FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Period Ended: SEPTEMBER 30, 1995
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Commission File Number: 0-10306
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INDEPENDENCE HOLDING COMPANY
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(Exact name of Registrant as specified in its charter)
DELAWARE 58-1407235
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(State of Incorporation) (I.R.S. Employer Identification No.)
96 CUMMINGS POINT ROAD, STAMFORD, CONNECTICUT 06902
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 358-8000
NOT APPLICABLE
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Former name, former address and 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 .
-- --
14,864,549 SHARES OF COMMON STOCK, $1.00 PAR VALUE*
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Common Stock outstanding as of November 9, 1995
* Does not include 4,377,900 shares held by wholly owned
subsidiaries of the Registrant.
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
INDEX
PART 1 - FINANCIAL INFORMATION PAGE NO.
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Consolidated Balance Sheets -
September 30, 1995 (unaudited) and December 31, 1994.. 2
Consolidated Statements of Operations -
Three Months and Nine Months Ended
September 30, 1995 and 1994 (unaudited)............... 3
Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 1995 and 1994 (unaudited)......... 4
Notes to Consolidated Financial Statements (unaudited). 5 - 9
Management's Discussion and Analysis of Results of
Operations and Financial Condition.................... 10 - 16
PART II - OTHER INFORMATION
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Item 6 - Exhibits and Reports on Form 8-K.............. 17
Signatures............................................. 18
- 1 -
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, DECEMBER 31,
1995 1994
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(UNAUDITED)
ASSETS:
Cash and cash equivalents........................$ 13,065,000 $ 21,271,000
Short-term investments........................... 8,584,000 708,000
Securities purchased under agreements to resell.. 20,477,000 18,660,000
Fixed maturities (Note 2)........................ 131,489,000 129,817,000
Equity securities (Note 2)....................... 17,805,000 6,383,000
Other investments................................ 25,242,000 24,288,000
Trade accounts, notes and other receivables...... 14,343,000 10,590,000
Inventories (Note 3)............................. 12,530,000 10,497,000
Deferred insurance acquisition costs............. 9,292,000 10,979,000
Property, plant and equipment, net............... 3,953,000 4,447,000
Due from reinsurers.............................. 46,582,000 39,336,000
Due from brokers................................. 44,000 596,000
Other assets..................................... 4,994,000 4,786,000
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TOTAL ASSETS................................$308,400,000 $282,358,000
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LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Future insurance policy benefits.................$103,910,000 $ 95,277,000
Unearned premiums................................ 13,867,000 14,680,000
Future annuity policy benefits................... 33,989,000 34,436,000
Insurance policy claims.......................... 3,531,000 4,434,000
Other policyholders' funds....................... 2,131,000 2,161,000
Financial instruments sold, but not yet
purchased (Note 2).............................. 7,567,000 1,571,000
Due to brokers................................... 23,748,000 22,006,000
Due to reinsurers................................ 3,910,000 4,225,000
Accounts payable, accruals and other liabilities. 21,299,000 20,836,000
Income taxes, principally deferred (Note 5)...... 4,495,000 5,780,000
Long-term debt................................... 22,750,000 21,258,000
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TOTAL LIABILITIES............................ 241,197,000 226,664,000
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STOCKHOLDERS' EQUITY:
Common stock, par value $1 per share (50,000,000
shares authorized; 15,036,040 and 15,528,730
shares issued and outstanding, respectively,
net of 4,377,900 shares in treasury)............ 15,036,000 15,529,000
Paid-in capital.................................. 69,215,000 69,800,000
Unrealized losses on investments, net
of deferred tax benefits of $421,000
and $906,000, respectively...................... (1,132,000) (9,168,000)
Accumulated deficit.............................. (15,916,000) (20,467,000)
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TOTAL STOCKHOLDERS' EQUITY................... 67,203,000 55,694,000
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...$308,400,000 $282,358,000
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SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 2 -
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1995 1994
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REVENUES:
Insurance premiums.......$13,379,000 $13,014,000 $40,309,000 $38,403,000
Net investment income.... 3,598,000 3,140,000 10,270,000 9,473,000
Net realized and un-
realized gains (losses). 320,000 (1,489,000) (86,000) (1,330,000)
Sales.................... 10,229,000 8,818,000 30,296,000 27,464,000
Equity income (loss)..... 17,000 43,000 (405,000) 319,000
Other income (loss)...... 490,000 (147,000) 1,867,000 679,000
---------- ---------- ---------- ----------
28,033,000 23,379,000 82,251,000 75,008,000
---------- ---------- ---------- ----------
EXPENSES:
Insurance benefits,
claims and reserves..... 9,741,000 8,100,000 28,590,000 26,256,000
Amortization of deferred
insurance acquisition
costs................... 911,000 1,523,000 2,971,000 4,018,000
Cost of sales............ 7,995,000 6,417,000 23,288,000 20,823,000
Interest expense......... 472,000 358,000 1,395,000 932,000
Selling, general and
administrative expenses. 6,758,000 6,018,000 21,558,000 18,603,000
---------- ---------- ---------- ----------
25,877,000 22,416,000 77,802,000 70,632,000
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Operating income before
income taxes............. 2,156,000 963,000 4,449,000 4,376,000
Income tax expense
(benefit)................ 131,000 415,000 (102,000) 849,000
---------- ---------- ---------- ----------
Net income................$ 2,025,000 $ 548,000 $ 4,551,000 $ 3,527,000
========== ========== ========== ==========
INCOME PER COMMON SHARE:
Net income................$ .13 $ .04 $ .30 $ .22
========== ========== ========== ==========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING....... 15,067,000 15,670,000 15,298,000 15,768,000
========== ========== ========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 3 -
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
1995 1994
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................$ 4,551,000 $ 3,527,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred insurance acquisition
costs.......................................... 2,971,000 4,018,000
Net realized losses on sales of investment
securities..................................... 376,000 1,288,000
Unrealized (gains) losses on trading securities. (290,000) 42,000
Equity loss (income)............................ 405,000 (319,000)
Depreciation.................................... 531,000 433,000
Deferred tax benefits........................... (1,285,000) (166,000)
Income taxes credited to paid-in capital........ 599,000 548,000
Other........................................... 503,000 622,000
Change in assets and liabilities:
Net (purchases) sales of trading securities..... (800,000) 1,997,000
Change in future insurance policy benefits,
claims and other policy liabilities............ 8,259,000 4,718,000
Additions to deferred insurance
acquisition costs.............................. (1,284,000) (1,709,000)
Change in income tax liability.................. (486,000) 770,000
Change in net amounts due from and to reinsurers (7,561,000) (4,291,000)
Change in trade accounts, notes and other
receivables.................................... (3,770,000) (2,173,000)
Other........................................... (1,788,000) (2,350,000)
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Net cash provided by operating activities.. 931,000 6,955,000
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CASH FLOWS FROM INVESTING ACTIVITIES:
Change in net amount due from and to brokers.... 2,294,000 (5,519,000)
Sales and maturities of short-term investments.. 7,393,000 3,311,000
Purchases of short-term investments............. (15,271,000) (1,231,000)
Net (purchases) sales of resale and repurchase
agreements..................................... (1,817,000) 7,981,000
Sales of fixed maturities....................... 185,860,000 126,992,000
Purchases of fixed maturities................... (179,933,000) (140,551,000)
Sales of equity securities...................... 58,257,000 27,940,000
Purchases of equity securities.................. (62,179,000) (27,600,000)
Proceeds on sale of other investments........... 4,022,000 892,000
Other investments, net of distributions......... (5,411,000) (520,000)
Net additions to property, plant and equipment.. (37,000) (638,000)
Other........................................... - (541,000)
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Net cash used by operating activities...... (6,822,000) (9,484,000)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common stock...................... (1,677,000) (662,000)
Payments of investment type insurance contracts. (1,818,000) (2,430,000)
Increase in long-term debt...................... 2,950,000 1,433,000
Repayment of long-term debt..................... (1,459,000) (1,163,000)
Dividends paid.................................. (311,000) (316,000)
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Net cash used by financing activities...... (2,315,000) (3,138,000)
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Decrease in cash and cash equivalents........... (8,206,000) (5,667,000)
Cash and cash equivalents, beginning of year.... 21,271,000 19,613,000
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Cash and cash equivalents, end of period........$ 13,065,000 $ 13,946,000
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SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 4 -
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
(UNAUDITED)
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NOTE 1. SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(A) BUSINESS AND ORGANIZATION
Independence Holding Company and subsidiaries (the "Company"
or "IHC") is a diversified financial company primarily engaged in
insurance activities through Madison National Life Insurance
Company, Inc. and its subsidiaries ("Madison Life"), and Standard
Security Life Insurance Company of New York and its subsidiaries
including First Standard Security Insurance Company ("Standard
Life") (collectively, the "Insurance Group"), and in manufacturing
commercial signs through Zimmerman Sign Company ("Zimmerman" or the
"Manufacturing Group").
Geneve Corporation, a diversified financial holding company,
and its affiliated entities ("Geneve") hold approximately 54% of
IHC's outstanding common stock at September 30, 1995.
(B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements have been prepared in
accordance with the requirements for quarterly reports on Form 10-
Q. In the opinion of management, all adjustments (consisting only
of normal recurring accruals) that are necessary for a fair
presentation of the consolidated results of operations for the
interim periods have been included. The consolidated results of
operations for the three months and nine months ended September 30,
1995 are not necessarily indicative of the results to be
anticipated for the entire year. The consolidated financial
statements should be read in conjunction with the consolidated
financial statements and the notes included in IHC's Annual Report
on Form 10-K for the year ended December 31, 1994. Certain amounts
in the prior year's consolidated financial statements and notes
thereto have been restated to conform to the 1995 presentation.
- 5 -
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 2. INVESTMENT SECURITIES
The cost (amortized cost with respect to certain fixed income
securities) and market value of IHC's investment securities as of
September 30, 1995 and December 31, 1994 are as follows:
SEPTEMBER 30, 1995
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GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS (LOSSES) VALUE
--------------------------------------------------
(DOLLARS IN THOUSANDS)
AVAILABLE-FOR-SALE SECURITIES:
FIXED MATURITIES
Corporate securities.......$ 32,705 $ 238 $ (1,373) $ 31,570
U.S. Government and
agencies obligations...... 29,469 336 (89) 29,716
Government National
Mortgage Association...... 68,819 110 (315) 68,614
Obligations of states
and political sub-
divisions................. 1,621 36 (68) 1,589
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$132,614 $ 720 $ (1,845) $131,489
======= ======= ======= =======
EQUITY SECURITIES
Common stock...............$ 12,064 $ 1,223 $ (252) $ 13,035
Preferred stock............ 1,378 82 - 1,460
Options.................... 150 86 (13) 223
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$ 13,592 $ 1,391 $ (265) $ 14,718
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FINANCIAL INSTRUMENTS SOLD,
BUT NOT YET PURCHASED
Common stock...............$ (4,643) $ 3 $ (1,564) $ (6,204)
Options.................... (110) 10 (2) (102)
------- ------- ------- -------
$ (4,753) $ 13 $ (1,566) $ (6,306)
======= ======= ======= =======
TRADING SECURITIES:
EQUITY SECURITIES
Common stock...............$ 2,873 $ 242 $ (28) $ 3,087
======= ======= ======= =======
FINANCIAL INSTRUMENTS SOLD,
BUT NOT YET PURCHASED
Common stock...............$ (1,169) $ 5 $ (68) $ (1,232)
Options.................... (34) 5 - (29)
------- ------- ------- -------
$ (1,203) $ 10 $ (68) $ (1,261)
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- 6 -
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 2. INVESTMENT SECURITIES (CONTINUED)
The average market value of trading options sold, but not yet
purchased, was $27,000 for the period ended September 30, 1995.
DECEMBER 31, 1994
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS (LOSSES) VALUE
--------------------------------------------------
(DOLLARS IN THOUSANDS)
AVAILABLE-FOR-SALE SECURITIES:
FIXED MATURITIES
Corporate securities.......$ 34,590 $ 6 $ (4,035) $ 30,561
U.S. Government and
agencies obligations...... 46,885 - (2,781) 44,104
Government National
Mortgage Association...... 54,658 - (1,790) 52,868
Obligations of states
and political sub-
divisions................. 2,422 11 (149) 2,284
------- ------- ------- -------
$138,555 $ 17 $ (8,755) $129,817
======= ======= ======= =======
EQUITY SECURITIES
Common stock...............$ 2,711 $ 41 $ (309) $ 2,443
Preferred stock............ 2,241 - (327) 1,914
Options.................... 1,471 - (844) 627
------- ------- ------- -------
$ 6,423 $ 41 $ (1,480) $ 4,984
======= ======= ======= =======
FINANCIAL INSTRUMENTS SOLD,
BUT NOT YET PURCHASED
Common stock...............$ (563) $ - $ (31) $ (594)
Options.................... (525) 134 - (391)
------- ------- ------- -------
$ (1,088) $ 134 $ (31) $ (985)
======= ======= ======= =======
TRADING SECURITIES:
EQUITY SECURITIES
Common stock...............$ 1,421 $ - $ (40) $ 1,381
Options.................... 80 - (62) 18
------- ------- ------- -------
$ 1,501 $ - $ (102) $ 1,399
======= ======= ======= =======
FINANCIAL INSTRUMENTS SOLD,
BUT NOT YET PURCHASED
Common stock...............$ (481) $ - $ (36) $ (517)
Options.................... (72) 3 - (69)
------- ------- ------- -------
$ (553) $ 3 $ (36) $ (586)
======= ======= ======= =======
- 7 -
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 2. INVESTMENT SECURITIES (CONTINUED)
The average market value of trading long options was $36,000
and the average market value of trading options sold but not yet
purchased was $26,000 for the year ended December 31, 1994.
The amortized cost and market value of fixed maturities at
September 30, 1995, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
SEPTEMBER 30, 1995
----------------------
AMORTIZED MARKET
COST VALUE
--------- ------
(DOLLARS IN THOUSANDS)
Due in one year or less.................$ 1,588 $ 1,592
Due after one year through
five years............................. 6,313 6,221
Due after five years through
ten years.............................. 32,896 32,921
Due after ten years..................... 22,998 22,141
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63,795 62,875
Government National
Mortgage Association................... 68,819 68,614
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Totals..................................$132,614 $131,489
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For the three and nine months ended September 30, 1995, gross
gains of approximately $1,654,000 and $6,760,000, respectively, and
gross losses of approximately $1,264,000 and $7,059,000,
respectively, were realized on sales of available-for-sale
securities.
For the three and nine months ended September 30, 1994, gross
gains of approximately $1,260,000 and $6,594,000, respectively, and
gross losses of approximately $2,761,000 and $8,028,000,
respectively, were realized on sales of available-for-sale
securities.
Approximately $130,000 of losses were realized on sales of
options available-for-sale, $26,000 of gains were realized on
options held for trading and $105,000 of gains were realized on
sales of future contracts available-for-sale for the three months
ended September 30, 1995.
Approximately $2,283,000 of losses were realized on sales of
options available-for-sale, $48,000 of losses were realized on
options held for trading and $1,089,000 of losses were realized on
sales of future contracts available-for-sale for the nine months
ended September 30, 1995.
- 8 -
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
NOTE 3. INVENTORIES
Inventories at September 30, 1995 and December 31, 1994 are as
follows:
SEPTEMBER 30, DECEMBER 31,
1995 1994
-----------------------------
(DOLLARS IN THOUSANDS)
Raw materials..................$ 5,059 $ 4,558
Work in progress............... 6,165 4,078
Finished goods................. 1,306 1,861
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$12,530 $10,497
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NOTE 4. INCOME PER COMMON SHARE
The computations of income per common share were based upon
the weighted average common shares outstanding of 15,066,550 and
15,670,330 for the three months ended September 30, 1995 and 1994,
respectively, and 15,298,033 and 15,767,967 for the nine months
ended September 30, 1995 and 1994, respectively. Common stock
equivalents represented by warrants and stock options were not
utilized in the calculations as the effect of their assumed
exercise would have been anti-dilutive.
NOTE 5. INCOME TAXES
Effective July 1, 1993, the Insurance Group became included
in the Company's consolidated Federal income tax return. The
provision for income taxes shown in the consolidated statements of
operations was computed based on the Company's estimate of its
effective tax rates, including the expected tax impact of the
life/nonlife consolidation.
Federal income tax benefits amounting to $599,000 and $548,000
for the nine months ended September 30, 1995 and 1994,
respectively, and $251,000 for the three months ended September 30,
1994, resulting from changes in the utilization of net operating
loss carryforwards existing at December 31, 1980 (the date of
quasi-reorganization of IHC), were credited to paid-in capital.
There are no pre-1981 net operating loss carryforwards available to
be utilized subsequent to June 30, 1995.
NOTE 6. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
SEPTEMBER 30,
----------------------
1995 1994
----------------------
(DOLLARS IN THOUSANDS)
Cash payments for:
Interest..................$ 1,355 $ 556
Income taxes..............$ 1,081 $ 362
- 9 -
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
------------------------------------------------
Independence Holding Company and subsidiaries (the "Company"
or "IHC") has two operating segments: the Insurance Group and the
Manufacturing Group. The Insurance Group consists of the Company's
wholly-owned insurance subsidiaries, Madison National Life
Insurance Company, Inc. ("Madison Life") and its subsidiaries, and
Standard Security Life Insurance Company of New York and its
subsidiaries including First Standard Security Insurance Company
("Standard Life"). The Manufacturing Group consists of the
Company's majority owned sign manufacturing subsidiary, Zimmerman
Sign Company ("Zimmerman"). All remaining income, principally
income from parent company liquidity (cash, cash equivalents,
resale agreements and marketable securities) and expense items
associated with parent company activities, the Company's remaining
real estate operations and certain other investments of the Company
are included in Corporate.
RESULTS OF OPERATIONS
---------------------
THREE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO THREE MONTHS
ENDED SEPTEMBER 30, 1994
- --------------------------------------------------------------
The Company's net income applicable to common shares was $2.0
million or $.13 per share for the three month period ended
September 30, 1995 as compared to $.5 million or $.04 per share for
the comparable period of 1994, while operating income increased to
$2.2 million in the third quarter of 1995 from $1.0 million in the
third quarter of 1994.
INSURANCE GROUP
- ---------------
Standard Life underwrites specific and aggregate excess
medical insurance coverage ("stop loss") sold to employers who
self-fund their employees' health benefits, short-term statutory
disability benefits law business ("DBL") and group life insurance.
Standard Life also performs auditing and marketing services in
connection with its stop loss business. Standard Life has existing
business in-force in the following lines of business which are in
runoff status: individual accident and health, individual life,
single premium immediate annuities, and miscellaneous business. In
addition, Standard Life actively seeks opportunities to enter into
cooperative underwriting and reinsurance arrangements with other
life insurers, reinsurers and managed care companies, and has
already begun writing reinsurance on, and forming risk sharing and
other alliances with, HMO's.
Madison Life markets group long-term and short-term disability
and group life products as well as credit life and credit accident
and health products. Its existing blocks of individual ordinary
life, individual accident and health, and annual and single premium
- 10 -
deferred annuity business are in runoff status. Madison Life
historically has purchased, on an assumption reinsurance basis,
blocks of group credit life and credit disability insurance and
individual ordinary life insurance business to increase overall
profitability.
The Insurance Group had operating income of $2.1 million for
the three months ended September 30, 1995 versus operating income
of $.6 million for the three months ended September 30, 1994.
Operating income includes net realized and unrealized gains of $.1
million for the quarter ended September 30, 1995 compared to $1.4
million of losses for the comparable quarter of 1994. Operating
income excluding net securities gains and losses remained constant
at $2.0 million in the third quarter of 1995 as compared to the
third quarter of 1994. Premium revenues increased $.4 million from
the third quarter of 1994 to the third quarter of 1995. Premium
revenues at Madison Life increased $.5 million primarily from an
increase in group term life and group long term disability as a
result of additional written premiums. Standard Life had a $.1
million decrease in premiums resulting from an increase in stop
loss premiums of $.6 million and a $.2 million increase in premiums
from group accident and health business assumed, partially offset
by a $.4 million decrease in DBL premiums due to a higher level of
lapses experienced and a $.5 million decrease in ordinary life
premiums. Total investment income increased $.4 million from 1994
to 1995 primarily due to higher returns on certain equity funds.
Equity income remained unchanged. Other income increased $.9
million from 1994 to 1995 resulting from an increase in stop loss
fees earned at Standard Life of $.1 million and a $.4 million
reduction in lotto annuitant expenses. In addition, developments
relating to a stop loss treaty at Madison Life resulted in a
reduction of other income of $.4 million in 1994.
Insurance benefits, claims and reserves increased $1.6
million, representing an increase of $.5 million at Madison Life
and an increase of $1.1 million at Standard Life. The increase at
Madison Life is primarily due to a $.3 million increase in ordinary
life and individual accident and health claims and reserves as a
result of the continued growth of this line of business and a $.2
million increase in credit life and credit accident and health
claims. The increase at Standard Life is comprised of an increase
of stop loss claims and reserves of $.4 million, an increase in
claims and reserves on the assumed block of group accident and
health business of $.3 million, an increase in reserves of $.5
million attributable to the closed blocks of life, annuity and
individual and group accident and health lines of business
primarily from the payout of a lotto annuitant in 1994, and a
decrease of DBL reserves of $.1 million. Amortization of deferred
acquisition costs and general and administrative expenses for the
Insurance Group increased $.1 million; Madison Life's expenses
increased $.3 million and Standard Life's expenses decreased $.2
million. The increase at Madison Life is primarily due to an
increase in consulting fees, employee costs and premium taxes
related to the acquisition and writing of new business.
- 11 -
MANUFACTURING GROUP
- -------------------
Zimmerman had operating income of $.7 million for the three
months ended September 30, 1995 compared to operating income
of $1.1 million for the comparable 1994 period. Sales increased
$1.4 million to $10.2 million in the third quarter of 1995, while
cost of sales increased $1.6 million. This resulted in gross profit
margins of 21.8% for the three months ended September 30, 1995 as
compared to 27.2% for the same three month period of 1994. The
gross profit margin for the third quarter of 1994 was favorably
impacted by a non-recurring fixed price freight contract. Interest
expense increased $.1 million due to higher borrowing levels.
Selling, general and administrative expenses also increased by $.1
million.
CORPORATE
- ---------
Net operating expenses for the three months ended September
30, 1995 amounted to $.6 million, compared to net operating
expenses of $.7 million for the same period of 1994. Investment
income remained constant while realized gains increased $.3
million. Other income declined $.2 million reflecting a sale of
real estate in 1994. Interest expense related to the debt of a
corporate subsidiary and general and administrative expenses
remained constant.
NINE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1994
- ------------------------------------------------------------------
The Company's net income applicable to common shares was $4.6
million or $.30 per share for the nine months ended September 30,
1995 as compared to $3.5 million or $.22 per share for the nine
months ended September 30, 1994, while operating income remained
constant at $4.4 million.
INSURANCE GROUP
- ---------------
The Insurance Group had operating income of $4.3 million for
the nine months ended September 30, 1995 versus $3.8 for the first
nine months of 1994. Operating income includes net realized and
unrealized losses of $.4 million for the nine months ended
September 30, 1995 versus $1.3 million of losses for the nine
months ended September 30, 1994. Operating income excluding net
securities gains and losses was $4.7 million for the nine months
ended September 30, 1995 as compared to $5.1 million for the nine
months ended September 30, 1994. Premium revenues increased $1.9
million. Madison Life had an increase of $1.4 million primarily
due to an increase of $.6 million in group term life and group long
term disability as a result of additional written premiums, an
increase in group LTD premiums of $.4 million and a $.4 million
increase in other life and health lines of business. Premium
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revenues at Standard Life increased $.5 million due to an increase
in stop loss premiums of $1.2 million, a $.7 million increase in
premiums from group accident and health business assumed, along
with a $.2 million increase from a new managed health care product.
These increases were partially offset by a $1.2 million decrease in
DBL premiums due to a higher level of lapses experienced and a $.4
million decrease in ordinary life business. Net investment income
increased $.7 million primarily due to higher returns on certain
equity funds. Equity income decreased $.7 million due to expenses
sustained from certain start-up insurance related partnerships.
Other income increased $1.4 million as a result of the following:
(i) an increase of $.2 million in stop loss fees, a $.3 million
reduction in lotto annuitant expenses and a $.2 million increase in
reinsurance recoveries at Standard Life, and (ii) a charge against
other income of $.7 million made in 1994 for a stop loss treaty at
Madison Life.
Insurance benefits, claims and reserves increased by $2.3
million for the nine months ended September 30, 1995 compared to
the same period of 1994. Madison Life's expenses increased $1.3
million due to an increase of $.7 million in group term life and
group long term disability claims attributable to the additional
writings in these lines of business, and a $.6 million increase in
credit life and credit accident and health claims. Standard Life's
expenses increased $1.0 million due to an increase in stop loss
claims and reserves of $.6 million, an increase of claims on the
assumed block of group accident and health business of $.4 million,
and a $1.0 million increase in claims from the ordinary life
annuity, individual and group accident and health lines of business
primarily from the payout of a lotto annuitant in 1994, offset by
a decrease of DBL reserves of $1.0 million due to favorable
experience on this block of business.
Amortization of deferred acquisition costs and general and
administrative expenses for the Insurance Group increased $1.4
million. Standard Life's expenses increased by $.8 million
resulting from an increase in commissions of $.1 million, and an
increase in insurance taxes of $.2 million from higher premiums and
an increase in general expenses of $.5 million. Madison Life's
general expenses increased by $.6 million. The increase in general
expenses for both Standard Life and Madison Life resulted from an
increase in employee costs, consulting fees and premium taxes
related to the growth in new business.
MANUFACTURING GROUP
- -------------------
Operating income decreased $.2 million to $2.5 million for the
nine months ended September 30, 1995 as compared to the same period
of 1994. Sales increased $2.8 million while cost of sales
increased $2.5 million, resulting in a gross profit margin of 23.1%
in 1995 versus 24.2% in 1994. The gross profit margin for the nine
months ended September 30, 1994 was favorably impacted by a non-
recurring fixed price freight contract. Interest expense increased $.3
million due to higher borrowings supporting the increase in sales.
Selling, general and administrative expenses increased $.2 million
due to the higher sales volume in 1995.
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CORPORATE
- ---------
Net operating expenses increased $.3 million for the nine
months ended September 30, 1995 as compared to 1994 levels.
Investment income increased $.1 million and realized gains
increased $.3 million. Other income declined $.2 million reflecting
a sale of real estate in 1994. Interest expense increased $.2
million due to higher interest rates on the debt of a corporate
subsidiary, and general and administrative expenses increased $.3
million.
LIQUIDITY
---------
CASH FLOWS - GENERAL
- --------------------
For the first nine months of 1995, net cash provided by
operating activities amounted to $.9 million, while investing
activities used $6.8 million of cash. Cash used by financing
activities of $2.3 million resulted from the repurchase of shares
of the Company's common stock for $1.7 million, the payment of
investment type insurance contracts of $1.8 million and the payment
of a dividend on common stock of $.3 million declared in 1994,
offset by a net increase in long-term debt of $1.5 million.
INSURANCE GROUP
- ---------------
The Insurance Group normally provides cash flow from
operations, from the receipt of scheduled principal payments on its
portfolio of fixed income securities and from earnings on short-
term investments. Such cash flow is used partially to finance
liabilities for insurance policy benefits. These liabilities
represent long-term obligations which are calculated using certain
assumed interest rates. The nature and quality of insurance company
investments must comply with all applicable statutes and
regulations which have been promulgated primarily for the
protection of policyholders. Of the aggregate carrying value of the
Insurance Group's investment assets, approximately 80.1% was
invested in investment grade fixed income securities, resale
agreements and cash and cash equivalents at September 30, 1995.
These investments carry less risk of default and therefore lower
interest rates than other types of fixed maturity investments. At
September 30, 1995, approximately 4.1% of the carrying value of
investable assets was invested in diversified non-investment grade
fixed income securities (investments in such securities have
different risks than investment grade securities, including greater
risk of loss upon default, and thinner trading markets). The
Company monitors its investment portfolio on a continuous basis and
believes the liquidity of the Insurance Group will not be adversely
affected by its current investments.
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MANUFACTURING GROUP
- -------------------
For the first nine months of 1995, $3.2 million of cash was
used by Zimmerman's operations reflecting an increase in
receivables and inventories due to higher sales volume. This use of
cash was financed by income generated in the first nine months and
a $1.5 million increase in bank borrowings. Zimmerman has a $10.0
million bank line of credit of which $8.0 million was outstanding
at September 30, 1995. The Company believes that Zimmerman has
sufficient funds to meet its obligations.
CORPORATE
- ---------
Corporate derives its funds principally from (i) dividends and
interest income from its Insurance Group and its Manufacturing
Group, (ii) tax payments and management fees from its subsidiaries
and (iii) investment income from Corporate liquidity.
State insurance laws restrict the Insurance Group's ability to
make dividend payments to the parent company. Regulatory
constraints have historically not affected IHC's consolidated
liquidity, although they have limited the ability of the parent
company to use cash generated by the Insurance Group to fund
operating expenses, interest and dividend payments at Corporate.
The Company repurchased 492,690 shares of its common stock at
a cost of $1.7 million during the nine months ended September 30,
1995.
Total Corporate liquidity (cash, cash equivalents, resale
agreements and marketable securities) amounted to $14.0 million at
September 30, 1995. At the present time, the Company is not in
need of any additional long-term financing.
CAPITAL RESOURCES
-----------------
The Company continues to explore actively new opportunities
which it perceives exist in the health, life, and property and
casualty insurance and reinsurance businesses. With its already
superior capital ratios, together with its broad licensing and
excellent asset quality and credit-worthiness, the Insurance Group
remains well positioned to increase or diversify its current
activities.
At the same time, the Company recognizes that health care
reform initiatives are continuing to be discussed at various levels
of government. Depending upon the scope and timing of any such
legislation that becomes law, the manner in which health insurance
business is conducted in the future could be impacted. The
Insurance Group continuously monitors these initiatives in an
effort to best take advantage of a changing health care
environment.
In accordance with Statement of Financial Accounting Standards
No. 115, the Company may carry its portfolio of fixed income
securities either as held to maturity (carried at amortized cost),
as trading securities (carried at fair market value) or as
available-for-sale (carried at fair market value); the Company has
- 15 -
chosen to carry all of its debt securities as available-for-sale.
Primarily as a result of the decline in interest rates in the first
nine months of 1995, the Company experienced a change in unrealized
gains of $8.1 million, net of deferred taxes of $.5 million, in
total stockholders' equity reflecting a decrease in unrealized
losses, net of deferred taxes from $9.2 million at December 31,
1994 to $1.1 million at September 30, 1995. The Company continues
to employ investment strategies to mitigate interest rate and other
market exposures.
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PART II. OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) 1) Exhibit 11. Statement re: computation of per
share earnings.
2) Exhibit 27. Financial Data Schedule.
b) No report on Form 8-K was filed during the quarter ended
September 30, 1995.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
INDEPENDENCE HOLDING COMPANY
----------------------------
(THE REGISTRANT)
Dated: November 13, 1995 By: /s/Roy T.K. Thung
-------------------------
Roy T. K. Thung
Executive Vice President,
Chief Financial Officer
and Treasurer
Dated: November 13, 1995 By: /s/Teresa A. Herbert
-------------------------
Teresa A. Herbert
Vice President and
Controller
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