Disposal Groups, Including Discontinued Operations, Disclosure | Note 2. Discontinued Operations (A) Sale of Standard Security Life On April 14, 2021, IHC and its wholly owned subsidiary, Independence Capital Corp. (“ICC”), entered into a Stock Purchase Agreement (the “SSL Purchase Agreement”) with Reliance Standard Life Insurance Company (“Reliance Standard”) to sell all of the issued and outstanding capital stock of Standard Security Life, a wholly owned subsidiary of ICC, for an aggregate purchase price of $180,000,000 in cash. In addition, at closing, the Company will receive a dividend from Standard Security Life equal to the excess of aggregate statutory capital and surplus over $53,000,000 as of the closing date. Standard Security Life had statutory capital and surplus of $82,091,000 at June 30, 2021. The closing of the transaction, the closing dividend and certain other items are subject to customary closing conditions including applicable regulatory approvals, one of which is the approval of the New York State Department of Financial Services. Standard Security Life currently cedes a portion of its New York short-term disability (“DBL”) and paid family leave rider (“PFL”) business to Independence American Insurance Company. We filed notice to cancel this reinsurance contract in accordance with the terms of the SSL Purchase Agreement. Under the terms of the SSL Purchase Agreement, the sale transaction will include all of Standard Security Life’s DBL and PFL business (including the DBL and PFL business previously ceded to Independence American Insurance Company) and will exclude other lines of business which will be reinsured prior to the closing. The DBL and PFL business being sold was part of the Company’s Group disability, life, DBL and PFL segment. The aforementioned transaction, consisting of the sale of Standard Security Life, the closing dividend and other closing conditions, is collectively referred to as the “SSL Sale” transaction or disposal group. DBL and PFL are major product lines for the Company. The sale of Standard Security Life and resulting exit from DBL and PFL business represents a strategic shift that will have a major effect on the Company’s operations and financial results. The SSL Sale transaction qualified for reporting as discontinued operations in the second quarter of 2021 upon the Board of Director’s commitment to a plan for its disposal in April 2021, and the subsequent execution of the SSL Purchase Agreement. Provided that all regulatory approvals and other closing conditions are met, the Company expects to complete the SSL Sale transaction by the end of 2021. On July 29, 2021, the SSL Purchase Agreement was amended and restated to: (i) include in the disposal group, the business lines that were previously excluded from the transaction; (ii) remove the reinsurance requirement for the previously excluded business lines; and (iii) increase the target statutory capital and surplus to $57,000,000. As a result of this change in the disposal plan, the Company will include the assets, liabilities and results of operations for those business lines affected in discontinued operations for all periods presented, beginning in the third quarter of 2021. Aside from customary transition services, there will be no continuing involvement with Standard Security Life after its disposal. (B) Sale of Pet Division and Independence American Insurance Company (“Pets Sale”) On May 17, 2021, IHC and certain subsidiaries entered into agreements to sell a 70% controlling interest in its pet division, including all of the issued and outstanding capital stock of Independence American Insurance Company to a subsidiary of Iguana Capital, Inc. (“Iguana Capital”), an investment company specifically formed to facilitate this transaction as follows: (i) (ii) (iii) Both agreements are subject to customary closing conditions. The closing of the IAHC Purchase Agreement however is also subject to certain regulatory approvals, one of which is the approval of the Delaware Insurance Department. For this reason, the transaction was structured as two agreements such that the sale of PetPartners occurred on June 30, 2021, and the closing of the transactions contemplated in the IAHC Purchase Agreement will follow at a later date upon receipt of applicable regulatory approvals. Provided that all regulatory approvals and other closing conditions are met, the Company expects to complete the IAHC sale transaction by the end of 2021. Under the terms of the IAHC Purchase Agreement, the transaction includes the sale of all Independence American Insurance Company’s pet business and excludes other business lines. These excluded business lines will be retained by the Company through a reinsurance agreement with Madison National Life prior to closing. The reinsurance agreement will remain in effect until the underlying business is either transferred to Madison National Life or the business runs out. The aforementioned transaction, consisting of the sale of PetPartners, IAHC and Independence American Insurance Company, and other closing conditions, is collectively referred to as the “Pets Sale” transaction or disposal group. The pet business being sold was part of the Company’s Specialty Health segment. Because the pet business is a major product line for the Company, and the Company will no longer actively engage in the sales and marketing of pet insurance, the Pets Sale transaction represents a strategic shift that will have a major effect on the Company’s operations and financial results. The Pets Sale transaction qualified for reporting as discontinued operations in the second quarter of 2021 as a result of the Board of Directors’ commitment to a plan for the disposal of a controlling interest in its pet business in May 2021, and the execution of both the PPI Purchase Agreement and the IAHC Purchase Agreement on May 17, 2021. On June 30, 2021, the Company completed the sale of its majority interest in PetPartners and, as a result, the Company ceased to have a controlling financial interest in PetPartners. Upon closing, the Company received proceeds of $78,779,000 (consisting of the purchase price and certain initial working capital adjustments), recognized an initial equity investment in Iguana Capital valued at $33,762,000, and recorded a $62,693,000 gain on the disposal, net of transaction costs and income taxes. Transaction costs consisting of transaction bonuses, legal expenses and financial advisor expenses amounted to an aggregate of $6,070,000. The PPI Purchase Agreement includes a waiver and consent to offer The American Kennel Club (“AKC”), PetPartners’ minority shareholder, until December 31, 2021, the right to sell their shares at the same price and terms as in the PPI Purchase Agreement. In the event AKC desires to sell such its shares, Iguana Capital and SBH will equally finance the cash payment to AKC. In connection with the PPI Sale transaction, the Company recorded a $6,800,000 contingent liability (the maximum amount required) based on its belief that AKC will exercise this right. If for any reason the IAHC Purchase Agreement is terminated, then at the option of either SBH or an affiliate of Iguana Capital, IAHC may reacquire the Company’s interest in PetPartners (the “PPI Put/Call Option”). The value of the PPI Put/Call Option was deemed to be negligible due to the structure of the put and call features, the short time horizon and the Company’s belief that there is a low probability that the deal would be terminated. The proceeds received from the sale of PetPartners were deposited into an escrow account owned by SBH and treated as a security deposit. The funds will be released from escrow upon either the consummation of the IAHC sale transaction or upon the exercise of the PPI Put/Call Option. At June 30, 2021, the security deposit is presented as funds held in escrow on the Condensed Consolidated Balance Sheet. Continuing involvement with the Pets Sale disposal group will consist of customary transition services, the reinsurance of retained business lines, the PPI Put/Call Option, and the equity investment in Iguana Capital. The following is a reconciliation, by disposal group, of the carrying amounts of major classes of assets and liabilities included in discontinued operations on the Condensed Consolidated Balance Sheets for the periods indicated (in thousands): June 30, 2021 SSL Sale Pets Sale Total Major classes of assets: Investments and cash $ 164,346 $ 144,688 $ 309,034 Goodwill - 41,716 41,716 Other assets 30,020 35,392 65,412 Assets attributable to discontinued operations $ 194,366 $ 221,796 $ 416,162 Major classes of liabilities: Policy benefits and claims $ 56,987 $ 12,743 $ 69,730 Unearned premiums 26,778 6,080 32,858 Other liabilities 12,500 5,092 17,592 Liabilities attributable to discontinued operations $ 96,265 $ 23,915 $ 120,180 December 31, 2020 SSL Sale Pets Sale Total Major classes of assets included in discontinued operations: Investments and cash $ 114,916 $ 149,844 $ 264,760 Goodwill - 62,414 62,414 Other assets 18,787 29,730 48,517 Assets attributable to discontinued operations $ 133,703 $ 241,988 $ 375,691 Major classes of liabilities included in discontinued operations: Policy benefits and claims $ 34,500 $ 11,775 $ 46,275 Unearned premiums 5,208 5,629 10,837 Other liabilities 9,316 9,511 18,827 Liabilities attributable to discontinued operations $ 49,024 $ 26,915 $ 75,939 The following is a reconciliation, by disposal group, of the major line items constituting the pretax profit of discontinued operations to the income from discontinued operations, net of tax, as shown on the Condensed Consolidated Statements of Income for the periods indicated (in thousands): For the Three Months Ended June 30, 2021 SSL Sale Pets Sale Total Revenues $ 50,342 $ 33,080 $ 83,422 Expenses: Insurance benefits, claims and reserves 24,341 18,442 42,783 Selling, general and administrative expenses 7,394 14,592 21,986 Pretax income of discontinued operations during phase-out 18,607 46 18,653 Pretax provision for loss on disposal (402) (410) (812) Pretax gain on disposal of discontinued operations - 74,534 74,534 Total pretax income from discontinued operations 18,205 74,170 92,375 Income tax expense on discontinued operations 3,836 11,734 15,570 Income from discontinued operations, net of tax $ 14,369 $ 62,436 $ 76,805 For the Three Months Ended June 30, 2020 SSL Sale Pets Sale Total Revenues $ 30,442 $ 20,407 $ 50,849 Expenses: Insurance benefits, claims and reserves 22,152 11,098 33,250 Selling, general and administrative expenses 6,150 7,855 14,005 Pretax income of discontinued operations during phase-out 2,140 1,454 3,594 Pretax provision for loss on disposal - - - Pretax gain on disposal of discontinued operations - - - Total pretax income from discontinued operations 2,140 1,454 3,594 Income tax expense on discontinued operations 822 442 1,264 Income from discontinued operations, net of tax $ 1,318 $ 1,012 $ 2,330 For the Six Months Ended June 30, 2021 SSL Sale Pets Sale Total Revenues $ 93,738 $ 61,999 $ 155,737 Expenses: Insurance benefits, claims and reserves 53,865 34,374 88,239 Selling, general and administrative expenses 14,850 26,796 41,646 Pretax income of discontinued operations during phase-out 25,023 829 25,852 Pretax provision for loss on disposal (402) (410) (812) Pretax gain on disposal of discontinued operations - 74,534 74,534 Total pretax income from discontinued operations 24,621 74,953 99,574 Income tax expense on discontinued operations 5,151 11,875 17,026 Income from discontinued operations, net of tax $ 19,470 $ 63,078 $ 82,548 For the Six Months Ended June 30, 2020 SSL Sale Pets Sale Total Revenue $ 59,943 $ 37,838 $ 97,781 Expenses: Insurance benefits, claims and reserves 40,560 20,459 61,019 Selling, general and administrative expenses 13,004 14,515 27,519 Pretax income of discontinued operations during phase-out 6,379 2,864 9,243 Pretax provision for loss on disposal - - - Pretax gain on disposal of discontinued operations - - - Total pretax income from discontinued operations 6,379 2,864 9,243 Income tax expense on discontinued operations 1,689 741 2,430 Income from discontinued operations, net of tax $ 4,690 $ 2,123 $ 6,813 The assets and liabilities in discontinued operations are measured at the lower of their carry value or fair value less cost to sell. During the three months and six months ended June 30, 2021, it was not necessary to write-down any assets or liabilities attributable to the disposal groups in discontinued operations to fair value, less costs to sell. The Company expects to recognize gains from the sales of these disposal groups, therefore, any costs to sell the disposal groups, primarily legal expenses, incurred prior to the actual disposal of the discontinued operation, are expensed when incurred and presented in pretax provision for loss on disposal in the tables above. Pretax income (loss) from discontinued operations during phase-out attributable to IHC was $18,653,000 and $25,852,000 for the three and six months ended June 30, 2021, respectively, and was $3,594,000 and $9,243,000 for the three and six months ended June 30, 2020, respectively. Total cash flows from operating activities of discontinued operations were $45,917,000 and $26,813,000 for the six months ended June 30, 2021 and 2020, respectively. Total cash flows from investing activities of discontinued operations were $(88,501,000) and $(29,753,000) for the six months ended June 30, 2021 and 2020, respectively. On a consolidated basis, the Company recorded $15,570,000 and $1,264,000 of income taxes related to pretax income from discontinued operations for the three months ended June 30, 2021 and 2020, respectively, and $17,026,000 and $2,430,000 for the six months ended June 30, 2021 and 2020, respectively. In 2021, these amounts include $11,841,000 of income taxes related to the pretax gain on disposal of discontinued operations. In connection with the sale of PetPartners, AMIC decreased its valuation allowance on existing deferred tax assets by $8,281,000 and utilized approximately $46,116,000 of its outstanding Federal net operating loss carryforwards (See Note 11). Differences between the Federal statutory income tax rate on discontinued operations and the Company’s effective income tax rate on pretax income from discontinued operations are primarily the result of AMIC’s decrease in its valuation allowance, state and local income taxes, nondeductible goodwill and other expenses. |