Independence Holding 10Q 2013 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

__________________________________________

FORM 10-Q

[X]

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

For the quarterly period endedJune 30, 2013.

[ ]

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

For the transition period from: ________ to _________

Commission File Number:0-10306

INDEPENDENCE HOLDING COMPANY

(Exact name of registrant as specified in its charter)


Delaware		58-1407235
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

96 CUMMINGS POINT ROAD, STAMFORD, CONNECTICUT 06902

(Address of principal executive offices) (Zip Code)

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

NOT APPLICABLE

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

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

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

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


Large Accelerated Filer [ ]	Accelerated Filer [ X ]
Non-Accelerated Filer [ ]	Smaller Reporting Company [ ]

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


Class	Outstanding at August 2, 2013
Common stock, $ 1.00 par value	17,667,526 Shares

INDEPENDENCE HOLDING COMPANY

INDEX


PART I – FINANCIAL INFORMATION				PAGE
					NO.

		Item 1. Financial Statements

			Condensed Consolidated Balance Sheets	4

			Condensed Consolidated Statements of Income	5

			Condensed Consolidated Statements of Comprehensive Income (Loss)	6

			Condensed Consolidated Statement of Changes in Equity	7

			Condensed Consolidated Statements of Cash Flows	8

			Notes to Condensed Consolidated Financial Statements	9

		Item 2. Management's Discussion and Analysis of Financial Condition
			and Results of Operations	28

		Item 3. Quantitative and Qualitative Disclosures about Market Risk		42

		Item 4. Controls and Procedures		43

PART II - OTHER INFORMATION

		Item 1. Legal Proceedings		44

		Item 1A. Risk Factors		44

		Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		44

		Item 3. Defaults Upon Senior Securities		44

		Item 4. Mine Safety Disclosures		44

		Item 5. Other Information		44

		Item 6. Exhibits		45

	Signatures			46

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

Forward-Looking Statements

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

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

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

PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements


INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

						June 30, 2013		December 31, 2012
						(Unaudited)
ASSETS:
	Investments:
		Short-term investments			$	50	$	50
		Securities purchased under agreements to resell				10,588		33,956
		Trading securities				7,997		7,016
		Fixed maturities, available-for-sale				573,527		719,602
		Equity securities, available-for-sale				5,594		15,598
		Other investments				25,648		35,134
				Total investments		623,404		811,356

	Cash and cash equivalents					18,977		23,945
	Deferred acquisition costs					29,624		33,401
	Due and unpaid premiums					73,146		49,430
	Due from reinsurers					383,848		166,880
	Premium and claim funds					36,524		40,596
	Goodwill					50,318		50,318
	Other assets					77,548		86,382

				TOTAL ASSETS	$	1,293,389	$	1,262,308

LIABILITIES AND STOCKHOLDERS’ EQUITY:
LIABILITIES:
	Claims and claim adjustment expenses-health				$	240,155	$	194,480
	Future policy benefits-life and annuity					289,726		290,238
	Funds on deposit					276,287		278,084
	Unearned premiums					11,106		8,453
	Other policyholders' funds					24,990		22,373
	Due to reinsurers					45,454		48,192
	Accounts payable, accruals and other liabilities					71,425		71,495
	Debt					8,000		8,000
	Junior subordinated debt securities					38,146		38,146

				TOTAL LIABILITIES		1,005,289		959,461

STOCKHOLDERS’ EQUITY:
IHC STOCKHOLDERS' EQUITY:
	Preferred stock (none issued)					- -		-
	Common stock $1.00 par value, 23,000,000 shares authorized;
			18,473,958 and 18,461,992 shares
			issued; 17,665,051 and 17,932,954 shares outstanding			18,474		18,462
	Paid-in capital					127,187		126,589
	Accumulated other comprehensive income (loss)					(3,459)		15,013
	Treasury stock, at cost; 808,907 and 529,038 shares					(7,431)		(4,533)
	Retained earnings					137,921		130,153

TOTAL IHC STOCKHOLDERS’ EQUITY						272,692		285,684
NONCONTROLLING INTERESTS IN SUBSIDIARIES						15,408		17,163

				TOTAL EQUITY		288,100		302,847

				TOTAL LIABILITIES AND EQUITY	$	1,293,389	$	1,262,308

See the accompanying Notes to Condensed Consolidated Financial Statements.


INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share data)

						Three Months Ended				Six Months Ended
						June 30,				June 30,
						2013		2012		2013		2012
REVENUES:
		Premiums earned			$	125,465	$	85,469	$	242,833	$	169,243
	Net investment income					7,002		7,609		15,003		16,360
	Fee income					6,039		5,889		12,581		13,310
	Other income					1,659		1,247		3,011		2,403
	Net realized investment gains					11,735		1,850		16,354		2,987

	Other-than-temporary impairment losses:
			Total other-than-temporary impairment losses			-		(909)		-		(992)
			Portion of losses recognized in other comprehensive income			-		288		-		288
				Net impairment losses recognized in earnings		-		(621)		-		(704)

						151,900		101,443		289,782		203,599
EXPENSES:
		Insurance benefits, claims and reserves				89,276		60,265		174,736		117,400
	Selling, general and administrative expenses					44,862		33,331		87,742		69,803
	Amortization of deferred acquisitions costs					10,948		1,631		12,388		3,225
	Interest expense on debt					490		540		977		1,079

						145,576		95,767		275,843		191,507

	Income from operations before income taxes					6,324		5,676		13,939		12,092
	Income taxes					2,166		1,846		4,741		3,932

	Net income					4,158		3,830		9,198		8,160
	Less: Income from noncontrolling interests in subsidiaries					(467)		(299)		(806)		(707)

			NET INCOME ATTRIBUTABLE TO IHC		$	3,691	$	3,531	$	8,392	$	7,453

Basic income per common share					$	.21	$	.20	$	.47	$	.41

WEIGHTED AVERAGE SHARES OUTSTANDING						17,753		17,987		17,836		18,008

Diluted income per common share					$	.21	$	.20	$	.47	$	.41

WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING						17,805		18,025		17,922		18,100

See the accompanying Notes to Condensed Consolidated Financial Statements.

INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

(In thousands)


						Three Months Ended				Six Months Ended
						June 30,				June 30,
						2013		2012		2013		2012

Net income					$	4,158	$	3,830	$	9,198	$	8,160
Other comprehensive income (loss):
	Available-for-sale securities:
	Unrealized gains (losses) on available-for-sale securities, pre-tax					(25,889)		6,602		(27,996)		7,307
	Tax expense (benefit) on unrealized gains (losses) on available-for-sale
		securities				(8,325)		2,066		(8,905)		2,366
	Unrealized gains (losses) on available-for-sale securities, net of taxes					(17,564)		4,536		(19,091)		4,941

	Other-than-temporary impairment losses, pre-tax					-		(288)		-		(288)
	Tax benefit on other-than-temporary impairment losses					-		(41)		-		(41)
	Other-than-temporary impairment losses, net of taxes					-		(247)		-		(247)

	Cash flow hedge:
	Unrealized gains (losses) on cash flow hedge, pre-tax					22		28		45		(8)
	Tax expense (benefit) on unrealized gains (losses) on cash flow hedge					9		11		18		(3)
	Unrealized gains (losses) on cash flow hedge, net of taxes					13		17		27		(5)

	Other comprehensive income (loss), net of tax					(17,551)		4,306		(19,064)		4,689

		COMPREHENSIVE INCOME (LOSS), NET OF TAX				(13,393)		8,136		(9,866)		12,849

Comprehensive income, net of tax, attributable to noncontrolling
			interests:
Income from noncontrolling interests in subsidiaries						(467)		(299)		(806)		(707)
Other comprehensive loss, net of tax, attributable to noncontrolling
		interests:
	Unrealized (income) loss on available-for-sale securities, net of tax					465		(126)		556		(93)
	Other comprehensive (income) loss, net of tax, attributable to
		noncontrolling interests				465		(126)		556		(93)

		COMPREHENSIVE INCOME, NET OF TAX,
				ATTRIBUTABLE TO NONCONTROLLING INTERESTS		(2)		(425)		(250)		(800)

		COMPREHENSIVE INCOME (LOSS), NET OF TAX,
				ATTRIBUTABLE TO IHC	$	(13,395)	$	7,711	$	(10,116)	$	12,049

See the accompanying Notes to Condensed Consolidated Financial Statements.


INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Unaudited)
SIX MONTHS ENDED JUNE 30, 2013 (In thousands)


								ACCUMULATED								NON-
								OTHER		TREASURY				TOTAL IHC		CONTROLLING
				COMMON		PAID-IN		COMPREHENSIVE		STOCK,		RETAINED		STOCKHOLDERS'		INTERESTS IN		TOTAL
				STOCK		CAPITAL		INCOME (LOSS)		AT COST		EARNINGS		EQUITY		SUBSIDIARIES		EQUITY

BALANCE AT
	DECEMBER 31, 2012		$	18,462	$	126,589	$	15,013	$	(4,533)	$	130,153	$	285,684	$	17,163	$	302,847

Net income												8,392		8,392		806		9,198
Other comprehensive
	(loss), net of tax							(18,508)						(18,508)		(556)		(19,064)
Repurchases of common stock										(2,898)				(2,898)		-		(2,898)
Common stock dividend
	($.035 per share)											(624)		(624)		-		(624)
Share-based compensation
	expenses and related
		tax benefits		12		191								203		-		203
Acquire noncontrolling interests						403		36						439		(1,638)		(1,199)
Distributions to noncontrolling
	interests													-		(368)		(368)
Other capital transactions						4								4		1		5

BALANCE AT
	JUNE 30, 2013		$	18,474	$	127,187	$	(3,459)	$	(7,431)	$	137,921	$	272,692	$	15,408	$	288,100

See the accompanying Notes to Condensed Consolidated Financial Statements.


INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)

						Six Months Ended June 30,
						2013		2012
CASH FLOWS PROVIDED BY (USED BY) OPERATING ACTIVITIES:
	Net income				$	9,198	$	8,160
	Adjustments to reconcile net income to net change in cash from
		operating activities:
			Amortization of deferred acquisition costs			12,388		3,225
			Net realized investment gains			(16,354)		(2,987)
			Other-than-temporary impairment losses			-		704
			Equity income from equity method investments			(1,160)		(556)
			Depreciation and amortization			2,342		1,973
			Share-based compensation expenses			508		633
			Deferred tax expense			6,025		1,945
			Other			2,623		3,514
Changes in assets and liabilities:
			Net purchases of trading securities			(428)		(712)
			Change in insurance liabilities			47,468		1,636
			Additions to deferred acquisition costs, net			(3,082)		(3,362)
			Change in amounts due from reinsurers			(216,968)		(149,570)
			Change in premium and claim funds			4,072		1,887
			Change in current income tax liability			(782)		2,544
			Change in due and unpaid premiums			(23,716)		(3,431)
			Change in other assets			1,188		553
			Change in other liabilities			(3,284)		(5,838)

				Net change in cash from operating activities		(179,962)		(139,682)

CASH FLOWS PROVIDED BY (USED BY) INVESTING ACTIVITIES:
		Change in net amount due from and to securities brokers				13,418		5,315
		Net (purchases) sales of securities under resale and repurchase agreements				23,368		(4,379)
		Sales of equity securities				10,029		4,928
		Purchases of equity securities				-		(2,963)
		Sales of fixed maturities				460,981		336,049
		Maturities and other repayments of fixed maturities				32,970		35,893
		Purchases of fixed maturities				(368,514)		(239,053)
		Change in other investments				-		3,535
		Cash paid in acquisitions of companies, net of cash acquired				-		(243)
		Other investing activities				9,751		(3,389)

				Net change in cash from investing activities		182,003		135,693

CASH FLOWS PROVIDED BY (USED BY) FINANCING ACTIVITIES:
		Repurchases of common stock				(2,898)		(1,013)
		Cash paid in acquisitions of noncontrolling interests				(1,199)		(58)
		Proceeds (withdrawals) of investment-type insurance contracts				(1,570)		1,338
		Dividends paid				(624)		(1,051)
		Other capital transactions				(718)		(53)

				Net change in cash from financing activities		(7,009)		(837)

Net change in cash and cash equivalents						(4,968)		(4,826)
Cash and cash equivalents, beginning of year						23,945		18,227

Cash and cash equivalents, end of period					$	18,977	$	13,401

See the accompanying Notes to Condensed Consolidated Financial Statements.

INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1.

Significant Accounting Policies and Practices

(A)

Business and Organization

Independence Holding Company, a Delaware corporation (“IHC”), is a holding company principally engaged in the life and health insurance business through: (i) its insurance companies, Standard Security Life Insurance Company of New York ("Standard Security Life"), Madison National Life Insurance Company, Inc. ("Madison National Life"), Independence American Insurance Company (“Independence American”); and (ii) its marketing and administrative companies, including IHC Risk Solutions, LLC, IHC Health Solutions, Inc. and IHC Specialty Benefits, Inc. 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 June 30, 2013, the Company also owned an 80.6% interest in American Independence Corp. ("AMIC").

Geneve Corporation, a diversified financial holding company, and its affiliated entities held approximately 51.8% of IHC's outstanding common stock at June 30, 2013.

(B)

Basis of Presentation

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

In the opinion of management, all adjustments (consisting only of normal recurring accruals) that are necessary for a fair presentation of the consolidated financial position and results of operations for the interim periods have been included. The condensed consolidated results of operations for the three months and six months ended June 30, 2013 are not necessarily indicative of the results to be anticipated for the entire year.

(C)

Recent Accounting Pronouncements

Recently Adopted Accounting Standards

In February 2013, the Financial Accounting Standards Board (“FASB”) issued guidance requiring an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. For other amounts, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. The adoption of this guidance, effective January 1, 2013, only affected the Company’s presentation of

information pertaining to other comprehensive income (loss) and did not affect the Company’s consolidated financial statements.

In July 2012, the FASB issued guidance to revise the subsequent measurement requirements for indefinite-lived intangible assets. In accordance with the amendments in this Update, an entity will have the option to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that an indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. The adoption of this guidance, effective January 1, 2013, did not have a material effect on the Company’s consolidated financial statements.

In December 2011 and March 2013, 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. The adoption of this guidance, effective January 1, 2013, did not have a material effect on the Company’s consolidated financial statements.

Recently Issued Accounting Standards Not Yet Adopted

In July 2013, the FASB, issued guidance for the presentation of unrecognized tax benefits to better reflect the manner in which an entity would settle, at the reporting date, any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 31, 2013. The Company’s presentation of unrecognized tax benefits is consistent with this guidance and therefore the adoption of such guidance will not have an effect on the Company’s consolidated financial statements.

In July 2013, the FASB issued guidance that permits the Fed Funds Effective Swap Rate to be used as a U.S. benchmark interest rate for hedge accounting purposes and removes the restriction on using different benchmark rates for similar hedges. This guidance is effective prospectively for qualifying new or re-designated hedging relationships entered into on or after July 17, 2013 and is not expected to have an impact 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. Management has not yet determined the impact that the adoption of this guidance will have on the Company’s consolidated financial statements.

(D)

Reclassifications

Certain amounts in prior year’s Condensed Consolidated Financial Statements and Notes thereto have been reclassified to conform to the 2013 presentation.

Note 2.

American Independence Corp.

As a result of share repurchases by AMIC in January 2013, (i) noncontrolling interests decreased by $1,638,000; (ii) the Company recorded a $403,000 credit to its paid-in capital; and (iii) IHC’s ownership interest in AMIC increased to 80.6%.

Note 3.

Income Per Common Share

Diluted income per share, computed using the treasury stock method, include incremental shares from; (i) the assumed exercise of dilutive stock options; (ii) the assumed vesting of dilutive restricted stock; and (iii) assumed share settlement of dilutive stock appreciation rights (“SARs”)

of 52,000 and 86,000 shares, respectively, for the three months and six months ended June 30, 2013, and 38,000 and 92,000 shares, respectively, for the three months and six months ended June 30, 2012.

Note 4.

Investments

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


		June 30, 2013
				GROSS		GROSS
		AMORTIZED		UNREALIZED		UNREALIZED		FAIR
		COST		GAINS		LOSSES		VALUE

FIXED MATURITIES
AVAILABLE-FOR-SALE:
Corporate securities	$	226,660	$	2,469	$	(6,733)	$	222,396
CMOs - residential⁽¹⁾		2,050		2,821		-		4,871
CMOs - commercial		975		-		(404)		571
U.S. Government obligations		30,353		374		(268)		30,459
Agency MBS - residential⁽²⁾		119		-		(1)		118
GSEs⁽³⁾		32,108		132		(269)		31,971
States and political subdivisions		249,145		3,597		(5,211)		247,531
Foreign governments		33,128		75		(1,591)		31,612
Redeemable preferred stocks		4,036		89		(127)		3,998

Total fixed maturities	$	578,574	$	9,557	$	(14,604)	$	573,527


EQUITY SECURITIES
AVAILABLE-FOR-SALE:
Nonredeemable preferred stocks		5,504		90		-		5,594

Total equity securities	$	5,504	$	90	$	-	$	5,594


		December 31, 2012
				GROSS		GROSS
		AMORTIZED		UNREALIZED		UNREALIZED		FAIR
		COST		GAINS		LOSSES		VALUE

FIXED MATURITIES
AVAILABLE-FOR-SALE:
Corporate securities	$	343,529	$	11,247	$	(953)	$	353,823
CMOs - residential⁽¹⁾		12,993		7,166		(65)		20,094
CMOs - commercial		975		-		(405)		570
U.S. Government obligations		18,376		492		(2)		18,866
Agency MBS - residential⁽²⁾		397		31		-		428
GSEs⁽³⁾		48,598		1,075		(67)		49,606
States and political subdivisions		260,086		9,134		(995)		268,225
Redeemable preferred stocks		6,323		1,667		-		7,990

Total fixed maturities	$	691,277	$	30,812	$	(2,487)	$	719,602


EQUITY SECURITIES
AVAILABLE-FOR-SALE:
Nonredeemable preferred stocks		15,355		253		(10)		15,598

Total equity securities	$	15,355	$	253	$	(10)	$	15,598

(1)

Collateralized mortgage obligations (“CMOs”).

(2)

Mortgage-backed securities (“MBS”).

(3)

Government-sponsored enterprises (“GSEs”) are private enterprises established and chartered by the Federal Government or its various insurance and lease programs which carry the full faith and credit obligation of the U.S. Government.

The amortized cost and fair value of fixed maturities available-for-sale at June 30, 2013, by contractual maturity, are shown below (in thousands). 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. CMOs and MBSs are shown separately, as they are not due at a single maturity.



		AMORTIZED		FAIR
		COST		VALUE

Due in one year or less	$	2,675	$	2,982
Due after one year through five years		72,968		73,858
Due after five years through ten years		176,580		172,378
Due after ten years		291,099		286,779
CMOs and MBSs		35,252		37,530

	$	578,574	$	573,527

The following tables summarize, for all available-for-sale securities in an unrealized loss position, the aggregate fair value and gross unrealized loss by length of time those securities that have continuously been in an unrealized loss position, for the periods indicated:


		June 30, 2013

		Less than 12 Months				12 Months or Longer				Total

		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
		Value		Losses		Value		Losses		Value		Losses

Corporate securities	$	153,179	$	6,403	$	4,721	$	330	$	157,900	$	6,733
CMOs - commercial		-		-		571		404		571		404
U.S. Government obligations		17,385		268		-		-		17,385		268
Agency MBS - residential		118		1		-		-		118		1
GSEs		15,453		92		5,648		177		21,101		269
States and political subdivisions		145,939		4,406		20,212		805		166,151		5,211
Foreign governments		27,446		1,591		-		-		27,446		1,591
Redeemable preferred stocks		3,635		127		-		-		3,635		127
Total temporarily impaired
securities	$	363,155	$	12,888	$	31,152	$	1,716	$	394,307	$	14,604

Number of securities in an
unrealized loss position		113				15				128


		December 31, 2012

		Less than 12 Months				12 Months or Longer				Total

		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
		Value		Losses		Value		Losses		Value		Losses

Corporate securities	$	61,386	$	953	$	-	$	-	$	61,386	$	953
CMOs - residential		2,416		21		1,138		44		3,554		65
CMOs - commercial		-		-		570		405		570		405
U.S. Government obligations		5,667		2		-		-		5,667		2
GSEs		6,162		40		2,784		27		8,946		67
States and political subdivisions		53,036		657		17,707		338		70,743		995
Total fixed maturities		128,667		1,673		22,199		814		150,866		2,487
Nonredeemable preferred stocks		1,378		10		-		-		1,378		10
Total temporarily impaired
securities	$	130,045	$	1,683	$	22,199	$	814	$	152,244	$	2,497

Number of securities in an
unrealized loss position		45				23				68

Substantially all of the unrealized losses on fixed maturities available-for-sale at June 30, 2013 and December 31, 2012 relate to investment grade securities and are attributable to changes in market interest rates. 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 June 30, 2013.

Net realized investment gains (losses) are as follows for periods indicated (in thousands):


		Three Months Ended				Six Months Ended
		June 30,				June 30,
		2013		2012		2013		2012

Sales of available-for-sale securities:
Fixed maturities	$	11,825	$	2,101	$	16,276	$	3,343
Preferred stocks		64		-		177		(491)
Total sales of available-for-sale securities		11,889		2,101		16,453		2,852

Sales of trading securities		349		(151)		385		105
Other gains (losses)		(415)		-		(654)		-
Total realized gains (losses)		11,823		1,950		16,184		2,957

Unrealized gains (losses) on trading securities:
Available-for-sale securities transferred
to trading category		-		-		-		138
Change in unrealized gains (losses) on trading securities		(88)		(100)		170		(108)
Total unrealized gains (losses) on trading securities		(88)		(100)		170		30

Net realized investment gains (losses)	$	11,735	$	1,850	$	16,354	$	2,987

For the three months and six months ended June 30, 2013, the Company realized gross gains of $14,104,000 and $18,736,000, respectively, and realized gross losses of $2,215,000 and $2,283,000, respectively, on sales of available-for-sale securities. For the three months and six months ended June 30, 2012, the Company realized gross gains of $2,799,000 and $6,089,000, respectively, and realized gross losses of $698,000 and $3,237,000, respectively, on sales of available-for-sale securities.

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

Other-Than-Temporary Impairment Evaluations

We recognize an other-than-temporary impairment loss in earnings in the period that we determine: 1) we intend to sell the security; 2) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis; or 3) the security has a credit loss. Any non-credit portion of the other-than-temporary impairment loss is recognized in other comprehensive income (loss). See Note 1E(vi) to the Consolidated Financial Statements in the 2012 Annual Report for further discussion of the factors considered by management in its regular review to identify and recognize other-than-temporary impairments on available-for-sale securities. Our other-than-temporary impairment losses were as follows for the periods indicated (in thousands):


		Three Months Ended				Six Months Ended
		June 30,				June 30,
		2013		2012		2013		2012

Total other-than-temporary impairment losses	$	-	$	909	$	-	$	992
Portion of losses recognized in other comprehensive
income (loss)		-		(288)		-		(288)

Net impairment losses recognized in earnings	$	-	$	621	$	-	$	704

Credit losses were recognized on certain fixed maturities for which each security also had an impairment loss recognized in other comprehensive income (loss). The rollforward of these credit losses were as follows for the periods indicated (in thousands):


		Three Months Ended				Six Months Ended
		June 30,				June 30,
		2013		2012		2013		2012

Balance at beginning of year	$	1,976	$	1,979	$	1,976	$	2,555
Credit losses during the period for which an other-
than-temporary loss was not previously recognized		-		473		-		473
Additional credit losses for which an other-than-
temporary loss was previously recognized		-		148		-		148
Securities sold		(1,413)		-		(1,413)		(576)

Balance at end of period	$	563	$	2,600	$	563	$	2,600

The after-tax portion of other-than-temporary impairments included in accumulated other comprehensive income (loss) at June 30, 2013 and December 31, 2012 consists of $345,000 and $389,000, respectively, related to CMO securities; and $0 and $684,000, respectively, related to redeemable preferred stock.

Note 5.

Cash Flow Hedge

In connection with its outstanding 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 ($8,000,000 June 30, 2013 and December 31, 2012), 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 June 30, 2013 and December 31, 2012, the fair value of interest rate swap was $318,000 and $363,000, respectively, which is included in other liabilities on the accompanying Consolidated Balance Sheets. See Note 6 for further discussion on the valuation techniques utilized to determine the fair value of the interest rate swap.

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 at fair value.

Investments in fixed maturities and equity securities:

Available-for-sale securities included in Level 1 are equities with quoted market prices. Level 2 is primarily comprised of our portfolio of government securities, agency mortgage-backed securities, corporate fixed income securities, collateralized mortgage obligations, municipals, GSEs and certain preferred stocks that were priced with observable market inputs. Level 3 securities consist primarily of CMO securities backed by 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. Significant unobservable inputs used in the fair value measurement of CMO’s are prepayment rates, probability of default, and loss severity in the event of default. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for loss severity and a directionally opposite change in the assumption used for prepayment rates. Further we retain independent pricing vendors to assist in valuing certain instruments.

Trading securities:

Trading securities included in Level 1 are equity securities with quoted market prices.

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 financial assets and liabilities measured at fair value on a recurring basis for the periods indicated (in thousands):


		June 30, 2013
		Level 1		Level 2		Level 3		Total

FINANCIAL ASSETS:
Fixed maturities available-for-sale:
Corporate securities	$	-	$	222,396	$	-	$	222,396
CMOs - residential		-		501		4,370		4,871
CMOs - commercial		-		-		571		571
US Government obligations		-		30,459		-		30,459
Agency MBS - residential		-		118		-		118
GSEs		-		31,971		-		31,971
States and political subdivisions		-		245,030		2,501		247,531
Foreign governments		-		31,612		-		31,612
Redeemable preferred stocks		3,998		-		-		3,998
Total fixed maturities		3,998		562,087		7,442		573,527

Equity securities available-for-sale:
Nonredeemable preferred stocks		5,594		-		-		5,594
Total equity securities		5,594		-		-		5,594

Trading securities - equities		7,997		-		-		7,997
Total trading securities		7,997		-		-		7,997

Total Financial Assets	$	17,589	$	562,087	$	7,442	$	587,118

FINANCIAL LIABILITIES:
Interest rate swap	$	-	$	318	$	-	$	318


		December 31, 2012
		Level 1		Level 2		Level 3		Total

FINANCIAL ASSETS:
Fixed maturities available-for-sale:
Corporate securities	$	-	$	353,823	$	-	$	353,823
CMOs - residential		-		6,041		14,053		20,094
CMOs - commercial		-		-		570		570
US Government obligations		-		18,866		-		18,866
Agency MBS - residential		-		428		-		428
GSEs		-		49,606		-		49,606
States and political subdivisions		-		265,667		2,558		268,225
Redeemable preferred stocks		7,990		-		-		7,990
Total fixed maturities		7,990		694,431		17,181		719,602

Equity securities available-for-sale:
Nonredeemable preferred stocks		15,598		-		-		15,598
Total equity securities		15,598		-		-		15,598

Trading securities - equities		7,016		-		-		7,016
Total trading securities		7,016		-		-		7,016

Total Financial Assets	$	30,604	$	694,431	$	17,181	$	742,216

FINANCIAL LIABILITIES:
Interest rate swap	$	-	$	363	$	-	$	363

It is the Company’s policy to recognize transfers of assets and liabilities between levels of the fair value hierarchy at the end of a reporting period. At June 30, 2013, there were no transfers of assets and liabilities between Level 1 and Level 2 of the fair value hierarchy. No securities were transferred out of Level 2 and into the Level 3 category at June 30, 2013. The Company does not transfer out of Level 3 and into Level 2 until such time as observable inputs become available and reliable or the range of available independent prices narrow. No securities were transferred out of the Level 3 category in 2012. The changes in the carrying value of Level 3 assets and liabilities, for the periods indicated, are summarized as follows (in thousands):


		Three Months Ended June 30, 2013
		CMOs				States and
						Political
		Residential		Commercial		Subdivisions		Total

Beginning balance	$	9,755	$	576	$	2,529	$	12,860

Gains (losses) included in earnings:
Net realized investment gains		3,145		-		-		3,145

Gains (losses) included in other comprehensive income (loss):
Net unrealized gains (losses)		(2,957)		(5)		(19)		(2,981)

Sales of securities		(5,286)		-		-		(5,286)
Repayments and amortization of fixed maturities		(287)		-		(9)		(296)

Balance at end of period	$	4,370	$	571	$	2,501	$	7,442


		Three Months Ended June 30, 2012
		CMOs				States and
						Political
		Residential		Commercial		Subdivisions		Total

Beginning balance	$	13,350	$	533	$	2,643	$	16,526

Gains (losses) included in earnings:
Other-than-temporary impairments		(148)		(473)		-		(621)

Gains (losses) included in other comprehensive income (loss):
Net unrealized gains (losses)		399		491		(42)		848

Repayments and amortization of fixed maturities		(632)		-		13		(619)

Balance at end of period	$	12,969	$	551	$	2,614	$	16,134


		Six Months Ended June 30, 2013
		CMOs				States and
						Political
		Residential		Commercial		Subdivisions		Total

Beginning balance	$	14,053	$	570	$	2,558	$	17,181

Gains (losses) included in earnings:
Net realized investment gains		4,635		-		-		4,635

Gains (losses) included in other comprehensive income (loss):
Net unrealized gains (losses)		(4,249)		1		(42)		(4,290)

Sales of securities		(9,320)		-		-		(9,320)
Repayments and amortization of fixed maturities		(749)		-		(15)		(764)

Balance at end of period	$	4,370	$	571	$	2,501	$	7,442


		Six Months Ended June 30, 2012
		CMOs				States and
						Political
		Residential		Commercial		Subdivisions		Total

Beginning balance	$	22,127	$	538	$	-	$	22,665

Purchases of securities		-		-		2,135		2,135

Gains(losses) included in earnings:
Net realized investment losses		(1,212)		-		-		(1,212)
Other-than-temporary impairments		(231)		(473)		-		(704)

Gains (losses) included in other comprehensive income (loss):
Net unrealized gains (losses)		1,070		486		454		2,010

Sales of securities		(7,087)		-		-		(7,087)
Repayments and amortization of fixed maturities		(1,698)		-		25		(1,673)

Balance at end of period	$	12,969	$	551	$	2,614	$	16,134

The following table provides carrying values, fair values and classification in the fair value hierarchy of the Company’s financial instruments, for the periods indicated, that are not carried at fair value but are subject to fair value disclosure requirements (in thousands):


		June 30, 2013				December 31, 2012
		Level 2				Level 2
		Fair		Carrying		Fair		Carrying
		Value		Value		Value		Value

FINANCIAL ASSETS:
Policy loans	$	14,896	$	11,519	$	28,748	$	22,165

FINANCIAL LIABILITIES:
Funds on deposit	$	277,282	$	276,287	$	279,125	$	278,084
Debt and junior subordinated
debt securities	$	46,146	$	46,146	$	46,146	$	46,146

The following methods and assumptions were used to estimate the fair value of the financial instruments that are not carried at fair value in the Condensed Consolidated Financial Statements:

(A)

Policy Loans

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

(B)

Funds on Deposit

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

(C)

Debt

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

Note 7.

Goodwill and Other Intangible Assets

The change in the carrying amount of goodwill and other intangible assets (included in other assets in the Condensed Consolidated Balance Sheets) for the first six months of 2013 is as follows (in thousands):


				Other Intangible Assets
								Total
								Other
				Definitive		Indefinite		Intangible
		Goodwill		Lives		Lives		Assets

Balance at December 31, 2012	$	50,318	$	10,294	$	7,977	$	18,271

Medical Stop-Loss:
Broker relationships		-		(183)		-		(183)
Amortization expense		-		(1,636)		-		(1,636)

Balance at June 30, 2013	$	50,318	$	8,475	$	7,977	$	16,452

Note 8.

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.

A) IHC Share-Based Compensation Plans

Total share-based compensation was $370,000 and $147,000 for the three months ended June 30, 2013 and 2012, respectively, and was $491,000 and $617,000 for the six months ended June 30, 2013 and 2012, respectively. Related tax benefits of $148,000 and $59,000 were recognized for the three months ended June 30, 2013 and 2012, respectively, and $196,000 and $246,000 were recognized for the six months ended June 30, 2013 and 2012, respectively.

Under the terms of IHC’s stock-based compensation plans, option exercise prices are more than or equal to the quoted market price of the shares at the date of grant; option terms range from five to ten years; and vesting periods are three years for employee options. The Company may also grant shares of restricted stock, share appreciation rights (“SARs”) and share-based performance awards. Restricted shares are valued at the quoted market price of the shares at the date of grant and have a three-year vesting period. Exercise prices of SARs are more than or equal to the quoted market price of IHC shares at the date of the grant and have three year vesting periods. At June 30, 2013, there were 350,170 shares available for future stock-based compensation grants under IHC’s stock incentive plans.

Stock Options

At June 30, 2013 and December 31, 2012, there were 693,836 options outstanding. In March 2013, 192,500 options outstanding were modified to extend the expiration term 5 years. The incremental cost of the modified awards was $618,000, which will be recognized over a new 2-year vesting period starting from the date of the modification. There was no other option activity during the six-month period ending June 30, 2013.

The following table summarizes information regarding outstanding and exercisable options as of June 30, 2013:


		Outstanding		Exercisable

Number of options		693,836		501,336
Weighted average exercise price per share	$	9.36	$	9.12
Aggregate intrinsic value for all options	$	1,711	$	1,359
Weighted average contractual term remaining		2.4 years		1.5 years

The fair value of an option award is estimated on the date of grant using the Black-Scholes option valuation model.

Compensation expense of $77,000 and $60,000 was recognized in the three months ended June 30, 2013 and 2012, respectively, and $90,000 and $121,000 was recognized in the six months ended June 30, 2013 and 2012, respectively, for the portion of the grant-date fair value of stock options vesting during that period.

As of June 30, 2013, the total unrecognized compensation expense related to non-vested stock options was $528,000, which is expected to be recognized over the remaining requisite weighted-average service period of 1.71 years.

Restricted Stock

The following table summarizes restricted stock activity for the six months ended June 30, 2013:


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

December 31, 2012	13,200	$	9.37
Granted	7,425		11.66
Vested	(3,300)		8.64

June 30, 2013	17,325	$	10.49

IHC granted 7,425 shares of restricted stock awards during each of the six months ended June 30, 2013 and 2012 with a weighted average grant-date fair value of $11.66 and $9.39, respectively, per share.

The total fair value of restricted stock that vested during each of the first six months of 2013 and 2012 was $37,000 and $16,000, respectively. Restricted stock expense was $14,000 and $9,000 for the three months ended June 30, 2013 and 2012, respectively, and was $27,000 and $18,000 for the six months ended June 30, 2013 and 2012, respectively.

As of June 30, 2013, the total unrecognized compensation expense related to non-vested restricted stock awards was $155,000 which is expected to be recognized over the remaining requisite weighted-average service period of 2.1 years.

SARs and Share-Based Performance Awards

IHC had 263,900 and 269,950 SAR awards outstanding at June 30, 2013 and December 31, 2012, respectively. No SARs awards were granted during the six months ended June 30, 2013. During the six months ended June 30, 2012, the Company granted 44,000 SAR awards. The fair value of SARs is calculated using the Black-Scholes valuation model at the grant date and each subsequent reporting period until settlement. Compensation cost is based on the proportionate amount of the requisite service that has been rendered to date. Once fully vested, changes in fair value of the SARs continue to be recognized as compensation expense in the period of the change until settlement. For three months ended June 30, 2013, and 2012, IHC recorded $279,000, and $58,000, respectively, of compensation costs for these awards. For six months ended June 30, 2013, and 2012, IHC recorded $378,000, and $451,000, respectively, of compensation costs for these awards. In the second quarter of 2013, 6,050 SARs were exercised with an aggregate intrinsic value of $19,000. No SARs were exercised during the six months ended June 30, 2012. Included in Other Liabilities in the Company’s Condensed Consolidated Balance Sheets at June 30, 2013 and December 31, 2012 are liabilities of $1,042,000 and $683,000, respectively, pertaining to SARs.

Other outstanding awards include share-based performance awards. Compensation costs for these awards are recognized and accrued as performance conditions are met, based on the current share price. For the three months ended June 30, 2013, and 2012, IHC recorded $0 and $18,000, respectively, of compensation costs for these awards, and for the six months ended June 30, 2013, and 2012, IHC recorded $(5,000) and $27,000, respectively. The intrinsic value of share-based performance awards paid during the six months ended June 30, 2013 and 2012 was $83,000 and $57,000, respectively. Included in the other liabilities on the Company’s Condensed Consolidated Balance Sheets at June 30, 2013 and December 31, 2012 are liabilities of $10,000 and $97,000, respectively, pertaining to share-based performance awards.

AMIC Share-Based Compensation Plans

Total AMIC share-based compensation expense was $9,000 and $8,000 the three months ended June 30, 2013 and 2012, respectively, and was $17,000 and $16,000 for the six months ended June 30, 2013 and 2012, respectively. Related tax benefits of $3,000 were recognized for both the three months ended June 30, 2013 and 2012; and were $6,000 for both the six months ended June 30, 2013 and 2012.

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

Stock Options

The following table summarizes information regarding AMIC’s outstanding and exercisable options for the six months ended June 30, 2013:


	Shares	Weighted- Average
	Under Option	Exercise Price

December 31, 2012	227,285	$	11.40
Granted	13,334		7.01
Expired	(18,334)		7.50
June 30, 2013	222,285	$	11.46

The following table summarizes information regarding AMIC’s outstanding and exercisable options as of June 30, 2013:


		Outstanding		Exercisable

Number of options		222,285		202,284
Weighted average exercise price per share	$	11.46	$	11.95
Aggregate intrinsic value for all options (in thousands)	$	62	$	53
Weighted average contractual term remaining		3.28 years		2.68 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 six months ended June 30, 2013 was $4.04 per share. No options were granted during the six months ended June 30, 2012. The assumptions set forth in the table below were used to value the stock options granted during the six months ended June 30, 2013:


		June 30,
		2013

Weighted-average risk-free interest rate		2.30%
Annual dividend rate per share		-
Weighted-average volatility factor of the Company's common stock		45.00%
Weighted-average expected term of options		5 years

Compensation expense of $9,000 and $8,000 was recognized for the three-month periods ended June 30, 2013 and 2012, respectively, and was $17,000 and $16,000 for the six-month periods ended June 30, 2013 and 2012, respectively, for the portion of the grant-date fair value of AMIC’s stock options vesting during the period.

As of June 30, 2013, the total unrecognized compensation expense related to AMIC’s non-vested options was $84,000 which will be recognized over the remaining requisite service periods.

Note 9.

Income Taxes

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

At June 30, 2013, AMIC had net operating loss carryforwards of approximately $269,415,000 for

federal income tax purposes, expiring in varying amounts through the year 2031, with a significant portion expiring in 2021. The net deferred tax asset relative to AMIC included in other assets on IHC’s Condensed Consolidated Balance Sheets was $11,180,000 and $12,173,000 at June 30, 2013 and December 31, 2012, respectively. Effective January 15, 2013, AMIC will be included in the consolidated Federal income tax returns of IHC on a June 30 fiscal year as a result of the increase in IHC’s ownership interest in AMIC to over 80%.

Note 10.

Reinsurance

Effective May 31, 2013, Madison National Life entered into a coinsurance agreement with an unaffiliated reinsurer, Guggenheim Life and Annuity Company, to cede approximately $218,633,000 of life and annuity reserves and, in accordance with its terms, transferred net cash and other assets, with an aggregate value of $215,137,000, to the reinsurer during the second quarter of 2013. As a result of this transaction, the Company: (i) recorded estimated amounts due from reinsurers of $218,296,000; (ii) recorded $6,643,000 of estimated deferred expenses (included in other assets) which will be amortized over the life of the underlying reinsured contracts; and (iii) wrote-off $9,307,000 of deferred acquisition costs associated with this block of policies. The write-off was more than offset by gains realized by the Company in the transaction, most of which resulted from the required sale and transfer of invested assets.

Note 11.

Supplemental Disclosures of Cash Flow Information

Tax refunds, net of tax payments, were $961,000 and $911,000 during the six months ended June 30, 2013 and 2012.

Cash payments for interest were $985,000 and $1,074,000 during the six months ended June 30, 2013 and 2012, respectively.

Note 12.

Contingencies

On January 2, 2013, Madison National Life was named one of several defendants in a potential lawsuit related to certain provisions of a particular line of health insurance for business written in 2007 and prior, whereby Madison National Life was the insurance carrier during one of the years in question. Though Madison National Life has not yet been served with the plaintiffs’ complaint, the Company has accrued $1,250,000 in return of premium reserves (net of recoveries) in response to the information that it has received. The Company terminated the MGU that produced this business in 2008.

Note 13.

Other Comprehensive Income (Loss)

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

Changes in the balances for each component of accumulated other comprehensive income, shown net of taxes, for the periods indicated were as follows (in thousands):


		Three Months Ended June 30, 2013
		Unrealized
		Gains (Losses) on
		Available-for Sale		Cash Flow
		Securities		Hedge		Total

Beginning balance	$	13,831	$	(204)	$	13,627

Other comprehensive income (loss) before reclassifications		(9,992)		13		(9,979)

Amounts reclassified from accumulated OCI		(7,572)		-		(7,572)

Net other comprehensive income (loss)		(17,564)		13		(17,551)

Less other comprehensive loss attributable
to noncontrolling interests		465		-		465

Ending balance	$	(3,268)	$	(191)	$	(3,459)


		Three Months Ended June 30, 2012
		Unrealized
		Gains (Losses) on
		Available-for Sale		Cash Flow
		Securities		Hedge		Total

Beginning balance	$	8,589	$	(319)	$	8,270

Other comprehensive income (loss) before reclassifications		5,215		17		5,232

Amounts reclassified from accumulated OCI		(926)		-		(926)

Net other comprehensive income (loss)		4,289		17		4,306

Less other comprehensive loss attributable
to noncontrolling interests		(126)		-		(126)
Acquired from noncontrolling interests		2		-		2

Ending balance	$	12,754	$	(302)	$	12,452


		Six Months Ended June 30, 2013
		Unrealized
		Gains (Losses) on
		Available-for Sale		Cash Flow
		Securities		Hedge		Total

Beginning balance	$	15,231	$	(218)	$	15,013

Other comprehensive income (loss) before reclassifications		(8,544)		27		(8,517)

Amounts reclassified from accumulated OCI		(10,547)		-		(10,547)

Net other comprehensive income (loss)		(19,091)		27		(19,064)

Less other comprehensive loss attributable
to noncontrolling interests		556		-		556
Acquired from noncontrolling interests		36		-		36

Ending balance	$	(3,268)	$	(191)	$	(3,459)


		Six Months Ended June 30, 2012
		Unrealized		Unrealized
		Gains (Losses) on		Gains (Losses) on
		Available-for-Sale		Cash Flow
		Securities		Hedge		Total

Beginning balance	$	8,150	$	(297)	$	7,853

Other comprehensive income (loss) before reclassifications		6,173		(5)		6,168

Amounts reclassified from accumulated OCI		(1,479)		-		(1,479)

Net other comprehensive income (loss)		4,694		(5)		4,689

Less other comprehensive loss attributable
to noncontrolling interests		(93)		-		(93)
Acquired from noncontrolling interests		3		-		3

Ending balance	$	12,754	$	(302)	$	12,452

Presented below are the amounts reclassified out of accumulated other comprehensive income and recognized in earnings for each of the periods indicated (in thousands):


		Three Months Ended				Six Months Ended
		June 30,				June 30,
		2013		2012		2013		2012

Unrealized gains (losses) on available-for-sale securities
reclassified during the period to the following income
statement line items:
Net realized investment gains	$	11,475	$	2,102	$	15,801	$	2,990
Net impairment losses recognized in earnings		-		(621)		-		(704)

Income from operations before income tax		11,475		1,481		15,801		2,286
Tax effect		3,903		555		5,254		807

Net income	$	7,572	$	926	$	10,547	$	1,479

Note 14.

Segment Reporting

The Insurance Group principally engages in the life and health insurance business. Information by business segment is presented below for the periods indicated (in thousands):


			Three Months Ended				Six Months Ended
			June 30,				June 30,
			2013		2012		2013		2012
Revenues:
Medical Stop-Loss		$	43,668	$	34,298	$	85,790	$	69,558
Fully Insured Health			68,435		40,009		132,118		78,676
Group disability, life, annuities and DBL			16,369		12,826		30,843		25,741
Individual life, annuities and other			11,673		13,061		24,620		26,851
Corporate			20		20		57		490
			140,165		100,214		273,428		201,316
Net realized investment gains			11,735		1,850		16,354		2,987
Other-than-temporary impairment losses			-		(621)		-		(704)
Total revenues		$	151,900	$	101,443	$	289,782	$	203,599

Income from operations
	before income taxes:
Medical Stop-Loss		$	3,416	$	3,849	$	6,432	$	9,934
Fully Insured Health^(A)			191		2,006		(141)		3,158
Group disability, life, annuities and DBL			2,399		733		3,975		702
Individual life, annuities and other^(B)			(9,549)		(172)		(9,167)		198
Corporate			(1,378)		(1,429)		(2,537)		(3,104)
			(4,921)		4,987		(1,438)		10,888
Net realized investment gains			11,735		1,850		16,354		2,987
Other-than-temporary impairment losses			-		(621)		-		(704)
Interest expense			(490)		(540)		(977)		(1,079)
Income from operations before
income taxes		$	6,324	$	5,676	$	13,939	$	12,092

(A)

The Fully Insured Health segment includes amortization of intangible assets. Total amortization expense was $607,000 and $610,000 for the three months ended June 30, 2013 and 2012, respectively, and was $1,209,000 and $1,205,000, respectively, for the six months ended June 30, 2013 and 2012. Amortization expense for the other segments is not material to their operating results.

(B)

For the three months and six months ended June 30, 2013, the Individual life, annuities and other segment includes the write-off of $9,307,000 of deferred acquisition costs in connection with a coinsurance agreement. See Note 10 for more reinsurance information.

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

The following discussion of the financial condition and results of operations of Independence Holding Company ("IHC") and its subsidiaries (collectively, the "Company") should be read in conjunction with, and is qualified in its entirety by reference to, the Consolidated Financial Statements of the Company and the related Notes thereto appearing in our annual report on Form 10-K for the fiscal year ended December 31, 2012, as filed with the Securities and Exchange Commission, and our unaudited Condensed Consolidated Financial Statements and related Notes thereto appearing elsewhere in this quarterly report.

Overview

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

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

The results of operations for the three months and six months ended June 30, 2013and 2012 are summarized as follows (in thousands):


			Three Months Ended				Six Months Ended
			June 30,				June 30,
			2013		2012		2013		2012

Revenues		$	151,900	$	101,443	$	289,782	$	203,599
Expenses			145,576		95,767		275,843		191,507

Income from operations before income taxes			6,324		5,676		13,939		12,092
Income taxes			2,166		1,846		4,741		3,932

Net income			4,158		3,830		9,198		8,160

Less: Income from noncontrolling interests in subsidiaries			(467)		(299)		(806)		(707)

	Net income attributable to IHC	$	3,691		3,531	$	8,392		7,453

Net income of $.21 per share, diluted, for the three months ended June 30, 2013 compared to $.20 per share, diluted, for the same period in 2012. Net income of $.47 per share, diluted, for the six months ended June 30, 2013, compared to $.41 per share, diluted, for the six months ended June 30, 2012.

Consolidated investment yields (on an annualized basis) of 3.5% and 3.7% for the three months and six months ended June 30, 2013compared to 3.8% and 3.9% for the comparable periods in 2012;

Increase in IHC’s ownership in AMIC to 80.6% as a result of AMIC’s share repurchases in the first quarter of 2013;

In the second quarter of 2013, Madison National Life entered into a coinsurance agreement with an unaffiliated reinsurer, effective May 31, 2013, to cede approximately $218.6 million of life and annuity reserves. Net realized investment gains were $16.4 million for the six months ended June 30, 2013, of which a significant portion resulted from sales of invested assets in connection with the transfer of assets in accordance with the terms of such coinsurance agreement. In addition, the Company wrote-off $9.3 million of deferred acquisition costs as a result of this coinsurance agreement, which was more than offset by the net realized investment gains in the period; and

Book value of $15.44 per common share, a decrease of $.49 per common share from $15.93 at December 31, 2012 primarily due to an increase in interest rates during the second quarter.

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

The Medical Stop-Loss segment reported income before taxes of $3.4 million for the second quarter of 2013 compared to $3.8 million in the same quarter in 2012, and reported income before taxes of $6.4 million for the first six months of 2013 compared to $9.9 million for the first six months of 2012. The decrease is primarily due to higher loss ratios in 2013;

Premiums earned increased $8.6 million and $16.2 million for the three months and six months ended June 30, 2013, respectively, when compared to the same periods in 2012. The increase in premiums earned is primarily due to increased volume.

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


		Three Months Ended				Six Months Ended
		June 30,				June 30,
		2013		2012		2013		2012

Premiums Earned	$	42,539	$	33,984	$	82,794	$	66,635
Insurance Benefits, Claims & Reserves		28,580		22,588		57,494		40,995
Expenses		11,556		8,951		21,229		18,475

Loss Ratio^(A)		67.2%		66.5%		69.5%		61.5%
Expense Ratio^(B)		27.2%		26.3%		25.6%		27.7%
Combined Ratio^(C)		94.4%		92.8%		95.1%		89.2%

(A)

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

(B)

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

(C)

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

The Company recorded an increase in the loss ratio in the medical stop-loss line of business for the six months ended June 30, 2013 due to an unfavorable reserve development related to business written with a certain producer which resulted in a $2.1 million increase in claim reserves on this program. We have ceased writing new business with this producer.

The Fully Insured Health segment reported $0.2 million of income before taxes for the three months ended June 30, 2013as compared to $2.0 million for the comparable period in 2012, and reported $0.1 million of losses before taxes for the six months ended June 30, 2013 compared to $3.2 million of income before taxes for the same period in 2012. The decrease is primarily due to higher loss ratios in 2013;

Premiums earned increased $28.9 million and $53.7 million for the three months and six months ended June 30, 2013 over the comparable 2012 periods primarily due to premiums generated by new lines of business (pet and international lines) combined with increased volume and retentions in certain other lines of the business.

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


		Three Months Ended				Six Months Ended
		June 30,				June 30,
		2013		2012		2013		2012

Premiums Earned	$	61,852	$	32,982	$	118,751	$	65,067
Insurance Benefits, Claims & Reserves		43,780		21,370		83,458		42,382
Expenses		18,927		9,706		37,084		19,116

Loss Ratio		70.8%		64.8%		70.3%		65.1%
Expense Ratio		30.6%		29.4%		31.2%		29.4%
Combined Ratio		101.4%		94.2%		101.5%		94.5%

The increase in the loss ratio was primarily attributable to an increase in the claims experience on major medical business for groups and individuals primarily due to unfavorable development on business that is produced by two non-owned third party administrators and a reserve adjustment for a potential lawsuit related to business written through an MGU that was previously terminated.

Income before taxes from the Group disability, life, annuities and DBL segment increased $1.7 million and $3.3 million for the three months and six months ended June 30, 2013 compared to the three months and six months ended June 30, 2012 primarily as a result of improved loss ratios in LTD and increased volume in DBL business;

Income before taxes from the Individual life, annuities and other segment decreased $9.4 million for both the three-month and six-month periods ended June 30, 2013 as compared to the same periods in 2012 as a result of a $9.3 million write-off of deferred acquisition costs in connection with a coinsurance agreement in the second quarter of 2013;

Income before taxes from the Corporate segment remained comparable in the second quarter of 2013 as compared to the same period in 2012, and increased $0.6 million in the six-month period ended June 30, 2013 over the same period of 2012, primarily due to a decrease in corporate overhead;

Net realized investment gains were $11.7 million and $16.4 million for the three months and six months ended June 30, 2013 compared to net realized investment gains of $1.9 million and $3.0 million for the three months and six months ended June 30, 2012. A significant portion of the net realized investment gains in 2013 resulted from sales of invested assets in connection with the transfer of assets in accordance with the terms of a coinsurance agreement. The Company did not record any other-than-temporary impairment losses in 2013. Other-than-temporary impairment losses recognized in earnings for the three months and six months ended June 30, 2012 were $0.6 million and $0.7 million, respectively; and

Premiums by principal product for the three months and six months ended June 30, 2013 and 2012 are as follows (in thousands):


			Three Months Ended				Six Months Ended
			June 30,				June 30,

Gross Direct and Assumed
	Earned Premiums:		2013		2012		2013		2012

Medical Stop-Loss		$	50,416	$	40,882	$	98,511	$	80,433
Fully Insured Health			72,365		53,002		137,846		105,449
Group disability, life, annuities and DBL			26,041		22,836		50,416		45,642
Individual, life, annuities and other			8,808		7,608		16,361		15,769

		$	157,630	$	124,328	$	303,134	$	247,293


			Three Months Ended				Six Months Ended
			June 30,				June 30,

Net Direct and Assumed
	Earned Premiums:		2013		2012		2013		2012

Medical Stop-Loss		$	42,539	$	33,984	$	82,794	$	66,635
Fully Insured Health			61,852		32,982		118,751		65,067
Group disability, life, annuities and DBL			15,234		12,177		29,090		24,353
Individual, life, annuities and other			5,840		6,326		12,198		13,188

		$	125,465	$	85,469	$	242,833	$	169,243

CRITICAL ACCOUNTING POLICIES

The accounting and reporting policies of the Company conform to U.S. generally accepted accounting principles ("GAAP"). The preparation of the Condensed Consolidated Financial Statements in conformity with GAAP requires the Company's management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. A summary of the Company's significant accounting policies and practices is provided in Note 1 of the Notes to the Consolidated Financial Statements included in Item 8 of the Annual Report on Form 10-K for the fiscal year ended December 31, 2012. Management has identified the accounting policies related toInsurance Premium Revenue Recognition and Policy Charges, Insurance Reserves, Deferred Acquisition Costs, Investments, Goodwill and Other Intangible Assets, and Deferred Income Taxesas those that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of the Company's Consolidated Financial Statements and this Management's Discussion and Analysis. A full discussion of these policies is included under the heading, “Critical Accounting Policies” in Item 7 of the Annual Report on Form 10-K for the fiscal year ended December 31, 2012. During the six months ended June 30, 2013, there were no additions to or changes in the critical accounting policies disclosed in the 2012 Form 10-K except for the recently adopted accounting standards discussed in Note 1(C) of the Notes to Condensed Consolidated Financial Statements.

Results of Operations for the Three Months Ended June 30, 2013 Compared to the Three Months Ended June 30, 2012

Information by business segment for the three months ended June 30, 2013and 2012 is as follows:


									Benefits,		Amortization		Selling,
					Net		Fee and		Claims		of Deferred		General
		Premiums			Investment		Other		and		Acquisition		And
June 30, 2013		Earned			Income		Income		Reserves		Costs		Administrative		Total
(In thousands)

Medical Stop-Loss		$	42,539	1,130			(1)		28,580		-		11,672		$	3,416
Fully Insured Health		61,852		497			6,086		43,780		5		24,459			191
Group disability,
	life, annuities
	and DBL	15,234		982			153		9,569		-		4,401			2,399
Individual life,
	annuities and other	5,840		4,373			1,460		7,347		10,943		2,932			(9,549)
Corporate		-		20			-		-		-		1,398			(1,378)
Sub total		$	125,465	$		7,002	$	7,698	$	89,276	$	10,948	$	44,862		(4,921)


Net realized investment gains																11,735
Other-than-temporary impairment losses																-
Interest expense on debt																(490)
Income from operations before income taxes																6,324
Income taxes																2,166
Net income															$	4,158


									Benefits,		Amortization		Selling,
					Net		Fee and		Claims		of Deferred		General
		Premiums			Investment		Other		and		Acquisition		And
June 30, 2012		Earned			Income		Income		Reserves		Costs		Administrative		Total
(In thousands)

Medical Stop-Loss		$	33,984	1,032			(718)		22,588		-		7,861		$	3,849
Fully Insured Health		32,982		317			6,710		21,370		6		16,627			2,006
Group disability,
	life, annuities
	and DBL	12,177		645			4		8,265		-		3,828			733
Individual life,
	annuities and other	6,326		5,595			1,140		8,042		1,625		3,566			(172)
Corporate		-		20			-		-		-		1,449			(1,429)
Sub total		$	85,469	$		7,609	$	7,136	$	60,265	$	1,631	$	33,331		4,987


Net realized investment gains																1,850
Other-than-temporary impairment losses																(621)
Interest expense on debt																(540)
Income from operations before income taxes																5,676
Income taxes																1,846
Net income															$	3,830

Premiums Earned

In the second quarter of 2013, premiums earned increased $40.0 million over the comparable period of 2012. The increase is primarily due to: (i) the Fully Insured Health segment which had a $28.9 million increase in premiums primarily as a result of increased retentions on most lines of business and increased volume in the short term medical business and major medical business for groups and individuals in addition to premiums from the new pet and international lines of business; (ii) a $8.6 million increase in the Medical Stop-Loss segment due to increased volume of business in 2013; and (iii) a $3.0 million increase in the Group disability, life, annuities and DBL segment primarily due to increased premiums from the DBL line; partially offset by (iv) a decrease of $0.5 million of earned premiums in the Individual life, annuities and other segment primarily as a result of decreased premium volume from lines in run-off.

Net Investment Income

Total net investment income decreased $0.6 million. The overall annualized investment yields were 3.5% and 3.8% (approximately 3.6% and 3.9%, on a tax advantaged basis) in the second quarter of 2013 and 2012, respectively. The overall decrease was primarily a result of a decrease in investment income on bonds, equities and short-term investments due to the transfer of $215.1 million of invested assets in the second quarter of 2013 related to a coinsurance treaty. The annualized investment yields on bonds, equities and short-term investments were 3.5% and 3.7% in the second quarter of 2013 and 2012, respectively. IHC has approximately $121.8 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

The Company had net realized investment gains of $11.7 million in 2013 compared to $1.9 million in 2012. 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. In the second quarter of 2013, a significant portion of the net realized investment gains resulted from sales of invested assets in connection with the transfer of assets in accordance with the terms of a coinsurance agreement.

The Company did not record any other-than-temporary impairment losses in the second quarter of 2013. In the second quarter of 2012, the Company recorded $0.6 million of other-than-temporary impairment losses, pre-tax. Other-than-temporary impairment losses in 2012 consist of credit losses resulting from expected cash flows of debt securities that are less than their amortized cost basis.

Fee Income and Other Income

Fee income increased $0.2 million for the three-month period ended June 30, 2013compared to the three-month period ended June 30, 2012.

Other income increased $0.4 million in the second quarter of 2013 compared to the same period in 2012.

Insurance Benefits, Claims and Reserves

In the second quarter of 2013, insurance, benefits, claims and reserves increased $29.0 million over the comparable period in 2012. The increase is primarily attributable to: (i) an increase of $22.4 million in the Fully Insured Health segment, principally due to the increase in premiums on the major medical business for groups and individuals and short term medical lines of business in addition to the new pet and international lines of business and higher loss ratios; (ii) an increase of $6.0 million in the Medical Stop-Loss segment as a result of an increase in premium volume and higher loss ratios; (iii) an increase of $1.3 million in the group disability, life, annuities and DBL segment primarily due to an increase in the DBL line of $1.9 million as a result of increased volume, partially offset by a $0.7 million decrease in the LTD line as a result of lower loss ratios in 2013; partially offset by (iv) a $0.7 million decrease in the Individual life, annuity and other segment primarily a result of decreased volume from lines in run-off.

Amortization of Deferred Acquisition Costs

In the second quarter of 2013, the Company wrote-off $9.3 million of deferred acquisition costs in connection with a coinsurance agreement. Excluding this write-off, amortization of deferred acquisition costs was comparable to the same period in 2012.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $11.6 million. The increase is primarily due to: (i) a $7.9 million increase in the Fully Insured Health segment largely due to an increase in commission and other general expenses in the major medical business for groups and individuals and short-term medical lines of business in addition to commission and other general expenses related to the new pet and international lines in 2013; (ii) a $3.8 million increase in commissions and other general expenses in the Medical Stop-Loss segment; (iii) an increase of $0.6 million in the group disability, life, annuities and DBL due to increased DBL volume; offset by (iv) a decrease of $0.7 million in Individual life, annuity and other segment.

Income Taxes

The effective tax rate for the three months ended June 30, 2013 and 2012 was 34.3% and 32.5%, respectively. The lower effective tax rate in 2012 was due to a higher benefit from tax-advantaged securities as a percentage of income in 2012.

Results of Operations for the Six Months Ended June 30, 2013 Compared to the Six Months Ended June 30, 2012

Information by business segment for the six months ended June 30, 2013and 2012 is as follows:


									Benefits,		Amortization		Selling,
					Net		Fee and		Claims		of Deferred		General
		Premiums			Investment		Other		and		Acquisition		And
June 30, 2013		Earned			Income		Income		Reserves		Costs		Administrative		Total
(In thousands)

Medical Stop-Loss		$	82,794	2,700			296		57,494		-		21,864		$	6,432
Fully Insured Health		118,751		1,017			12,350		83,458		10		48,791			(141)
Group disability,
	life, annuities
	and DBL	29,090		1,578			175		18,534		-		8,334			3,975
Individual life,
	annuities and other	12,198		9,651			2,771		15,250		12,378		6,159			(9,167)
Corporate		-		57			-		-		-		2,594			(2,537)
Sub total		$	242,833	$		15,003	$	15,592	$	174,736	$	12,388	$	87,742		(1,438)


Net realized investment gains																16,354
Interest expense on debt																(977)
Income from operations before income taxes																13,939
Income taxes																4,741
Net income															$	9,198


									Benefits,		Amortization		Selling,
					Net		Fee and		Claims		of Deferred		General
		Premiums			Investment		Other		and		Acquisition		And
June 30, 2012		Earned			Income		Income		Reserves		Costs		Administrative		Total
(In thousands)

Medical Stop-Loss		$	66,635	2,386			537		40,995		-		18,629		$	9,934
Fully Insured Health		65,067		646			12,963		42,382		12		33,124			3,158
Group disability,
	life, annuities
	and DBL	24,353		1,322			66		17,104		-		7,935			702
Individual life,
	annuities and other	13,188		11,516			2,147		16,919		3,213		6,521			198
Corporate		-		490			-		-		-		3,594			(3,104)
Sub total		$	169,243	$		16,360	$	15,713	$	117,400	$	3,225	$	69,803		10,888


Net realized investment gains																2,987
Other-than-temporary impairment losses																(704)
Interest expense on debt																(1,079)
Income from operations before income taxes																12,092
Income taxes																3,932
Net income															$	8,160

Premiums Earned

In the first six months of 2013, premiums earned increased $73.6 million over the comparable period of 2012. The increase is primarily due to: (i) the Fully Insured Health segment which had a $53.7 million increase in premiums primarily as a result of increased retentions on most lines of business and increased volume in the short term medical business and major medical business for groups and individuals in addition to premiums from the new pet and international lines of business; (ii) a $16.2 million increase in the Medical Stop-Loss segment due to increased volume of business in 2013; and (iii) a $4.7 million increase in the Group disability, life, annuities and DBL segment primarily due to increased premiums from the DBL line; partially offset by (iv) a decrease of $1.0 million of earned premiums in the Individual life, annuities and other segment primarily as a result of decreased premium volume from lines in run-off.

Net Investment Income

Total net investment income decreased $1.4 million. The overall annualized investment yields were 3.7% and 3.9% (approximately 3.8% and 4.0%, on a tax advantaged basis) in the first six months of 2013 and 2012, respectively. The overall decrease was primarily a result of a decrease in investment income on bonds, equities and short-term investments due to the transfer of $215.1 million of invested assets in the second quarter of 2013 related to a coinsurance treaty. The annualized investment yields on bonds, equities and short-term investments were 3.5% and 3.7% in the first six months of 2013 and 2012, respectively. IHC has approximately $121.8 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

The Company had net realized investment gains of $16.4 million in 2013 compared to $3.0 million in 2012. 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 2013 resulted from sales of invested assets in connection with the transfer of assets, during the second quarter, in accordance with the terms of a coinsurance agreement.

The Company did not record any other-than-temporary impairment losses in the six months ended June 30, 2013. During the six months ended June 30, 2012, the Company recorded $.7 million of other-than-temporary impairment losses, pre-tax. Other-than-temporary impairment losses in 2012 consist of credit losses resulting from expected cash flows of debt securities that are less than their amortized cost basis.

Fee Income and Other Income

Fee income decreased $0.7 million for the six-month period ended June 30, 2013compared to the six-month period ended June 30, 2012.

Total other income increased $0.6 million in the six-month period ended June 30, 2013compared to the six-month period ended June 3, 2012.

Insurance Benefits, Claims and Reserves

In the first six months of 2013, insurance, benefits, claims and reserves increased $57.3 million over the comparable period in 2012. The increase is primarily attributable to: (i) an increase of $41.1 million in the Fully Insured Health segment, principally due to the increase in premiums on the major medical business for groups and individuals and short term medical lines of business in addition to the new pet and international lines of business and higher loss ratios; (ii) an increase of $16.5 million in the Medical Stop-Loss segment as a result of an increase in premium volume and higher loss ratios; (iii) an increase of $1.4 million in the group disability, life, annuities and DBL segment primarily due to an increase in the DBL line of $2.8 million as a result of increased volume, partially offset by a $1.6 million decrease in the LTD line as a result of lower loss ratios in 2013; offset by (iv) a $1.7 million decrease in the Individual life, annuity and other segment primarily a result of decreased volume from lines in run-off.

Amortization of Deferred Acquisition Costs

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $17.9 million. The increase is primarily due to: (i) a $15.7 million increase in the Fully Insured Health segment largely a result of an increase in commission and other general expenses in the major medical business due to the increase in volume for groups and individuals and short term medical lines of business in addition to commission and other general expenses related to the new pet and international lines in 2013; (ii) a $3.3 million increase in commissions and other general expenses in the Medical Stop-Loss segment due to the increase in volume; partially offset by (iii) a decrease of $1.0 million in corporate overhead expenses due to a reduction in employment and consulting related expenses.

Income Taxes

The effective tax rate for the six months ended June 30, 2013 and 2012 was 34.0% and 32.5%, respectively. The lower effective tax rate in 2012 was due to a higher benefit from tax-advantaged securities as a percentage of income in 2012.

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. No dividends were declared or paid by the Insurance Group in the first six months of 2013. The Insurance Group declared and paid $3.0 million of cash dividends to Corporate in the six months ended June 30, 2012.

Cash Flows

The Company had $19.0 million and $23.9 million of cash and cash equivalents as of June 30, 2013 and December 31, 2012, respectively.

For the six months ended June 30, 2013, operating activities of the Company utilized $180.0 million of cash, whereas $182.0 million of cash was provided by investing activities. In the second quarter of 2013, the Company liquidated investments to fund a $215.1 million payment to an unaffiliated reinsurer in accordance with the terms of a coinsurance agreement causing the increase in investing activities and corresponding decrease in operating activities. Financing activities, which utilized $7.0 million for the period, includes $2.9 million utilized by IHC to acquire treasury shares and $1.2 million utilized by AMIC to purchase shares of its common stock from noncontrolling interests.

The Company has $529.9 million of future policy benefits and claims and claim adjustment expenses 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 six months ended June 30, 2013, cash received from the maturities and other repayments of fixed maturities was $33.0 million.

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

BALANCE SHEET

Cash and investments decreased $192.9 million from December 31, 2012 largely due to the transfer of $215.1 million of cash and investments to an unaffiliated reinsurer in connection with a coinsurance agreement during the second quarter of 2013.

The Company had net receivables from reinsurers of $338.4 million at June 30, 2013 compared to $118.7 million at December 31, 2012. The Company recorded $218.3 million of estimated reinsurance recoverables in connection with a coinsurance agreement during the second quarter of 2013. All of such reinsurance receivables are highly rated companies or are adequately secured. No allowance for doubtful accounts was necessary at June 30, 2013.

In connection with the coinsurance agreement mentioned above, the Company wrote-off $9.3 million of deferred acquisition costs and recorded $6.6 million of estimated deferred expenses (included in other assets on the Condensed Consolidated Balance Sheet) which will be amortized over the life of the underlying reinsured contracts, in the second quarter of 2013.

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


		Total Health Reserves
		June 30,		December 31,
		2013		2012

Medical Stop-Loss	$	68,764	$	59,029
Fully Insured Health		59,444		40,747
Group Disability		104,715		87,171
Individual A&H and Other		7,232		7,533

	$	240,155	$	194,480

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

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

The $13.0 million decrease in IHC’s stockholders' equity in the first six months of 2013 is primarily due an $18.5 million decrease in other comprehensive income (loss) for the period, common stock dividends of $0.6 million and $2.9 million of treasury stock purchases, partially offset by net income of $8.4 million.

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 $14.6 million at June 30, 2013, approximately 99.1% 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 June 30, 2013, approximately 0.9% (or $4.9 million) of the carrying value of fixed maturities was invested in non-investment grade fixed maturities (primarily mortgage securities) (investments in such securities have different risks than investment grade securities, including greater risk of loss upon default, and thinner trading markets). The Company does not have any non-performing fixed maturities at June 30, 2013.

The Company reviews its investments regularly and monitors its investments continually for impairments. The Company did not record any other-than-temporary impairment losses in the six months ended June 30, 2013. For the six months ended June 30, 2012, the Company recorded $0.7 million of losses for other-than-temporary impairments in earnings and $0.3 million of losses for other-than-temporary impairments in other comprehensive income (loss). The following table summarizes the carrying value of securities with fair values less than 80% of their amortized cost at June 30, 2013 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	$	-	$	-	$	-	$	404	$	404

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 June 30, 2013. In 2013, the Company recorded $17.7 million of net unrealized losses on available-for sale securities, pre-tax, in other comprehensive income (loss) prior to DAC and reclassification adjustments. From time to time, as warranted, the Company may employ investment strategies to mitigate interest rate and other market exposures. Further deterioration in credit quality of the companies backing the securities, further deterioration in the condition of the financial services industry, a continuation of the current imbalances in liquidity that exist in the marketplace, a continuation or worsening of the current economic recession, or additional declines in real estate values may further affect the fair value of these securities and increase the potential that certain unrealized losses be designated as other-than-temporary in future periods and the Company may incur additional write-downs.

CAPITAL RESOURCES

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

IHC enters into a variety of contractual obligations with third parties in the ordinary course of its operations, including liabilities for insurance reserves, funds on deposit, debt and operating lease obligations. However, IHC does not believe that its cash flow requirements can be fully assessed based solely upon an analysis of these obligations. Future cash outflows, whether they are contractual obligations or not, also will vary based upon IHC’s future needs. Although some outflows are fixed, others depend on future events. The maturity distribution of the Company’s obligations, as of June 30, 2013, is not materially different from that reported in the schedule of such obligations at December 31, 2012 which was included in Item7of the Company’s Annual Report on Form 10-K.

OUTLOOK

For 2013, we will emphasize:

Continued growth in our medical stop-loss segment as the demand for this product continues to grow and Risk Solutions continues to build its reputation as a direct writer and provider of captive solutions;

Our individual major medical premiums will decline somewhat in 2013, and more rapidly in 2014, as we discontinue writing new business in most states;

Further 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;

Continued growth in pet insurance;

Increasing emphasis on direct-to-consumer distribution initiatives as we believe this will be a growing means for selling health insurance in the coming years;

Growth in small group major medical premiums in 2013, but a decline in this line of business in 2014 as employers may choose to drop group health coverage or self-fund;

Increasing sales of short-term, limited medical and supplemental health products, such as dental, hospital indemnity and critical illness and international products to offset the reduction in major medical premiums in 2014;

Selling non-subscriber occupational accident insurance in Texas;

Increasing sales in our DBL line of business; and

Continued focus on administrative efficiencies.

The Company remained highly liquid in 2013 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 $121.8 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 June 30, 2013, IHC owned 80.6% of AMIC’s outstanding common stock.

We had a significant increase in the profitability and growth of our stop-loss business in 2012, our largest core business, which we attribute to the more efficient and controlled model of writing the majority of our medical stop-loss on a direct basis. At present, all indicators point to a continuation of this growth and higher level of profitability. There are a number of market forces that support this expectation. We have observed a trend on the part of our producers of stop-loss to consolidate their business with a smaller number of stop-loss carriers. The direct writing model employed by Risk Solutions is well suited to take advantage of this trend. There is an increased interest in self-funded options to address concerns about cost and regulatory burdens and we have developed targeted programs to address these needs. Finally there appears to be a market recognition that stop loss buying decisions need to be more about price. Service and fair claims payment practices are also important considerations and the partnership model under which Risk Solutions operates is increasingly recognized as addressing those issues.

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 Act of 2010, as amended, signed by President Obama in March 2010 and its subsequent interpretations by state and federal regulators. The appropriate regulatory agencies have now issued their 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 essential health benefit (“EHB”) 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-EHB 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, the accuracy of our reserving methodology, returns on our invested assets, and our ability to manage expenses. We will also need to be diligent with the increased rate review scrutiny to effect timely rate changes and will need to stay focused on the management of medical cost drivers as medical trend levels have reversed direction in 2012 causing margin pressures. Therefore, factors affecting these items, as well as unemployment and global financial markets, may have a material adverse effect on our results of operations and financial condition.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

The results of the model specify whether the investments and their related cash flows can support the related current insurance cash flows. Additionally, various scenarios are developed changing interest

rates and other related assumptions. These scenarios help evaluate the market risk due to changing interest rates in relation to the business of the Insurance Group.

The expected change in fair value as a percentage of the Company's fixed income portfolio at June 30, 2013 given a 100 to 200 basis point rise or decline in interest rates is not materially different than the expected change at December 31, 2012 included in Item 7A of the Company’s Annual Report on Form 10-K.

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

ITEM 4.

CONTROLS AND PROCEDURES

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

There has been no change in IHC’s internal control over financial reporting during the quarter ended June 30, 2013 that has materially affected, or is reasonably likely to materially affect, IHC's internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

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

ITEM 1A.

RISK FACTORS

There were no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 in Item 1A to Part 1 of Form 10-K.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Share Repurchase Program

IHC has a program, initiated in 1991, under which it repurchases shares of its common stock. In March 2013, the Board of Directors authorized the repurchase of up to 500,000 shares of IHC’s common stock, in addition to prior authorizations, under the 1991 plan. As of June 30, 2013, 319,429 shares were still authorized to be repurchased under the plan. Share repurchases during the second quarter of 2013 are summarized as follows:


2013
				Maximum Number
		Average Price		Of Shares Which
Month of	Shares	of Repurchased		Can be
Repurchase	Repurchased	Shares		Repurchased

April	28,654	$	10.45	513,088
May	168,021	$	10.34	345,067
June	25,642	$	11.54	319,429

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.

OTHER INFORMATION

Not applicable.

ITEM 6.

EXHIBITS

10.1

Indemnity Reinsurance Agreement, effective January 26, 2012, by and between Standard Security Life Insurance Company of New York and First Security Benefit Life Insurance and Annuity Company of New York.

10.2

Indemnity Reinsurance Agreement, effective May 31, 2013, by and between Madison National Life Insurance Company, Inc. and Guggenheim Life and Annuity Company

31.1

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

31.2

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

32.1

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

32.2

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

101.INS

XBRL Instance Document.

101.SCH

XBRL Taxonomy Extension Schema Document.

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.

101.LAB

XBRL Taxonomy Extension Label Linkbase Document.

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document.

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document.

SIGNATURES

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

INDEPENDENCE HOLDING COMPANY

(REGISTRANT)

By:

/s/Roy T. K. Thung

Date:

August 8, 2013

Roy T.K. Thung

Chief Executive Officer, President

and Chairman

By:

/s/Teresa A. Herbert

Date:

August 8, 2013

Teresa A. Herbert

Senior Vice President and

Chief Financial Officer

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Independence Holding (IHC) 10-Q2013 Q2 Quarterly report

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