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: MARCH 31, 1996
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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, $1.00 PAR VALUE*
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Common Stock outstanding as of May 9, 1996
* Does not include 4,377,900 shares held by wholly owned
subsidiaries of the Registrant.
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
INDEX
PART 1 - FINANCIAL INFORMATION PAGE NO.
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Consolidated Balance Sheets -
March 31, 1996 (unaudited) and December 31, 1995. 2
Consolidated Statements of Operations -
Three Months Ended March 31, 1996
and 1995 (unaudited)............................. 3
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1996
and 1995 (unaudited)............................. 4
Notes to Consolidated Financial Statements
(unaudited)...................................... 5 - 10
Management's Discussion and Analysis of Results of
Operations and Financial Condition............... 11 - 16
PART II - OTHER INFORMATION
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Item 6 - Exhibits and Reports on Form 8-K......... 17
Signatures........................................ 18
- 1 -
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET MARCH 31, DECEMBER 31,
1996 1995
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(UNAUDITED)
ASSETS:
Cash and cash equivalents........................$ 6,637,000 $ 26,860,000
Short-term investments........................... 6,393,000 7,376,000
Securities purchased under agreements to resell.. 8,567,000 5,195,000
Fixed maturities (Note 3)........................ 155,064,000 141,393,000
Equity securities (Note 3)....................... 8,799,000 6,490,000
Other investments................................ 30,012,000 25,413,000
Trade accounts, notes and other receivables...... 3,919,000 4,164,000
Deferred insurance acquisition costs............. 8,532,000 9,156,000
Property, plant and equipment, net............... 1,160,000 1,204,000
Due from reinsurers.............................. 40,164,000 44,588,000
Due from brokers................................. 383,000 1,706,000
Other assets..................................... 7,342,000 5,369,000
Net assets of discontinued operations (Note 2)... 7,714,000 7,293,000
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TOTAL ASSETS................................$284,686,000 $286,207,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Future policy benefits...........................$103,023,000 $103,872,000
Unearned premiums................................ 14,100,000 12,665,000
Funds on deposit................................. 34,939,000 34,463,000
Insurance policy claims.......................... 4,204,000 5,162,000
Other policyholders' funds....................... 2,216,000 2,071,000
Financial instruments sold, but not yet
purchased (Note 3).............................. 484,000 836,000
Due to brokers................................... 23,883,000 22,136,000
Due to reinsurers................................ 2,871,000 3,946,000
Accounts payable, accruals and other liabilities. 12,442,000 12,423,000
Income taxes, principally deferred (Note 5)...... 4,380,000 4,915,000
Long-term debt................................... 12,111,000 12,111,000
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TOTAL LIABILITIES............................ 214,653,000 214,600,000
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STOCKHOLDERS' EQUITY:
Common stock, par value $1 per share (50,000,000
shares authorized; 14,864,549 shares issued and
outstanding, net of 4,377,900 shares in
treasury)....................................... 14,865,000 14,865,000
Paid-in capital.................................. 68,812,000 68,812,000
Unrealized gains (losses) on investments,
net of deferred taxes (tax benefits) of
$(290,000) and $321,000, respectively........... (2,873,000) 495,000
Accumulated deficit............................... (10,771,000) (12,565,000)
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TOTAL STOCKHOLDERS' EQUITY................... 70,033,000 71,607,000
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...$284,686,000 $286,207,000
=========== ===========
See Accompanying Notes to Consolidated Financial Statements.
- 2 -
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1996 1995
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REVENUES:
Insurance premiums...............................$ 16,453,000 $ 13,205,000
Net investment income............................ 3,693,000 3,274,000
Net realized and unrealized
gains (losses).................................. 167,000 (768,000)
Equity income (loss)............................. 97,000 (233,000)
Other income..................................... 1,435,000 740,000
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21,845,000 16,218,000
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EXPENSES:
Insurance benefits, claims and reserves....... 12,076,000 9,512,000
Amortization of deferred insurance acquisition
costs........................................... 1,072,000 1,071,000
Interest expense................................. 235,000 274,000
Selling, general and administrative expenses..... 7,084,000 5,745,000
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20,467,000 16,602,000
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Operating income (loss) before income taxes....... 1,378,000 (384,000)
Income tax expense (benefit)...................... 15,000 (533,000)
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Income from continuing operations, net............ 1,363,000 149,000
Income from discontinued operations............... 431,000 588,000
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Net income........................................$ 1,794,000 $ 737,000
========== ==========
INCOME PER COMMON SHARE:
Income from continuing operations.................$ .09 .01
Income from discontinued operations, net.......... .03 .04
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Net income........................................$ .12 $ .05
========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING........ 14,931,000 15,491,000
========== ==========
See Accompanying Notes to Consolidated Financial Statements.
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INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................$ 1,794,000 $ 737,000
Adjustment to reconcile net income to net cash
provided by operating activities:
Amortization of deferred insurance acquisition
costs.......................................... 1,072,000 1,071,000
Realized losses (gains) on sales of
investment securities.......................... (143,000) 981,000
Unrealized gains on trading securities.......... (24,000) (213,000)
Equity loss (income)............................ (97,000) 233,000
Depreciation.................................... 71,000 71,000
Deferred taxes (tax benefits)................... 7,000 (835,000)
Income tax benefit credited to paid-in capital.. - 263,000
Income from discontinued operations, net........ (431,000) (588,000)
Other........................................... (13,000) 69,000
Change in assets and liabilities:
Net sales of trading securities................. (637,000) 541,000
Increase (decrease) in future insurance policy
benefits, claims and other policy liabilities... 517,000 2,200,000
Additions to deferred insurance acquisition
costs.......................................... (447,000) (378,000)
Change in net amounts due from and to reinsurers 3,349,000 (1,174,000)
Change in income tax liability.................. 69,000 (398,000)
Other........................................... (1,221,000) (296,000)
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Net cash provided by operating activities.. 3,866,000 2,284,000
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CASH FLOWS FROM INVESTING ACTIVITIES:
Change in net amount due from and to brokers.... 3,070,000 4,654,000
Sales and maturities of short-term investments.. 6,956,000 60,000
Purchases of short-term investments............. (5,968,000) (60,000)
Net purchases of resale and repurchase
agreements..................................... (3,373,000) (12,417,000)
Sales of equity securities...................... 6,839,000 20,445,000
Purchases of equity securities.................. (8,373,000) (24,878,000)
Sales and maturities of fixed maturities........ 49,347,000 93,392,000
Purchases of fixed maturities................... (67,340,000) (91,009,000)
Proceeds on sale of other investments........... 3,200,000 -
Other investments, net.......................... (7,697,000) (2,541,000)
Discontinued operations, net.................... 10,000 225,000
Other........................................... (195,000) 722,000
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Net cash used by investing activities...... (23,524,000) (11,407,000)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common stock and warrants......... - (346,000)
Payments of investment-type insurance contracts. (268,000) (268,000)
Repayment of long-term debt..................... - (500,000)
Dividends paid.................................. (297,000) (311,000)
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Net cash used by financing activities...... (565,000) (1,425,000)
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Decrease in cash and cash equivalents............ (20,223,000) (10,548,000)
Cash and cash equivalents, beginning of year..... 26,860,000 20,670,000
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Cash and cash equivalents, end of period.........$ 6,637,000 $ 10,122,000
========== ==========
See Accompanying Notes to Consolidated Financial Statements.
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INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(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 financial services company engaged primarily in
insurance activities through its wholly-owned subsidiaries,
Standard Security Life Insurance Company of New York ("Standard
Life"), Madison National Life Insurance Company, Inc. ("Madison
Life") and First Standard Security Insurance Company ("First
Standard") and their affiliates (the "Insurance Group").
IHC is also engaged in sign manufacturing through its
majority-owned subsidiary, Zimmerman Sign Company ("Zimmerman").
The Company intends, however, to reposition itself exclusively as
a financial services company. In that regard, the Company is
continuing to consider various alternative transactions which would
result in the divestiture or significant reduction of the Company's
investment in Zimmerman, although there can be no assurance that
any such transactions would be consummated. The Consolidated
Financial Statements of IHC and notes thereto have been restated to
present Zimmerman as discontinued operations.
Geneve Corporation, a diversified financial holding company,
and its affiliated entities ("Geneve") hold approximately 55% of
IHC's outstanding common stock.
(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 ended March 31, 1996 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, 1995. Certain amounts in prior year's
consolidated financial statements and notes thereto have been
restated to conform to the 1996 presentation.
The preparation of financial statements in conformity with
generally accepted accounting principles 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
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INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1. SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(CONTINUED)
during the reporting period. Actual results could differ from
those estimates.
NOTE 2. DISCONTINUED OPERATIONS
Although IHC is engaged in sign manufacturing through
Zimmerman, the Company intends to reposition itself exclusively as
a financial services company engaged principally in insurance
activities. In that regard, the Company is continuing to consider
various alternative transactions which would result in the
divestiture or significant reduction of the Company's investment in
Zimmerman, although there can be no assurance that any such
transactions would be consummated.
Since Zimmerman has historically comprised all of IHC's
manufacturing segment, the Consolidated Financial Statements and
notes thereto of IHC have been restated to present Zimmerman as
discontinued operations.
The net assets of Zimmerman have been reclassified in the
Consolidated Balance Sheets as follows:
MARCH 31, DECEMBER 31,
1996 1995
---------------------
(DOLLARS IN THOUSANDS)
Accounts receivable.............. $ 9,120 $ 9,284
Inventories...................... 13,658 12,659
Other assets..................... 4,074 3,938
Accounts payable and
liabilities including
minority interest............... (9,524) (8,899)
Long-term debt................... (9,614) (9,689)
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Net assets of discontinued
operations...................... $ 7,714 $ 7,293
====== ======
Income from discontinued operations for the three months ended
March 31, 1996 and 1995 is summarized as follows:
1996 1995
----------------------
(DOLLARS IN THOUSANDS)
Revenues..........................$ 10,163 $ 10,151
======= =======
Operating income from
discontinued operations,
net of minority interest.........$ 698 $ 947
Income taxes...................... 267 359
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Net income from
discontinued operations..........$ 431 $ 588
======= =======
- 6 -
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 2. DISCONTINUED OPERATIONS (CONTINUED)
Zimmerman is included in the consolidated federal income tax
return filed by IHC. On a separate company basis, Zimmerman has a
tax sharing agreement with IHC; accordingly, discontinued
operations are shown net of applicable taxes in accordance with
such agreement.
NOTE 3. INVESTMENT SECURITIES
The cost (amortized cost with respect to certain fixed income
securities) and market value of IHC's investment securities as of
March 31, 1996 and December 31, 1995 are as follows:
MARCH 31, 1996
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS (LOSSES) VALUE
--------------------------------------------------
(DOLLARS IN THOUSANDS)
FIXED MATURITIES
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AVAILABLE-FOR-SALE:
Corporate securities......$ 28,357 $ 179 $ (1,292) $ 27,244
U.S. Government and
agencies obligations.... 28,239 110 (881) 27,468
Government National
Mortgage Association.... 100,203 30 (1,461) 98,772
Obligations of states and
political subdivisions.. 1,620 34 (74) 1,580
------- ------- ------- -------
Total fixed maturities $158,419 $ 353 $ (3,708) $155,064
======= ======= ======= =======
EQUITY SECURITIES
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AVAILABLE-FOR-SALE:
Common stock..............$ 3,776 $ 137 $ (97) $ 3,816
Options................... 62 - (12) 50
Preferred stock........... 3,530 236 (73) 3,693
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7,368 373 (182) 7,559
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TRADING:
Common stock.............. 534 6 (125) 415
Preferred stock........... 826 - (1) 825
------- ------- ------- -------
1,360 6 (126) 1,240
------- ------- ------- -------
Total equity securities $ 8,728 $ 379 $ (308) $ 8,799
======= ======= ======= =======
- 7 -
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 3. INVESTMENT SECURITIES (CONTINUED)
MARCH 31, 1996
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS (LOSSES) VALUE
--------------------------------------------------
(DOLLARS IN THOUSANDS)
FINANCIAL INSTRUMENTS SOLD,
BUT NOT YET PURCHASED
- ---------------------------
TRADING:
Common stock............... (384) $ 13 $ - $ (371)
Options.................... (155) 45 (3) (113)
------- ------- ------- -------
Total financial instruments
sold, but not yet
purchased..................$ (539) $ 58 $ (3) $ (484)
======= ======= ======= =======
DECEMBER 31, 1995
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS (LOSSES) VALUE
--------------------------------------------------
(DOLLARS IN THOUSANDS)
FIXED MATURITIES
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AVAILABLE-FOR-SALE:
Corporate securities.......$ 28,805 $ 448 $ (767) $ 28,486
U.S. Government and
agencies obligations...... 43,496 941 (6) 44,431
Government National
Mortgage Association..... 66,361 496 (5) 66,852
Obligations of states and
political subdivisions... 1,620 44 (40) 1,624
------- ------ ------- -------
Total fixed maturities $140,282 $ 1,929 $ (818) $141,393
======= ====== ======= =======
EQUITY SECURITIES
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AVAILABLE-FOR-SALE:
Common stock................$ 988 $ 6 $ (235) $ 759
Preferred stock............. 4,516 150 (97) 4,569
------- ------ ------- -------
5,504 156 (332) 5,328
------- ------ ------- -------
TRADING:
Common stock................ 1,137 4 (130) 1,011
Preferred stock............. 151 - - 151
------- ------ ------- -------
1,288 4 (130) 1,162
------- ------ ------- -------
Total equity securities $ 6,792 $ 160 $ (462) $ 6,490
======= ====== ======= =======
- 8 -
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------------------
NOTE 3. INVESTMENT SECURITIES (CONTINUED)
DECEMBER 31, 1995
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS (LOSSES) VALUE
--------------------------------------------------
(DOLLARS IN THOUSANDS)
FINANCIAL INSTRUMENTS SOLD,
BUT NOT YET PURCHASED
- --------------------------
TRADING:
Common stock...............$ (752) $ 36 $ (119) $ (835)
Options.................... (2) 1 - (1)
------- ------ ------- -------
Total financial instruments
sold, but not yet
purchased...................$ (754) $ 37 $ (119) $ (836)
======= ====== ======= =======
The amortized cost and market value of fixed maturities at
March 31, 1996, 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.
MARCH 31, 1996
----------------------
AMORTIZED MARKET
COST VALUE
----------------------
(DOLLARS IN THOUSANDS)
Due in one year or less................$ - $ -
Due after one year through
five years............................ 4,089 4,085
Due after five years through
ten years............................. 32,410 31,429
Due after ten years.................... 21,717 20,778
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58,216 56,292
Government National
Mortgage Association.................. 100,203 98,772
------- -------
Totals.................................$158,419 $155,064
======= =======
NOTE 4. INCOME PER SHARE
The computations of income per share were based upon the
weighted average number of common and dilutive common equivalent
shares outstanding of approximately 14,931,000 and 15,491,000 for
the three months ended March 31, 1996 and 1995, respectively.
Dilutive common equivalent shares include 66,000 and 5,000 for the
quarters ended March 31, 1996 and 1995, respectively, from the
assumed exercise of options using the treasury stock method. Fully
diluted earnings per share is not shown as the assumed exercise of
all other stock options and warrants is anti-dilutive.
- 9 -
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 5. INCOME TAXES
The provision for income taxes shown in the consolidated
statements of operations was computed based on the Company's
estimate of the effective tax rates expected to be applicable for
the current year, including the expected tax impact of the
life/nonlife consolidation and discontinued operations.
Federal income tax benefits amounting to $263,000 for the
three months ended March 31, 1995, resulting from the utilization
of net operating loss carryforwards existing at December 31, 1980
(the date of quasi-reorganization of IHC), were credited to paid-in
capital. There are no remaining Federal income tax benefits to be
credited to paid-in capital for net operating loss carryforwards in
1996.
NOTE 6. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
MARCH 31,
1996 1995
----------------------
(DOLLARS IN THOUSANDS)
Cash payments for:
Interest.....................$ 179 $ 298
Income taxes.................$ 214 $ 809
- 10 -
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
------------------------------------------------
Independence Holding Company and subsidiaries (the "Company"
or "IHC") consists of one continuing operating segment: the
Insurance Group. This segment is composed of IHC's wholly-owned
subsidiaries, Standard Security Life Insurance Company of New York
("Standard Life"), Madison National Life Insurance Company, Inc.
("Madison Life") and First Standard Security Insurance Company
("First Standard") and their affiliates. 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.
IHC is also engaged in sign manufacturing through its
majority-owned subsidiary, Zimmerman Sign Company ("Zimmerman").
The Company intends, however, to reposition itself exclusively as
a financial services company engaged principally in insurance
activities. In that regard, the Company is continuing to consider
various alternative transactions which would result in the
divestiture or significant reduction of the Company's investment in
Zimmerman, although there can be no assurance that any such
transactions would be consummated. The Consolidated Financial
Statements of IHC have been restated to present Zimmerman as
discontinued operations (see Note 2 of Notes to Consolidated
Financial Statements).
RESULTS OF OPERATIONS
---------------------
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED
MARCH 31, 1995
- ----------------------------------------------------------------
The Company's net income applicable to common shares was $1.8
million or $.12 per share for the period ended March 31, 1996 as
compared to $.7 million or $.05 per share for the comparable period
of 1995. Operating income from continuing operations increased to
$1.4 million in the first quarter of 1996 from a loss of $.4
million in the first quarter of 1995. The Company had net realized
and unrealized gains of $.2 million in the first quarter of 1996,
as compared to losses of $.8 million for the first quarter of 1995.
Excluding net realized and unrealized gains, the Company had
operating income from continuing operations of $1.2 million in the
first three months of 1996 as compared to $.4 million for the
comparable period of 1995. Income from discontinued operations,
net was $.4 million for the three months ended March 31, 1996
versus $.6 million for the comparable period of 1995.
- 11 -
INSURANCE GROUP
- ---------------
Standard Life's core businesses are: (i) underwriting specific
and aggregate excess medical insurance coverage ("stop loss") sold
to employers that self-insure their employees' health benefits and
(ii) short-term statutory disability benefits law business in New
York ("DBL"). Standard Life also markets group life insurance to
employers who self insure or enroll in health maintenance
organizations ("HMO's"). Standard Life has developed ancillary
products, including reinsurance on, and risk-sharing and other
alliances with, HMO's and provider health care organizations that
desire to reduce their risk assumption and/or are required to
purchase this coverage by regulation; point-of-service ("POS")
insurance coverage sold to employers who are participating in an
HMO health benefit plan and want to purchase a health insurance
product that will provide their employees with a choice of
providers; a behavioral health carve-out POS policy that is sold to
employers that wish to provide a supplemental mental health
insurance product to their employees; and reinsurance coverage for
life and health insurance sold in South and Central America. In
addition, Standard Life has existing business in-force in the
following lines of business which are in runoff: individual
accident and health, individual life, single premium immediate
annuities, and miscellaneous insurance business. Standard Life
also actively seeks opportunities to enter into cooperative
underwriting and reinsurance arrangements with other life and
health insurers, reinsurers, HMO's and managed care companies, that
it believes would augment its existing businesses. Standard Life
also performs auditing and marketing services in connection with
its stop loss business.
Madison Life markets group long-term and short-term disability
and group life products as well as credit life and credit
disability products. The group long-term and short-term disability
and group life products are marketed to school districts,
municipalities and hospitals, primarily in the Midwest. This
business is sold through two marketing agencies that specialize in
these target markets and assist in the billing and administration
of the business. Approximately 85% of the credit insurance
premiums are written through credit unions. Other sources of
credit insurance premiums include automobile dealers, banks and
finance companies. Its existing blocks of individual ordinary
life, individual accident and health, and annual and single premium
deferred annuity business are in runoff. 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. In
March 1996, Madison Life entered into an agreement to purchase,
subject to certain conditions, a block of pre-need individual
ordinary life insurance and annuity policies with reserves of
approximately $33 million. Madison Life, through an investment
subsidiary, has also entered into several joint venture investments
involved in managed health care activities, including provider
- 12 -
excess reinsurance, development and management of provider
sponsored health plans and reinsurance of life and health
insurance.
The Insurance Group had operating income of $2.2 million for
the three months ended March 31, 1996 versus operating income of
$.5 million for the three months ended March 31, 1995. Operating
income includes net realized and unrealized gains of $.2 million
for the quarter ended March 31, 1996 compared to $.9 million of
losses for the comparable quarter of 1995. The Company makes
decisions to sell securities based on cash flow needs, investment
opportunities, and economic and market conditions thus creating
fluctuations in gains from one year to the next. Operating income
excluding net realized and unrealized gains was $2.0 million in the
first quarter of 1996 as compared to $1.4 million for the first
quarter of 1995. Premium revenues increased $3.2 million from the
first quarter of 1995 to the first quarter of 1996; premium
revenues at Madison Life remained steady from 1995 to 1996 while
Standard Life had a $3.2 million increase in premiums. The increase
at Standard Life is comprised of: a $2.0 million increase in stop
loss premiums reflecting the increased retention along with the
continued growth in this line of business, $.5 million from a new
POS product, $.5 million from a new HMO reinsurance product, and a
$.4 million increase in the group accident and health pool assumed,
offset by a $.2 million decrease due to the continuing runoff of
the closed blocks of life, annuity and individual and group
accident and health lines of business. Total investment income
increased $.3 million due to a realignment of the portfolio and
higher returns on certain equity investments, resulting in a 7.6%
annualized return on investments in the first quarter of 1996
compared to a 7.2% annualized return on investments in 1995.
Equity income increased $.3 million due to a reduction in expenses
sustained from certain start-up insurance related partnerships in
1995. Other income increased $.6 million from 1995 to 1996
resulting from an increase in reinsurance recoveries at Madison
Life and an increase in stop loss fees earned at Standard Life.
Insurance benefits, claims and reserves increased $2.6 million
reflecting an increase of $.2 million at Madison Life and $2.4
million at Standard Life. The increase at Standard Life is
comprised of: $1.3 million in stop loss claims paid as a result of
the increased retention in this line of business, additional
reserves of $.7 million relating to the new POS and HMO reinsurance
products, and $.4 million relating to the assumed block of group
accident and health line of business. Amortization of deferred
acquisition costs and general and administrative expenses for the
Insurance Group increased $1.2 million; Madison Life's expenses
decreased $.2 million and Standard Life's expenses increased $1.4
million. Standard Life's expenses increased due to a $.4 million
increase in commissions due to the growth of business, a $.1
million increase in amortization of deferred acquisition costs and
a $.9 million increase in general expenses due to administrative
fees associated with the higher retention of the stop loss business
and an increase in salary and consulting expenses.
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DISCONTINUED OPERATIONS
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Operating income was $.7 million for the three months ended
March 31, 1996 as compared to $.9 million for the comparable period
of 1995. Sales remained relatively steady while cost of sales
increased $.1 million. Gross profit margins were 22.7% for the
three months ended March 31, 1996 as compared to 23.3% for the
comparable period of 1995. Interest expense remained constant.
Selling, general and administrative expenses increased $.1 million.
CORPORATE
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Operating losses for the three months ended March 31, 1996
amounted to $.8 million, compared to operating losses of $.9
million for the same period of 1995. Operating income includes
realized gains of $.1 million for the quarter ended March 31, 1995.
Operating losses excluding net realized and unrealized gains was
$.8 million in the first quarter of 1996 as compared to $1.0
million in the first quarter of 1995. Investment income increased
$.1 million from 1995. Other income increased $.1 million from the
sale of real estate. Interest expense and selling, general and
administrative expenses remained steady.
LIQUIDITY
---------
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 80.0% was
invested in investment grade fixed income securities, resale
agreements and cash and cash equivalents at March 31, 1996. These
investments carry less risk of default and therefore lower interest
rates than other types of fixed maturity investments. At March 31,
1996, approximately 4.8% 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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DISCONTINUED OPERATIONS
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For the first three months of 1996, $.3 million of cash was
provided by Zimmerman's operations. This cash was used to purchase
property and equipment of $.3 million. Zimmerman has a $10.0
million bank line of credit of which $8.7 million was outstanding
at March 31, 1996. The Company believes that Zimmerman has
sufficient funds to meet its obligations.
CORPORATE
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Corporate derives its funds principally from (i) dividends and
interest income from its Insurance Group and Zimmerman, (ii) tax
payments and management fees from its subsidiaries and (iii)
investment income from Corporate liquidity.
Regulatory constraints have historically not affected IHC'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 to fund operating expenses,
interest and dividend payments at Corporate.
Total corporate liquidity (cash, cash equivalents, resale
agreements and marketable securities) amounted to $12.0 million at
March 31, 1996. At the present time, the Company is not in need of
any additional long-term financing.
CAPITAL RESOURCES
-----------------
Due to its superior capital ratios, broad licensing and
excellent asset quality and credit-worthiness, the Insurance Group
remains well positioned to increase or diversify its current
activities, and to raise additional capital in the public or
private markets to the extent determined to be necessary or
desirable, in order to pursue acquisition opportunities or
otherwise expand its operations.
In accordance with SFAS 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 chosen to carry all of its debt securities
as available-for-sale. Primarily as a result of the increase in
interest rates in the first quarter, the Company recorded an
unrealized loss of $3.4 million, net of deferred tax benefits of
$.6 million, in total stockholders' equity; the foregoing reflects
unrealized gains net of taxes, of $.5 million at December 31, 1995
and $2.9 million of losses at March 31, 1996. The Company
continues to employ investment strategies to mitigate interest rate
and other market exposures.
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NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
In October 1995, the Financial Accounting Standards Board
issued SFAS No. 123, "Accounting for Stock-Based Compensation"
which is effective for fiscal years beginning after December 15,
1995. SFAS No. 123 establishes financial accounting and reporting
standards for stock-based employee compensation plans, and allows
either expensing the value of stock-based compensation over the
period earned, or disclosing in the Notes to the Consolidated
Financial Statements the pro forma impact to net income and
earnings per share as if the fair value of the awards had been
charged to compensation expense. The Company has not completed its
analysis of the Statement, nor has it made a determination as to
the expense recognition or disclosure provisions of the Statement.
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PART II. OTHER INFORMATION
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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
March 31, 1996.
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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: May 14, 1996 By: /s/Roy T.K. Thung
---------------------------
Roy T. K. Thung
Executive Vice President,
Chief Financial Officer
and Treasurer
Dated: May 14, 1996 By: /s/Teresa A. Herbert
---------------------------
Teresa A. Herbert
Vice President and
Controller
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