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, 1996
------------------
Commission File Number: 0-10306
-------
INDEPENDENCE HOLDING COMPANY
----------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 58-1407235
- ----------------------- ----------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
96 CUMMINGS POINT ROAD, STAMFORD, CONNECTICUT 06902
- ---------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 358-8000
NOT APPLICABLE
- ------------------------------------------------------------------
Former name, former address and 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 .
-- --
7,431,748 SHARES OF COMMON STOCK, $1.00 PAR VALUE*
- -------------------------------------------------------------------
Common Stock outstanding as of November 8, 1996
(Adjusted for the one-for-two reverse stock split of the Company's
shares of Common Stock effective June 28, 1996)
* Does not include 2,188,950 treasury shares held of record by
the Registrant.
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
INDEX
PART 1 - FINANCIAL INFORMATION PAGE NO.
- ------------------------------ --------
Consolidated Balance Sheets -
September 30, 1996 (unaudited) and
December 31, 1995................................ 2
Consolidated Statements of Operations -
Three Months and Nine Months Ended
September 30, 1996 and 1995 (unaudited).......... 3
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1996
and 1995 (unaudited)............................. 4
Notes to Consolidated Financial Statements
(unaudited)...................................... 5 - 12
Management's Discussion and Analysis of Results
of Operations and Financial Condition............ 13 - 22
PART II - OTHER INFORMATION
- ---------------------------
Item 6 - Exhibits and Reports on Form 8-K......... 23
Signatures........................................ 24
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET SEPTEMBER 30, DECEMBER 31,
1996 1995
- -----------------------------------------------------------------------------
(UNAUDITED)
ASSETS:
Cash and cash equivalents........................$ 7,741,000 $ 26,860,000
Short-term investments........................... 9,329,000 7,376,000
Securities purchased under agreements to resell.. 12,721,000 5,195,000
Fixed maturities (Note 3)........................ 166,116,000 141,393,000
Equity securities (Note 3)....................... 5,201,000 6,490,000
Other investments................................ 29,337,000 25,413,000
Trade accounts, notes and other receivables...... 3,935,000 4,164,000
Deferred insurance acquisition costs............. 11,052,000 9,156,000
Property, plant and equipment, net............... 1,638,000 1,204,000
Due from reinsurers.............................. 41,308,000 44,588,000
Due from brokers................................. 6,518,000 1,706,000
Other assets..................................... 7,933,000 5,369,000
Net assets of discontinued operations (Note 2)... 8,719,000 7,293,000
----------- -----------
TOTAL ASSETS................................$311,548,000 $286,207,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Future policy benefits...........................$138,133,000 $103,872,000
Unearned premiums................................ 12,701,000 12,665,000
Funds on deposit................................. 33,837,000 34,463,000
Insurance policy claims.......................... 3,852,000 5,162,000
Other policyholders' funds....................... 2,238,000 2,071,000
Financial instruments sold, but not yet
purchased (Note 3).............................. 66,000 836,000
Due to brokers................................... 15,723,000 22,136,000
Due to reinsurers................................ 3,039,000 3,946,000
Accounts payable, accruals and other liabilities. 13,955,000 12,423,000
Income taxes, principally deferred (Note 6)...... 3,655,000 4,915,000
Long-term debt................................... 10,056,000 12,111,000
----------- -----------
TOTAL LIABILITIES............................ 237,255,000 214,600,000
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, par value $1 per share
(15,000,000 shares authorized; 7,431,748
shares and 7,432,274 shares, respectively,
issued and outstanding, net of 2,188,950
shares in treasury).............................. 7,432,000 7,432,000
Paid-in capital.................................. 76,240,000 76,245,000
Unrealized gains (losses) on investments,
net of deferred taxes (tax benefits) of
$(499,000) and $321,000, respectively........... (3,160,000) 495,000
Accumulated deficit.............................. (6,219,000) (12,565,000)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY................... 74,293,000 71,607,000
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...$311,548,000 $286,207,000
=========== ===========
See Accompanying Notes to Consolidated Financial Statements.
- 2 -
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1996 1995 1996 1995
- ---------------------------------------------------------------------------
REVENUES:
Insurance premiums....$ 17,084,000 $ 13,379,000 $ 50,632,000 $ 40,309,000
Net investment income 3,394,000 3,597,000 12,099,000 10,268,000
Net realized and
unrealized gains
(losses)............. 208,000 320,000 (453,000) (86,000)
Equity income (loss).. (36,000) 17,000 40,000 (405,000)
Other income.......... 1,050,000 490,000 3,114,000 1,867,000
---------- ---------- ---------- ----------
21,700,000 17,803,000 65,432,000 51,953,000
---------- ---------- ---------- ----------
EXPENSES:
Insurance benefits,
claims and reserves.. 12,024,000 9,741,000 36,650,000 28,590,000
Amortization of
deferred insurance
acquisition costs.... 713,000 911,000 2,935,000 2,971,000
Interest expense...... 192,000 275,000 657,000 834,000
Selling, general and
administrative
expenses............. 7,052,000 5,436,000 20,971,000 17,624,000
---------- ---------- ---------- ----------
19,981,000 16,363,000 61,213,000 50,019,000
---------- ---------- ---------- ----------
Operating income
before income taxes... 1,719,000 1,440,000 4,219,000 1,934,000
Income tax benefit..... (237,000) (143,000) (569,000) (1,059,000)
---------- ---------- ---------- ----------
Income from continuing
operations, net....... 1,956,000 1,583,000 4,788,000 2,993,000
Income from discontinued
operations, net....... 531,000 442,000 1,558,000 1,558,000
---------- ---------- ---------- ----------
Net income.............$ 2,487,000 $ 2,025,000 $ 6,346,000 $ 4,551,000
========== ========== ========== ==========
INCOME PER COMMON SHARE:
Income from continuing
operations............$ .26 $ .21 $ .64 $ .39
Income from discontinued
operations, net....... .07 .06 .21 .20
---------- ---------- ---------- ----------
Net income.............$ .33 $ .27 $ .85 $ .59
========== ========== ========== ==========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING.... 7,500,000 7,537,000 7,489,000 7,652,000
========== ========== ========== ==========
See Accompanying Notes to Consolidated Financial Statements.
- 3 -
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 1995
- ---------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................$ 6,346,000 $ 4,551,000
Adjustment to reconcile net income to net cash
provided by operating activities:
Amortization of deferred insurance acquisition
costs.......................................... 2,935,000 2,971,000
Realized losses on sales of
investment securities.......................... 461,000 376,000
Unrealized gains on trading securities.......... (8,000) (290,000)
Equity loss (income)............................ (40,000) 405,000
Depreciation.................................... 225,000 209,000
Deferred taxes (tax benefits)................... (126,000) (1,285,000)
Income tax benefit credited to paid-in capital.. - 599,000
Income from discontinued operations, net........ (1,558,000) (1,558,000)
Other........................................... (11,000) 162,000
Change in assets and liabilities:
Net purchases of trading securities............. (261,000) (800,000)
Increase in future insurance policy benefits
claims and other policy liabilities............ 34,347,000 8,259,000
Additions to deferred insurance acquisition
costs.......................................... (4,831,000) (1,284,000)
Change in net amounts due from and to reinsurers 2,372,000 (7,561,000)
Change in income tax liability.................. (315,000) (486,000)
Other........................................... (237,000) (620,000)
----------- -----------
Net cash provided by operating activities.. 39,299,000 3,648,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in net amount due from and to brokers.... (11,225,000) 2,294,000
Sales and maturities of short-term investments.. 22,245,000 7,393,000
Purchases of short-term investments............. (24,195,000) (15,271,000)
Net purchases of resale and repurchase
agreements..................................... (7,527,000) (1,817,000)
Sales of equity securities...................... 17,112,000 58,257,000
Purchases of equity securities.................. (15,632,000) (62,179,000)
Sales and maturities of fixed maturities........ 120,069,000 185,860,000
Purchases of fixed maturities...................(150,490,000) (179,933,000)
Proceeds on sale of other investments........... 3,200,000 4,022,000
Other investments, net.......................... (12,348,000) (5,411,000)
Discontinued operations, net.................... 132,000 562,000
Other........................................... 4,416,000 (533,000)
----------- -----------
Net cash used by investing activities...... (54,243,000) (6,756,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common stock and warrants......... (5,000) (1,677,000)
Payments of investment-type insurance contracts. (1,818,000) (1,818,000)
Repayment of long-term debt..................... (2,055,000) (750,000)
Dividends paid.................................. (297,000) (311,000)
----------- -----------
Net cash used by financing activities...... (4,175,000) (4,556,000)
----------- -----------
Decrease in cash and cash equivalents............ (19,119,000) (7,664,000)
Cash and cash equivalents, beginning of year..... 26,860,000 20,670,000
----------- -----------
Cash and cash equivalents, end of period.........$ 7,741,000 $ 13,006,000
=========== ===========
See Accompanying Notes to Consolidated Financial Statements.
- 4 -
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
- --------------------------------------------------------------------
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, IHC's Board of
Directors has approved the distribution of its entire investment
in Zimmerman on a pro rata basis to holders of IHC Common Stock.
Such distribution remains subject to satisfaction of certain
conditions, including effectiveness of a registration statement.
The Consolidated Financial Statements of IHC and notes thereto
have been restated to present Zimmerman as discontinued
operations. (See Note 8).
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 nine months ended September 30, 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.
- 5 -
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(CONTINUED)
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
during the reporting period. Actual results could differ from
those estimates. Certain amounts in prior year's consolidated
financial statements and notes thereto have been restated to
conform to the 1996 presentation.
(C) ONE-FOR-TWO REVERSE STOCK SPLIT
A one-for-two reverse stock split of the Company's shares of
Common Stock became effective on June 28, 1996; accordingly,
common shares outstanding and per share calculations have been
restated for prior periods.
NOTE 2. DISCONTINUED OPERATIONS
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:
SEPTEMBER 30, DECEMBER 31,
1996 1995
---------------------------
(DOLLARS IN THOUSANDS)
Accounts receivable............. $ 9,489 $ 9,284
Inventories..................... 14,977 12,659
Other assets.................... 2,981 3,938
Accounts payable and
liabilities including
minority interest.............. (8,664) (8,899)
Long-term debt.................. (10,064) (9,689)
Net assets of discontinued ------- -------
operations..................... $ 8,719 $ 7,293
======= =======
Income from discontinued operations for the three months and
nine months ended September 30, 1996 and 1995 is summarized as
follows:
- 6 -
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------
NOTE 2. DISCONTINUED OPERATIONS (CONTINUED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
------------------- -------------------
(DOLLARS IN THOUSANDS)
Revenues...........$ 9,832 $ 10,230 $ 30,451 $ 30,298
======= ======= ======= =======
Operating income
from discontinued
operations, net of
minority interest.$ 862 $ 716 $ 2,531 $ 2,515
Income taxes....... 331 274 973 957
Net income from ------- ------- ------- -------
discontinued
operations, net of
minority interest.$ 531 $ 442 $ 1,558 $ 1,558
======= ======= ======= =======
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.
Zimmerman will incur approximately $1,036,000 of expenses due
to transactions associated with the distribution of Zimmerman.
The net expense to IHC of $550,000, including a tax benefit of
$352,000 and minority interest of $134,000, was offset by expected
income from Zimmerman for the fourth quarter of 1996 and is
recorded in discontinued operations, net on the consolidated
statement of operations for the period ended September 30, 1996.
NOTE 3. INVESTMENT SECURITIES
The cost (amortized cost with respect to certain fixed
income securities) and market value of IHC's investment securities
as of September 30, 1996 and December 31, 1995 are as follows:
- 7 -
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
NOTE 3. INVESTMENT SECURITIES (CONTINUED)
SEPTEMBER 30, 1996
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS (LOSSES) VALUE
--------------------------------------------------
(DOLLARS IN THOUSANDS)
FIXED MATURITIES
- ----------------
AVAILABLE-FOR-SALE:
Corporate securities......$ 29,324 $ 150 $ (1,619) $ 27,855
U.S. Government and
agencies obligations..... 29,498 128 (1,118) 28,508
Government National
Mortgage Association..... 108,971 21 (1,306) 107,686
Obligations of states and
political subdivisions.. 1,619 37 (88) 1,568
------- ------- -------- -------
169,412 336 (4,131) 165,617
------- ------- -------- -------
TRADING:
U.S. Government and
agencies obligations.... 499 - - 499
------- ------- -------- -------
Total fixed maturities $169,911 $ 336 $ (4,131) $166,116
======= ======= ======== =======
EQUITY SECURITIES
AVAILABLE-FOR-SALE:
Common stock..............$ 1,608 $ 114 $ (110) $ 1,612
Preferred stock........... 2,906 194 (62) 3,038
------- ------- -------- -------
4,514 308 (172) 4,650
------- ------- -------- -------
TRADING:
Common stock.............. 644 36 (129) 551
------- ------- ------- -------
Total equity securities $ 5,158 $ 344 $ (301) $ 5,201
======= ======= ======= =======
FINANCIAL INSTRUMENTS SOLD,
BUT NOT YET PURCHASED
TRADING:
Options....................$ (75) $ 9 $ - $ (66)
Total financial instruments ------- ------- -------- -------
sold, but not yet
purchased.................$ (75) $ 9 $ - $ (66)
======= ======= ======== =======
- 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)
FIXED MATURITIES
- ----------------
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) $141,393
======= ====== ======= =======
EQUITY SECURITIES
AVAILABLE-FOR-SALE:
Common stock................$ 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
======= ====== ======= =======
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
September 30, 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.
- 9 -
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------
NOTE 3. INVESTMENT SECURITIES (CONTINUED)
SEPTEMBER 30, 1996
----------------------
AMORTIZED MARKET
COST VALUE
----------------------
(DOLLARS IN THOUSANDS)
Due in one year or less................$ - $ -
Due after one year through
five years............................ 6,868 6,769
Due after five years through
ten years............................. 32,769 31,546
Due after ten years.................... 21,303 20,115
------- -------
60,940 58,430
Government National
Mortgage Association.................. 108,971 107,686
------- -------
Totals.................................$169,911 $166,116
======= =======
NOTE 4. OTHER INVESTMENTS
At September 30, 1996 and 1995, the Company had an investment
of $11,201,000 and $3,796,000, respectively, in a limited
partnership which invests in relatively "market neutral"
strategies, such as risk arbitrage, convertible arbitrage and
distressed situations. The condensed statement of operations for
the limited partnership is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
----------------------------------------
(DOLLARS IN THOUSANDS)
Revenues............$ 1,119 $ 655 $ 4,889 $ 789
Net income..........$ 793 $ 648 $ 3,896 $ 770
IHC's share of net
income.............$ 230 $ 291 $ 1,440 $ 345
NOTE 5. 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 7,500,000 and 7,537,000 for
the three months ended September 30, 1996 and 1995, respectively,
and 7,489,000 and 7,652,000 for the nine months ended September
30, 1996 and 1995 respectively (see Note 1c). Dilutive common
equivalent shares include 68,000 and 3,000 for the three months
- 10 -
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------------
NOTE 5. INCOME PER SHARE (CONTINUED)
ended September 30, 1996 and 1995, respectively, and 57,000 and
3,000 for the nine months ended September 30, 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.
NOTE 6. 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 $599,000 for the
nine months ended September 30, 1995, resulting from the
utilization of net operating loss carryforwards existing at
December 31, 1980 (the date of quasi-reorganization of IHC), were
credited to paid-in capital. There are no remaining Federal
income tax benefits to be credited to paid-in capital for net
operating loss carryforwards in 1996.
NOTE 7. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
SEPTEMBER 30,
1996 1995
----------------------
(DOLLARS IN THOUSANDS)
Cash payments for:
Interest.....................$ 643 $ 823
Income taxes.................$ 877 $ 1,081
NOTE 8. SUBSEQUENT EVENTS
On November 13, 1996, the Board of Directors approved the
distribution of IHC's entire investment in Zimmerman, on a pro
rata basis, to the holders of IHC common stock. The spin-off is
expected to be effective on December 31, 1996, and is subject to
satisfaction of certain remaining conditions, including
effectiveness of a registration statement.
- 11 -
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
NOTE 8. SUBSEQUENT EVENTS (CONTINUED)
The terms of the spin-off provide for IHC shareholders to
receive one share of Zimmerman Common Stock for each five shares
of IHC Common Stock, and cash in lieu of fractional shares. IHC
has received a ruling from the Internal Revenue Service that the
distribution would be tax-free to IHC shareholders, and IHC would
not recognize income, gain or loss as a result of the transaction.
In connection with the spin-off, Zimmerman entered into
banking arrangements in October 1996 to borrow up to an aggregate
of $33,000,000, of which $10,000,000 consists of subordinated debt
guaranteed by a subsidiary of IHC. The proceeds of current
borrowings by Zimmerman under such arrangements have been used,
among other things, to repay all of its prior outstanding
indebtedness and to pay $17,600,000 of a declared $19,701,000
special dividend to its shareholders. Of the $18,470,000 portion
of the special dividend to which it is entitled, IHC has used the
paid portion to repay all of its $10,000,000 of indebtedness, to
contribute $5,000,000 to its insurance group in exchange for a
surplus note: IHC will use the balance of its portion of the
special dividend for working capital.
Assuming consummation of the spin-off, IHC could record a
credit of approximately $7,400,000 to stockholders' equity (as at
September 30, 1996); such credit would, however, be deferred until
such time as the guaranty of Zimmerman's subordinated debt is
eliminated.
- 12 -
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, IHC's Board of Directors has approved
the distribution of its entire investment in Zimmerman on a pro
rata basis to holders of IHC Common Stock. Such distribution
remains subject to satisfaction of certain conditions, including
effectiveness of a registration statement. The Consolidated
Financial Statements of IHC have been restated to present
Zimmerman as discontinued operations (see Note 2 and Note 8 of
Notes to Consolidated Financial Statements).
RESULTS OF OPERATIONS
---------------------
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS
ENDED SEPTEMBER 30, 1995
- --------------------------------------------------------------
The Company's net income applicable to common shares was $2.5
million or $.33 per share for the quarter ended September 30, 1996
versus $2.0 million or $.27 per share for the comparable period of
1995. Operating income before income taxes from continuing
operations increased to $1.7 million in the third quarter of 1996
from $1.4 million in the third quarter of 1995. The Company had
net realized and unrealized gains of $.2 million in the third
quarter of 1996 compared to gains of $.3 million in the third
quarter of 1995. Excluding net realized and unrealized gains, the
Company had operating income from continuing operations of $1.5
million in the third quarter of 1996 compared to $1.1 million in
the same period of 1995. Income from discontinued operations, net
was $.5 million for the three months ended September 30, 1996
versus $.4 million for the comparable period of 1995. Operating
income before income taxes from discontinued operations was $.9
million for the three months ended September 30, 1996 compared to
$.7 million for the same period in 1995.
- 13 -
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
and is marketing managed care products, including reinsurance for
HMO's and provider health care organizations that desire to reduce
their risk assumption and/or are required to purchase this
coverage by regulation. In addition, Standard Life markets 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
an expanded choice of providers. Standard Life has also entered
the international market by providing reinsurance coverage in
Latin America and the Caribbean to local insurance companies.
Standard provides, as the issuing carrier, special risk disability
and accident coverages for the sports and entertainment industries
as well as to highly compensated executives and entertainers. 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
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. In the fourth quarter of 1995, a
subsidiary of Standard Life acquired a majority interest in a
third party administrator ("TPA") in New York.
Effective July 1, 1996, the ceding company on a block of
Standard Life's ordinary life and annuity runoff business
exercised its right to recapture this business; accordingly, the
consolidated statement of operations does not reflect any income
subsequent to June 30, 1996 from this block. Standard Life and
the ceding company are currently negotiating the terms of the
recapture, including the possible repurchase of the recapture
rights, and expect to settle matters relating thereto in the
fourth quarter of 1996.
During the second quarter of 1996, Madison Life's rating from
A.M. Best & Company, Inc. was upgraded to B++ (Very Good).
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, predominantly in the Midwest. This business is
primarily sold through a marketing agency that specializes in
these target markets and assists in the billing and administration
- 14 -
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 May 1996, Madison Life acquired, effective
January 1, 1996, 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 excess reinsurance,
development and management of provider sponsored health plans and
reinsurance of life and health insurance.
The Insurance Group had operating income of $2.5 million for
the three months ended September 30, 1996 versus $2.1 million for
the three months ended September 30, 1995. Operating income
includes net realized and unrealized gains of $.2 million for the
quarter ended September 30, 1996 compared to $.1 million of gains
for the comparable quarter of 1995. Decisions to sell securities
are 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 $2.3 million for the third quarter of
1996 as compared to $2.0 million for the third quarter of 1995.
Premium revenues increased $3.7 million or 28% from the third
quarter of 1995 to the third quarter of 1996; premium revenues at
Madison Life increased $.5 million from 1995 to 1996 while
Standard Life had a $3.2 million increase in premiums. The
increase at Madison Life is comprised of: a $.1 million increase
in the credit lines of business primarily due to new accounts
added during 1996, a $.1 million increase in long-term disability
premiums, a $.1 million increase in group term life premium, and
a $.2 million increase in ordinary life and individual accident
and health lines of business primarily from the acquisition of the
pre-need block of business purchased in May 1996. The increase at
Standard Life is comprised of: a $2.1 million increase in stop
loss premiums reflecting increased retention along with the
continued growth in this line of business, $.4 million from a new
POS product, $.5 million from a new HMO reinsurance product and a
$.4 million increase in DBL premiums due to an acquisition in the
third quarter of 1996, 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 decreased $.1 million. The annualized return on
investments in the third quarter of 1996 was 7.0% compared to 7.6%
in the third quarter of 1995. Equity income decreased $.1
million. Other income increased $.6 million, reflecting increases
of $.1 million at Madison Life and $.5 million at Standard Life.
- 15 -
The $.5 million increase at Standard Life is a result of fees
earned from the TPA and an increase in stop loss fee income due to
the increase in premiums in that line of business.
Insurance benefits, claims and reserves increased $2.3
million reflecting an increase of $.9 million at Madison Life and
$1.4 million at Standard Life. Madison Life's increase is the
result of the following: a $.5 million increase in ordinary life
and individual accident and health claims and reserves primarily
due to the acquisition of the pre-need block of business, a $.1
million increase in long-term disability claims, a $.1 million
increase in group term life claims and a $.2 million increase in
the credit line of business. The increase at Standard Life is
comprised of: $1.2 million in stop loss claims incurred as a
result of the increased retention in this line of business,
additional claims and reserves of $.3 million relating to a new
POS product, a $.2 million increase in DBL claims and reserves,
and a $.5 million increase relating to a new HMO reinsurance
product, offset by a $.8 million decrease due to the continuing
runoff of the closed blocks of life, annuity and individual and
group accident and health lines of business. Amortization of
deferred acquisition costs and general and administrative expenses
for the Insurance Group increased $1.5 million; Madison Life's
expenses increased $.2 million and Standard Life's expenses
increased $1.3 million. Standard Life's expenses increased due to
a $.7 million increase in commissions due to the growth of
business, and a $.6 million increase in general expenses due to
administrative fees associated with the higher retention of the
stop loss business, expenses attributable to the TPA and expenses
attributable to new product development.
CORPORATE
- ---------
Operating losses for the three months ended September 30,
1996 amounted to $.8 million, compared to operating losses of $.7
million for the same period of 1995. Operating income includes
realized gains of $.2 million for the quarter ended September 30,
1995. Operating losses excluding net realized and unrealized
gains were $.8 million in the third quarter of 1996 compared to
$.9 million in the third quarter of 1995. Investment income
decreased $.1 million from 1995 while other income remained
steady. Interest expense decreased $.1 million due to lower
borrowings. Selling, general and administrative expenses
decreased $.1 million.
DISCONTINUED OPERATIONS
- -----------------------
Operating income of Zimmerman was $.9 million for the three
months ended September 30, 1996 versus $.7 million for the
comparable period of 1995. Sales decreased $.4 million and cost of
sales decreased $.6 million. Gross profit margins were 24.6% for
the three months ended September 30, 1996 as compared to 21.8% for
- 16 -
the comparable period of 1995. Interest expense and selling,
general and administrative expenses remained constant.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1995
- ------------------------------------------------------------------
The Company's net income applicable to common shares was $6.3
million or $.85 per share for the nine months ended September 30,
1996 versus $4.6 million or $.59 per share for the comparable
period of 1995. Operating income from continuing operations
increased to $4.2 million in the period ended September 30, 1996
from $1.9 million in the period ended September 30, 1995. The
Company had net realized and unrealized losses of $.5 million for
the nine months ended September 30, 1996, compared to losses of
$.1 million for the nine months ended September 30, 1995.
Excluding net realized and unrealized losses, the Company had
operating income from continuing operations of $4.7 million in the
first nine months of 1996 compared to $2.0 million in the same
period of 1995. Income from discontinued operations, net was $1.6
million for both the nine months ended September 30, 1996 and
1995. Operating income before income taxes from discontinued
operations was $2.5 million for both the nine months ended
September 30, 1996 and 1995.
INSURANCE GROUP
- ---------------
The Insurance Group had operating income of $6.6 million for
the nine months ended September 30, 1996 versus $4.3 million for
the nine months ended September 30, 1995. Operating income
includes net realized and unrealized losses of $.5 million for the
nine months ended September 30, 1996 compared to $.4 million of
losses for the same period of 1995. Operating income excluding
net realized and unrealized losses was $7.1 million for the nine
months of 1996 compared to $4.7 million for the nine months of
1995. Premium revenues increased $10.3 million or 26% from 1995
to 1996; premium revenues at Madison Life increased $1.7 million
while Standard Life had a $8.6 million increase in premiums. The
increase at Madison Life is comprised of: a $.4 million increase
in the credit lines of business primarily due to new accounts
added during 1996, a $.4 million increase in long-term disability
premiums, a $.5 million increase in ordinary life and individual
accident and health line of business primarily from the
acquisition of the pre-need block of business purchased in May
1996, a $.2 million increase in group term life premiums and a $.2
million increase in other life and health lines of business. The
change at Standard Life is comprised of the following increases:
$6.1 million in stop loss premiums reflecting increased retention
along with the continued growth in this line of business, $1.4
million from a new POS product, $1.4 million from a new HMO
reinsurance product, and $.4 million in its DBL line of business
due to an acquisition in the third quarter of 1996, offset by a
$.7 million decrease due to the continuing runoff in the closed
- 17 -
blocks of life, annuity and individual and group accident and
health lines of business. Total investment income increased $1.7
million due to a realignment of the securities portfolio, higher
returns on certain equity investments, and an increase in assets
for the pre-need block of business at Madison Life acquired in
1996. The annualized return on investments in the first nine
months of 1996 was 7.5% compared to 7.4% for the nine months of
1995. Equity income increased $.5 million due to a reduction in
expenses sustained from certain start-up insurance related
partnerships in 1995. Other income increased $1.2 million from
1995 to 1996 resulting from an increase of $.4 million in
reinsurance recoveries at Madison Life, an increase in stop loss
fees earned at Standard Life of $.3 million, and an increase in
fees earned of $.5 million from the TPA at Standard Life.
Insurance benefits, claims and reserves increased $8.1
million reflecting an increase of $2.9 million at Madison Life and
$5.2 million at Standard Life. Madison Life's increase is a
result of the following: a $1.4 million increase in ordinary life
and individual accident and health claims and reserves primarily
due to the acquisition of the pre-need block of business, a $.3
million increase in long-term disability claims, a $.3 million
increase in group term life claims, a $.2 million increase in
claims and reserves in other life and health lines of business, a
$.3 increase in interest credited to annuities, and a $.4 million
increase in the credit line of business due to new accounts. The
change at Standard Life is comprised of the following increases:
$4.0 million in stop loss claims incurred as a result of the
increased retention and the increased premiums in this line of
business, additional claims and reserves of $1.1 million relating
to a new POS product, $1.2 million in claims and reserves from a
new HMO reinsurance product, $.6 million relating to the assumed
block of group accident and health line of business and $.4
million in DBL claims due to increased volume, offset by a $2.1
million decrease in claims and reserves due to the continuing
runoff of the closed blocks of life, annuity and individual and
group accident and health lines of business. Amortization of
deferred acquisition costs and general and administrative expenses
for the Insurance Group increased $3.2 million; Madison Life's
expenses remained steady. Standard Life's expenses increased due
to a $1.3 million increase in commissions due to the growth in
business, a $.1 million increase in amortization of deferred
acquisition costs and a $1.8 million increase in general expenses
due to administrative fees associated with the higher retention of
the stop loss business, an increase in salary and consulting
expenses, general expenses attributable to the TPA, and expenses
attributable to new product development.
- 18 -
CORPORATE
- ---------
Operating losses for both the nine months ended September 30,
1996 and 1995 amounted to $2.4 million. Operating losses include
realized gains of $.3 million for the nine months ended September
30, 1995. Excluding net realized and unrealized gains, operating
losses decreased to $2.4 million for the nine months ended
September 30, 1996 compared to losses of $2.7 million for the nine
months ended September 30, 1995. Investment income increased $.1
million from 1995 and other income increased $.1 million.
Interest expense decreased $.2 million and selling, general and
administrative expenses increased $.1 million.
DISCONTINUED OPERATIONS
- -----------------------
Operating income of Zimmerman remained constant at $2.5
million for the nine months ended September 30, 1996 and 1995.
Sales increased $.2 million while cost of sales remained
unchanged. Gross profit margins were 23.5% for the nine months
ended September 30, 1996 compared to 23.1% for the same period of
1995. There were no changes in interest expense. Selling,
general and administrative expenses increased $.2 million.
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 84.6%
was invested in investment grade fixed income securities, resale
agreements and cash and cash equivalents at September 30, 1996.
These investments carry less risk of default and therefore lower
interest rates than other types of fixed maturity investments. At
September 30, 1996, approximately 3.6% 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.
- 19 -
CORPORATE
- ---------
Corporate derives its funds principally from (i) dividends
and interest income from its Insurance Group, (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 $11.9 million at
September 30, 1996. At the present time, the Company is not in
need of any additional long-term financing.
DISCONTINUED OPERATIONS
- -----------------------
For the first nine months of 1996, $.1 million of cash was
provided by Zimmerman's operations. Cash of $.5 million was used
to purchase property and equipment. Zimmerman has a $10.0 million
bank line of credit of which $9.2 million was outstanding at
September 30, 1996. The Company believes that Zimmerman has
sufficient funds to meet its obligations ("See Recent
Developments").
RECENT DEVELOPMENTS
- -------------------
The Board of Directors has approved the distribution of IHC's
entire investment in Zimmerman, on a pro rata basis, to the
holders of IHC common stock. The spin-off is expected to be
effective on December 31, 1996, subject to satisfaction of certain
remaining conditions, including effectiveness of a registration
statement.
The terms of the spin-off provide for IHC shareholders to
receive one share of Zimmerman Common Stock for each five shares
of IHC Common Stock, and cash in lieu of fractional shares. IHC
has received a ruling from the Internal Revenue Service that the
distribution would be tax-free to IHC shareholders, and IHC would
not recognize income, gain or loss as a result of the transaction.
In connection with the spin-off, Zimmerman entered into
banking arrangements in October 1996 to borrow up to an aggregate
of $33.0 million, of which $10.0 million consists of subordinated
debt guaranteed by a subsidiary of IHC. The proceeds of current
borrowings by Zimmerman under such arrangements have been used,
among other things, to repay all of its prior outstanding
indebtedness and to pay $17.6 million of a declared $19.7 million
special dividend to its shareholders. Of the $18.5 million
portion of the special dividend to which it is entitled, IHC has
used the paid portion to repay all of its $10.0 million of
indebtedness and to contribute $5.0 million to its insurance group
in exchange for a surplus note; IHC will use the balance of its
- 20 -
portion of the special dividend for working capital. Net estimated
expenses of $.6 million in connection with the spin-off
transactions were offset by expected income from Zimmerman for the
fourth quarter of 1996 and are recorded in discontinued
operations, net on the consolidated statement of operations.
Assuming consummation of the spin-off, IHC could record a
credit of approximately $7,400,000 to stockholders' equity (as at
September 30, 1996); such credit would, however, be deferred until
such time as the guarantee of Zimmerman's subordinated debt is
eliminated.
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 Statement of Financial Accounting
Standards ("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 substantially all of its debt
securities as available-for-sale. Primarily as a result of the
increase in interest rates in the first nine months of 1996, the
Company recorded an unrealized loss on available-for-sale
securities of $3.7 million, net of deferred tax benefits of $.8
million, in total stockholders' equity; the foregoing reflects
unrealized gains, net of taxes, of $.5 million at December 31,
1995 and $3.2 million of unrealized losses at September 30, 1996.
The Company continues to employ investment strategies to mitigate
interest rate and other market exposures.
NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
In October 1995, the Financial Accounting Standards Board
("FASB") 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 decided
to adopt the disclosure provisions of the Statement.
- 21 -
In June 1996, the FASB issued SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." The requirements of SFAS No. 125 would be effective
for transfers of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and are to be
applied prospectively. Earlier or retroactive application is not
permitted. The Company is currently evaluating the impact of this
Statement.
- 22 -
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, 1996.
- 23 -
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 14, 1996 By: /s/Roy T.K. Thung
-------------------------
Roy T. K. Thung
Executive Vice President,
Chief Financial Officer
and Treasurer
Dated: November 14, 1996 By: /s/Teresa A. Herbert
-------------------------
Teresa A. Herbert
Vice President and
Controller
- 24 -