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 Quarterly Period Ended: MARCH 31, 1999
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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 former 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 .
- -
7,311,800 SHARES OF COMMON STOCK, $1.00 PAR VALUE
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Common stock outstanding as of May 10, 1999
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
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Consolidated Balance Sheets -
March 31, 1999(unaudited)and December 31, 1998.. 3
Consolidated Statements of Operations -
Three Months Ended March 31, 1999
and 1998(unaudited)............................. 4
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1999
and 1998(unaudited)............................. 5
Notes to Consolidated Financial Statements
(unaudited)...................................... 6 - 9
Management's Discussion and Analysis of Results
of Operations and Financial Condition........... 10 - 16
PART II - OTHER INFORMATION
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Item 6 - Exhibits and Reports on Form 8-K........ 17
Signatures....................................... 18
2
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS MARCH 31, DECEMBER 31,
1999 1998
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ASSETS: (UNAUDITED)
Cash and cash equivalents..................$ 3,505,000 $ 7,889,000
Investments:
Short-term investments.................... 20,238,000 25,250,000
Securities purchased under
agreements to resell..................... 20,095,000 11,681,000
Fixed maturities.......................... 217,836,000 220,030,000
Equity securities......................... 14,535,000 17,004,000
Other investments......................... 53,327,000 52,191,000
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Total investments...................... 326,031,000 326,156,000
Deferred policy acquisition costs.......... 14,824,000 14,247,000
Due and unpaid premiums.................... 14,693,000 10,313,000
Due from reinsurers........................ 138,372,000 128,425,000
Notes and other receivables................ 5,855,000 3,844,000
Other assets............................... 10,476,000 9,438,000
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TOTAL ASSETS...........................$513,756,000 $500,312,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Future policy liabilities..................$230,945,000 $217,920,000
Unearned premiums.......................... 21,523,000 21,029,000
Funds on deposit........................... 79,374,000 80,792,000
Insurance policy claims.................... 5,875,000 5,380,000
Other policyholders' funds................. 3,606,000 3,370,000
Financial instruments sold, but
not yet purchased......................... - 458,000
Due to brokers............................. 19,390,000 18,933,000
Due to reinsurers.......................... 16,575,000 14,320,000
Accounts payable, accruals and
other liabilities......................... 21,010,000 21,235,000
Income taxes............................... 6,288,000 7,348,000
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TOTAL LIABILITIES...................... 404,586,000 390,785,000
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STOCKHOLDERS' EQUITY:
Preferred stock (none issued).............. - -
Common stock, 7,337,800 and 7,367,000
shares issued and outstanding, net
of 2,278,719 and 2,249,019 shares in
treasury, respectively.................... 7,338,000 7,367,000
Paid-in capital............................ 82,850,000 83,191,000
Accumulated other comprehensive income:
Unrealized gains on investments, net...... 213,000 2,643,000
Retained earnings ......................... 18,769,000 16,326,000
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TOTAL STOCKHOLDERS' EQUITY............. 109,170,000 109,527,000
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TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY..................$513,756,000 $500,312,000
=========== ===========
See Accompanying Notes to Consolidated Financial Statements.
3
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 1998
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REVENUES:
Premiums earned.....................$ 20,210,000 $ 21,059,000
Net investment income............... 5,650,000 5,921,000
Net realized and unrealized gains... 432,000 213,000
Equity loss......................... (8,000) (67,000)
Other income........................ 2,210,000 1,152,000
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28,494,000 28,278,000
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EXPENSES:
Insurance benefits, claims and
reserves........................... 14,606,000 16,387,000
Amortization of deferred
acquisition costs.................. 1,257,000 1,192,000
Selling, general and administrative
expenses........................... 8,889,000 7,605,000
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24,752,000 25,184,000
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Operating income before
income taxes....................... 3,742,000 3,094,000
Income tax expense.................. 1,299,000 603,000
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NET INCOME...........................$ 2,443,000 $ 2,491,000
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BASIC INCOME PER COMMON SHARE........$ .33 $ .34
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WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING......................... 7,361,000 7,430,000
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DILUTED INCOME PER COMMON SHARE......$ .33 $ .33
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WEIGHTED AVERAGE DILUTED SHARES
OUTSTANDING......................... 7,488,000 7,553,000
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See Accompanying Notes to Consolidated Financial Statements.
4
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................... $ 2,443,000 $ 2,491,000
Adjustments to reconcile net income to
net cash provided (used) by operating
activities:
Amortization of deferred policy
acquisition costs...................... 1,257,000 1,192,000
Realized gains on sales of investments.. (591,000) (18,000)
Unrealized losses (gains) on trading
securities............................. 159,000 (195,000)
Equity loss............................. 8,000 67,000
Depreciation............................ 161,000 110,000
Deferred tax expense.................... 467,000 103,000
Other................................... (239,000) 4,000
Changes in assets and liabilities:
Net sales (purchases) of trading
securities............................. 356,000 (171,000)
Increase in future policy liabilities,
claims and other policy liabilities.... 13,101,000 10,367,000
Additions to deferred policy
acquisition costs...................... (1,209,000) (560,000)
Change in net amounts due from and to
reinsurers............................. (7,692,000) (5,710,000)
Change in income tax liability.......... (230,000) 61,000
Change in due and unpaid premiums....... (4,380,000) (6,583,000)
Other................................... (1,292,000) (3,570,000)
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Net cash provided (used) by
operating activities............... 2,319,000 (2,412,000)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Change in net amount due from and to
brokers................................. 716,000 (23,637,000)
Sales and maturities of short-term
investments............................. 30,970,000 22,159,000
Purchases of short-term investments...... (25,933,000) (25,776,000)
Net (purchases) sales of resale
agreements.............................. (8,414,000) 13,928,000
Sales and maturities of fixed maturities. 14,311,000 39,547,000
Purchases of fixed maturities............ (15,474,000) (39,998,000)
Sales of equity securities............... 13,684,000 6,979,000
Purchases of equity securities........... (12,380,000) (12,767,000)
Proceeds on sales of other investments... 3,534,000 3,807,000
Additional investments in other
investments, net of distributions....... (4,677,000) (4,073,000)
Other.................................... (2,033,000) 499,000
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Net cash used by investing
activities......................... (5,696,000) (19,332,000)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of common stock options......... 5,000 6,000
Payments of investment-type insurance
contracts............................... (268,000) (268,000)
Repurchase of common stock and warrants.. (376,000) -
Dividends paid........................... (368,000) (372,000)
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Net cash used by financing
activities........................ (1,007,000) (634,000)
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Decrease in cash and cash equivalents.... (4,384,000) (22,378,000)
Cash and cash equivalents, beginning
of year................................. 7,889,000 23,028,000
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Cash and cash equivalents, end of period..$ 3,505,000 $ 650,000
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See Accompanying Notes to Consolidated Financial Statements.
5
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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NOTE 1. SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(A) BUSINESS AND ORGANIZATION
Independence Holding Company ("IHC") is a holding company
engaged principally in the life and health insurance business
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
subsidiaries (collectively, the "Insurance Group"). IHC and its
subsidiaries (including the Insurance Group) are collectively
referred to as the "Company".
Geneve Corporation, a diversified financial holding company,
and its affiliated entities hold approximately 56% of IHC's
outstanding common stock.
(B) PRINCIPLES OF CONSOLIDATION AND PREPARATION OF
FINANCIAL STATEMENTS
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, 1999 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, 1998. Certain amounts in the prior
year's consolidated financial statements and notes thereto have
been restated to conform to the 1999 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 during the reporting period. Actual results could
differ from those estimates.
6
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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NOTE 2. OTHER INVESTMENTS
The Company had invested $18,870,000 and $16,710,000 at
March 31, 1999 and 1998, respectively, in Dolphin Limited
Partnership-A ("DLP-A"), a limited partnership which invests in
relatively "market neutral" strategies, such as merger arbitrage,
convertible arbitrage and distressed situations. The condensed
statements of operations for DLP-A for the three months ended
March 31, 1999 and 1998 are as follows:
1999 1998
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(IN THOUSANDS)
Revenues..................................$ 2,552 $ 2,168
Net income................................$ 1,862 $ 1,501
IHC's share of
net income...............................$ 711 $ 653
NOTE 3. INCOME PER COMMON SHARE
Included in the diluted earnings per share calculation for
1999 and 1998, respectively, are 127,000 and 123,000 shares from
the assumed exercise of options using the treasury stock method.
Net income does not change as a result of the assumed dilution of
options. Warrants to purchase 1,939,739 shares of common stock at
$16.37 per share were not included in the computation of diluted
earnings per share because the warrants' strike price was greater
than the average market price of the common shares during the
first quarter of 1999 and 1998.
NOTE 4. 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.
The income tax expense for the three months ended March 31,
1999 allocated to stockholders' equity for unrealized gains on
investment securities was $169,000, representing the change in
deferred tax liability of $1,297,000 at March 31, 1999 from
$1,466,000 at December 31, 1998.
NOTE 5. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for income taxes were $592,000 and $439,000
for the three months ended March 31, 1999 and 1998, respectively.
7
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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NOTE 6. COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, "Reporting Comprehensive
Income, effective January 1, 1998. SFAS No. 130 establishes
standards for the reporting and display of comprehensive income
and its components. The components of comprehensive income
include net income and certain amounts previously reported
directly in equity.
Comprehensive income for the three months ended March 31,
1999 and 1998 is as follows:
1999 1998
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(IN THOUSANDS)
Net income.................................$ 2,443 $ 2,491
Unrealized (losses) gains, on
securities, net of reclassification....... (2,430) 184
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Comprehensive income .................$ 13 $ 2,675
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NOTE 7. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board
issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." The requirements for SFAS No. 133 are
effective for financial statements for periods beginning after
June 15, 1999. The Company is currently evaluating the impact of
SFAS No. 133 but does not expect it to have a material impact on
the Company.
NOTE 8. SEGMENT REPORTING
The Insurance Group engages principally in the life and
health insurance business. Interest expense, taxes, and general
expenses associated with parent company activities are included
in Corporate. Information by business segment for the three
months ended March 31, 1999 and 1998 is as follows:
8
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 8. SEGMENT REPORTING (CONTINUED)
1999 1998
-------------------------
(IN THOUSANDS)
REVENUES:
Medical Stop-Loss.................$ 6,851 $ 5,741
DBL............................... 5,500 5,414
Group Term Disability and
Term Life........................ 3,059 2,403
Credit Life and Disability........ 5,085 6,259
Managed Health Care............... 627 1,456
Special Disability................ 16 51
Acquired Blocks
/Other Business.................. 6,293 6,058
Corporate......................... 631 683
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28,062 28,065
Net Realized and Unrealized
Gains............................ 432 213
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$ 28,494 $ 28,278
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OPERATING INCOME (LOSS):
Medical Stop-Loss.................$ (695) $ 603
DBL............................... 1,445 178
Group Term Disability and
Term Life........................ (190) 48
Credit Life and Disability........ 604 939
Managed Health Care............... 661 286
Special Disability................ 216 179
Acquired Blocks
/Other Business.................. 1,324 671
Corporate......................... (55) (23)
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3,310 2,881
Net Realized and Unrealized
Gains............................ 432 213
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$ 3,742 $ 3,094
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9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Independence Holding Company, a Delaware corporation
("IHC"), is a holding company engaged principally in the life and
health insurance business 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 subsidiaries (collectively, the "Insurance
Group"). IHC and its subsidiaries (including the Insurance Group)
are collectively referred to as the "Company." All remaining
income, principally income from parent company liquidity (cash,
cash equivalents, resale agreements, marketable securities and
partnership investments) and expense items associated with parent
company activities, the Company's remaining real estate holdings
and certain other investments of the Company, are included in
Corporate.
RESULTS OF OPERATIONS
---------------------
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED
MARCH 31, 1998
- -----------------------------------------------------------------
The Company's operating income increased $.6 million, or
21%, to $3.7 million for the period ended March 31, 1999 from
$3.1 million for the same period in 1998. The Company had net
realized and unrealized gains of $.4 million in 1999 and $.2
million in 1998. Decisions to sell securities are based on cash
flow needs, investment opportunities and economic and market
conditions, thus creating fluctuations in gains (losses) from
year to year. Excluding net realized and unrealized gains, the
Company had operating income of $3.3 million in 1999 as compared
to $2.9 million in 1998 which approximately consisted of: an
increase in all lines of business of $1.1 million offset by a
decrease in yields on investable assets of $.7 million (see Note
8 of Notes to Consolidated Financial Statements). Net income was
$2.4 million, or $.33 per share, diluted, for the quarter ended
March 31, 1999 compared to $2.5 million, or $.33 per share,
diluted, for the quarter ended March 31, 1998. Income tax expense
increased to $1.3 million in 1999 from $.6 million in 1998 (see
Capital Resources).
Insurance Group
- ---------------
The Insurance Group's operating income increased $.7 million
to $3.8 million in 1999 from $3.1 million in 1998. Operating
income includes net realized and unrealized gains of $.3 million
in 1999 compared to $.2 million in 1998. Operating income
excluding net realized and unrealized gains was $3.5 million in
1999 compared to $2.9 million in 1998.
10
Premium revenues decreased $.8 million to $20.2 million in
1999 from $21.0 million in 1998; premium revenues decreased $.3
million at Madison Life and $.5 million at Standard Life. The
decrease at Madison Life is comprised of: a $1.0 million decrease
in the credit lines of business, primarily due to the runoff of
acquisitions of two single premium blocks of business effective
in 1997; and a $.2 million decrease in dental premiums; such
decreases are offset by: a $.6 million increase in long-term
disability ("LTD") premiums as a result of an increase in
retention on this line of business and an increase in premiums
written in 1999; a $.2 million increase in ordinary life and
individual accident and health premiums; and a $.1 million
increase in other life and health lines of business. The decrease
at Standard Life is comprised of: a $.7 million decrease in HMO
premiums due to lower written premiums and a $.3 million decrease
in an accident and health reinsurance facility; such decreases
are offset by: a $.1 million increase in its DBL line; and a $.4
million increase in the closed blocks of life, annuity and
individual and group accident and health lines of business.
Total net investment income decreased $.3 million primarily
due to lower returns on certain equity investments partially
offset by an increase in assets. The annualized return on
investments of the Insurance Group in the first quarter of 1999
was 6.5% compared to 7.3% in the first quarter of 1998 resulting
in $.6 million of the decrease in investment income.
Other income increased $1.1 million due to fee income earned
by the managing general underwriter ("MGU") in which Madison Life
acquired a controlling interest effective December 31, 1997; such
fee income was offset by expenses described below in general and
administrative expenses. Equity income from partnerships
increased $.1 million from 1998 to 1999.
Insurance benefits, claims and reserves decreased $1.6
million, reflecting a decrease of $.2 million at Madison Life and
$1.4 million at Standard Life. Madison Life's decrease resulted
from: a $.9 million decrease in the credit line of business due
to the runoff of acquisitions; such decrease is offset by: a $.2
million increase in ordinary life and individual accident and
health reserves and claims; a $.4 million increase in LTD claims
due to the increase in premiums; and a $.1 million increase in
claims and reserves in other life and health lines of business.
The change at Standard Life is comprised of: a $1.8 million
increase in stop-loss reserves due to higher claims experience;
such increase is offset by: a $.6 million decrease in HMO
reinsurance reserves due to a decrease in premiums; a $1.3
million decrease in DBL claims and reserves due to improved
experience; a $.6 million decrease in reserves in the closed
blocks of life, annuity and individual and group accident and
health lines of business due to the continued runoff of this line
of business; a $.3 million decrease in the accident and health
reinsurance facility due to the decrease in premiums; and a $.4
million decrease in point of service claims.
11
Amortization of deferred acquisition costs and general and
administrative expenses for the Insurance Group increased $1.2
million. Madison Life's expenses increased $1.2 million and
Standard Life's expenses remained constant. The increase at
Madison Life is primarily due to increases in commissions of $.2
million and other general expenses of $1.0 million related to the
MGU acquired in 1997.
Corporate
- ---------
Operating income for the quarter ended March 31, 1999
decreased by $.1 million from 1998 to a loss of $.1 million.
Investment income remained constant. Selling, general and
administrative expenses increased by $.1 million.
LIQUIDITY
---------
Insurance Group
- ---------------
The Insurance Group normally provides cash flow from: (i)
operations; (ii) the receipt of scheduled principal payments on
its portfolio of fixed income securities; and (iii) earnings on
investments. Such cash flow is used partially to finance
liabilities for insurance policy benefits. These liabilities
represent long-term and short-term obligations which are
calculated using certain assumed interest rates.
Asset Quality
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 85% was invested in investment
grade fixed income securities, resale agreements, policy loans
and cash and cash equivalents at March 31, 1999. Also at such
date, approximately 97.4% of the Insurance Group's fixed
maturities were investment grade. These investments carry less
risk and, therefore, lower interest rates than other types of
fixed maturity investments. At March 31, 1999, approximately 2.6%
of the carrying value of fixed maturities 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). Less than .1% of the
carrying value of the Company's total investments was represented
by real estate and mortgage loans. The Company has no non-
performing fixed maturities.
12
Risk Management
The Company manages interest rate risk by seeking to
maintain a portfolio with a duration and average life that falls
within the band of the duration and average life of the
applicable liabilities, and may utilize options to modify the
duration and average life of such assets.
The Company monitors its investment portfolio on a
continuous basis and believes that the liquidity of the Insurance
Group will not be adversely affected by its current investments.
This monitoring includes the maintenance of an asset-liability
model that matches current insurance liability cash flows with
current investment cash flows.
In the Company's analysis of the asset-liability model, a
100 basis point change in interest rates on the Insurance Group's
liabilities would not be expected to have a material adverse
effect on the Company. With respect to its liabilities, if
interest rates were to increase, the risk to the Company is that
policies would be surrendered and assets would need to be sold.
This is not a material exposure to the Company since a large
portion of the Insurance Group's interest sensitive policies are
burial policies that are not subject to the typical surrender
patterns of other interest sensitive policies, and many of the
Insurance Group's universal life and annuity policies come from
liquidated companies which tend to exhibit lower surrender rates
than such policies of continuing companies. Additionally, there
are charges to help offset the benefits being surrendered. If
interest rates were to decrease substantially, the risk to the
Company is that some of its investment assets would be subject to
early redemption. This is not a material exposure because the
Company would have additional gains in its portfolio to help
offset the future reduction of investment income. With respect to
its investments, the Company employs (from time to time as
warranted) investment strategies to mitigate interest rate and
other market exposures.
The expected change in fair value of the Company's fixed
income portfolio at March 31, 1999 given a 100 basis point rise
or decline in interest rates is not materially different than the
expected change at December 31, 1998.
Balance Sheet
The increase in due from and to reinsurers is offset by the
increase in future policy liabilities and is attributable to the
increase in reserves in the stop-loss line of business of which a
large portion is reinsured. This increase in reserves is a result
of the higher claims experience. Future policy liabilities also
increased $4.1 million due to the acquisition of a block of
individual life and annuity insurance policies in January 1999 by
Standard Life.
13
The Company had net receivables from reinsurers of $121.8
million at March 31, 1999. Substantially all of the business
ceded to such reinsurers is of short duration. All of such
receivables are current and are either due from highly rated
companies or are adequately secured. Accordingly, no allowance
for doubtful accounts was necessary at March 31, 1999.
Corporate
- ---------
Corporate derives its funds principally from: (i) dividends
and interest income from the Insurance Group; (ii) management
fees from its subsidiaries; and (iii) investment income from
Corporate liquidity. Regulatory constraints historically have
not affected the Company'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.
Total corporate liquidity (cash, cash equivalents, resale
agreements and marketable securities) amounted to $17.4 million
at March 31, 1999. During the first three months of 1999, IHC
repurchased 29,700 shares of common stock for $.4 million under a
repurchase program initiated in 1991.
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 acquisitions or otherwise expand
its operations.
It is anticipated that future acquisitions will be funded
internally from existing capital and surplus and parent company
liquidity including a new $30.0 million credit facility.
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 all of its debt securities as
available-for-sale. The Company experienced a decrease in
unrealized gains of $2.4 million, net of deferred tax expense, in
total stockholders' equity, reflecting unrealized gains of $.2
million at March 31, 1999 versus $2.6 million at December 31,
1998. From time to time, as warranted, the Company employs
investment strategies to mitigate interest rate and other market
exposures.
14
The results of the 1999 first quarter reflect a higher
effective tax rate than in the 1998 first quarter due to the loss
of tax benefits associated with the utilization of net operating
loss carryforwards which are no longer available.
Year 2000
- ---------
The Year 2000 issue is the result of computer programs being
written using two digits rather than four digits to define the
applicable year. If not corrected, computer applications could
fail or create erroneous results by or at the Year 2000. The
Company, together with outside vendors engaged by the Company,
has made assessments of the Company's potential Year 2000
exposure, and has begun testing all of the Company's systems.
Since the Company has spent in excess of $1.3 million to update
and enhance many of its primary systems in the past several
years, the Company does not believe that the Year 2000 issue will
pose internal operational difficulties. Most of the Company's
critical internal software and hardware have already been tested
and are compliant, and the Company expects that all internal
systems will be Year 2000 compliant prior to June 30, 1999. The
cost of updating the Company's remaining systems is not expected
to exceed $100,000.
The Company believes that its greatest Year 2000 exposure
arises from the possibility of non-compliance by, among others,
its MGUs, MGAs, HMOs, agents, TPAs, producers, reinsurers,
securities brokers and bankers. The Company has requested
information from these third parties and is continuing to monitor
their responses and evaluate any possible impact on the Company.
All of Standard Life's medical stop-loss and group life MGUs have
represented that they are or will be Year 2000 compliant by
December 31, 1999 and Madison Life's largest MGA for group life
and long-term disability has indicated that it will be compliant
by June 30, 1999. Standard Life has required that its MGUs obtain
Year 2000 compliance certifications from, and has supplied the
MGUs with questionnaires to be completed by, TPAs and producers
with whom they place business. In addition, the U.S. Senate
Special Committee on the Year 2000 Technology Problem determined
that the healthcare industry lags in its progress towards Year
2000 preparedness. In particular, the Committee cited concerns
over the preparedness of large, rural and inner-city hospitals,
and doctor's offices, the availability of pharmaceuticals and the
preparedness of health claim billing systems.
The Company is in the development stages of formulating a
contingency plan with respect to this exposure. With respect to
functions performed internally by the Company, if one of the
Company's systems is not compliant, the Company could resort to
manual collection of premiums and processing of claims, or could
temporarily transfer these functions to affiliated or
unaffiliated entities. With respect to functions currently
performed externally, the Company could consider temporarily
performing these functions internally, or transferring the
15
functions to another of the Company's vendors that is Year 2000
compliant.
The dates of expected completion and the costs of the
Company's Year 2000 remediation efforts are based on management's
estimates, which were derived utilizing assumptions of future
events, including the availability of certain resources, third
party remediation plans and other factors. There can be no
guarantee that these expectations will be achieved; if the actual
timing and costs for the Company's Year 2000 compliance program
differ materially from those anticipated, the Company's financial
results and financial condition could be significantly affected.
Additionally, despite testing by the Company, the Company's
systems may contain undetected errors or defects associated with
Year 2000 date functions. The inability of the Company to
correctly identify significant Year 2000 issues for remediation
or to complete its Year 2000 remediation and testing efforts
prior to respective critical dates, as well as the failure of
third parties (with whom the Company has an important
relationship) to identify, remediate and test their own Year 2000
issues and the resulting disruption which could occur in the
Company's systems, could have material adverse effects on the
Company's business, results of operations, cash flows and
financial condition.
New Accounting Pronouncements
- -----------------------------
In June 1998, the Financial Accounting Standards Board
("FASB") issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective
for fiscal years beginning after June 15, 1999. SFAS No. 133
establishes standards for accounting and reporting for derivative
instruments and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities
in the balance sheet and measures those instruments at fair
value. The Company is evaluating the statement but does not
expect it to have a material impact on the Company.
Some of the statements included within Management's
Discussion and Analysis may be considered to be forward looking
statements which are subject to certain risks and uncertainties.
Factors which could cause the actual results to differ materially
from those suggested by such statements are described from time
to time in the Company's Annual Report on Form 10-K and other
filings with the Securities and Exchange Commission.
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PART II. OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) 1) Exhibit 11. Statement re: computation
of per share earnings.
2) Exhibit 27. Financial Data Schedule.
b) No report on Form 8-K was filed during the quarter
ended March 31, 1999.
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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 13, 1999 By:/s/ Roy T.K. Thung
---------------------
Roy T.K. Thung
Executive Vice President,
Chief Financial Officer
and Treasurer
Dated: May 13, 1999 By:/s/ Teresa A. Herbert
---------------------
Teresa A. Herbert
Vice President and
Controller
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