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 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. On July 29, 2021, the stock purchase agreement was amended and restated (the “SSL Amended Purchase Agreement”). In accordance with the SSL Amended Purchase Agreement, the Company will receive the excess of aggregate statutory capital and surplus, calculated as of the closing date, over $57,000,000. The closing of the transaction, the closing distribution 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 (”NYSDFS”). Standard Security Life focuses on underwriting and selling its New York short-term disability (“DBL”) and paid family leave rider (“PFL”) products and ceded a portion of this business to Independence American Insurance Company. We filed notice and received approval to cancel this reinsurance contract in accordance with the terms of the SSL Amended Purchase Agreement effective June 30, 2021. Under the terms of the SSL Amended 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) in addition to all its other lines of business. 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 distribution 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. 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. 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 reinsured by Madison National Life prior to closing. The reinsurance agreement will remain in effect until the underlying 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 $78,263,000 (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 $62,229,000 gain on the disposal, net of transaction costs and income taxes for the nine months ended September 30, 2021. Transaction costs consisting of transaction bonuses, legal expenses and financial advisor expenses amounted to an aggregate of $6,079,000. 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 September 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 PPI Put/Call Option and the equity investment in Iguana Capital. At September 30, 2021, the carrying value of the Company’s 30% equity interest in Iguana Capital is $33,475,000. The investment is accounted for using the equity method of accounting, and for the three months and nine months ended September 30, 2021, the Company recorded an equity loss of $(287,000) on its investment in Iguana Capital. In the fourth quarter of 2021, the Company committed to invest an additional $3,200,000 to Iguana Capital, but as a result of the magnitude of other investments being made by Iguana Capital, the Company expects its equity interest in Iguana Capital will be diluted. (C) Sale of Madison National Life On July 14, 2021, IHC and its wholly owned subsidiary ICC entered into a stock purchase agreement (the “MNL Purchase Agreement”) with Horace Mann Educators Corporation to sell all of the issued and outstanding capital stock of Madison National Life, which is wholly owned by ICC, for an aggregate purchase price of $172,500,000 in cash; in addition, if Madison National Life reaches specified financial targets in 2023, IHC will receive an additional purchase price of up to $12,500,000. In accordance with the MNL Stock Purchase agreement and prior to closing, Madison National Life will enter into a reinsurance agreement with Independence American Insurance Company to reinsure all of Independence American Insurance Company’s non-pet business, primarily specialty health products, that are excluded from the Pets Sale transaction discussed above. The transaction has been approved by the Board of Directors of IHC, and IHC’s majority stockholders have entered into a voting agreement under which such majority stockholders agreed to approve the transaction. IHC’s majority stockholders approved the transaction by written consent on October 18, 2021. The closing is expected no earlier than January 1, 2022; and the transaction is subject to customary closing conditions, including applicable regulatory approvals, one of which is the approval by the Wisconsin Office of the Commissioner of Insurance. The aforementioned transaction, which includes the reinsured specialty health business of Independence American Insurance Company, is referred to as the “MNL Sale” transaction or disposal group and qualifies for reporting as discontinued operations in the third quarter of 2021 upon the Board of Director’s commitment to the disposal plan in July 2021. In addition to customary transition services, there will be some continuing involvement with Madison National Life after its disposal with regards to the runout of the reinsured specialty health lines of business. 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): September 30, 2021 SSL Sale Pets Sale MNL Sale Total Major classes of assets: Investments and cash $ 154,902 $ 151,036 $ 195,993 $ 501,931 Due from reinsurers 13,237 - 339,689 352,926 Goodwill - 41,716 12,486 54,202 Other assets 36,431 16,663 33,230 86,324 Assets attributable to discontinued operations $ 204,570 $ 209,415 $ 581,398 $ 995,383 Major classes of liabilities: Policy benefits and claims $ 43,576 $ 13,727 $ 117,352 $ 174,655 Future policy benefits 20,650 - 174,534 195,184 Funds on deposit 593 - 141,935 142,528 Unearned premiums 13,956 6,497 1,791 22,244 Other liabilities 19,656 2,508 44,478 66,642 Liabilities attributable to discontinued operations $ 98,431 $ 22,732 $ 480,090 $ 601,253 December 31, 2020 SSL Sale Pets Sale MNL Sale Total Major classes of assets: Investments and cash $ 114,916 $ 149,844 $ 193,821 $ 458,581 Due from reinsurers 13,188 - 344,017 357,205 Goodwill - 62,414 12,486 74,900 Other assets 19,015 22,389 14,483 55,887 Assets attributable to discontinued operations $ 147,119 $ 234,647 $ 564,807 $ 946,573 Major classes of liabilities: Policy benefits and claims $ 39,296 $ 11,775 $ 128,161 $ 179,232 Future policy benefits 21,236 - 176,850 198,086 Funds on deposit 710 - 140,666 141,376 Unearned premiums 5,394 5,629 1,766 12,789 Other liabilities 10,382 8,012 32,774 51,168 Liabilities attributable to discontinued operations $ 77,018 $ 25,416 $ 480,217 $ 582,651 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 September 30, 2021 SSL Sale Pets Sale MNL Sale Total Revenues $ 51,274 $ 32,138 $ 41,838 $ 125,250 Expenses: Insurance benefits, claims and reserves 20,214 19,301 12,974 52,489 Selling, general and administrative expenses 8,166 11,466 16,011 35,643 Pretax income of discontinued operations during phase-out 22,894 1,371 12,853 37,118 Pretax provision for loss on disposal (59) (86) (64) (209) Pretax gain (loss) on disposal of discontinued operations - (526) - (526) Total pretax income from discontinued operations 22,835 759 12,789 36,383 Income tax expense on discontinued operations 4,721 103 2,688 7,512 Income from discontinued operations, net of tax $ 18,114 $ 656 $ 10,101 $ 28,871 For the Three Months Ended September 30, 2020 SSL Sale Pets Sale MNL Sale Total Revenues $ 30,222 $ 22,117 $ 54,036 $ 106,375 Expenses: Insurance benefits, claims and reserves 18,795 12,426 18,606 49,827 Selling, general and administrative expenses 6,398 7,766 22,089 36,253 Pretax income of discontinued operations during phase-out 5,029 1,925 13,341 20,295 Pretax provision for loss on disposal - - - - Pretax gain on disposal of discontinued operations - - - - Total pretax income from discontinued operations 5,029 1,925 13,341 20,295 Income tax expense on discontinued operations 1,031 402 2,785 4,218 Income from discontinued operations, net of tax $ 3,998 $ 1,523 $ 10,556 $ 16,077 For the Nine Months Ended September 30, 2021 SSL Sale Pets Sale MNL Sale Total Revenues $ 146,915 $ 90,913 $ 128,857 $ 366,685 Expenses: Insurance benefits, claims and reserves 74,812 53,675 51,354 179,841 Selling, general and administrative expenses 23,365 35,038 51,052 109,455 Pretax income of discontinued operations during phase-out 48,738 2,200 26,451 77,389 Pretax provision for loss on disposal (461) (480) (80) (1,021) Pretax gain on disposal of discontinued operations - 74,008 - 74,008 Total pretax income from discontinued operations 48,277 75,728 26,371 150,376 Income tax expense on discontinued operations 10,046 11,982 5,539 27,567 Income from discontinued operations, net of tax $ 38,231 $ 63,746 $ 20,832 $ 122,809 For the Nine Months Ended September 30, 2020 SSL Sale Pets Sale MNL Sale Total Revenue $ 92,419 $ 55,589 $ 155,272 $ 303,280 Expenses: Insurance benefits, claims and reserves 59,216 32,885 66,373 158,474 Selling, general and administrative expenses 22,895 17,915 65,206 106,016 Pretax income of discontinued operations during phase-out 10,308 4,789 23,693 38,790 Pretax provision for loss on disposal - - - - Pretax gain on disposal of discontinued operations - - - - Total pretax income from discontinued operations 10,308 4,789 23,693 38,790 Income tax expense on discontinued operations 2,488 1,143 5,205 8,836 Income from discontinued operations, net of tax $ 7,820 $ 3,646 $ 18,488 $ 29,954 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 nine months ended September 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 $37,118,000 and $77,389,000 for the three and nine months ended September 30, 2021, respectively, and was $20,295,000 and $38,790,000 for the three and nine months ended September 30, 2020, respectively. Total cash flows from operating activities of discontinued operations were $54,693,000 and $52,019,000 for the nine months ended September 30, 2021 and 2020, respectively. Total cash flows from investing activities of discontinued operations were $(100,302,000) and $(44,836,000) for the nine months ended September 30, 2021 and 2020, respectively. On a consolidated basis, the Company recorded $7,512,000 and $4,218,000 of income taxes related to pretax income from discontinued operations for the three months ended September 30, 2021 and 2020, respectively, and $27,567,000 and $8,836,000 for the nine months ended September 30, 2021 and 2020, respectively. In 2021, the amounts for the nine months period include $11,675,000 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 12). 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. |