighted-average risk-free interest rate			2.3%
Annual dividend rate per share		$	.05
Weighted-average volatility factor of the
	Company's common stock		45.0%
Weighted-average expected term of options			4.5 years

Compensation expense of $292,000, $494,000 and $357,000 was recognized in the years ended December 31, 2011, 2010 and 2009, respectively, for the portion of the grant-date fair value of stock options vested during that period.

At December 31, 2011, the total unrecognized compensation cost related to non-vested stock options was $242,000 which is expected to be recognized as compensation expense over a weighted average period of 1.0 years.

Restricted Stock

The Company issued 6,750 restricted stock awards during year ended December 31, 2011 and issued 2,250 restricted stock awards in both the years ended December 31, 2010 and 2009 with weighted-average grant-date fair values of $10.82, $7.01and $6.74 per share, respectively. The total fair value of restricted stock that vested in 2011, 2010 and 2009 was $23,000, $23,000 and $70,000, respectively. Restricted stock expense was $27,000, $28,000 and $104,000 in 2011, 2010 and 2009, respectively.

The following table summarizes restricted stock activity for the year ended December 31, 2011:


	No. of	Weighted-Average
	Non-vested	Grant-Date
	Shares	Fair Value

December 31, 2010	4,500	$	7.80
Granted	6,750	$	10.82
Vested	(2,250)	$	8.67

December 31, 2011	9,000	$	9.85

At December 31, 2011, the total unrecognized compensation cost related to non-vested restricted stock awards was $71,000 which is expected to be recognized as compensation expense over a weighted average period of 2.2 years.

SARs and Other Share-Based Performance Awards

IHC had 209,500 and 100,000 SAR awards outstanding at December 31, 2011 and 2010, respectively, of which 109,500 were issued during 2011 and 100,000 were issued in 2010. No SARs were issued in 2009. 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

100

until settlement. For the years ended December 31, 2011, 2010 and 2009, IHC recorded $209,000, $79,000 and $ (1,000), respectively, of compensation costs for these awards. No SARs were exercised in 2011, 2010 or 2009, however, in 2009, 80,000 SARs were cancelled and the Company made a cash payment of $4,000 representing the fair value of the SARs at such time. Included in Other Liabilities on the Company’s Consolidated Balance Sheets at December 31, 2011 and December 31, 2010 are liabilities of $288,000 and $79,000, 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 years ended December 31, 2011, 2010 and 2009, the Company recorded $45,000, $74,000 and $48,000, respectively, of compensation costs for these plans. The intrinsic value of share-based performance awards issued in 2011, 2010 and 2009 was $55,000, $54,000 and $39,000, respectively. Included in Other Liabilities on the Company’s Consolidated Balance Sheets at December 31, 2011 and 2010 are liabilities of $65,000 and $75,000, respectively, pertaining to share-based performance awards.

AMIC Share-Based Compensation Plans

Total AMIC share-based compensation expense was $43,000 for the year ended December 31, 2011 and was $62,000 for the period between the Acquisition Date and December 31, 2010. Related tax benefits of $15,000 and $21,000 were recognized for the year ended December 31, 2011 and for the period between the Acquisition Date and December 31, 2010, respectively.

Effective July 1, 2009, AMIC implemented the 2009 Stock Incentive Plan (“AMIC 2009 Plan”), which the AMIC stockholders approved on June 19, 2009. The AMIC 2009 Plan provided for the grants of non-statutory and incentive stock options, stock appreciation rights, restricted stock awards, performance shares, and other awards to officers, employee and other individuals. Under the terms of the AMIC 2009 Plan, stock options have a maximum term of ten years from the date of grant, and have various vesting criteria depending on the grant with most grants vesting 25% on the first year anniversary date of the grant and ratably over the next 36 months. AMIC’s 1998 Plan, which expired by its terms on October 7, 2008, had reserved for issuance a total of 7,154,198 common stock shares. At December 31, 2011, stock options for 333,956 common stock shares were outstanding, stock options for 310,622 common stock shares were vested, and 6,517,221 common stock shares that had not been issued remained available for future stock options grants and other awards. Awards made under AMIC’s 1998 Plan prior to its expiration are still in effect.

Stock Options

The following table summarizes information regarding AMIC’s outstanding and exercisable options for the year ended December 31, 2011:


	Shares	Weighted- Average
	Under Option	Exercise Price

December 31, 2010	359,234	$	9.95
Granted	20,001	5.52
Expired	(31,668)	4.50
Exercised	(13,611)	4.24
December 31, 2011	333,956		10.43

101

The following table summarizes information regarding AMIC’s outstanding and exercisable options as of December 31, 2011:


		Outstanding		Exercisable

Number of options		333,956		310,622
Weighted average exercise price per share	$	10.43	$	10.82
Aggregate intrinsic value for all options	$	-	$	-
Weighted average contractual term remaining		3.12 years		2.67 years

The fair value of an option award is estimated on the date of grant using the Black-Scholes option valuation model. The weighted average grant-date fair-value of options granted during the year ended December 31, 2011 and during the period between the Acquisition Date and December 31, 2011 was $3.02 and $2.79 per share, respectively. The assumptions set forth in the table below were used to value the stock options granted during the periods:


		2011		2010

Weighted-average risk-free interest rate		3.11		3.69%
Annual dividend rate per share	$	-	$	-
Weighted-average volatility factor of the Company's common stock		36.89%		45.0%
Weighted-average expected term of options		5 years		5 years

Compensation expense of $36,000 and $47,000 was recognized for the year ended December 31, 2011 and for the period between the Acquisition Date and December 31, 2010, respectively, representing the portion of the grant-date fair value of AMIC’s stock options vesting during the period.

AMIC received cash proceeds of $57,000 upon the exercise of 13,611 options with an intrinsic value of $11,000 during the year ended December 31, 2011. AMIC received cash proceeds of $45,000 upon the exercise of 10,000 options with an intrinsic value of $1,000 during the period between the Acquisition Date and December 31, 2010.

As of December 31, 2011, the total unrecognized compensation expense related to AMIC’s non-vested options was $80,000 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 were issued in 2011 or 2010. The total fair value of AMIC’s restricted stock that vested during the year ended December 31, 2011 and during the period between the Acquisition Date and December 31, 2010 was $12,000 and $13,000, respectively. Restricted stock expense was $7,000 and $15,000 for the year ended December 31, 2011 and for the period between the Acquisition Date and December 31, 2010, respectively.

102

The following table summarizes AMIC’s restricted stock activity for the year ended December 31, 2011:


	No. of	Weighted-Average
	Non-vested	Grant-Date
	Shares	Fair Value

December 31, 2010	2,500	$	6.92
Vested	(1,500)	$	6.92
Forfeited	(1,000)	$	6.92

December 31, 2011	-	$	6.92

Note 18.

Income Taxes

IHC and its subsidiaries, excluding AMIC, file a consolidated Federal income tax return on a June 30 fiscal year. AMIC continues to file its own separate income tax return on a September 30 fiscal year and is not included in the consolidated tax return of IHC. The provision for income tax expense (benefit) attributable to income from continuing operations as shown in the Consolidated Statements of Operations for the years ended December 31, 2011, 2010 and 2009 is as follows:


			2011		2010		2009
			(In thousands)

CURRENT:
	U.S. Federal	$	4,397	$	(2,973)	$	1,545
	State and Local		523		456		235
			4,920		(2,517)		1,780

DEFERRED:
	U.S. Federal		(912)		12,698		(9,997)
	State and Local		(276)		2,402		(2,452)
			(1,188)		15,100		(12,449)

		$	3,732	$	12,583	$	(10,669)

Income taxes recorded for the year ended December 31, 2011 includes 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.

Taxes computed at the Federal statutory rate of 35% in 2011, 2010 and 2009, attributable to pretax income from continuing operations, are reconciled to the Company's actual income tax expense on income from continuing operations as follows:

103


			2011		2010		2009
			(In thousands)

Tax computed at the statutory rate		$	6,474	$	12,688	$	(6,336)
Dividends received deduction and tax
	exempt interest		(600)		(1,816)		(2,025)
State and local income taxes, net of Federal effect			444		1,858		(1,442)
AMIC deferred income tax reversal			(2,319)		-		-
Other, net			(267)		(147)		(866)

Income tax expense		$	3,732	$	12,583	$	(10,669)

Deferred income tax expense for the year ended December 31, 2011 allocated to stockholders' equity (principally for net unrealized gains on investment securities) was $3,408,000, representing the increase in the related net deferred tax liability to $3,768,000 at December 31, 2011 from $360,000 at December 31, 2010.

Temporary differences between the Consolidated Financial Statement carrying amounts and tax bases of assets and liabilities that give rise to the deferred tax assets and liabilities at December 31, 2011 and 2010 are summarized below. The net deferred tax asset or liability is included in Other Assets or Other Liabilities, as appropriate, in the Consolidated Balance Sheets. IHC and its subsidiaries, excluding AMIC, have certain tax-planning strategies that were used in determining that a valuation allowance was not necessary on its deferred tax assets at December 31, 2011 or 2010. At December 31, 2011 and 2010, AMIC had net deferred tax assets of $8,030,000 and $9,227,000, respectively, net of a valuation allowance of $84,665,000 and $86,059,000, respectively.


				2011			2010
				(In thousands)
DEFERRED TAX ASSETS:
	Deferred insurance policy acquisition costs		$	1,996	$	2,612
	Unrealized losses on investment securities			197		771
	Investment write-downs			5,189		5,383
	Loss carryforwards			114,876		112,788
	Insurance reserves			1,269		-
	Other			4,407		7,109
		Total gross deferred tax assets		127,934		128,663
	Less valuation allowance			(84,665)		(86,059)

		Net deferred tax assets		43,269		42,604

DEFERRED TAX LIABILITIES:
	Deferred insurance policy acquisition costs			(9,942)		(11,868)
	Insurance reserves			(6,101)		(5,414)
	Investment in AMIC			-		(2,589)
	Unrealized gains on investment securities			(4,336)		-
	Other			(7,892)		(5,982)

		Total gross deferred tax liabilities		(28,271)		(25,853)

	Net deferred tax asset		$	14,998	$	16,751

104

As of December 31, 2011, IHC and its subsidiaries, excluding AMIC, had net operating tax loss carryforwards arising from limitations on offsetting non-life insurance company losses against life insurance company income. The non-life insurance company tax loss carryforwards amount to approximately $40,750,000 at December 31, 2011, which expire as follows (in thousands):


Tax Year:
2025	$	498
2026		1,865
2027		7,294
2028		3,317
2029		10,614
2030		10,470
2031		5,608
2032		1,084

	$	40,750

In addition, as of December 31, 2011, IHC and its subsidiaries, excluding AMIC, had capital tax loss carryforwards of approximately $7,500,000 expiring in 2014 and 2015 arising from excess capital losses realized by the life insurance company group.

At December 31, 2011, AMIC had federal NOL carryforwards of approximately $274,718,000 which expire as follows (in thousands):


Tax Year:
2019	$		16,675
2020			70,827
2021			142,530
2022			41,252
2023			528
2024			2
2025			-
2026			354
2027		-
2028		2
2029			1,372
2030			-
2031			1,176
	$		274,718

At December 31, 2011, AMIC also had NOL carryforwards of approximately $25,814,000 for state income tax purposes, primarily in the State of California. Management believes that it is more likely than not that the state tax benefit of these net operating loss carryforwards will not be realized.

AMIC's ability to utilize its federal NOL carrryforwards would be substantially reduced if AMIC were to undergo an "ownership change" within the meaning of Section 382(g)(1) of the Internal Revenue Code. AMIC will be treated as having had an "ownership change" if there is more than a 50% increase in stock ownership during a three year '"testing period" by "5% stockholders."

As the NOL carryforwards are utilized by IHC and AMIC, the amount of NOL carryforwards could be reduced upon audit by the IRS for those tax years open for assessment under the statute of limitations.

105

The Internal Revenue Service ("IRS") is currently auditing AMIC’s 2009 consolidated income tax return. Management believes that it has made adequate provision for all income tax uncertainties, such that the outcome of any unresolved issues or claims will not result in a material change to our financial position or results of operations.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Management believes that it is more likely than not that IHC and its subsidiaries, and AMIC, will realize the benefits of these net deferred tax assets recorded at December 31, 2011. As of December 31, 2011, IHC and its subsidiaries, and AMIC, believe there were no material uncertain tax positions that would require disclosure under U.S. GAAP.

Interest expense and penalties for the years ended December 31, 2011, 2010 and 2009 are insignificant.

Net cash (receipts) payments for income taxes were $(3,626,000), $637,000 and $2,393,000 in 2011, 2010 and 2009, respectively.

Note 19.

Commitments and Concentration of Credit Risk

Certain subsidiaries of the Company are obligated under non-cancelable operating lease agreements for office space. Total rental expense for the years 2011, 2010 and 2009 for operating leases was $4,016,000, $4,942,000 and $4,137,000, respectively.

The approximate minimum annual rental payments under operating leases that have remaining non-cancelable lease terms in excess of one year at December 31, 2011 are as follows (in thousands):


2012		$	3,237
2013			2,620
2014			2,370
2015			2,313
2016			2,037
2017 and thereafter			1,254

	Total	$	13,831

At December 31, 2011, the Company had no investment securities of any one issuer or in any one industry which exceeded 10% of stockholders' equity, except for investments in obligations of the U.S. Government and its agencies and mortgage-backed securities issued by GSEs, as summarized in Note 4.

Fixed maturities with a carrying value of $11,406,000 and $11,771,000 were on deposit with various state insurance departments at December 31, 2011 and 2010, respectively.

At December 31, 2011, the Company had net receivables of $45,348,000 and $29,502,000 from two different reinsurers which are both rated A by A.M. Best. These are the only reinsurers with a net receivable that individually exceed 10% of the stockholders' equity of the Company. The Company believes that these receivables are fully collectible.

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

106

available relating 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.

Note 20.

Acquisitions of Policy Blocks

In addition to its core life and health lines of business, IHC has acquired blocks of life insurance and annuity policies from other insurance companies, guaranty associations and liquidators. The deferred acquisition costs that arise from the acquisition of these policy blocks are costs that vary with, and are primarily related to, the acquisition of new and renewal insurance contracts. As these were acquisitions of blocks of existing policies, the deferral reflects the purchase price of the policies and the associated finder’s fees. Both of these were variable and directly related to obtaining the policy block.

The Company did not record any significant policy block acquisitions in 2011 or 2009. Madison National Life acquired a block of life insurance policies during 2010. The following reflects the impact of these transactions:


			2010
Liabilities:
	Insurance reserves - life	$	1,603
	Other		3
			1,606

Non-cash assets:
	Deferred acquisition costs		100
	Other investments (policy loans)		251
	Due and unpaid premiums		63
			414

Cash received		$	1,192

Note 21.

Reinsurance

Standard Security Life, Madison National Life and Independence American reinsure portions of certain business in order to limit the assumption of disproportionate risks. Standard Security Life, Madison National Life and Independence American retain varying amounts of individual life or group life insurance. Amounts not retained are ceded to other companies on an automatic or facultative basis. In addition, Standard Security Life, Madison National Life and Independence American participate in various coinsurance treaties on a quota share basis. Standard Security Life, Madison National Life and Independence American are contingently liable with respect to reinsurance in the unlikely event that the assuming reinsurers are unable to meet their obligations. The ceding of reinsurance does not discharge the primary liability of the original insurer to the insured.

Madison National Life entered into a reinsurance treaty with an unaffiliated reinsurer to cede $48,837,000 of life reserves, effective April 1, 2009, in exchange for transferring $40,639,000 in cash to such reinsurer. Madison National Life recorded a net deferred gain of $8,198,000 which will be amortized over the life of the contract. In accordance with the terms of the agreement, Madison National Life will continue to administer this block of business.

107

The effect of reinsurance on life insurance in-force, benefits to policyholders and premiums earned is as follows:


										PERCENTAGE
					ASSUMED		CEDED			OF AMOUNT
			GROSS		FROM OTHER		TO OTHER		NET	ASSUMED
			AMOUNT		COMPANIES		COMPANIES		AMOUNT	TO NET
			(In thousands)

Life Insurance In-Force:

December 31, 2011		$	11,322,537	$	236,650	$	6,207,385	$	5,351,802	4.4%
December 31, 2010		$	11,253,298	$	291,467	$	5,797,444	$	5,747,321	5.1%
December 31, 2009		$	11,091,711	$	703,045	$	6,173,559	$	5,621,197	12.5%

Benefits to Policyholders:

December 31, 2011		$	272,128	$	53,929	$	101,994	$	224,063	24.1%
December 31, 2010		$	307,988	$	65,624	$	132,936	$	240,676	27.3%
December 31, 2009		$	302,785	$	93,307	$	176,301	$	219,791	42.5%

Premiums Earned:

December 31, 2011
	Health	$	377,294	$	51,703	$	130,451	$	298,546	17.3%
	Life and annuity		48,881		7,663		18,676		37,868	20.2%
		$	426,175	$	59,366	$	149,127	$	336,414	17.6%

December 31, 2010
	Health	$	394,446	$	55,036	$	159,896	$	289,586	19.0%
	Life and annuity		48,280		8,712		20,432		36,560	23.8%
		$	442,726	$	63,748	$	180,328	$	326,146	19.5%

December 31, 2009
	Health	$	376,139	$	97,527	$	215,567	$	258,099	37.8%
	Life and annuity		39,285		14,595		17,180		36,700	39.8%
		$	415,424	$	112,122	$	232,747	$	294,799	38.0%

Included in Gross Amount in 2010 and 2009, respectively, are $8,452,000 and $62,259,000 of premiums written through AMIC subsidiaries prior to its consolidation in 2010. Included in Ceded to Other Companies in 2010 and 2009, respectively, are $5,867,000 and $45,519,000 of Premiums Earned and $3,020,000 and $31,009,000 of Benefits to Policyholders for business ceded to Independence American, a subsidiary of AMIC prior to its consolidation in 2010.

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 $143,421,000 of group annuity reserves in the first quarter of 2012. As a result of such agreement, the Company wrote-off $4,568,000 of deferred acquisition costs at December 31, 2011.

108

Note 22.

Segment Reporting

The Insurance Group principally engages in the life and health insurance business. Interest expense, taxes, and general expenses associated with parent company activities are included in Corporate. Identifiable assets by segment are those assets that are utilized in each segment and are allocated based upon the mean reserves and liabilities of each such segment. Corporate assets are composed principally of cash equivalents, resale agreements, fixed maturities, equity securities, partnership interests and certain other investments. Information by business segment for the years ended December 31, 2011, 2010 and 2009 is presented below.


				2011		2010		2009
				(In thousands)
Revenues:
Medical Stop-Loss ^(A)			$	123,497	$	130,654	$	133,121
Fully Insured Health ^(B)				167,900		150,684		115,975
Group disability; life, annuities and DBL ^(C)				60,376		65,972		64,992
Individual life, annuities and other				58,103		58,641		60,638
Corporate				973		28,590		1,314
				410,849		434,541		376,040
Net realized investment gains				8,670		4,646		8,789
Other-than-temporary impairment losses				(1,523)		(3,819)		(29,991)

Total revenues			$	417,996	$	435,368	$	354,838


Income (loss) from continuing operations
		before income taxes:
Medical Stop-Loss ^(A)			$	8,983	$	1,878	$	3,709
Fully Insured Health ^(B)				7,692		3,126		(7,808)
Group disability; life, annuities and DBL ^{(C) (D)}				1,733		6,646		7,107
Individual life, annuities and other				389		2,217		6,302
Corporate				(5,481)		23,470		(3,393)
				13,316		37,337		5,917
Interest expense				(1,965)		(1,912)		(2,817)
Net realized investment gains				8,670		4,646		8,789
Other-than-temporary impairment losses				(1,523)		(3,819)		(29,991)

Income (loss) from continuing operations
	before income taxes		$	18,498	$	36,252	$	(18,102)

(A)

The amount includes equity income from AMIC (prior to its acquisition) of $14,000 and $786,000 for the years 2010 and 2009, respectively.

(B)

The amount includes equity income from AMIC (prior to its acquisition) of $244,000 and $387,000 for the years ended December 31, 2010 and 2009, respectively.

(C)

The amount includes equity income from AMIC (prior to its acquisition) of $22,000 and $116,000 for the years ended December 31, 2010 and 2009, respectively.

(D)

The Fully Insured Health segment includes amortization of intangible assets recorded as a result of purchase accounting for the recent acquisitions. Total amortization expense was $2,374,000, $2,382,000 and $2,458,000 for the years ended December 31, 2011, 2010 and 2009, respectively. Amortization expense for the other segments is insignificant.

109


		2011		2010
		(In thousands)
IDENTIFIABLE ASSETS AT YEAR END
Medical Stop-Loss ^(A)	$	164,593	$	187,639
Fully Insured Health ^(B)		159,404		164,014
Group disability; life, annuities and DBL		311,422		281,495
Individual life, annuities and other		689,522		681,244
Corporate		33,918		47,400
	$	1,358,859	$	1,361,792

(A)

The Medical Stop-Loss segment includes allocated goodwill of $5,664,000 at both December 31, 2011 and 2010.

(B)

The Fully Insured Health segment includes allocated goodwill of $44,654,000 and $46,048,000 at December 31, 2011 and 2010, respectively.

Note 23.

Dividend Restrictions on Insurance Subsidiaries and IHC

Dividends from Madison National Life are subject to the prior notification to the Commissioner of Insurance of the State of Wisconsin if such dividend distribution exceeds 115% of the distribution for the corresponding period of the previous year. In addition, if such dividends, together with the fair market value of other dividends paid or credited and distributions made within the preceding twelve months, exceed the lesser of (i) total net gain from operations for the preceding calendar year minus realized capital gains for that calendar year and (ii) 10% of surplus with regard to policyholders as of December 31 of the preceding year, such dividends may be paid so long as such dividends have not been disapproved by the Wisconsin Insurance Commissioner within 30 days of its receipt of notice thereof. In the fourth quarter of 2011, upon approval by the Wisconsin Insurance Commissioner, Madison National Life transferred to its parent, a subsidiary of IHC, all of the outstanding common stock of its wholly owned subsidiary, Standard Security Life, representing an extraordinary dividend with a statutory value of $106,314,000. In addition, Madison National Life declared and paid cash dividends of $2,000,000, $3,450,000 and $3,000,000, in 2011, 2010 and 2009, respectively. Madison National Life's statutory capital and surplus was $70,266,000 (unaudited) and $174,171,000 as of December 31, 2011 and 2010, respectively. For the years ended December 31, 2011, 2010 and 2009, Madison National Life's statutory net income was $15,080,000 (unaudited), $12,820,000 and $21,423,000, respectively.

The payment of dividends by Standard Security Life to its parent, a subsidiary of IHC, is subject to the prior notification to the New York State Insurance Department if such dividends, together with other dividends in such calendar year exceed the lesser of (i) 10% of surplus as regards policyholders as of the immediately preceding calendar year and (ii) net gain from operations for the immediately preceding calendar year, not including realized capital gains. Such dividends may be paid so long as they have not been disapproved by the New York State Department of Insurance within 30 days of its receipt of notice thereof. Standard Security Life declared and paid dividends to its parent of $4,950,000, $8,500,000 and $7,800,000 in 2011, 2010 and 2009, respectively. Standard Security Life's statutory capital and surplus was $106,481,000 (unaudited) and $109,264,000 as of December 31, 2011 and 2010, respectively. For the years ended December 31, 2011, 2010 and 2009, Standard Security Life's statutory net income was $7,709,000 (unaudited), $3,267,000 and $8,783,000, respectively.

Dividends from Independence American to its parent, a subsidiary of AMIC, are subject to the prior notification to the Delaware Insurance Commissioner, if such dividends, together with the fair market value of other dividends or distributions made within the preceding twelve months, exceed the greater of (i) 10% of surplus as regards policyholders as of the preceding December 31 or (ii) net income, not including realized capital gains, for the twelve-month period ending the December 31 next preceding.

110

Such dividends may be paid as long as they have not been disapproved by the Delaware Insurance Commissioner within 30 days of its receipt of notice thereof. Independence American paid dividends of $1,000,000 and $1,500,000 in 2011 and 2010, respectively. Independence American’s statutory surplus was $50,466,000 (unaudited) and $47,392,000 as of December 31, 2011 and 2010, respectively, and statutory net income was $3,407,000 (unaudited) and $2,697,000 for 2011and 2010, respectively.

Under Delaware law, IHC is permitted to pay dividends from surplus or net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. IHC declared cash dividends of $807,000 in 2011, $762,000 in 2010 and $771,000 in 2009. In February 2012, IHC announced a special 10% stock dividend payable to shareholders of record on February 17, 2012 with a distribution date of March 5, 2012. Fractional shares will be paid in cash in lieu of stock. IHC also announced it will increase its annual dividend from $.05 to $.07 per share.

Note 24.

Other Comprehensive Income (Loss)

The components of total comprehensive income (loss) include (i) net income or loss reported in the Consolidated Statements of Operations, (ii) 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, and (iii) effective April 1, 2009, the non-credit related component of other-than-temporary impairments of fixed maturities, net of tax.

The net unrealized gains and losses on investment securities included in total comprehensive income (loss) for the years ended December 31, 2011, 2010 and 2009 are as follows:


				Before		Tax		Net of
				Tax		Effect		Tax
			(In thousands)
2011
Unrealized gains arising during the year			$	20,399	$	(5,920)	$	14,479
Allocation to deferred acquisition costs				(2,453)		-		(2,453)
Reclassification of net gains included in earnings				(8,961)		3,026		(5,935)
Reclassification of losses recognized as other-than-
	temporary impairments in earnings			1,523		(514)		1,009
		Net unrealized gains on available-for-sale securities	$	10,508	$	(3,408)	$	7,100

2010
Unrealized gains arising during the year			$	20,762	$	(6,398)	$	14,364
Allocation to deferred acquisition costs				(3,042)		-		(3,042)
Reclassification of net gains included in earnings				(9,474)		3,433		(6,041)
Reclassification of losses recognized as other-than-
	temporary impairments in earnings			3,819		(1,363)		2,456
		Net unrealized losses on available-for-sale securities	$	12,065	$	(4,328)	$	7,737

2009
Unrealized losses arising during the year			$	95,484	$	(30,006)	$	65,478
Allocation to deferred acquisition costs				(11,559)		-		(11,559)
Reclassification of net losses included in earnings				(8,789)		3,144		(5,645)
Reclassification of losses recognized as other-than-
	temporary impairments in earnings			793		(289)		504
		Net unrealized losses on available-for-sale securities	$	75,929	$	(27,151)	$	48,778

111

Included in accumulated other comprehensive income at December 31, 2011 and 2010 are after-tax adjustments of $1,686,000 and $1,132,000, respectively, related to the non-credit related component of other-than-temporary impairment losses. In 2011, unrealized gains arising during the year include losses of $609,000, representing the non-credit portion of other-than-temporary impairments, net of $330,000 tax, and the reclassification of net gains to earnings includes $55,000 of the non-credit related component of previously recorded other-than-temporary impairments on securities that were sold during the period, net of $32,000 tax. For the year ended December 31, 2010, the reclassification of net gains to earnings incudes $410,000 of non-credit related components of previously recorded other-than-temporary impairments on securities that were sold during the period , net of $221,000 tax.

Note 25.

Quarterly Data (Unaudited)

The quarterly results of operations for the years ended December 31, 2011 and 2010 are summarized below:


				FIRST		SECOND		THIRD		FOURTH
				QUARTER		QUARTER		QUARTER		QUARTER
				(In thousands, except per share data)
2011

Total revenues			$	104,319	$	105,525	$	103,659	$	104,493

Income from continuing operations			$	3,800	$	3,464	$	4,011	$	3,491
(Income) from noncontrolling interests
	in subsidiaries			(616)		(424)		(457)		(266)

Net income attributable to IHC			$	3,184	$	3,040	$	3,554	$	3,225

Basic income (loss) per common share:
Income from continuing operations			$	.21	$	.19	$	.22	$	.20
Loss from discontinued operations				-		-		-		-

		Basic income (loss) per common share	$	.21	$	.19	$	.22	$	.20

Diluted income (loss) per common are:
Income from continuing operations			$	.21	$	.19	$	.22	$	.20
Loss from discontinued operations				-		-		-		-

		Diluted income per share	$	.21	$	.19	$	.22	$	.20

112


				FIRST		SECOND		THIRD		FOURTH
				QUARTER		QUARTER		QUARTER		QUARTER
				(In thousands, except per share data)
2010

Total revenues			$	116,350	$	106,431	$	107,875	$	104,712

Income (loss) from continuing operations			$	16,377	$	2,318	$	5,051	$	(77)
Loss from discontinued operations				(127)		(55)		(21)		(53)
(Income) from noncontrolling interests
	in subsidiaries			(216)		(565)		(610)		(285)

Net income (loss) attributable to IHC			$	16,034	$	1,698	$	4,420	$	(415)

Basic income (loss) per common share:
Income (loss) from continuing operations			$	1.06	$	.11	$	.29	$	(.02)
Loss from discontinued operations				(.01)		-		-		(.01)

		Basic income (loss) per common share	$	1.05	$	.11	$	.29	$	(.03)

Diluted income (loss) per common are:
Income (loss) from continuing operations			$	1.05	$	.11	$	.29	$	(.02)
Loss from discontinued operations				(.01)		-		-		(.01)

		Diluted income (loss) per share	$	1.04	$	.11	$	.29	$	(.03)

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	SCHEDULE I

INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
SUMMARY OF INVESTMENTS – OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2011



										AMOUNT
										SHOWN IN
										BALANCE
TYPE OF INVESTMENT						COST		VALUE		SHEET
						(In thousands)
FIXED MATURITIES:
	United States Government and
			Government agencies and
			authorities		$	165,346	$	167,167	$	167,167
	GSEs⁽¹⁾					59,633		59,851		59,851
	States, municipalities and
			political subdivisions			250,361		255,402		255,402
	Public utilities					34,056		34,475		34,475
	All other debt securities					319,854		325,978		325,978

			TOTAL FIXED MATURITIES			829,250		842,873		842,873

EQUITY SECURITIES:
	Common stock					6,537		6,699		6,699
	Non-redeemable preferred
		stocks				29,818		30,842		30,842

		TOTAL EQUITY SECURITIES				36,355		37,541		37,541

Short-term investments						50		50		50
Securities purchased under
	agreements to resell					17,258		17,258		17,258
Investment partnership interests						4,139		4,139		4,139
Operating partnership interests						6,829		6,829		6,829
Policy loans						23,109		23,109		23,109
Investment in trust subsidiaries						1,146		1,146		1,146

				TOTAL INVESTMENTS	$	918,136	$	932,945	$	932,945

(1) Government-sponsored enterprise securities consist of Federal National Mortgage Association mortgage-backed securities and other fixed maturity securities issued by the Federal Home Loan Mortgage Corporation and Federal National Mortgage Association.

114


	SCHEDULE II

INDEPENDENCE HOLDING COMPANY
BALANCE SHEETS
(PARENT COMPANY ONLY)


					DECEMBER 31,
					2011		2010
					(In thousands, except share data)

ASSETS:
	Cash and cash equivalents			$	3,098	$	601
	Fixed maturities, available-for-sale				-		771
	Other investments				4,298		6,323
	Investments in continuing consolidated subsidiaries				331,784		310,814
	Taxes receivable				16,233		13,626
	Goodwill				228		228
	Other assets				56		59

		TOTAL ASSETS		$	355,697	$	332,422

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
	Accounts payable and other liabilities			$	4,586	$	4,207
	Amounts due to consolidated subsidiaries, net				28,813		23,269
	Income taxes payable				7,597		5,374
	Net liabilities related to discontinued operations				-		771
	Junior subordinated debt securities				38,146		38,146
	Dividends payable				411		381

		TOTAL LIABILITIES			79,553		72,148

STOCKHOLDERS' EQUITY:
	Preferred stock (none issued)				-		-
	Common stock, $1.00 par value, 20,000,000 shares authorized;
			16,774,540 and 15,472,020 shares issued,
			16,412,405 and 15,232,865 shares outstanding		16,775		15,472
	Paid-in capital				111,814		101,003
	Accumulated other comprehensive income				7,853		633
	Treasury stock, at cost; 362,052 and 239,155 shares				(2,928)		(1,917)
	Retained earnings				127,563		115,437

		TOTAL IHC’S STOCKHOLDERS' EQUITY			261,077		230,628
		NONCONTROLLING INTERESTS IN SUBSIDIARIES			15,067		29,646

		TOTAL EQUITY			276,144		260,274

		TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	355,697	$	332,422

The financial information of Independence Holding Company (Parent Company Only) should be read in conjunction with the Consolidated Financial Statements and Notes thereto.

115


	SCHEDULE II

	(Continued)

INDEPENDENCE HOLDING COMPANY
STATEMENTS OF OPERATIONS
(PARENT COMPANY ONLY)


			2011		2010		2009
			(In thousands)

REVENUES:
	Net investment income	$	929	$	746	$	1,298
	Net realized investment gains (losses)		23		62		(2)
	Other-than-temporary impairment losses		-		-		(1,735)
	Other income		3,138		3,142		3,357

			4,090		3,950		2,918

EXPENSES:
	Interest expense on debt		1,575		1,589		2,269
	General and administrative expenses		4,088		3,805		4,229

			5,663		5,394		6,498

Loss before tax benefit			(1,573)		(1,444)		(3,580)
Income tax benefit			(563)		(559)		(1,446)

Loss before equity in net income (loss) of subsidiaries			(1,010)		(885)		(2,134)
Equity in net income (loss) of subsidiaries			15,776		24,554		(5,299)

Income (loss) from continuing operations			14,766		23,669		(7,433)

Discontinued operations:
	Income (loss) from discontinued operations		-		(256)		301

Net income (loss)			14,766		23,413		(7,132)

(Income) loss from noncontrolling interests in
	subsidiaries		(1,763)		(1,676)		10

Net loss attributable to IHC		$	13,003	$	21,737	$	(7,122)

The financial information of Independence Holding Company (Parent Company Only) should be read in conjunction with the Consolidated Financial Statements and Notes thereto.

116


	SCHEDULE II

	(Continued)

INDEPENDENCE HOLDING COMPANY
STATEMENTS OF CASH FLOWS
(PARENT COMPANY ONLY)


								2011		2010		2009
								(In thousands)

CASH FLOWS PROVIDED BY (USED BY)
	OPERATING ACTIVITIES:
			Net income (loss)				$	14,766	$	23,413	$	(7,132)
			Adjustments to net income (loss):
					Equity in net (income) loss of subsidiaries			(15,776)		(24,554)		5,299
					(Income) loss from discontinued operations			-		256		(301)
					Other			(1,470)		(640)		(248)
		Changes in other assets and liabilities						1,828		368		6,223

						Net change in cash from operating activities		(652)		(1,157)		3,841

CASH FLOWS PROVIDED BY (USED BY)
	INVESTING ACTIVITIES:
			Decrease in investments in and advances to consolidated
				subsidiaries				2,264		1,762		2,500
			Purchases of fixed maturities					(497)		(2,567)		(5,007)
			Sales of fixed maturities					1,271		5,377		1,501
			Net distributions from (additions to) other investments					2,025		(659)		(1,174)
			Other investing activities					-		(199)		-

						Net change in cash from investing activities		5,063		3,714		(2,180)

CASH FLOWS PROVIDED BY (USED BY)
	FINANCING ACTIVITIES:
			Proceeds from issuance of common stock					-		-		1
			Repurchases of common stock					(911)		(1,591)		-
			Cash paid in acquisitions of noncontrolling interests					(62)		-		-
			Excess tax benefits from exercises of common stock options
				and vesting of restricted stock				(164)		(51)		(720)
			Dividends paid					(777)		(767)		(746)

						Net change in cash from financing activities		(1,914)		(2,409)		(1,465)

			Net change in cash and cash equivalents					2,497		148		196
			Cash and cash equivalents, beginning of year					601		453		257

			Cash and cash equivalents, end of year				$	3,098	$	601	$	453

The financial information of Independence Holding Company (Parent Company Only) should be read in conjunction with the Consolidated Financial Statements and Notes thereto.

117


SCHEDULE III
INDEPENDENCE HOLDING COMPANY
SUPPLEMENTARY INSURANCE INFORMATION
(In thousands)

				FUTURE
				POLICY		OTHER			INSURANCE	AMORTIZATION	SELLING
			DEFERRED	BENEFITS,	UNEARNED	POLICY-	NET	NET	BENEFITS,	OF DEFERRED	GENERAL &		NET
			ACQUISITION	LOSSES &	PREMIUMS	HOLDERS’	PREMIUMS	INVESTMENT	CLAIMS &	ACQUISTION	ADMINISTRATIVE		PREMIUMS
			COSTS	CLAIMS	(3)	FUNDS	EARNED	INCOME (1)	RESERVES	COSTS	EXPENSES (2)		WRITTEN
December 31, 2011
Medical Stop-Loss		$	-	58,741	-	-	114,478	4,399	75,490	-	39,024	$	114,478
Fully Insured Health			65	32,508	1,471	367	141,322	1,429	89,040	21	71,147		142,206
Group disability; life,
	annuities and DBL		-	265,595	2,565	99	50,698	9,495	37,946	5,099	15,598		50,871
Individual life, annuities
	and other		37,036	545,037	283	21,080	29,916	23,492	36,386	6,449	14,879		29,913
Corporate			-	-	-	-	-	973	-	-	6,454		-
		$	37,101	901,881	4,319	21,546	336,414	39,788	238,862	11,569	147,102	$	337,468

December 31, 2010
Medical Stop-Loss		$	-	64,339	-	-	121,156	4,080	89,968	-	38,808	$	121,156
Fully Insured Health			87	34,540	1,452	589	120,818	1,454	81,676	28	65,854		120,598
Group disability; life,
	annuities and DBL		4,015	249,937	2,336	26	55,828	9,668	41,440	497	17,389		55,791
Individual life, annuities
	and other		39,363	547,527	255	19,580	28,344	25,839	38,234	5,718	12,472		28,340
Corporate			-	-	-	-	-	760	-	-	5,120		-
		$	43,465	896,343	4,043	20,195	326,146	41,801	251,318	6,243	139,643	$	325,885
December 31, 2009
Medical Stop-Loss		$	-	71,504	-	-	127,724	3,690	92,899	-	36,513	$	127,724
Fully Insured Health			115	34,721	2,065	506	84,698	789	58,500	28	65,255		84,395
Group disability; life,
	annuities and DBL		4,003	234,986	2,108	44	54,896	9,657	39,270	364	18,251		54,988
Individual life, annuities
	and other		40,126	552,267	9,044	19,967	27,481	28,070	34,565	5,127	14,644		27,476
Corporate			-	-	-	-	-	1,314	-	-	4,707		-
		$	44,244	893,478	13,217	20,517	294,799	43,520	225,234	5,519	139,370	$	294,583

(1)

Net investment income is allocated between product lines based on the mean reserve method.

(2)

Where possible, direct operating expenses are specifically identified and charged to product lines. Indirect expenses are allocated based on time studies; however, other acceptable methods of allocation might produce different results.

(3)

2009 includes $8,847,000 of unearned premium reserves related to the co-insurance agreement for the sale of the Company’s credit segment. In 2010, these reserves were transferred in accordance with an assumption reinsurance agreement.

118

EXHIBIT INDEX

Exhibit Number

3.1

Restated Certificate of Incorporation of Independence Holding Company (Filed as Exhibit 3(i) to our Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 and incorporated herein by reference).

3.2

Certificate of Amendment of Restated Certificate of Incorporation of Independence Holding Company (Filed as Exhibit 3.1 to our Current Report on Form 8-K filed with the SEC on July 29, 2004 and incorporated herein by reference).

3.3

By-Laws of Independence Holding Company (Filed as Exhibit 3.3 to our Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference).

10.3

Officer Employment Agreement, made as of April 18, 2011, by and among Independence Holding Company, Standard Security Life Insurance Company of New York and Mr. David T. Kettig (Filed as Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on April 22, 2011 and incorporated herein by reference).

10.4

Officer Employment Agreement, made as of April 18, 2011, by and among Independence Holding Company, Madison National Life Insurance Company, Inc. and Mr. Larry R. Graber (Filed as Exhibit 10.2 to our Current Report on Form 8-K filed with the SEC on April 22, 2011 and incorporated herein by reference).

10.5

Officer Employment Agreement, made as of April 18, 2011, by and among Independence Holding Company, IHC Health Solutions, Inc. and Mr. Jeffrey C. Smedsrud made as of April 18, 2011 (Filed as Exhibit 10.3 to our Current Report on Form 8-K filed with the SEC on April 22, 2011 and incorporated herein by reference).

10.6

Officer Employment Agreement, made as of April 18, 2011, by and among Independence Holding Company, Actuarial Management Corporation and Mr. Bernon R. Erickson, Jr. (Filed as Exhibit 10.4 to our Current Report on Form 8-K filed with the SEC on April 22, 2011 and incorporated herein by reference).

10.7

Officer Employment Agreement, made as of April 18, 2011, by and between Independence Holding Company and Ms. Teresa A. Herbert (Filed as Exhibit 10.5 to our Current Report on Form 8-K filed with the SEC on April 22, 2011 and incorporated herein by reference).

10.8

Officer Employment Agreement, made as of May 11, 2011, by and between Independence Holding Company and Mr. Roy T.K. Thung (Filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q for the period ended March 31, 2011 that was filed with the SEC on May 12, 2011, and incorporated herein by reference).

Subsidiaries of Independence Holding Company, as of December 31, 2011.*

Consent of Independent Registered Public Accounting Firm.*

31.1

Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

119

31.2

Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

32.1

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

32.2

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

*Filed herewith.

120

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Independence Holding (IHC) 10-K2011 FY Annual report

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