The following discussion of the financial condition and results of operations of
American Independence Corp. ("AMIC") and its subsidiaries (collectively, the
"Company") should be read in conjunction with, and is qualified in its entirety
by reference to, the consolidated financial statements of the Company and the
related Notes thereto appearing in our annual report on Form 10-K for the year
ended December 31, 2011, as filed with the Securities and Exchange Commission,
and our condensed consolidated financial statements and related Notes thereto
appearing elsewhere in this quarterly report.
Overview
We are an insurance holding company engaged in the insurance and reinsurance
business through our wholly owned insurance company, Independence American
Insurance Company ("Independence American"), our wholly owned business
development and program management company, IHC Specialty Benefits, Inc.
("Specialty Benefits"), our full service direct writer of medical-stop insurance
for self-insured employer groups IHC Risk Solutions, LLC ("Risk Solutions"), and
our two insurance and marketing agencies, Independent Producers of America, LLC
("IPA") and HealthInsurance.org ("HIO"). Since November 2002, AMIC has been
affiliated with Independence Holding Company ("IHC"), which owned 78.6% of
AMIC's stock as of June 30, 2012. The senior management of IHC provides
direction to the Company through a service agreement between the Company and
IHC. As of June 30, 2012, a significant amount of Independence American's
revenue was from reinsurance premiums. The majority of these premiums are ceded
to Independence American from IHC under reinsurance treaties to cede its gross
medical stop-loss premiums written to Independence American. In addition,
Independence American assumes fully insured health and short-term statutory
disability benefit product in New York State ("DBL") premiums from IHC, and
assumes medical stop-loss premiums from unaffiliated carriers. Independence
American began writing group major medical, medical stop-loss, major medical
plans for individuals and families, and short-term medical in 2007, added dental
in 2009, and pet insurance in 2012. Given its broad licensing, A- (Excellent)
rating from A.M. Best, and that it is the only property and casualty company in
IHC, Independence American expects to expand the distribution of its health and
pet insurance products.
While management considers a wide range of factors in its strategic planning,
the overriding consideration is underwriting profitability. Management's
assessment of trends in health and pet insurance markets play a significant role
in determining whether to expand Independence American's insurance premiums.
Since Independence American reinsures a portion of all of the business produced
by Risk Solutions, and since it is also eligible to earn profit sharing
commissions based on the profitability of the business it places, Risk Solutions
also emphasizes underwriting profitability. In addition, management focuses on
controlling operating costs. By sharing employees with IHC and sharing
resources among our subsidiaries, we strive to maximize our earnings.
Independence American Insurance Company
Independence American, which is domiciled in Delaware, is licensed to write
property and/or casualty insurance in 49 states and the District of Columbia,
and has an A- (Excellent) rating from A.M. Best. An A.M. Best rating is
assigned after an extensive quantitative and qualitative evaluation of a
company's financial condition and operating performance, and is also based upon
factors relevant to policyholders, agents, and intermediaries, and is not
directed toward protection of investors. A.M. Best's ratings are not
recommendations to buy, sell or hold securities of the Company. Independence
American's unaudited statutory capital and surplus as of June 30, 2012 was
$53,120,000.
Risk Solutions
Risk Solutions has offices near Hartford, Connecticut, Philadelphia,
Pennsylvania and Chicago, Illinois, and markets and underwrites employer medical
stop-loss and group life primarily for Standard Security Life Insurance Company
of New York ("Standard Security Life"). It also writes, to a much lesser
extent, for four other carriers, including Madison National Life Insurance
Company, Inc. ("Madison National Life") and Independence American.
Agencies
The Company has a 51% interest in HIO, which is headquartered in Minneapolis,
Minnesota. HIO is an insurance and marketing agency through its
well-established internet domain address: www.healthinsurance.org. This domain
generates hundreds of daily leads from individuals and small employers seeking
affordable health insurance solutions. The Company owns Specialty Benefits,
which is headquartered in Minneapolis, Minnesota. Specialty Benefits is a
business development and program management company. The Company has a 89.6%
interest in IPA which is headquartered in Tampa, Florida. IPA is a national,
career agent marketing organization which operates under a controlled career
agent distribution model in which independent producers sell products approved
by IPA and AMIC. The Company increased its ownership interest in IPA from 51%
to 79% at September 30, 2011, and from 79% to 89.6% at December 31, 2011.
20
The following is a summary of key performance information and events:
The results of operations for the three months and six months ended June 30,
2012 and 2011 are summarized as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2012 2011 2012 2011
Revenues $ 23,475 $ 21,970 $ 45,709 $ 43,692
Expenses 22,728 21,475 43,057 41,645
Income before income tax 747 495 2,652 2,047
Provision for income taxes 196 71 804 566
Net income 551 424 1,848 1,481 Less: Net income attributable to the
non-controlling interest (242) (287) (420) (407)
Net income attributable to American
Independence Corp. $ 309 $ 137 $ 1,428 $ 1,074
·
The book value of the Company increased to $11.59 per share at June 30, 2012
compared to $11.36 per share at December 31, 2011.
·
Net income per share increased to $.04 per share, diluted, or $0.3 million, for
the three months ended June 30, 2012, compared to $.02 per share, diluted, or
$0.1 million for the three months ended June 30, 2011. Net income per share
increased to $.17 per share, diluted, or $1.4 million, for six three months
ended June 30, 2012, compared to $.13 per share, diluted, or $1.1 million for
the six months ended June 30, 2011
·
At June 30, 2012, 98.9% of the Company's fixed maturities were investment grade.
·
Consolidated investment yields were 3.1% and 3.4% for the six months ended June
30, 2012 and 2011, respectively. The lower yield is primarily due to a decrease
in investments in higher yield municipal bonds.
·
Premiums earned increased 7% to $37.8 million for the six months ended June 30,
2012 compared to $35.4 million for the six months ended June 30, 2011, primarily
due to higher direct and assumed medical stop-loss premiums, offset by lower
direct group major medical premiums written.
·
For the six months ended June 30, 2012 and 2011, Independence American wrote
$5.1 million and $6.8 million, respectively, of individual health business
produced by our marketing organization IPA.
·
For the six months ended June 30, 2012, Risk Solutions and our Agencies
generated revenues of $7.0 million compared to $7.2 million for the six months
ended June 30, 2011 primarily due to a decrease in profit commissions earned.
·
Underwriting experience, as indicated by GAAP Combined Ratios on our three lines
of business for the three months and six months ended June 30, 2012 and 2011,
are as follows (in thousands):
§
Medical Stop-Loss Three Months Ended Six Months Ended
June 30, June 30,
2012 2011 2012 2011
Premiums Earned $ 11,620 $ 9,317 $ 22,671 $ 18,499
Insurance Benefits Claims and Reserves 9,191 6,424 15,833
12,804
Profit Commission Expense (Recovery) (647) 249 (397)
696
Expenses 3,173 2,548 6,180 5,052
Loss Ratio(A) 79.1% 68.9% 69.8% 69.2%
Profit Commission Expense Ratio (B) -5.6% 2.7% -1.8%
3.8%
Expense Ratio (C) 27.3% 27.3% 27.3% 27.3%
Combined Ratio (D) 100.8% 98.9% 95.3% 100.3%
21
§
Fully Insured Health Three Months Ended Six Months Ended
June 30, June 30,
2012 2011 2012 2011
Premiums Earned $ 6,952 $ 7,630 $ 13,596 $ 15,456Insurance Benefits Claims and Reserves 4,608 6,090 9,202
10,265
Profit Commission Expense (Recovery) 125 (514) 122
(561)
Expenses 1,512 1,852 2,979 3,863
Loss Ratio(A) 66.3% 79.8% 67.7% 66.4%
Profit Commission Expense Ratio (B) 1.8% -6.7% 0.9% -3.6%
Expense Ratio (C) 21.7% 24.3% 21.9% 25.0%
Combined Ratio (D) 89.8% 97.4% 90.5% 87.8%
§
DBL Three Months Ended Six Months Ended
June 30, June 30,
2012 2011 2012 2011
Premiums Earned $ 762 $ 719 $ 1,524 $ 1,480Insurance Benefits Claims and Reserves 467 404 922
897
Expenses 263 222 510 471
Loss Ratio(A) 61.3% 56.2% 60.5% 60.6%
Expense Ratio (C) 34.5% 30.9% 33.5% 31.8%
Combined Ratio (D) 95.8% 87.1% 94.0% 92.4%
(A)
Loss ratio represents insurance benefits, claims and reserves divided by
premiums earned.
(B)
Profit commission expense ratio represents profit commissions divided by
premiums earned.
(C)
Expense ratio represents commissions, administrative fees, premium taxes and
other underwriting expenses divided by premiums earned.
(D)
The combined ratio is equal to the sum of the loss ratio, profit commission
expense ratio and the expense ratio.
·
The Company recorded an increase in the loss ratio in the medical stop-loss line
of business for the three months and six months ended June 30, 2012 due to the
poor performance on business written through one program. This increase was
partially offset by the reversal of profit commissions as evidenced by the
profit commission ratio.
·
The Company recorded a decrease in the loss ratio in the fully insured health
line of business for the three months ended June 30, 2012 due to the improved
performance in direct group major medical business compared to the prior year.
The Company recorded an increase in the loss ratio in the fully insured health
line of business for the six months ended June 30, 2012 due to higher direct
individual health claims, offset by the improved performance in direct group
major medical business.
·
The Company experienced an increase in the loss ratio for DBL for the three
months and six months ended June 30, 2012 as a result of higher claims.
Critical Accounting Policies
The accounting and reporting policies of the Company conform to U.S. generally
accepted accounting principles ("U.S. GAAP"). The preparation of the condensed
consolidated financial statements in conformity with U.S. GAAP requires the
Company's management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates. A summary of the Company's significant
accounting policies and practices is provided in Note 1 of the Notes to the
Consolidated Financial Statements included in Item 8 of the Annual Report on
Form 10-K for the year ended December 31, 2011. Management has identified the
accounting policies related to Insurance Reserves, Premium and Fee income
Revenue Recognition, Reinsurance, Income Taxes, Investments, Goodwill and Other
Intangibles as those that, due to the judgments, estimates and assumptions
inherent in those policies, are critical to an understanding of the Company's
condensed consolidated financial statements and this Management's Discussion and
Analysis. A full discussion of these policies is included
22
under Critical Accounting Policies in Item 7 of the Annual Report on Form 10-K
for the year ended December 31, 2011. During the six months ended June 30,
2012, there were no additions to or changes in the critical accounting policies
disclosed in the Form 10-K for the year ended December 31, 2011 except for the
recently adopted accounting standards discussed in Note 1(C) of the Notes to the
Condensed Consolidated Financial Statements.
Results of Operations for the Three Months Ended June 30, 2012, Compared to the
Three Months Ended June 30, 2011.
Benefits, Selling,
Fees and Net Claims General AmortizationJune 30, Premiums Other Investment and and
and
2012 Earned Income Income Reserves Admin Depreciation Total
(In thousands)
Independence
American:
Medical stop-loss $ 11,620 - 337 9,191 2,526 - $ 240Fully Insured Health 6,952 - 94 4,608
1,637 - 801
DBL 762 - 14 467 263 - 46
Total Independence
American 19,334 - 445 14,266 4,426 - 1,087
Risk Solutions
And Agencies - 3,786 42 - 3,580 45 203
Corporate - - 13 - 411 - (398)
Subtotal $ 19,334 3,786 500 14,266 8,417 45 892
Net realized investment gains 44
Other-than-temporary impairment losses
(189)
Income before income taxes 747
Income taxes (196)
Net income 551
Less: Net income attributable to the
non-controlling interest (242)
Net income attributable to American Independence Corp. $ 309
Benefits, Selling,
Fees and Net Claims General AmortizationJune 30, Premiums Other Investment and and
and
2011 Earned Income Income Reserves Admin Depreciation Total
(In thousands)
Independence
American:
Medical stop-loss $ 9,317 - 360 6,424 2,760 37 $ 456Fully Insured Health 7,630 - 132 6,090
1,213 125 334
DBL 719 - 16 404 222 - 109
Total Independence
American 17,666 - 508 12,918 4,195 162 899
Risk Solutions
and Agencies - 3,668 36 - 3,621 55 28
Corporate - - 12 - 524 - (512)
Subtotal $ 17,666 3,668 556 12,918 8,340 217 415
Net realized investment gains 100
Other-than-temporary impairment losses
(20)
Income before income taxes 495
Income taxes (71)
Net income 424
Less: Net income attributable to the
non-controlling interest (287)
Net income attributable to American Independence Corp.$ 137
Premiums Earned. Premiums earned increased 9%, or $1,688,000 from 2011 to 2012.
The Company currently has three lines of business. Premiums relating to
medical stop-loss business increased $2,303,000. This is due to an increase in
medical stop-loss premiums assumed by Independence American $1,471,000 and an
increase in medical stop-loss premiums written by Independence American
($831,000). Premiums relating to fully insured health consisting of group major
medical, limited medical, short-term medical, dental, vision, hospital
indemnity, and individual health decreased ($678,000). The decrease is
primarily due to a decrease in group major medical premiums written by
Independence American ($1,104,000). Premiums relating to DBL increased $43,000.
For the three months ended June 30, 2012, Independence American assumed 10% of
IHC's short-term medical business, approximately 8% of certain of IHC's group
major medical business, 20% of IHC's DBL business and approximately 23% of IHC's
medical stop-loss business. There were no significant changes to these
percentages from the prior year.
23
Fee and Agency Income. Fee and agency income increased $156,000 from 2011 to
2012. Risk Solutions fee income-administration decreased $70,000 to $1,190,000
for 2012, compared to $1,260,000 for 2011. Risk Solutions fee income-profit
commission increased $32,000 to $401,000 for 2012, compared to $369,000 for
2011. Profit commissions for a given year are based primarily on the
performance of business written during portions of the three preceding years.
Therefore, profit commissions for 2012 are based on business written during
portions of 2009, 2010 and 2011. In 2012, income from our Agencies consisted of
commission income and other fees of $1,113,000 from IPA and revenue of $809,000
and $226,000 from HIO and Specialty Benefits, respectively. In 2011, income
from our Agencies consisted of commission income and other fees of $1,420,000
from IPA and revenue of $534,000 from HIO.
Net Investment Income. Net investment income decreased $56,000 from 2011 to
2012. The investment yields were 3.1% for the three months ended June 30, 2012
and 3.4% for the three months ended June 30, 2011. The lower yield is primarily
due to the current interest rate environment.
Net Realized Investment Gains and Other-Than-Temporary Impairment Losses. The
Company recorded a net realized investment gain of $44,000 for the three months
ended June 30, 2012, compared to a gain of $100,000 for the three months ended
June 30, 2011. The Company's decision as to whether to sell securities is based
on management's ongoing evaluation of investment opportunities and economic
market conditions, thus creating fluctuations in realized gains or losses from
period to period. For the three months ended June 30, 2012 and 2011, the
Company recorded $189,000 and $20,000, respectively, of
other-than-temporary-impairment losses. These credit losses were a result of
the expected cash flows of a debt security being less than the debt security's
amortized cost.
Other Income. Other income decreased $38,000 from 2011 to 2012 due to lower
consulting fees earned by Risk Solutions for the three months ended June 30,
2012, compared to the three months ended June 30, 2011.
Insurance Benefits, Claims and Reserves. Insurance benefits claims and reserves
increased 10%, or $1,348,000 from 2011 to 2012. The increase is primarily
comprised of an increase in direct medical stop-loss of $2,105,000 due to higher
premiums written and a higher loss ratio, an increase in assumed medical
stop-loss of $662,000 due to higher premiums written offset by a lower loss
ratio, offset by a decrease in direct fully insured of $1,351,000 due to lower
loss ratios.
Selling, General and Administrative. Selling, general and administrative
expenses increased $77,000 from 2011 to 2012. This increase is primarily due to
(i) higher expenses of $352,000 due to the formation of Specialty Benefits in
May 2012, (ii) higher commission expense of $309,000 at Independence American
primarily due to higher medical stop-loss premiums written, (iii) higher
expenses at HIO of $191,000 due to higher referral and management fees, (iv)
higher administration expense of $118,000 at Independence American due to higher
fees in direct medical stop-loss due to higher premiums written, (v) higher
underwriting expenses of $60,000 at Independence American, offset by (vi) lower
expenses at IPA of $370,000 primarily due to lower professional fees and lower
agent commission expense, (vii) lower profit commission expense of $257,000 at
Independence American primarily for the medical stop-loss business, (viii) lower
expenses at Risk Solutions of $212,000 primarily due to lower salary expense and
lower professional fees, and (ix) lower legal and consulting expenses of
$146,000.
Amortization and Depreciation. Amortization and depreciation expense decreased
$172,000 from 2011 to 2012.
Income Taxes. The provision for income taxes increased $125,000 to $196,000, an
effective rate of 38.8%, for the three months ended June 30, 2012, compared to
$71,000, an effective rate of 34.1%, for the three months ended June 30, 2011.
Net income for the three months ended June 30, 2012 and 2011 includes a
non-cash provision for federal income taxes of $152,000 and $52,000,
respectively. The state tax effective rate decreased to 7.5% for the three
months ended June 30, 2012, compared to 11.1% for the three months ended June
30, 2011. For as long as AMIC utilizes its NOL carryforwards, it will not pay
any income taxes, except for federal alternative minimum taxes and state income
taxes.
Net Income attributable to the non-controlling interest. Net income
attributable to the non-controlling interest decreased $45,000 from 2011 to
2012. The net income for the three months ended June 30, 2012 relates to the
49% non-controlling interest in HIO and the 10% non-controlling interest in IPA.
The net income for the three months ended June 30, 2011 relates to the 49%
non-controlling interest in HIO and the 49% non-controlling interest in IPA.
Net Income attributable to American Independence Corp. The net income
attributable to the Company increased to $309,000, or $.04 per share, diluted,
for the three months ended June 30, 2012, compared to $137,000, or $.02 per
share, diluted, for the three months ended June 30, 2011.
24
Results of Operations for the Six Months Ended June 30, 2012, Compared to the
Six Months Ended June 30, 2011.
Benefits, Selling,
Fees and Net Claims General AmortizationJune 30, Premiums Other Investment and
and and
2012 Earned Income Income Reserves Admin Depreciation Total
(In thousands)
Independence
American:
Medical stop-loss $ 22,671 - 650 15,833 5,783 - $ 1,705
Fully Insured Health 13,596 - 204 9,202 3,101 - 1,497
DBL 1,524 - 29 922 510 - 121
Total Independence
American 37,791 - 883 25,957 9,394 - 3,323
Risk Solutions
And Agencies - 6,941 84 - 6,819 90 116
Corporate - - 29 - 797 - (768)
Subtotal $ 37,791 6,941 996 25,957 17,010 90 2,671
Net realized investment gains 170
Other-than-temporary impairment losses
(189)
Income before income taxes 2,652
Income taxes (804)
Net income 1,848
Less: Net income attributable to the
non-controlling interest (420)
Net income attributable to American Independence Corp. $ 1,428
Benefits, Selling,
Fees and Net Claims General AmortizationJune 30, Premiums Other Investment and
and and
2011 Earned Income Income Reserves Admin Depreciation Total
(In thousands)
Independence
American:
Medical stop-loss $ 18,499 - 736 12,804 5,675 73 $ 683
Fully Insured Health 15,456 - 243 10,265 3,051 251 2,132
DBL 1,480 - 34 897 471 - 146
Total Independence
American 35,435 - 1,013 23,966 9,197 324 2,961
Risk Solutions
and Agencies - 7,077 77 - 7,147 107 (100)
Corporate - - 25 - 904 - (879)
Subtotal $ 35,435 7,077 1,115 23,966 17,248 431 1,982
Net realized investment gains 85
Other-than-temporary impairment losses
(20)
Income before income taxes 2,047
Income taxes (566)
Net income 1,481
Less: Net income attributable to the
non-controlling interest (407)
Net income attributable to American Independence Corp.$ 1,074
Premiums Earned. Premiums earned increased 7%, or $2,356,000 from 2011 to 2012.
The Company currently has three lines of business. Premiums relating to
medical stop-loss business increased $4,172,000. This is due to an increase in
medical stop-loss premiums assumed by Independence American $2,291,000 and an
increase in medical stop-loss premiums written by Independence American
($1,881,000). Premiums relating to fully insured health consisting of group
major medical, limited medical, short-term medical, dental, vision, hospital
indemnity, and individual health decreased $1,860,000. The decrease is
primarily due to a decrease in group major medical premiums written by
Independence American ($2,362,000). Premiums relating to DBL increased $44,000.
For the six months ended June 30, 2012, Independence American assumed 10% of
IHC's short-term medical business, approximately 9% of certain of IHC's group
major medical business, 20% of IHC's DBL business and approximately 23% of IHC's
medical stop-loss business. There were no significant changes to these
percentages from the prior year.
Fee and Agency Income. Fee and agency income decreased $32,000 from 2011 to
2012. Risk Solutions fee income-administration decreased $46,000 to $2,461,000
for 2012, compared to $2,507,000 for 2011. Risk Solutions fee income-profit
commission decreased $179,000 to $459,000 for 2012, compared to $638,000 for
2011. Profit commissions for a given year are based primarily on the
performance of business written during portions of the three preceding years.
Therefore, profit commissions for 2012 are based on business written during
portions of 2009, 2010 and 2011. In 2012, income from our Agencies consisted of
25
commission income and other fees of $2,259,000 from IPA and revenue of
$1,462,000 and $226,000 from HIO and Specialty Benefits, respectively. In 2011,
income from our Agencies consisted of commission income and other fees of
$2,690,000 from IPA and revenue of $1,064,000 from HIO.
Net Investment Income. Net investment income decreased $119,000 from 2011 to
2012. The investment yields were 3.1% for the six months ended June 30, 2012
and 3.4% for the six months ended June 30, 2011. The lower yield is primarily
due to the current interest rate environment.
Net Realized Investment Gains and Other-Than-Temporary Impairment Losses. The
Company recorded a net realized investment gain of $168,000 for the six months
ended June 30, 2012, compared to a gain of $85,000 for the six months ended June
30, 2011. The Company's decision as to whether to sell securities is based on
management's ongoing evaluation of investment opportunities and economic market
conditions, thus creating fluctuations in realized gains or losses from period
to period. For the six months ended June 30, 2012 and 2011, the Company
recorded $189,000 and $20,000, respectively, of other-than-temporary-impairment
losses. These credit losses were a result of the expected cash flows of a debt
security being less than the debt security's amortized cost.
Other Income. Other income decreased $104,000 from 2011 to 2012 due to lower
consulting fees earned by Risk Solutions for the six months ended June 30, 2012,
compared to the six months ended June 30, 2011.
Insurance Benefits, Claims and Reserves. Insurance benefits claims and reserves
increased 8%, or $1,991,000 from 2011 to 2012. The increase is primarily
comprised of an increase in direct medical stop-loss of $2,480,000 due to higher
premiums written and a higher loss ratio, an increase in assumed medical
stop-loss of $549,000 due to higher premiums written, offset by a decrease in
direct fully insured of $1,001,000 due to lower premiums written, offset by a
higher loss ratio.
Selling, General and Administrative. Selling, general and administrative
expenses decreased $238,000 from 2011 to 2012. This decrease is primarily due
to (i) lower expenses at Risk Solutions of $530,000 primarily due to lower
salary expense and lower professional fees, (ii) lower expenses at IPA of
$525,000 primarily due to lower professional fees and lower agent commission
expense, (iii) lower profit commission expense of $410,000 at Independence
American primarily for the medical stop-loss business, (iv) lower legal and
consulting expenses of $156,000, offset by (v) higher expenses at HIO of
$376,000 due to higher referral and management fees, (vi) higher expenses of
$352,000 due to the formation of Specialty Benefits in May 2012, (vii) higher
commission expense of $339,000 at Independence American primarily due to higher
medical stop-loss premiums written, (viii) higher administration expense of
$237,000 at Independence American due to higher fees in direct medical stop-loss
due to higher premiums written.
Amortization and Depreciation. Amortization and depreciation expense decreased
$341,000 from 2011 to 2012.
Income Taxes. The provision for income taxes increased $238,000 to $804,000, an
effective rate of 36.0%, for the six months ended June 30, 2012, compared to
$566,000, an effective rate of 34.5%, for the six months ended June 30, 2011.
Net income for the six months ended June 30, 2012 and 2011 includes a non-cash
provision for federal income taxes of $710,000 and $516,000, respectively. The
state tax effective rate increased to 2.8% for the six months ended June 30,
2012, compared to 2.1% for the six months ended June 30, 2011. For as long as
AMIC utilizes its NOL carryforwards, it will not pay any income taxes, except
for federal alternative minimum taxes and state income taxes.
Net Income attributable to the non-controlling interest. Net income
attributable to the non-controlling interest increased $13,000 from 2011 to
2012. The net income for the six months ended June 30, 2012 relates to the 49%
non-controlling interest in HIO and the 10% non-controlling interest in IPA.
The net income for the six months ended June 30, 2011 relates to the 49%
non-controlling interest in HIO and the 49% non-controlling interest in IPA.
Net Income attributable to American Independence Corp. The net income
attributable to the Company increased to $1,428,000, or $.17 per share, diluted,
for the six months ended June 30, 2012, compared to $1,074,000, or $.13 per
share, diluted, for the six months ended June 30, 2011.
LIQUIDITY
Independence American
Independence American principally derives cash flow from: (i) operations; (ii)
the receipt of scheduled principal payments on its portfolio of fixed income
securities; and (iii) earnings on investments and other investing activities.
Such cash flow is partially used to finance liabilities for insurance policy
benefits and reinsurance obligations.
26
Corporate
Corporate derives cash flow funds principally from: dividends and tax payments
from its subsidiaries and investment income from corporate liquidity. The
ability of Independence American to pay dividends to its parent company is
governed by Delaware insurance laws and regulations; otherwise, there are no
regulatory constraints on the ability of any of our subsidiaries to pay
dividends to its parent company. For the six months ended June 30, 2012, our
Agencies and Risk Solutions paid $411,000 in dividends to Corporate.
Cash Flows
As of June 30, 2012, the Company had $69,036,000 of cash, cash equivalents, and
investments net of amounts due to/from securities brokers compared with
$66,382,000 as of December 31, 2011.
Net cash provided by operating activities of continuing operations for the six
months ended June 30, 2012 was $2,424,000. Net cash used by investing
activities of continuing operations for the six months ended June 30, 2012 was
$2,180,000.
At June 30, 2012, the Company had $13,004,000 of restricted cash at Risk
Solutions. This amount is directly offset by corresponding liabilities for
Premium and Claim Funds Payable of $13,004,000. This asset, in part, represents
the premium that is remitted by the insureds and is collected by Risk Solutions
on behalf of the insurance carriers they represent. Each month the premium is
remitted to the insurance carriers by Risk Solutions. Until such remittance is
made the collected premium is carried as an asset on the balance sheet with a
corresponding payable to each insurance carrier. In addition to the premium
being held at Risk Solutions, Risk Solutions is in possession of cash to pay
claims. The cash is deposited by each insurance carrier into a bank account
that Risk Solutions can access to reimburse claims in a timely manner. The cash
is used by Risk Solutions to pay claims on behalf of the insurance carriers they
represent.
At June 30, 2012, the Company had $21,790,000 of insurance reserves that it
expects to pay out of current assets and cash flows from future business. If
necessary, the Company could utilize the cash received from maturities and
repayments of its fixed maturity investments if the timing of claim payments
associated with the Company's insurance resources does not coincide with future
cash flows.
The Company believes it has sufficient cash to meet its currently anticipated
business requirements over the next twelve months including working capital
requirements and capital investments.
BALANCE SHEET
Total investments, net of amounts due to/from brokers, increased $2,410,000 to
$67,044,000 during the six months ended June 30, 2012 from $64,634,000 at
December 31, 2011, primarily due to the purchases of securities purchased under
agreements to resell, and an increase in unrealized gains on fixed maturity
securities.
The Company had receivables from reinsurers of $8,391,000 at June 30, 2012.
Substantially all of the business ceded to such reinsurers is of short
duration. All of such receivables are either due from related parties, highly
rated companies or are adequately secured. No allowance for doubtful accounts
was deemed necessary at June 30, 2012.
The Company's insurance reserves by line of business are as follows (in
thousands):
Total Insurance Reserves
June 30, December 31,
2012 2011
Medical Stop-Loss $ 15,342 $ 14,165
Fully Insured Health 5,836 6,259
DBL 612 606
$ 21,790 $ 21,030
Generally, during the first twelve months of an underwriting year, reserves for
medical stop-loss are first set at the projected net loss ratio, which is
determined using assumptions developed using completed prior experience trended
forward. The projected net loss ratio is the Company's best estimate of future
performance until such time as developing losses provide a better indication of
ultimate results.
27
Major factors that affect the projected net loss ratio assumption in reserving
for medical stop-loss relate to: (i) frequency and severity of claims; (ii)
changes in medical trend resulting from the influences of underlying cost
inflation, changes in utilization and demand for medical services, the impact of
new medical technology and changes in medical treatment protocols; and (iii) the
adherence by the MGUs that produce and administer this business to the Company's
underwriting guidelines. Changes in these underlying factors are what determine
the reasonably likely changes in the projected net loss ratio.
The primary assumption in the determination of fully insured reserves is that
historical claim development patterns tend to be representative of future claim
development patterns. Factors which may affect this assumption include changes
in claim payment processing times and procedures, changes in product design,
changes in time delay in submission of claims, and the incidence of unusually
large claims. The reserving analysis includes a review of claim processing
statistical measures and large claim early notifications; the potential impacts
of any changes in these factors are minimal. The time delay in submission of
claims tends to be stable over time and not subject to significant volatility.
Since our analysis considered a variety of outcomes related to these factors,
the Company does not believe that any reasonably likely change in these factors
will have a material effect on the Company's financial condition, results of
operations, or liquidity.
The $1,870,000 increase in AMIC's stockholders' equity in the first six months
of 2012 is primarily due to net income of $1,428,000, and a $434,000 increase in
net unrealized gains on investments.
Asset Quality and Investment Impairments
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. The Company's gross unrealized gains on
available-for-sale securities totaled $2,006,000 at June 30, 2012.
Approximately 98.9% of the Company's fixed maturities were investment grade and
continue to be rated on average AA. The Company marks all of its
available-for-sale securities to fair value through accumulated other
comprehensive income or loss. Higher grade investments tend to carry less
default risk and, therefore, lower interest rates than other types of fixed
maturity investments. At June 30, 2012, approximately 1.1% (or $626,000) of the
carrying value of fixed maturities was invested in non-investment grade fixed
maturities (primarily mortgage 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 does not have any
non-performing fixed maturity investments at June 30, 2012.
At June 30, 2012, the Company had $611,000 invested in whole loan CMOs backed by
Alt-A mortgages. Of this amount, 63.4% were in CMOs that originated in 2005 or
earlier and 36.6% were in CMOs that originated in 2006 or later. The Company's
mortgage security portfolio has no direct exposure to sub-prime mortgages.
The Company reviews its investments regularly and monitors its investments
continually for impairments. For the six months ended June 30, 2012 and 2011,
the Company recorded realized losses for other-than-temporary impairments of
$189,000 and $20,000, respectively. The following table summarizes the carrying
value of securities with fair values less than 80% of their amortized cost at
June 30, 2012 by the length of time the fair values of those securities were
below 80% of their amortized cost (in thousands):
Greater than Greater than
3 months, 6 months,
Less than less than less than Greater than
3 months 6 months 12 months 12 months Total
Fixed maturities $ - $ 2 $ - $ 169 $ 171
The unrealized losses on all available-for-sale securities have been evaluated
in accordance with the Company's impairment policy and were determined to be
temporary in nature at June 30, 2012. In 2012, the Company experienced an
increase in net unrealized gains of $434,000 which increased stockholders'
equity by $434,000 (reflecting net unrealized gains of $1,712,000 at June 30,
2012 compared to net unrealized gains of $1,278,000 at December 31, 2011). From
time to time, as warranted, the Company may employ investment strategies to
mitigate interest rate and other market exposures. Further deterioration in
credit quality of the companies backing the securities, further deterioration in
the condition of the financial services industry, a continuation of the current
imbalances in liquidity that exist in the marketplace, a continuation or
worsening of the current economic recession, or additional declines in real
estate values may further affect the fair value of these securities and increase
the potential that certain unrealized losses be designated as
other-than-temporary in future periods and the Company may incur additional
write-downs.
CAPITAL RESOURCES
As Independence American's total adjusted capital was significantly in excess of
the authorized control level risk-based capital, the Company remains well
positioned to increase or diversify its current activities. It is anticipated
that future acquisitions or
28
other expansion of operations will be funded internally from existing capital
and surplus and parent company liquidity. In the event additional funds are
required, it is expected that they would be borrowed or raised in the public or
private capital markets to the extent determined to be necessary or desirable.
OUTLOOK
For 2012, we will continue to emphasize:
•
Creating operating efficiencies as a result of merging four of our stop-loss
subsidiaries and rebranded the enterprise as IHC Risk Solutions ("IHCRS").
IHCRS has combined operations with two MGUs owned by IHC to form one functional
unit. This consolidation significantly enhances our operational efficiencies,
allows us to be more focused on our underwriting results and combine the
regional knowledge of our owned MGUs in order to deliver medical stop-loss on a
direct basis. The medical stop-loss results for business underwritten by IHCRS
continue to show significant profit margins primarily as a result of business
written in 2010 and 2011. We expect that business underwritten by IHCRS in 2012
will be quite profitable due to the underwriting and sales discipline resulting
from the consolidation of IHCRS, and the rate increases achieved by IHCRS on
renewal business, which was already performing well. The positive results on
business underwritten by IHCRS were partially offset by poor underwriting
results from a non-owned MGU program.
•
Maintaining the improved profitability of the medical stop-loss business
underwritten by IHCRS, while growing this block organically and through
acquisitions. In the third quarter of 2012, IHCRS acquired the assets of an MGU
with a block of approximately $10 million of medical stop-loss premiums.
•
We are now approved to write pet insurance in many key states, and have begun to
record premiums from this new line of business.
•
Continuing to seek additional opportunities to distribute health products and
pet insurance on Independence American paper.
•
Rolling out various supplemental medical products in 2012 for which we believe
there will be a developing market in future years. Independence American has
filed these products and they are now being distributed by IPA, among others.
•
Continuing the improved profitability of our fully insured health business.
We will continue to focus on our strategic objectives, including expanding our
distribution network. However, the success of a portion of our fully insured
health business may be affected by the passage of the Patient Protection and
Affordable Care and Education Reconciliation Act of 2010 signed by President
Obama in March 2010, and its subsequent interpretations by state and federal
regulators. The National Association of Insurance Commissioners has now issued
its proposed regulations. The regulations proposed to-date (including those
mandating minimum loss ratios) seem to have validated our strategy of pursuing
niche lines of business across many states utilizing multiple carriers. We have
begun a comprehensive review of all the options for AMIC and we are continuing a
thorough evaluation of our options for those health insurance products that may
be affected. Although the law will generally require insurers to operate with a
lower expense structure for major medical plans in the small employer and
individual markets, the law may make exceptions for carriers, such as ours, that
have a minimal presence in any one state. "Non-essential" lines of business and
medical stop-loss have been impacted by health care reform minimally or not at
all.
Our results depend on the adequacy of our product pricing, our underwriting and
the accuracy of our reserving methodology, returns on our invested assets and
our ability to manage expenses. Therefore, factors affecting these items,
including unemployment and global financial markets, may have a material adverse
effect on our results of operations and financial condition.
Item 3.
