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: SEPTEMBER 30, 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 .
- -
7,142,000 SHARES OF COMMON STOCK, $1.00 PAR VALUE
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Common stock outstanding as of November 12, 1999
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
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Consolidated Balance Sheets -
September 30, 1999(unaudited)
and December 31, 1998.......................... 3
Consolidated Statements of Operations -
Three Months and Nine Months Ended
September 30, 1999 and 1998 (unaudited)........ 4
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1999
and 1998(unaudited)............................ 5
Notes to Consolidated Financial Statements
(unaudited)..................................... 6 - 12
Management's Discussion and Analysis of Results
of Operations and Financial Condition.......... 13 - 22
PART II - OTHER INFORMATION
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Item 6 - Exhibits and Reports on Form 8-K........ 23
Signature........................................ 24
2
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, DECEMBER 31,
1999 1998
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(UNAUDITED)
ASSETS:
Cash and cash equivalents.........$ 5,378,000 $ 7,889,000
Investments:
Short-term investments........... 2,688,000 25,250,000
Securities purchased under
agreements to resell............ 22,279,000 11,681,000
Fixed maturities................. 241,436,000 220,030,000
Equity securities................ 24,297,000 17,004,000
Other investments................ 56,572,000 52,191,000
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Total investments............. 347,272,000 326,156,000
Deferred policy acquisition costs. 17,137,000 14,247,000
Due from brokers.................. 689,000 -
Due and unpaid premiums........... 15,857,000 10,313,000
Due from reinsurers............... 132,031,000 128,425,000
Notes and other receivables....... 3,125,000 3,844,000
Other assets...................... 11,274,000 9,438,000
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TOTAL ASSETS..................$532,763,000 $500,312,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Future policy liabilities.........$228,881,000 $217,920,000
Unearned premiums................. 17,674,000 21,029,000
Funds on deposit.................. 111,648,000 80,792,000
Insurance policy claims........... 6,361,000 5,380,000
Other policyholders' funds........ 3,720,000 3,370,000
Financial instruments sold, but
not yet purchased................ 49,000 458,000
Due to brokers.................... 16,773,000 18,933,000
Due to reinsurers................. 18,843,000 14,320,000
Accounts payable, accruals and
other liabilities................ 17,315,000 21,235,000
Income taxes...................... 5,640,000 7,348,000
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TOTAL LIABILITIES............. 426,904,000 390,785,000
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STOCKHOLDERS' EQUITY:
Preferred stock (none issued)..... - -
Common stock, 7,146,000 and 7,367,000
shares issued and outstanding, net
of 2,477,519 and 2,249,019 shares
in treasury, respectively........ 7,146,000 7,367,000
Paid-in capital................... 80,788,000 83,191,000
Accumulated other comprehensive
(loss) income:
Unrealized (losses) gains on
investments, net................ (6,076,000) 2,643,000
Retained earnings ................ 24,001,000 16,326,000
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TOTAL STOCKHOLDERS' EQUITY.... 105,859,000 109,527,000
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TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY.........$532,763,000 $500,312,000
=========== ===========
See Accompanying Notes to Consolidated Financial Statements.
3
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
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REVENUES:
Premiums earned......$22,275,000 $19,366,000 $61,372,000 $60,264,000
Net investment
income.............. 7,522,000 3,309,000 19,757,000 15,524,000
Net realized and
unrealized gains
(losses)............ (78,000) 1,118,000 95,000 1,531,000
Other income......... 2,090,000 2,315,000 6,406,000 5,294,000
---------- ---------- ---------- ----------
31,809,000 26,108,000 87,630,000 82,613,000
---------- ---------- ---------- ----------
EXPENSES:
Insurance benefits,
claims and reserves. 18,583,000 13,345,000 47,648,000 44,492,000
Amortization of
deferred acquisition
costs............... 1,889,000 1,305,000 4,380,000 3,781,000
Selling, general and
administrative
expenses............ 7,895,000 7,742,000 24,942,000 23,675,000
---------- ---------- ---------- ----------
28,367,000 22,392,000 76,970,000 71,948,000
---------- ---------- ---------- ----------
Operating income
before income taxes. 3,442,000 3,716,000 10,660,000 10,665,000
Income tax expense... 922,000 1,028,000 2,985,000 2,539,000
---------- ---------- ---------- ----------
NET INCOME............$ 2,520,000 $ 2,688,000 $ 7,675,000 $ 8,126,000
========== ========== ========== ==========
BASIC INCOME PER
COMMON SHARE.........$ .35 $ .36 $ 1.05 $ 1.09
========== ========== ========== ==========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING... 7,198,000 7,418,000 7,289,000 7,428,000
========== ========== ========== ==========
DILUTED INCOME PER
COMMON SHARE.........$ .35 $ .36 $ 1.04 $ 1.08
========== ========== ========== ==========
WEIGHTED AVERAGE DILUTED
SHARES OUTSTANDING... 7,302,000 7,539,000 7,400,000 7,557,000
========== ========== ========== ==========
See Accompanying Notes to Consolidated Financial Statements.
4
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................... $ 7,675,000 $ 8,126,000
Adjustments to reconcile net income to
net cash (used) provided by operating
activities:
Amortization of deferred policy
acquisition costs...................... 4,380,000 3,781,000
Realized gains on sales of investments.. (76,000) (1,815,000)
Unrealized gains on trading securities.. (19,000) 284,000
Equity (income) loss ................... (263,000) 14,000
Depreciation............................ 442,000 388,000
Deferred tax expense.................... 148,000 (420,000)
Other................................... (760,000) (240,000)
Changes in assets and liabilities:
Net (purchases) sales of trading
securities............................. (582,000) 857,000
Increase in insurance liabilities....... 41,611,000 43,966,000
Additions to deferred policy
acquisition costs...................... (4,847,000) (10,249,000)
Change in net amounts due from and to
reinsurers............................. 916,000 (10,240,000)
Change in income tax liability.......... (313,000) 344,000
Change in due and unpaid premiums....... (5,544,000) (1,327,000)
Other................................... (5,530,000) (6,958,000)
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Net cash provided by
operating activities............... 37,238,000 26,511,000
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CASH FLOWS FROM INVESTING ACTIVITIES:
Change in net amount due from and to
brokers................................. (2,589,000) (14,446,000)
Sales and maturities of short-term
investments............................. 68,370,000 72,749,000
Purchases of short-term investments...... (45,733,000) (70,767,000)
Net (purchases) sales of resale
agreements.............................. (10,598,000) 21,026,000
Sales and maturities of fixed maturities. 302,337,000 141,028,000
Purchases of fixed maturities............ (336,203,000) (169,067,000)
Sales of equity securities............... 38,204,000 35,961,000
Purchases of equity securities........... (44,851,000) (38,014,000)
Proceeds on sales of other investments... 4,829,000 6,275,000
Other investments, net................... (8,945,000) (8,035,000)
Other.................................... 240,000 (1,771,000)
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Net cash used by investing
activities......................... (34,939,000) (25,061,000)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of common stock options......... 80,000 55,000
Repurchase of common stock and warrants.. (2,704,000) (605,000)
Payments of investment-type insurance
contracts............................... (1,818,000) (1,885,000)
Dividends paid........................... (368,000) (372,000)
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Net cash used by financing
activities........................ (4,810,000) (2,807,000)
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Decrease in cash and cash equivalents.... (2,511,000) (1,357,000)
Cash and cash equivalents, beginning
of year................................. 7,889,000 23,028,000
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Cash and cash equivalents, end of period. $ 5,378,000 $ 21,671,000
=========== ===========
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 57% 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 and nine months ended September
30, 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 reclassified 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 $20,718,000 and $16,618,000 at
September 30, 1999 and 1998, respectively, in Dolphin Limited
Partnership-A ("DLP-A"), a limited partnership which invests in
relatively "market neutral" strategies, such as merger arbitrage,
convertible arbitrage and distressed situations. The condensed
statements of operations for DLP-A for the three months and nine
months ended September 30, 1999 and 1998 are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
1999 1998 1999 1998
------------------ -------------------
(IN THOUSANDS) (IN THOUSANDS)
Revenues.............$ 3,384 $ (659) $ 9,906 $ 2,518
Net income (loss)....$ 2,304 $ (787) $ 7,072 $ 1,313
IHC's share of
net income (loss)...$ 813 $ (367) $ 2,558 $ 561
NOTE 3. INVESTMENT SECURITIES
The cost, (amortized cost with respect to certain fixed
maturities) gross unrealized gains, gross unrealized losses and
fair value of investments in securities are as follows:
SEPTEMBER 30, 1999
----------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
----------------------------------------
(IN THOUSANDS)
FIXED MATURITIES
AVAILABLE-FOR-SALE:
Corporate securities...$ 49,067 $ 61 $ (1,945) $ 47,183
Collaterized mortgage
obligations ("CMO's")
and asset backed
securities............ 75,709 95 (1,197) 74,607
U.S. Government and
agencies obligations.. 63,431 45 (2,498) 60,978
GNMA's................. 57,729 7 (1,451) 56,285
Obligations of states
and political
subdivisions.......... 2,543 34 (194) 2,383
------- ------- ------- -------
Total fixed maturities..$248,479 $ 242 $ (7,285) $241,436
======= ======= ======= =======
EQUITY SECURITIES
AVAILABLE-FOR-SALE:
Common stock...........$ 18,032 $ 441 $ (1,352) $ 17,121
Options................ 238 161 (10) 389
Preferred stock........ 6,639 62 (248) 6,453
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24,909 664 (1,610) 23,963
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7
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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NOTE 3. INVESTMENT SECURITIES (CONTINUED)
SEPTEMBER 30, 1999
----------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
----------------------------------------
(IN THOUSANDS)
TRADING:
Common stock........... 496 2 (164) 334
------- ------- ------- -------
Total equity securities.$ 25,405 $ 666 $ (1,774) $ 24,297
======= ======= ======= =======
FINANCIAL INSTRUMENTS SOLD,
BUT NOT YET PURCHASED
TRADING:
Options................$ (72) $ 28 $ (5) $ (49)
======= ======= ======= =======
DECEMBER 31, 1998
----------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
----------------------------------------
(IN THOUSANDS)
FIXED MATURITIES`
AVAILABLE-FOR-SALE:
Corporate securities...$ 42,472 $ 1,026 $ (291) $ 43,207
U.S. Government and
agencies obligations.. 55,133 1,533 (201) 56,465
GNMA's................. 116,171 2,040 (147) 118,064
Obligations of states
and political
subdivisions.......... 2,346 69 (121) 2,294
------- ------- ------- -------
Total fixed maturities..$216,122 $ 4,668 $ (760) $220,030
======= ======= ======= =======
EQUITY SECURITIES
AVAILABLE-FOR-SALE:
Common stock...........$ 10,513 $ 956 $ (171) $ 11,298
Preferred stock........ 4,339 76 (71) 4,344
------- ------- ------- -------
14,852 1,032 (242) 15,642
------- ------- ------- -------
TRADING:
Common stock........... 1,448 295 (381) 1,362
------- ------- ------- -------
Total equity securities.$ 16,300 $ 1,327 $ (623) $ 17,004
======= ======= ======= =======
FINANCIAL INSTRUMENTS SOLD,
BUT NOT YET PURCHASED
TRADING:
Common stock...........$ (386) $ - $ (72) $ (458)
======= ======= ======= =======
8
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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NOTE 3. INVESTMENT SECURITIES (CONTINUED)
The amortized cost and fair value of fixed maturities at
September 30, 1999, 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.
Excluding extraordinary paydowns, the average life of mortgage
and asset backed securities is materially less than the stated
maturity.
AMORTIZED FAIR % 0F
COST VALUE FAIR VALUE
-----------------------------------
(IN THOUSANDS)
Due after one year through
five years..................$ 31,494 $ 31,237 12.9%
Due after five years through
ten years................... 41,400 39,872 16.5%
Due after ten years.......... 42,147 39,435 16.3%
------- ------- -----
115,041 110,544 45.7%
CMO's and asset backed
securities.................. 75,709 74,607 30.9%
GNMA's - 30 year............. 57,729 56,285 23.4%
------- ------- -----
$248,479 $241,436 100.0%
======= ======= =====
The average fair value of trading options and futures
contract sold, but not yet purchased was $112,000 and $71,000 for
1999 and 1998, respectively.
Gross gains of $3,868,000 and gross losses of $3,661,000
were realized on sales of available-for-sale securities for the
nine months ended September 30, 1999.
Gross gains of $3,148,000 and gross losses of $1,589,000
were realized on sales of available-for-sale securities for the
nine months ended September 30, 1998.
NOTE 4. INCOME PER COMMON SHARE
Included in the diluted earnings per share calculation for-
1999 and 1998, respectively, are 104,000 and 121,000 shares for
the three months ended September 30, 1999 and 1998 and 111,000
and 129,000 shares for the nine months ended September 30, 1999
and 1998 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 income per share because the strike
price of the warrants was greater than the average market price
of the common shares during the three months and nine months
ended September 30, 1999 and 1998.
9
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ------------------------------------------------------------------------
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.
The income tax benefit for the nine months ended September
30, 1999 allocated to stockholders' equity for unrealized gains
on investment securities was $1,543,000, representing the change
in deferred tax (benefit) liability of ($77,000) at September 30,
1999 from $1,466,000 at December 31, 1998.
Cash payments for income taxes were $2,548,000 and
$2,632,000 for the nine months ended September 30, 1999 and 1998,
respectively.
NOTE 6. COMPREHENSIVE (LOSS) INCOME
The Company adopted SFAS No. 130, "Reporting Comprehensive
Income, effective January 1, 1998. SFAS No. 130 establishes
standards for the reporting and display of comprehensive income
and its components. The components of comprehensive income
include net income and certain amounts previously reported
directly in equity.
Comprehensive (loss) income for the three months and nine
months ended September 30, 1999 and 1998 is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
1999 1998 1999 1998
------------------ -----------------
(IN THOUSANDS) (IN THOUSANDS)
Net income................$ 2,520 $ 2,688 $ 7,675 $ 8,126
Unrealized (losses)
gains, on securities,
net of reclassification.. (2,506) 1,939 (8,719) 2,747
------ ------ ------ ------
Comprehensive
income (loss).......$ 14 $ 4,627 $(1,044) $10,873
====== ====== ====== ======
10
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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NOTE 7. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board
issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." The requirements for SFAS No. 133 were
delayed by SFAS No. 137, "Deferral of the Effective Date of SFAS
Statement No. 133," and are now effective for financial
statements for periods beginning after June 15, 2000. SFAS No.
133 establishes standards for accounting and reporting for
derivative instruments and for hedging activities. It requires
that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at
fair value. The Company is currently evaluating the impact of
SFAS No. 133, but does not expect it to have a material impact on
the Company.
NOTE 8. SEGMENT REPORTING
The Insurance Group engages principally in the life and
health insurance business. Interest expense, taxes, and general
expenses associated with parent company activities are included
in Corporate. Information by business segment for the three
months and nine months ended September 30, 1999 and 1998 is as
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
1999 1998 1999 1998
------------------ -----------------
(IN THOUSANDS) (IN THOUSANDS)
REVENUES:
Medical Stop-Loss.......$ 6,558 $ 6,925 $ 20,452 $ 20,016
DBL..................... 4,745 5,245 15,058 16,299
Group Term Disability
and Term Life.......... 3,325 2,453 9,676 7,264
Credit Life and
Disability............. 5,522 5,123 15,898 17,351
Managed Health Care..... 673 475 1,982 1,663
Special Disability...... 81 18 124 130
Acquired Blocks
/Other Business........ 10,127 4,416 21,977 16,793
Corporate 856 335 2,368 1,566
------- ------- ------- -------
31,887 24,990 87,535 81,082
Net Realized and
Unrealized (Losses)
Gains.................. (78) 1,118 95 1,531
------- ------- ------- -------
$ 31,809 $ 26,108 $ 87,630 $ 82,613
======= ======= ======= =======
11
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ------------------------------------------------------------------------
NOTE 8. SEGMENT REPORTING (CONTINUED)
THREE MONTHS ENDED NINE MONTHS ENDED
1999 1998 1999 1998
------------------ -----------------
(IN THOUSANDS) (IN THOUSANDS)
OPERATING INCOME:
Medical Stop-Loss........$ (46) $ (385) $ (308) $ 1,188
DBL...................... 1,051 1,224 3,255 2,130
Group Term Disability and
Term Life............... 278 434 313 238
Credit Life and
Disability.............. 451 349 1,889 1,956
Managed Health Care...... (13) 286 843 638
Special Disability....... 181 182 372 622
Acquired Blocks
/Other Business......... 1,838 868 4,350 2,812
Corporate................ (220) (360) (149) (450)
------ ------ ------ ------
3,520 2,598 10,565 9,134
Net Realized and
Unrealized (Losses)
Gains................... (78) 1,118 95 1,531
------ ------ ------ ------
$ 3,442 $ 3,716 $ 10,660 $ 10,665
====== ====== ====== ======
NOTE 9. SUBSEQUENT EVENT
Subsequent to September 30, 1999, Madison Life entered into
four agreements to assume in excess of 100,000 life and annuity
policies with net reserves of approximately $140,000,000 from
companies that are in liquidation. Three of the agreements have
an effective date of June 30, 1999 (the "Mississippi
Transactions") and the fourth agreement is expected to have an
effective date of November 30, 1999 (the "Missouri Transaction").
The Mississippi Transactions have received court approval, but
remain subject to a notice period and certain other closing
conditions. Closing of the Missouri Transaction is subject to
entry of a liquidation order, court approval and certain other
conditions. All of these transactions are expected to close prior
to December 31, 1999. Prior to closing of these transactions, a
subsidiary of IHC will contribute an additional $15,000,000 of
surplus as paid in capital to Madison Life. Such contribution
will come from such subsidiary's existing $30,000,000 line of
credit.
12
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) and
expense items associated with parent company activities
(including the Company's remaining real estate holdings) are
included in Corporate.
RESULTS OF OPERATIONS
---------------------
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS
ENDED SEPTEMBER 30, 1998
- --------------------------------------------------------------
The Company's operating income decreased $.3 million to $3.4
million for the period ended September 30, 1999 from $3.7 million
for the same period in 1998. The Company had net realized and
unrealized losses of $.1 million in 1999 and gains of $1.1
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
(losses), the Company had operating income of $3.5 million in
1999 as compared to $2.6 million in 1998. Net income was $2.5
million, or $.35 per share, diluted, for the quarter ended
September 30, 1999 compared to $2.7 million, or $.36 per share,
diluted, for the quarter ended September 30, 1998. Income tax
expense decreased to $.9 million in 1999 from $1.0 million in
1998 (see Capital Resources).
Insurance Group
- ---------------
The Insurance Group's operating income decreased $.5 million
to $3.6 million in 1999 from $4.1 million in 1998. Operating
income includes net realized and unrealized losses of $.1 million
in 1999 compared to gains of $1.1 million in 1998. Operating
income excluding net realized and unrealized gains was $3.7
million in 1999 compared to $3.0 million in 1998.
13
Premium revenues increased $2.9 million to $22.3 million in
1999; premium revenues increased $1.7 million at Madison Life and
$1.2 million at Standard Life. The increase at Madison Life is
comprised of: a $.4 million increase in the credit line of
business, primarily due to higher earned premiums from the core
block of credit business; a $.8 million increase in ordinary life
and individual accident and health premiums due to the
acquisition of a block of business effective May 1, 1999; a $.8
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; and a $.2 million
increase in the group term life line of business; such increases
were offset by: a $.2 million decrease in dental premiums and a
$.3 million decrease in all other lines of business. The increase
at Standard Life is comprised of: an increase of $1.9 million and
$.4 million in group annuity and group life respectively, due to
the acquisition of a block of business effective April 1, 1999;
and a $.3 million increase in the point of service ("POS") line
of business due to an increase in rates; such increases were
offset by: a $.6 decrease in stop-loss health business due to an
overall reduction in retention; a $.5 million decrease in the DBL
line due to terminations in 1998 resulting in a lower premium
base in 1999; and a $.3 million decrease in an assumed block of
life and annuity business due to the runoff of this block.
Total net investment income increased $3.3 million primarily
due to higher returns on certain hedged equity investments, the
increase in assets related to acquisitions, and interest income
on assumption reinsurance transactions that closed in the quarter
ended September 30, 1999 with an effective date in the prior
quarter. The annualized return on investments of the Insurance
Group in the third quarter of 1999 was 6.9% compared to 4.4% in
the third quarter of 1998.
Other income increased $.1 million due to fee income earned
by Standard Life for the stop-loss health line due to an increase
in gross written premiums. Equity income from partnerships
increased $.2 million from 1998 to 1999.
Insurance benefits, claims and reserves increased $5.2
million, reflecting an increase of $1.7 million at Madison Life
and an increase of $3.5 million at Standard Life. Madison Life's
increase resulted from: a $.9 million increase in ordinary life
and individual accident and health reserves and claims due to the
acquisition of a new block of business effective May 1, 1999 ($.6
million) and other existing ordinary life and individual accident
and health business ($.3 million); a $.3 million increase in
surrenders on ordinary life policies; a $.5 million increase in
LTD claims associated with the increase in premiums; and a $.3
million increase in claims and reserves in other life and health
lines of business; such increases were offset by: a $.3 million
decrease in interest credited to universal life and annuity
products due to the runoff of policies from prior year
acquisitions. The change at Standard Life is comprised of:
14
increases of $2.7 million and $.3 million in net reserves of the
purchased block of group annuity and group life businesses,
respectively; a $.5 million increase in stop loss health reserves
due to higher loss ratios; and a $.3 million increase in DBL
claims and reserves; such increases were offset by: a $.3 million
decrease in an accident and health reinsurance facility.
Amortization of deferred acquisition costs and general and
administrative expenses for the Insurance Group increased $.6
million. Madison Life's expenses increased $.3 million due to a
net increase in commission expense due to the increase in
premiums. Standard Life's expenses increased $.3 million
primarily due to start-up costs of IndependenceCare LLC.
Corporate
- ---------
Operating loss was $.2 million for the quarter ended
September 30, 1999 compared to a loss of $.4 million for the
quarter ended September 30, 1998. Investment income increased $.8
million due to higher returns on certain hedged equity
investments in 1999. Other income decreased $.3 million due to
the absence in 1999 of the fee income earned in 1998 from the
termination of the guarantee of the debt of Zimmerman Sign
Company("Zimmerman"). Selling, general and administrative
expenses increased by $.3 million due to consulting costs related
to acquisitions.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 1998
- -----------------------------------------------------------------
The Company's operating income remained constant at $10.7
million for the nine months ended September 30, 1999 as compared
to the same period in 1998. The Company had net realized and
unrealized gains of $.1 million in 1999 and $1.5 million in 1998.
Excluding net realized and unrealized gains, the Company had
operating income of $10.6 million in 1999 as compared to $9.1
million in 1998 which approximately consisted of: an increase in
yields on investable assets of $2.2 million offset by a decrease
in acquisitions of $.7 million. Net income was $7.7 million, or
$1.04 per share, diluted, for the nine months ended September 30,
1999 compared to $8.1 million, or $1.08 per share, diluted, for
the nine months ended September 30, 1998. Income tax expense
increased to $3.0 million in 1999 from $2.5 million in 1998 (see
Capital Resources).
Insurance Group
- ---------------
The Insurance Group had operating income of $10.7 million in
1999 compared to $11.1 million (including net realized and
unrealized gains of $1.4 million) in 1998. Operating income
excluding net realized and unrealized gains was $10.7 million in
1999 compared to $9.7 million in 1998.
15
Premiums earned increased $1.1 million to $61.4 million in
1999 from $60.3 million in 1998; premiums earned at Madison Life
increased $1.1 million and Standard Life remained constant. The
increase at Madison Life is comprised of: a $1.8 million increase
in long-term disability premiums due to an increase in retention
on this line of business and an increase in premiums written in
1999; a $.8 million increase in ordinary life and individual
accident and health premiums primarily due to the acquisition of
a block of business effective May 1, 1999; and a $.5 million
increase in group term life premiums; such increases were offset
by: a $1.1 million decrease in the credit line of business
primarily due to the runoff of acquisitions; a $.6 million
decrease in dental premiums due to the runoff of this line of
business and a $.3 million decrease in all other lines of
business. The increase at Standard Life is comprised of: an
increase of $1.9 million and $.4 million in group annuity and
group life, respectively, due to the acquisition of a block of
business effective April 1, 1999; an increase of $.4 million in
the provider excess line of business due to increased production;
and a $.3 million increase in group term life due to increased
production; such increases were offset by: a $1.3 million
decrease in its DBL line due to terminations in 1998 resulting in
a lower premium base in 1999; a $.7 million decrease in an
accident and health reinsurance facility assumed due to the
runoff of this line; and a $1.0 million decrease in stop-loss
health premiums due to an overall reduction in retention in 1999.
Total net investment income increased $2.8 million primarily
due to higher yields on certain hedged equity investments, the
increase in assets related to acquisitions, and an increase in
interest income on assumption reinsurance transactions in 1999.
The annualized return on investments of the Insurance Group in
the first nine months of 1999 was 6.8% compared to 6.3% in the
first nine months of 1998.
Other income increased $1.4 million. Madison Life's income
increased $1.0 million primarily from fee income earned by the
MGU acquired on December 31, 1997; such fee income was offset by
expenses described below in general and administrative expenses.
Fee income at Standard Life increased $.4 million due to higher
gross stop loss health premiums. Equity income from partnerships
increased $.3 million from 1998 to 1999.
Insurance benefits, claims and reserves increased $3.2
million, reflecting an increase of $1.0 million at Madison Life
and $2.2 million at Standard Life. Madison Life's increase
resulted from: a $1.1 million increase in ordinary life and
individual accident and health reserves and claims due to the
acquisition of a new block of business ($.6 million) and other
existing ordinary life and individual accident and health
business ($.5 million); a $.3 million increase in surrenders on
ordinary life policies; a $.3 million increase in group term life
claims; and an increase of $1.2 million in LTD claims due to the
increase in premiums on this line; such increases were partially
16
offset by: a $1.9 million decrease in the credit line of business
due to the runoff of acquisitions. The change at Standard Life is
comprised of: a $1.8 million increase in reserves in the stop-
loss health line due to higher loss ratios; a $.3 million
increase in provider excess reserves due to increased volume; and
increases of $2.7 million and $.3 million in group annuity and
group life reserves, respectively, due to the acquisition of this
block effective April 1, 1999; such increases were offset by: a
$1.0 million decrease in reserves on the accident and health
reinsurance facility due to the runoff of this line; a $.5
million decrease in the POS line of business which reflects
reinsurance recoveries for prior year losses; and a $1.4 million
decrease in DBL claims and reserves due to improved experience
($.2 million) and decreased volume ($1.2 million).
Amortization of deferred policy acquisition costs and
general and administrative expenses for the Insurance Group
increased $1.4 million. Madison Life's expenses increased $1.9
million and Standard Life's expenses decreased $.5 million. The
increase at Madison Life is primarily due to $1.0 million in
general expenses from the MGU acquired on December 31, 1997 and
an increase in net commission expense of $.9 million due to the
increase in premiums. The decrease at Standard Life is primarily
due to; a $.5 million reduction in premium taxes due to lower
rates and a reduction in premiums; and a $.4 million decrease in
general expenses such decreases were partially offset by: an
increase of $.4 million due to start-up costs of IndependenceCare
LLC.
Corporate
- ---------
Operating income was flat for the nine months ended
September 30, 1999 compared to a loss of $.4 million for the same
period of 1998. Operating income includes net realized and
unrealized gains of $.1 million in 1999 and 1998. Operating loss
excluding net realized and unrealized gains was $.1 million in
1999 and $.5 million in 1998. Investment income increased $1.0
million due to higher returns on certain hedged equity
investments. Other income decreased $.3 million due to the
absence in 1999 of fee income generated in 1998 from the
termination of the guarantee of debt of Zimmerman. Selling,
general and administrative expenses increased $.3 million due to
consulting costs related to acquisitions.
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
17
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 84% was invested in investment
grade fixed income securities, resale agreements, policy loans
and cash and cash equivalents at September 30, 1999. Also at
such date, approximately 97.5% 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 September 30, 1999, approximately
2.5% 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.
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 futures and 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
18
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 pre-tax change in fair value (based upon
hypothetical parallel shifts in the U.S. Treasury yield curve) of
the Company's fixed income portfolio at September 30, 1999 given
a 100 basis point rise or decline in interest rates is as
follows:
Estimated
Estimated Change in
Change in Interest Rates Fair Value Fair Value
- ------------------------ ---------- ----------
(in millions)
100 basis point rise $ 229 ($12)
Base scenario 241 -
100 basis point decline 253 12
Balance Sheet
The decrease in short-term investments is offset by the
increase in fixed maturities and equity securities as the Company
changed its mix of investments during 1999. Future policy
liabilities increased due to the acquisition of a block of
individual life and annuity insurance policies in January 1999 by
Standard Life. The increase in funds on deposit was offset by the
overall increase in investments due to the acquisition of a block
of group annuity business by Standard Life effective May 1, 1999.
The decrease in cash is offset by a decrease in accounts payable,
accruals and other liabilities.
The Company had net receivables from reinsurers of $113.2
million at September 30, 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 September 30, 1999 and
December 31, 1998.
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.
19
Total corporate liquidity (cash, cash equivalents, resale
agreements and marketable securities) amounted to $14.2 million
at September 30, 1999. During 1999, IHC has repurchased 229,500
shares of common stock for $2.7 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 the $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. As a result of rising interest rates, the
Company experienced a decrease in unrealized gains of $8.7
million, net of deferred tax expense and net of deferred policy
acquisition costs. Such decrease is included in total
stockholders' equity, reflecting unrealized losses of $6.1
million at September 30, 1999 versus gains of $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.
The results of 1999 reflect a higher effective tax rate than
in 1998 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. The Company's internal software and hardware has been
tested and, the Company believes that all mission critical
internal systems are Year 2000 compliant. The cost of updating
the Company's mission critical systems has not exceeded $100,000.
20
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 December 31, 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 has
determined that the healthcare industry continues to lag in its
progress towards Year 2000 preparedness. In its report dated
September 22, 1999, the Committee cited concerns over software
used to manage patient data systems, biomedical devices,
infrastructure operations, and electronic interconnections or
interfaces.
The Company has created a contingency plan with respect to
the Year 2000 exposure. The contingency plan provides that in the
unlikely event of failure of any of the Company's mission
critical internal systems (which as noted above have been
successfully tested), the Company would perform these functions
manually until the system was corrected or replaced. With respect
to third party vendors performing mission critical functions on
behalf of the Company, in the unanticipated event that these
vendors' systems are not compliant, the Company would either
perform these functions internally or would utilize the systems
of the MGU acquired on December 31, 1997, the systems of which
have successfully passed a Y2K-specific rollover test. A Y2K
Event Team has been established at the Company, and each of its
material subsidiaries, that will provide on-site staffing for the
millennium weekend.
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 materially 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
21
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.
Subsequent Event
- ----------------
Subsequent to September 30, 1999, Madison Life entered into
four agreements to assume in excess of 100,000 life and annuity
policies with net reserves of approximately $140.0 million from
companies that are in liquidation. Three of the agreements have
an effective date of June 30, 1999 (the "Mississippi
Transactions") and the fourth agreement is expected to have an
effective date of November 30, 1999 (the "Missouri Transaction").
The Mississippi Transactions have received court approval, but
remain subject to a notice period and certain other closing
conditions. Closing of the Missouri Transaction is subject to
entry of a liquidation order, court approval and certain other
conditions. All of the transactions are expected to close prior
to December 31, 1999. Prior to closing of these transactions, a
subsidiary of IHC will contribute an additional $15.0 million of
surplus as paid in capital to Madison Life. Such contribution
will come from such subsidiary's existing $30.0 million line of
credit. Assuming completion of these transactions, IHC will have
assumed $180.0 million of net reserves in 1999. In addition, the
fourth quarter Consolidated Statement of Operations will reflect
an increase in insurance revenues, related expenses and
investment income reflecting the effective date of June 30, 1999
on the Mississippi Transactions.
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.
22
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) 1) Exhibit 11. Statement re: computation
of per share earnings.
2) Exhibit 27. Financial Data Schedule.
b) No report on Form 8-K was filed during the quarter
ended September 30, 1999.
23
SIGNATURE
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 12, 1999 By:/s/ Teresa A. Herbert
--------------------
Teresa A. Herbert
Vice President, Chief
Financial Officer and
Principal Accounting Officer
24