INDEPENDENCE HOLDING CO – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations of
"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 fiscal
year ended
Commission
related Notes thereto appearing elsewhere in this quarterly report.
Overview
principally engaged in underwriting, administering and/or distributing group and
individual specialty benefit products, including disability, supplemental
health, pet, and group life insurance through: (i) its insurance companies,
Standard Security Life,
Insurance Company
consisting of IHCSB, IBG, INSXCloud (collectively the "IHC Agencies") and its
lead generation company, Torchlight. On
majority interest in
insurance underwritten by
unaffiliated insurer. Standard Security Life,
as the "
Group
implicit in the terms "we", "us" and "our".
During the second and third quarters of 2021, the Board of Directors committed
to the following plans for the disposal of several business operations. Each
disposal plan below represents a strategic shift that will have a major effect
on the Company's operations and financial results and as such, they each qualify
for reporting as discontinued operations.
(A)On
purchase agreement with Reliance Standard ("SSL Purchase Agreement") to sell all
of the issued and outstanding capital stock of Standard Security Life, a wholly
owned subsidiary of ICC, for an aggregate purchase price of
cash. On
"SSL Amended Purchase Agreement"). In accordance with the SSL Amended Purchase
Agreement, the Company will receive the excess of aggregate statutory capital
and surplus, calculated as of the closing date, over
the transaction, the closing distribution and certain other items are subject to
customary closing conditions including applicable regulatory approvals, one of
which is the approval of the NYSDFS. Under the terms of the SSL Amended Purchase
Agreement, the transaction includes all of Standard Security Life's DBL and PFL
business in addition to all its other lines of business. The aforementioned
transaction, consisting of the sale of Standard Security Life, the closing
distribution and other closing conditions, is collectively referred to as the
"SSL Sale" transaction or disposal group.
(B)On
purchase agreement with a subsidiary of
in
underwritten by
insurer. In addition, IHC and its wholly owned subsidiary, AMIC, entered into a
stock purchase agreement with
outstanding capital stock of IAHC ("IAHC Purchase Agreement"), which owns all of
the issued and outstanding common stock of
Company
Pet Insurance, LLC
Purchase Agreement, the transaction includes all of
Insurance Company's
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business and excludes all other lines of business which will be reinsured by
taken in the aggregate, represents the sale of 70% of the Company's pet
business. The Company will retain a 30% interest in the business sold in the
form of an equity investment in the buyer,
sale of
Company received
at
discontinued operations, net of transaction costs. The cash is held in escrow
until such time as the IAHC sale transaction closes. In connection with the
pending sale of IAHC, the Company will receive approximately
cash and retain a 30% equity interest in the business sold valued at
approximately
IAHC Purchase Agreement is subject to customary closing conditions, including
applicable regulatory approvals, one of which is the approval of the
Insurance Department
of excluded business, and other closing conditions, is collectively referred to
as the "Pets Sale" transaction or disposal group.
(C)On July 14, 2021, IHC and its wholly owned subsidiary ICC entered into a
stock purchase agreement with Horace Mann Educators Corporation to sell all of
the issued and outstanding capital stock of
wholly owned by ICC, for an aggregate purchase price of
in addition, if
2023, IHC will receive an additional purchase price of up to
accordance with the stock purchase agreement and prior to closing,
National Life
Insurance Company
non-pet business, primarily specialty health products, that are excluded from
the Pets Sale transaction discussed above. The transaction has been approved by
the Board of Directors of IHC, and IHC's majority stockholders have entered into
a voting agreement under which such majority shareholders agreed to approve the
transaction. IHC's majority stockholders approved the transaction by written
consent on
2022
applicable regulatory approvals, one of which is the approval by the
Office of the Commissioner of Insurance
includes the reinsured specialty health business of
Insurance Company
group.
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The following is a summary of key performance information and events:
Results of operations are summarized as follows for the periods indicated (in
thousands):
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Revenues $ 6,513 $ 6,845 $ 22,486 $ 21,242
Expenses 21,592 16,431 53,028 43,221
Loss from continuing (15,079) (9,586) (30,542) (21,979)
operations before income
taxes
Income tax benefit (3,567) (2,241) (7,026) (5,617)
Loss from continuing (11,512) (7,345) (23,516) (16,362)
operations
Income from discontinued 28,871
16,077 122,809 29,954
operations
Net income 17,359 8,732 99,293 13,592 (Income) loss from - (44) 158 (205)
noncontrolling interests
Net income attributable
to IHC
·Loss from continuing operations of
months ended
same period in 2020. Loss from continuing operations of
diluted, for the nine months ended
share, diluted, for the same period in 2020.
·Consolidated investment yields (on an annualized basis) of 0.8% for both the
three and nine months ended
and 1.5% for the three month and nine month periods, respectively, in 2020;
·Book value of
at
·Income from discontinued operations for the three months and nine months ended
on the sale of
discontinued operations for the three months and nine months ended
2021
·Results for the first nine months of 2021 were negatively impacted by COVID-19.
Sales at our agency were lower than expected in the first half of 2021, impacted
by lower short-term medical ("STM") sales, as consumers, especially those over
the age of 50
Enrollment Periods for ACA coverage and the increased Advanced Premium Tax
Credits, also known as subsidies, as well as employers continuing to offer
employer sponsored coverage to furloughed workers. The agency is seeing an
increase in fee and commission income from the sale of ACA plans. Certain lines
of business that are sold with ACA coverage, such as dental and accident plans
exceeded expectations but due to lower commission on these products did not
fully offset the commission lost through lower STM sales. We are shifting our
call center focus to the ACA market for this period.
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The following is a summary of key performance information by segment:
As a result of the pending sales discussed above and in Note 2 to the Condensed
Consolidated Financial Statements, the operations of the
certain other pet assets, are presented in discontinued operations. Continuing
operations consist primarily of the IHC Agencies which are in the
Health
activities are included in Corporate. Management will re-assess the Company's
reportable segments based on its new organizational structure after the pending
sale transactions discussed in Note 2 are consummated.
·The Specialty Health segment reported
both the three months ended
million
2021
·The Corporate segment reported losses before taxes of
million
and reported losses of
30, 2021
primarily due to legal and investment bank fees recorded in connection with the
Going Private Transaction (see Note 1) and the formation of the Special
Committee of independent directors to consider the proposal, and to review,
evaluate, negotiate and approve or disapprove the proposal and alternatives.
COVID-19
In
a global health pandemic, and
emergency. COVID-19 has led to large scale disruption in the global economy,
market instability and widespread unemployment in
The COVID-19 outbreak continues to be a fluid situation. The business continuity
and emergency response plans we implemented during 2020 continue to ensure we
provide a high level of service to our customers and support our everyday
business needs. To help protect the safety and wellbeing of our employees and
mitigate the spread of COVID-19, we have limited travel and directed our
employees to work remotely whenever possible. As the COVID-19 outbreak continues
to evolve, the duration of COVID-19 and its potential effects on our business
cannot be certain. Regulatory mandates have affected, and we anticipate will
continue to impact, the insurance industry. We currently cannot predict if there
will be a material impact to our business, results of operations or financial
condition in future reporting periods. For more information, see the risk factor
under the heading "We continue to face risks related to the ongoing Coronavirus
(COVID-19) pandemic that could impact our sales, operating results and financial
condition" in Item 1A. Risk Factors of our Annual Report on Form 10-K for the
fiscal year ended
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CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of the Company conform to
preparation of the Condensed Consolidated Financial Statements in conformity
with
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 fiscal year ended
Management has identified the accounting policies related to Insurance Premium
Revenue Recognition and Policy Charges, Fee Income Revenue Recognition,
Insurance Liabilities, Investments,
Deferred Income Taxes as those that, due to the judgments, estimates and
assumptions inherent in those policies, are critical to an understanding of the
Company's Consolidated Financial Statements and this Management's Discussion and
Analysis. A full discussion of these policies is included under the heading,
"Critical Accounting Policies" in Item 7 of the Annual Report on Form 10-K for
the fiscal year ended
30, 2021
policies disclosed in the 2020 Form 10-K except for the recently adopted
accounting standards discussed in Note 1(D) of the Notes to Condensed
Consolidated Financial Statements.
Results of Operations for the Three Months Ended
the Three Months Ended
Information by business segment for the periods indicated is as follows:
Selling,
Net General
September 30, 2021 Investment Fee Other and
(In thousands) Income Income Income Administrative Total
Specialty Health $ (13) $ 5,569 $ (36) $ 12,542 $ (7,022)
Corporate 132 - 909 9,050 (8,009)
Sub total $ 119 $ 5,569 $ 873 $ 21,592 (15,031)
Net investment losses (48)
Loss from continuing operations before income taxes (15,079)
Income tax benefit (3,567)
Loss from continuing operations, net of tax $ (11,512)
Selling,
Net General
September 30, 2020 Investment Fee Other and
(In thousands) Income Income Income Administrative Total
Specialty Health $ (20) $ 6,113 $ 656 $ 13,718 $ (6,969)
Corporate 190 - (41) 2,713 (2,564)
Sub total $ 170 $ 6,113 $ 615 $ 16,431 (9,533)
Net investment losses (53)
Loss from continuing operations before income taxes (9,586)
Income tax benefit (2,241)
Loss from continuing operations, net of tax $ (7,345)
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Net Investment Income
The overall annualized investment yields were 0.8% and 0.9% in the third quarter
of 2021 and 2020, respectively.
Net Investment Gains
Net investment gains include the gains and losses from sales of fixed maturities
available-for-sale, equity securities and other investments. Decisions to sell
securities are based on management's ongoing evaluation of investment
opportunities and economic and market conditions, thus creating fluctuations in
gains and losses from period to period.
Fee Income
Fee income decreased
2021
is primarily due to lower STM sales in 2021 and decreases in commission accruals
principally on Medicare advantage products, partially offset by an increase in
lead generation fees.
Other Income
Other income in the 2021 primarily relates to equity losses on equity method
investments offset by income from the sale of an investment asset; and, in 2020,
other income includes the gain on the sale of a wholly owned agency that
administered occupational accident plans.
Selling, General and Administrative Expenses
Total selling, general and administrative expenses increased
the comparable period in 2020. The increase is primarily due to
increase in the Corporate segment, primarily legal and investment bank fees
recorded in in connection with the formation of a Special Committee of
independent directors to consider the proposed Going Private Transaction.
Income Taxes
The effective tax rate for the three months ended
compared to (23.4)% for the three months ended
income tax rate in 2021 relates to losses from continuing operations and are
impacted by tax benefits from exercises of share-based compensation and state
and local income tax benefits on certain subsidiaries. In 2020, the effective
income tax rate relates to losses from continuing operations and includes state
and local income tax benefits on certain subsidiaries.
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Results of Operations for the Nine Months Ended
the Nine Months Ended
Information by business segment for the periods indicated is as follows:
Selling,
Net General
September 30, 2021 Investment Fee Other and
(In thousands) Income Income Income Administrative Total
Specialty Health $ (51) $ 20,291 $ (36) $ 38,125 $ (17,921)
Corporate 481 - 1,696 14,903 (12,726)
Sub total $ 430 $ 20,291 $ 1,660 $ 53,028 (30,647)
Net investment gains 105
Loss from continuing operations before income taxes (30,542)
Income tax benefit (7,026)
Loss from continuing operations, net of tax $ (23,516)
Selling,
Net General
September 30, 2020 Investment Fee Other and
(In thousands) Income Income Income Administrative Total
Specialty Health $ (64) $ 18,465 $ 787 $ 35,767 $ (16,579)
Corporate 980 - 952 7,454 (5,522)
Sub total $ 916 $ 18,465 $ 1,739 $ 43,221 (22,101)
Net investment gains 122
Loss from continuing operations before income taxes (21,979)
Income tax benefit (5,617)
Loss from continuing operations, net of tax $ (16,362)
Net Investment Income
The overall annualized investment yields were 0.8% and 1.5% in the first nine
months of 2021 and 2020, respectively.
Net Investment Gains
Net investment gains include the gains and losses from sales of fixed maturities
available-for-sale, equity securities and other investments. Decisions to sell
securities are based on management's ongoing evaluation of investment
opportunities and economic and market conditions, thus creating fluctuations in
gains and losses from period to period.
Fee Income
Fee income increased
2021
primarily due to an increase in lead generation fees, partially offset by a
decrease in administrative fee income as a result of the sale, in
a wholly owned agency that administered occupational accident plans, lower STM
and fixed indemnity limited benefit plan sales, and a decrease in commission
accruals principally on Medicare advantage products.
Other Income
Other income in the 2021 primarily relates to income from the sale of an
investment asset partially offset by equity losses from equity method
investments; and, in 2020, other income includes a gain recorded in connection
with the step-acquisition of Torchlight and a gain on the sale of a wholly owned
agency that administered occupational accident plans.
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Selling, General and Administrative Expenses
Total selling, general and administrative expenses increased
the comparable period in 2020. The increase is primarily due to: (i)
million
fees recorded in connection with the formation of a Special Committee of
independent directors to consider the proposed Going Private Transaction; and
(ii) and increase of
increased lead generation expenses, compensation and system development related
expenses in our marketing and administrative companies.
Income Taxes
The effective tax rate for the nine months ended
compared to (25.6)% for the nine months ended
income tax rate for 2021 relates to losses from continuing operations and are
impacted by tax benefits from exercises of share-based compensation and state
and local income tax benefits on certain subsidiaries. In 2020, the effective
income tax rate relates to losses from continuing operations plus a benefit from
capital losses attributable to the sale of a subsidiary.
LIQUIDITY Corporate
Corporate derives its funds principally from: (i) dividends from the
Group
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
Group
declared and paid dividends of
It is anticipated that cash flows to be received upon the close of the disposal
transactions will provide sources of corporate liquidity to offset the loss of
cash flows previously derived from the insurance operations currently held in
discontinued operations. The Company is evaluating the best use of liquidity
derived from the disposal transactions.
The proceeds received from the sale of
account owned by SBH and treated as a security deposit. The funds will be
released from escrow upon either the consummation of the IAHC purchase or upon
the exercise of the PPI Put/Call Option. At
deposit is presented as funds held in escrow on the Condensed Consolidated
Balance Sheet.
Cash Flows
The Company had
restricted cash from continuing and discontinued operations as of
2021
For the nine months ended
primarily the result of the investment of cash and cash equivalents in resale
agreements. Financing activities utilized
million
discontinued operations were
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.
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There were no material negative impacts on the Company's cash flows or liquidity
with regards to COVID-19 during the first nine months of 2021.
BALANCE SHEET
In connection with the sale of
proceeds of
interest in
The
months of 2021 is primarily due to
IHC, which includes a
reduced by
Asset Quality and Investment Impairments
The Company has gross unrealized gains of
losses of
and continue to be rated on average AA. The Company marks all of its fixed
maturities available-for-sale to fair value through accumulated other
comprehensive income or loss. These investments tend to carry less default risk
and, therefore, lower interest rates than other types of fixed maturity
investments. The Company did not have any non-performing fixed maturities at
The Company reviews its investments regularly and monitors its investments
continually for impairments. The Company did not record any other-than-temporary
impairment losses in the nine months ended
not have any securities with fair values less than 80% of their amortized cost
at
The unrealized losses on fixed maturities available-for-sale were evaluated in
accordance with the Company's impairment policy and were determined to be
temporary in nature at
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, imbalances in liquidity that exist in the marketplace, a
worsening of the current economic recession, or 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 which may cause the Company to incur additional write-downs.
CAPITAL RESOURCES
Due to its strong capital ratios, broad licensing and excellent asset quality
and credit-worthiness, the
current activities. It is anticipated that any future acquisitions or other
expansion of operations at the remaining entities of IHC will be funded
internally from anticipated cash flows to be received upon the close of the
disposal transactions. 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.
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OUTLOOK
For the remainder of 2021, and continuing in 2022, the Company anticipates that
it will:
·Close on the sale of all of the issued and outstanding capital stock of
Standard Security Life to Reliance Standard pursuant to the SSL Purchase
Agreement signed on
Standard believes that this transaction, which is subject to various regulatory
approvals, will close by the end of this year. Under the terms of the SSL
Amended Purchase Agreement, Standard Security Life will receive the excess of
statutory capital and surplus, calculated as of the closing date, over
million
·Close on the sale of all of the issued and outstanding capital stock of IAHC to
We believe this transaction, which is subject to various regulatory approvals,
will close by the end of this year.
·Close on the sale of the stock of
Educators Corporation pursuant to the MNL Purchase Agreement signed on
2021
close no earlier than
·Focus on the transition and consummation of all transactions entered into in
2021. The consummation of these transactions shall be the entire focus of the
Company for the remainder of 2021. After all the transactions are consummated,
the Company will have the
cash and investments, net of liabilities, and an equity interest in
Capital
the approval by IHC's Board of Directors to contribute an additional
million
is equity interest in
·Improve the profitability and better integrate all of our agencies. IHC has
experienced many changes in its agency model in 2021 as a result of a changing
market and due to the decision to sell all three of IHC's carriers. Although we
continue to record losses in our agency business, we expect that to improve in
the future. IHC has re-evaluated and made significant changes to the direction
of the Company. As we progress, our agency operations will be centered around
INSXcloud.com (INSX), our CMS approved Web Broker. INSX provides an agent with
the ability to quote, directly enroll and track applications on the
Facilitated Marketplace
generate quotes, create PDF's of plan comparisons, enroll customers in plans,
and invite customers to enroll themselves - all through an easy-to-use
cloud-based web portal. IHC is expanding INSX to directly serve the consumer and
partner market, as well as expanding product offerings on the platform.
·Continue to expand on our IHCSB agency. The balance of IHCSB includes our W-2
Call Centers and our captive independent Advisors unit, both of which sell into
the under/over age 65 health insurance markets, as well as our
Brokerage Group
our platforms and contracts. We are refocusing a portion of our over 65 division
into the under 65 market in order to take advantage of the positioning of INSX,
IHCSB, our lead generation capabilities, and the market growth resulting from
the American Rescue Plan Act.
·Continue to focus on administrative efficiencies and the transition of the
three insurance carriers as we progress towards closing on all three sales in
the next few quarters
·Continue to monitor the COVID-19 outbreak as it evolves. The duration of
COVID-19 and its potential effects on our business cannot be certain, so we
currently cannot predict if there will be a material impact to our business,
results of operations or financial condition in 2021. During the COVID-19
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pandemic, we have fully transitioned our existing sales teams to work from home.
Our customer facing agents have transitioned to a full-time work at home model,
and although we have implemented enhanced technology solutions, sales may be
impacted as COVID-19 continues to develop.
Subject to making additional repurchases of IHC common stock, dividends to
shareholders and various investments, the Company will maintain a highly liquid
and high quality portfolio.
Our financial results in the future will depend on: (i) our ability to execute
on our revised agency model and develop the agencies into a profitable
operation; and (ii) any increase in the value of our minority interest in
Capital
DIGITAL MEDIA SOLUTIONS, INC. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
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