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: **JUNE 30, 2002
Commission File Number: **0-10306
 
**INDEPENDENCE HOLDING COMPANY**
(Exact name of registrant as specified in its charter)
**Delaware**58-1407235
(State of Incorporation)
(I.R.S. Employer Identification No.)
 

 

 
**96 CUMMINGS POINT ROAD, STAMFORD, CONNECTICUT                 06902**
                    (Address of principal executive offices)                                   (Zip Code)

Registrant's telephone number, including area code: **(203)358-8000****NOT APPLICABLE**
Former name, former address and 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.
 
**7,802,717 SHARES OF COMMON STOCK, $1.00 PAR VALUE**
Common stock outstanding as of August 14, 2002
**INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

INDEX

 
**PART I - FINANCIAL INFORMATION**PAGE NO.   
Consolidated Balance Sheets -  
June 30, 2002 (unaudited) and December 31, 2001 
3   
Consolidated Statements of Operations -  
Three Months and Six Months Ended June 30, 2002   
and 2001 (unaudited) 
4   
Consolidated Statements of Cash Flows -  
Six Months Ended June 30, 2002 and 2001 (unaudited) 
5   
Notes to Consolidated Financial Statements (unaudited) 
6 - 10   
Management's Discussion and Analysis of Financial Condition  
and Results of Operations 
11 - 16  **PART II - OTHER INFORMATION    
Item 4 - Submission of Matters to a Vote of Security Holders 
17   
Item 6 - Exhibits and Reports on Form 8-K 
17   
Signatures 
18
									
**INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES****CONSOLIDATED BALANCE SHEETS**JUNE 30,**DECEMBER 31,**2002**2001**(UNAUDITED)**ASSETS:
Investments:
Short-term investments
$
1,309,000
$
3,705,000
Securities purchased under agreements
to resell 
4,594,000
7,156,000
Fixed maturities 
430,995,000
423,745,000
Equity securities 
20,661,000
26,042,000
Other investments 
81,142,000
76,442,000
Total investments
538,701,000
537,090,000
Cash and cash equivalents
11,922,000
10,395,000
Due from brokers
56,158,000
2,650,000
Deferred acquisition costs 
26,342,000
25,751,000
Due and unpaid premiums
7,284,000
7,500,000
Due from reinsurers
128,099,000
125,852,000
Notes and other receivables
8,005,000
5,255,000
Other assets 
19,635,000
14,801,000**TOTAL ASSETS
$
796,146,000
$
729,294,000**LIABILITIES AND STOCKHOLDERS' EQUITY:**LIABILITIES:
Future insurance policy benefits 
$
309,919,000
$
298,310,000
Funds on deposit
190,200,000
189,791,000
Unearned premiums
16,818,000
16,067,000
Policy claims 
7,268,000
7,771,000
Other policyholders' funds
4,532,000
4,783,000
Due to brokers
85,272,000
41,461,000
Due to reinsurers
8,141,000
4,498,000
Accounts payable, accruals and other
Liabilities
16,997,000
15,001,000
Income taxes 
1,328,000
1,876,000
Long-term debt 
11,250,000
12,188,000**TOTAL LIABILITIES
651,725,000
591,746,000**STOCKHOLDERS' EQUITY: 
Preferred stock (none issued)
-
-
Common stock, 7,832,967 and
7,789,667 shares issued and outstanding,           
respectively, net of 1,944,189 and 
1,994,487 shares in treasury, respectively
7,833,000
7,790,000
Paid-in-capital
79,185,000
78,352,000
Accumulated other comprehensive income:
Unrealized (losses) gains on investments, 

Net
(1,951,000)
94,000
Retained earnings
59,354,000
51,312,000**TOTAL STOCKHOLDERS' EQUITY
144,421,000
137,548,000**TOTAL LIABILITIES AND**STOCKHOLDERS' EQUITY
$
796,146,000
$
729,294,000** 

See Accompanying Notes to Consolidated Financial Statements.
**INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES**CONSOLIDATED STATEMENTS OF OPERATIONS**(UNAUDITED)**THREE MONTHS ENDED**SIX MONTHS ENDED **JUNE 30,**JUNE 30, **2002**2001**2002**2001     **REVENUES:
         
Premiums earned
$
33,854,000
$
27,023,000
$
62,509,000
$
52,195,000 
Net investment income
9,526,000
9,043,000
19,121,000
18,606,000 
Net realized and     
unrealized gains 
142,000
743,000
326,000
2,386,000 
Other income  
2,175,000 
1,281,000 
3,669,000 
2,440,000       
45,697,000 
38,090,000 
85,625,000 
75,627,000     **EXPENSES:     
Insurance benefits, claims     
and reserves
24,840,000
20,121,000
47,062,000
40,969,000 
Amortization of deferred     
acquisition costs
1,605,000
1,916,000
2,932,000
3,377,000 
Selling, general and     
administrative expenses
12,697,000
9,606,000
22,921,000
18,187,000 
Interest expense on     
long-term debt 
120,000 
238,000 
223,000 
529,000       
39,262,000 
31,881,000 
73,138,000 
63,062,000      
Operating income before     
income taxes
6,435,000
6,209,000
12,487,000
12,565,000 
Income tax expense 
2,342,000 
2,281,000 
4,445,000 
4,576,000     **NET INCOME
$
4,093,000
$
3,928,000
$
8,042,000
$
7,989,000     **BASIC INCOME PER     **COMMON SHARE
$
.53
$
.50
$
1.03
$
1.01     
WEIGHTED AVERAGE     
COMMON SHARES     
OUTSTANDING 
7,787,000 
7,875,000 
7,787,000 
7,876,000     **DILUTED INCOME PER     **COMMON SHARE
$
.51
$
.49
$
1.00
$
1.00     
WEIGHTED AVERAGE     
DILUTIVE SHARES     
OUTSTANDING 
8,026,000 
8,014,000 
8,008,000 
8,007,000**See Accompanying Notes to Consolidated Financial Statements.

INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)****SIX MONTHS ENDED JUNE 30,**2002**2001

**CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
$
8,042,000
$
7,989,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred policy acquisition costs
2,932,000
3,377,000
Realized gains  on sales of investments
(326,000)
(2,449,000)
Unrealized losses on trading securities
       -
63,000
Depreciation 
439,000
658,000
Deferred tax expense (benefit)
248,000
(447,000)
Other
(665,000)
(493,000)
Changes in assets and liabilities:
Net sales of trading securities
9,000
(125,000)
Change in insurance liabilities
16,330,000
(5,557,000)
Additions to deferred acquisition costs
(3,229,000)
(2,191,000)
Change in net amounts due from and to
reinsurers
(2,103,000)
14,946,000
Change in income tax liability
349,000
746,000
Change in due and unpaid premiums
217,000
(3,000)
Other
1,787,000
(3,579,000)
Net cash provided by operating activities
24,030,000
12,935,000**CASH FLOWS FROM INVESTING ACTIVITIES:
Change in net amount due from and to brokers
(9,698,000)
19,519,000
Sales and maturities of short-term investments
7,503,000
18,105,000
Purchases of short-term investments
(5,172,000)
(14,757,000)
Net sales of resale agreements
2,562,000
8,021,000
Sales of fixed maturities
759,852,000
769,146,000
Purchases of fixed maturities
(768,623,000)
(807,333,000)
Sales of equity securities
16,289,000
23,334,000
Purchases of equity securities 
(12,335,000)
(38,841,000)
Proceeds on sale of other investments
1,030,000
3,260,000
Additional investments in other investments, net 
of distributions
(5,084,000)
(7,196,000)
Acquisition of companies
(3,357,000)
(1,756,000)
Net change in notes receivable
(3,049,000)
10,274,000
Other
(223,000)
(1,403,000)
Net cash used by investing activities
(20,305,000)
(19,627,000)
 

 **CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of common stock options and warrants
-
1,692,000
Repayment of Long Term Debt
(938,000)
-
Payments of investment-type insurance 
contracts
(816,000)
(1,047,000)
Repurchase of common stock 
(55,000)
(155,000)
Dividends paid
(389,000)
(394,000)
Net cash  (used)  provided by 
financing activities
(2,198,000)
96,000
 Increase (decrease)  in cash and cash
equivalents
1,527,000
(6,596,000)
Cash and cash equivalents, beginning of year
10,395,000
18,024,000
Cash and cash equivalents, end of period
$
11,922,000
           $
11,428,000**See Accompanying Notes to Consolidated Financial Statements.

 

5
**INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

													

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"), First Standard Security Insurance Company ("First Standard"), Risk Assessment Strategies, Inc. ("RAS") and IndependenceCare Holdings L.L.C. ("IndependenceCare") 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 58% of IHC's outstanding common stock at June 30, 2002.

**(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 six months ended June 30, 2002 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, 2001. Certain amounts in the prior year's consolidated financial statements and have been reclassified to conform to the 2002 presentation.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.

 

 
**INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 2.	INCOME PER COMMON SHARE**
Included in the diluted earnings per share calculation from the assumed exercise of options using the treasury stock method for the three months ended June 30, 2002 and 2001, respectively, are 239,000 and 139,000 shares and 221,000 and 131,000 shares for the six months ended June 30, 2002 and 2001, respectively. Net income does not change as a result of the assumed dilution of options. 
**NOTE 3.	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 six months ended June 30, 2002 allocated to stockholders' equity for unrealized losses on investment securities was $1,138,000, representing the change to a deferred tax asset of $1,137,000 at June 30, 2002 from a deferred tax liability of $1,000 at December 31, 2001.
**NOTE 4.	SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION**
Cash payments for income taxes were $3,668,000 and $4,348,000 for the six months ended June 30, 2002 and 2001, respectively. Cash payments for interest were $105,000 and $543,000 for the six months ended June 30, 2002 and 2001, respectively. Non-cash issuance of stock for the three months and six months ended June 30, 2002 amounted to $932,000. (See Note 8).
**NOTE 5.	COMPREHENSIVE INCOME**
The components of comprehensive income include net income and certain amounts reported directly in equity. Comprehensive income for the three months and six months ended June 30, 2002 and 2001 is as follows:
 **THREE MONTHS ENDED**SIX MONTHS ENDED **2002**2001**2002**2001 **(IN THOUSANDS)  
Net income
$
4,093
$
3,928
$
8,042
$
7,989
Unrealized (losses) gains, on

 
available-for-sale securities 
1,405 
(2,683) 
(2,045) 
(1,187)
Comprehensive income 
$
5,498
$
      1,245             
$
5,997
$
     6,802         **INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 6. 	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 six months ended June 30, 2002 and 2001 is as follows:
 **THREE  MONTHS ENDED**SIX MONTHS ENDED **2002**2001**2002**2001 **(IN THOUSANDS)     **Revenues:     

 
Medical Stop-Loss
$
14,643
$
8,112
$
25,403
$
14,553
DBL
5,397
5,121
10,446
10,265
Group Term Disability and     
Term Life and Annuities
6,741
5,956
13,105
11,693
Managed Health Care
3,952
3,659
7,305
6,654
Individual Life and Annuities
9,823
9,743
19,622
20,111
Credit Life and Disability
3,668
3,073
6,737
6,291
Other Business
1,164
1,208
2,244
2,733
Corporate 
167 
475 
437 
941 
45,555
37,347
85,299
73,241
Net Realized and Unrealized     
Gains   
142 
743 
326 
2,386 
$
45,697
$
38,090
$
85,625
$
75,627     **Operating Income (Loss):     

 
Medical Stop-Loss
$
2,781
$
1,727
$
4,982
$
3,177
DBL
743
481
1,333
1,252
Group Term Disability and     
Term Life and Annuities
1,380
735
2,434
772
Managed Health Care
589
418
583
808
Individual Life and Annuities
2,050
2,445
4,105
4,576
Credit Life and Disability
(360)
(72)
171
(52)
Other Business
419
381
614
1,056
Corporate 
(1,189) 
(411) 
(1,838) 
(881) 
6,413
5,704
12,384
10,708
Interest Expense
(120)
(238)
(223)
(529)
Net Realized and Unrealized     
Gains  
142 
743 
326 
2,386 
$
6,435
$
6,209
$
12,487
$
12,565** 

INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 7.	NEW ACCOUNTING PRONOUNCEMENTS

	Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). Under SFAS 142, goodwill is no longer subject to amortization over its estimated useful life. Instead, SFAS 142 requires that goodwill be evaluated at least annually for impairment by applying a fair value based test and, if impairment occurs, the amount of impaired goodwill must be written off immediately. At June 30, 2002 and December 31, 2001, the Company had goodwill of $7,161,000 and $3,985,000, respectively. The Company completed impairment testing of goodwill at June 30, 2002 and had no impairments. In addition, the Company no longer amortizes goodwill as a reduction to earnings from operations. 

	For the three and six months ended June 30, 2001, a reconciliation of reported net earnings to adjusted net income before amortization of goodwill is as follows (dollars in thousands, except per share data):
 **Three Months Ended**Six Months Ended **June 30,**June 30,  **2002 **2001 **2002 **2001
Net income as reported
$
4,093
$
3,928
$
8,042
$
7,989
Amortization of goodwill 
- 
140 
- 
287 
Adjusted net income
$
4,093
$
4,068
$
8,042
$
8,276     **Basic income per common share:     
Net income as reported
$
.53
$
.50
$
1.03
$
1.01
Amortization of goodwill 
- 
.02 
- 
.04 
Adjusted net income
$
.53
$
.52
$
1.03
$
1.05     **Diluted income per common share:
Net income as reported
$
.51
$
.49
$
1.00
$
1.00
Amortization of goodwill 
- 
.02 
- 
.03 
Adjusted net income
$
.51
$
.51
$
1.00
$
1.03** 

INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 8.	ISSUANCE OF COMMON STOCK

	During the second quarter of 2002, the Company purchased the remaining minority interest in RAS. Prior to this purchase, RAS was a majority owned MGU of Madison Life. The purchase was paid for with both cash and the issuance of 46,600 shares of common stock (the "Shares"). The Shares were issued at a fair value of $20.00 per share in reliance upon the exemption from the registration requirements of the Securities Act of 1933, as amended ("The Securities Act"), as a private placement of unregistered securities under Section 4(2) thereof.  Accordingly, the Shares will be "restricted securities", subject to a legend and will not be freely tradable in the United States until the Shares are registered for resale under the Securities Act, or to the extent they are tradable under Rule 144 promulgated under the Securities Act or any other available exemption. Any resale or other disposition of the securities in the United States must be made either under a registration statement filed by IHC with the Securities and Exchange Commission or under an exemption from the registration requirements of the Securities Act.
**Note 9.	SUBSEQUENT EVENT

On July 30, 2002, the Company announced that it had purchased a 19.9% interest in SoftNet Systems, Inc. ("SoftNet") for $15 million.  In addition, the Company announced that it had entered into an agreement to sell its subsidiary, First Standard Holdings Corp. ("FSHC"), for $31.92 million cash to SoftNet subject to certain conditions including SoftNet shareholder approval. Two representatives of IHC have become directors of SoftNet and, upon consummation of the sale of FSHC, SoftNet's operations will be directed by the management of IHC. Upon consummation of the sale of FSHC, the Company will make a cash tender offer at $3.00 per share for at least an additional 3,000,000 of SoftNet's outstanding shares, subject to certain limitations. FSHC owns First Standard, RAS and IndependenceCare.

 
**ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OFFINANCIAL 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"), First Standard Security Insurance Company ("First Standard"), Risk Assessment Strategies, Inc. ("RAS"), IndependenceCare Holdings L.L.C. ("IndependenceCare") and their subsidiaries (collectively, the "Insurance Group"). IHC and its subsidiaries (including the Insurance Group) are collectively referred to as the "Company." All remaining expenses and income, principally income from parent company liquidity, are included in Corporate.
**RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001

The Company's operating income was $6.4 million for the three months ended June 30, 2002 compared to $6.2 million for the same period of 2001. The Company had net realized and unrealized gains of $.1 million in 2002 and $.7 million in 2001. 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, operating income increased to $6.3 million in 2002 as compared to $5.5 million in 2001 (see Note 6 of Notes to Consolidated Financial Statements). Net income was $4.1 million, or $.51 per share, diluted, for the quarter ended June 30, 2002 versus $3.9 million, or $.49 per share, diluted, in 2001. 

**Insurance Group**
The Insurance Group's operating income increased $.9 million to $7.8 million in 2002 from $6.9 million in 2001. Operating income includes net realized and unrealized gains of $.1 million in 2002 compared to $.7 million in 2001. Operating income excluding net realized and unrealized gains was $7.7 million in 2002 compared to $6.2 million in 2001. 

Premium revenues increased $6.8 million to $33.8 million in 2002 from $27.0 million in 2001; premium revenues increased $.4 million at Madison Life and $6.4 million at Standard Life. The change at Madison Life is comprised of: a $.5 million increase in long-term disability ("LTD") premiums primarily due to rate increases in 2002; and a $.6 million increase in the credit lines of business primarily due to the cancellation of a reinsurance treaty; such increases were offset by: a $.5 million decrease in ordinary life and individual accident and health premiums due to the runoff of acquisitions; and a $.2 million decrease in group term life. The increase at Standard Life is comprised of: a $4.7 million increase in stop-loss premiums due to higher retention and increased volume in 2002; a $1.7 million increase in provider excess premiums due to the assumption of a block of business, an increase in direct writings and a $.3 million increase in annuity premiums; such increases were partially offset by a $.3 million decrease in all other lines.

Total net investment income increased $.8 million. The annualized return on investments of the Insurance Group in the second quarter of 2002 was 7.5% compared to 6.8% in the second quarter of 2001.

Other income increased $1.0 million due to a $.2 million increase in fee income at IndependenceCare as a result of an increase in premiums written, and a $.8 million increase in fee income earned by RAS. 

	Insurance benefits, claims and reserves increased $4.7 million, reflecting an increase of $.1 million at Madison Life and an increase of $4.6 million at Standard Life. Madison Life's increase resulted from: a $.3 million increase in ordinary life and individual accident and health reserves and claims; and a $.3 million increase in the credit line of business due to the increase in volume; such increases were offset by a $.1 million decrease in LTD claims; and a $.4 million decrease in claims and reserves in the group term life lines of business. The change at Standard Life is comprised of: a $3.2 million increase in stop-loss reserves due to the increase in premiums, slightly offset by lower loss ratios; a $.8 million increase in the provider excess block due to the increase in volume and a $.6 million increase in all other lines.

	Amortization of deferred acquisition costs and general and administrative expenses for the Insurance Group increased $2.4 million. Madison Life's expenses increased $.9 million. The increase at Madison Life is due to an increase in employee and related expenses, and other administrative expenses. Standard Life's expenses increased $1.5 million, comprised of a $.7 million increase in commissions and a $.2 million increase in state insurance taxes, licenses and fees, both due to the higher level of premiums and a $.5 million increase in general expenses. IndependenceCare's expenses remained constant. 
**Corporate

	Operating loss for the quarter ended June 30, 2002 increased by $.7 million from 2001 to a loss of $1.4 million due to a decrease in investment income of $.3 million as a result of lower returns on certain partnership investments and higher general expenses of $.5 million, offset by lower interest expense of $.1 million due to a decrease in interest rates in 2002.
**SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001

The Company's operating income was $12.5 million for the six month period ended June 30, 2002 compared to $12.6 million for the same period of 2001. The Company had net realized and unrealized gains of $.3 million in 2002 and unrealized gains of $2.4 million in 2001. Excluding net realized and unrealized gains, operating income increased to $12.2 million in 2002 as compared to $10.2 million in 2001 (see Note 6 of Notes to Consolidated Financial Statements). Net income was $8.0 million, or $1.00 per share, diluted, in both the six months ended June 30, 2002 and 2001. 

 
**Insurance Group

The Insurance Group's operating income increased $.8 million to $14.7 million in 2002 from $13.9 million in 2001. Operating income includes net realized and unrealized gains of $.3 million in 2002 compared to unrealized gains of $2.3 million in 2001. Operating income excluding net realized and unrealized gains was $14.4 million in 2002 compared to $11.6 million in 2001. 

Premium revenues increased $10.3 million to $62.5 million in 2002 from $52.2 million in 2001; premium revenues increased $.1 million at Madison Life and $10.2 million at Standard Life. The change at Madison Life is comprised of: a $.8 million increase in LTD premiums primarily due to rate increases in 2002; and a $.6 million increase in the credit lines of business, primarily due to increased retention resulting from the cancellation of a reinsurance treaty; such increases were offset by: a $1.2 million decrease in ordinary life and individual accident and health premiums due to the runoff of acquisitions and a $.1 million decrease in all other lines of business. The increase at Standard Life is comprised of: an $8.7 million increase in stop-loss premiums due to higher retention and increased volume in 2002; a $1.9 million increase in provider excess premiums due to an assumed block of business and an increase in direct writings, partially offset by a $.4 million decrease in all other lines.

Total net investment income increased $1.0 million due to an increase in returns on a partnership investment, and a slight increase in the annualized return. The annualized return on investments of the Insurance Group in 2002 was 7.5% compared to 7.3% in 2001.

Other income increased $1.4 million due to a $.3 million increase in fee income at IndependenceCare due to an increase in premiums written in 2002 and a $1.1 million increase in fee income from RAS. 

	Insurance benefits, claims and reserves increased $6.1 million, reflecting a decrease of $.4 million at Madison Life and an increase of $6.5 million at Standard Life. Madison Life's decrease resulted from: a $.4 million decrease in the group term life line of business, a $.3 million decrease in LTD claims and a $.5 million decrease in interest to annuity policies due to the drop in interest rates and a lower asset base; such decreases were offset by: a $.8 million increase in ordinary life and individual accident and health reserves, claims and surrenders. The change at Standard Life is comprised of: a $5.3 million increase in stop-loss reserves due to the increase in premiums slightly offset by lower loss ratios; a $.5 million increase in provider excess reserves due to the increase in volume; and a $.7 million increase in the Volunteer Fire Fighters Division annuity line due to the increase in premiums.

	Amortization of deferred acquisition costs and general and administrative expenses for the Insurance Group increased $3.8 million. Madison Life's expenses increased $.8 million and Standard Life's increased $2.9 million. The increase at Madison Life is primarily due to higher employee and related expenses, and other administrative expenses. The increase at Standard Life is comprised of a $1.7 million increase in commissions and a $.5 million increase in state insurance taxes, licenses and fees both due to the increase in premium volume and a $.7 million increase in general expenses due to higher salary and related expenses. IndependenceCare's expenses increased $.1 million. 
**Corporate

	Operating loss for the period ended June 30, 2002 increased by $.8 million from 2001 to a loss of $2.2 million. This decrease is due to lower investment income from partnerships in 2002 of $.6 million, a decrease in interest expense of $.3 million and an increase in general expenses of $.6 million.
**LIQUIDITY
**Insurance Group**
	The Insurance Group normally provides cash flow from: (i)  operations; (ii) the receipt of scheduled principal payments on its portfolio of fixed income securities; and (iii) earnings on investments. Such cash flow is used to partially finance liabilities for insurance policy benefits. These liabilities represent long-term and short-term obligations which are calculated using certain assumed interest rates.

In the first quarter of 2002, IndependenceCare purchased all of the assets of an employer stop-loss MGU in Austin, TX. In the second quarter of 2002, the Company acquired the remaining interest in RAS. Prior to this purchase, RAS was the majority owned MGU at Madison Life. The purchase of this minority interest was paid for with cash and the issuance of 46,600 shares of the Company's common stock.

	**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 81.9% was invested in investment grade fixed income securities, resale agreements, policy loans and cash and cash equivalents at June 30, 2002.  Also at such date, approximately 96.3 % 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 June 30, 2002, approximately 3.7% 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 were represented by real estate and mortgage loans. Less than .1% of the Company's total investments were in 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 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. 

The expected change in fair value as a percentage of the Company's fixed income portfolio at June 30, 2002 given a 100 to 300 basis point rise or decline in interest rates is not materially different than the expected change at December 31, 2001. In the Company's analysis of the asset-liability model, a 100 to 300 basis point change in interest rates on the Insurance Group's liabilities would not be expected to have a material adverse effect on the Company. With respect to its liabilities, if interest rates were to increase, the risk to the Company is that policies would be surrendered and assets would need to be sold. This is not a material exposure to the Company since a large portion of the Insurance Group's interest sensitive policies are burial policies that are not subject to the typical surrender patterns of other interest sensitive policies, and many of the Insurance Group's universal life and annuity policies come from liquidated companies which tend to exhibit lower surrender rates than such policies of continuing companies. Additionally, there are charges to help offset the benefits being surrendered. If interest rates were to decrease substantially, the risk to the Company is that some of its investment assets would be subject to early redemption. This is not a material exposure because the Company would have additional gains in its portfolio to help offset the future reduction of investment income. With respect to its investments, the Company employs (from time to time as warranted) investment strategies to mitigate interest rate and other market exposures.

	**Balance Sheet**
	The increase in due from and to brokers is due to the timing of securities trades that settled after June 30, 2002. 

	The Company had net receivables from reinsurers of $116.5 million at June 30, 2002.  Substantially all of the business ceded to such reinsurers is of short duration. All of such receivables are either due from highly rated companies or are adequately secured. Accordingly, no allowance for doubtful accounts was necessary at June 30, 2002.
**Corporate

	Corporate derives its funds principally from: (i) dividends and interest income from the Insurance Group; (ii) management fees from its subsidiaries; and (iii) investment income from Corporate liquidity. Regulatory constraints historically have not affected the Company's consolidated liquidity, although state insurance laws have provisions relating to the ability of the parent company to use cash generated by the Insurance Group.

	Total corporate liquidity (cash, cash equivalents, resale agreements and marketable securities) amounted to $5.0 million at June 30, 2002. 
**Capital Resources

Due to its favorable capital ratios, broad licensing and excellent asset quality and credit-worthiness, the Insurance Group remains well positioned to increase or diversify its current activities. It is anticipated that future acquisitions or 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.

	In accordance with Statement of Financial Accounting Standards  No. 115, the Company may carry its portfolio of fixed income securities either as held to maturity (carried at amortized cost), as trading securities (carried at fair market value) or as available-for-sale (carried at fair market value); the Company has chosen to carry all of its debt securities as available-for-sale. The Company experienced a decrease in unrealized gains of $2.0 million, net of deferred taxes and deferred policy acquisition costs, in total stockholders' equity, reflecting unrealized gains of $.1 million at December 31, 2001 versus unrealized losses of $1.9 million at June 30, 2002. From time to time, as warranted, the Company employs investment strategies to mitigate interest rate and other market exposures.
**Subsequent Event

On July 30, 2002, the Company announced that it had purchased a 19.9% interest in SoftNet Systems, Inc. ("SoftNet") for $15 million. In addition, the Company announced that it had entered into an agreement to sell its subsidiary, First Standard Holdings Corp. ("FSHC"), for $31.92 million cash to SoftNet subject to certain conditions including SoftNet shareholder approval. Two representatives of IHC have become directors of SoftNet and, upon consummation of the sale of FSHC, SoftNet's operations will be directed by the management of IHC. Upon consummation of the sale of FSHC, the Company will make a cash tender offer at $3.00 per share for at least an additional 3,000,000 of SoftNet's outstanding shares, subject to certain limitations. FSHC owns First Standard, RAS and IndependenceCare.
**Forward Looking Statements

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.
**PART II.  OTHER INFORMATION

Item 4.		Submission of Matters to a Vote of Security Holders
		At its Annual Meeting of Stockholders held on June 21, 2002, the following nine nominees were re-elected for one-year terms on the Board of Directors:

		Larry R. Graber, Harold E. Johnson, Allan C. Kirkman, Steven B. Lapin, Edward Netter, Robert P. Ross, Jr., Edward J. Scheider, James G. Tatum and Roy T.K. Thung

		The vote on the election of the above nominees was:

		For		At least 7,486,626 shares

		Withheld	No more than 21,736 shares

		In addition, at such meeting, the appointment of KPMG LLP as independent auditors for 2002 was ratified by a vote of 7,487,783 shares for, 4,806 shares against, and 1,833 shares abstaining. There were no broker non-votes. 
**Item 6.		Exhibits and Reports on Form 8-KExhibit 11.  Statement re:  computation of per share earnings.

b)	Exhibit 99. Certification of principal executive officer and principal financial officer

c)	A report on Form 8-K was filed on July 31, 2002.
**SIGNATURES**
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

INDEPENDENCE HOLDING COMPANY

(THE REGISTRANT)

Dated:  August 14, 2002                          By: /s/ Teresa A. Herbert  
                                                   Teresa A. Herbert

                                                   Vice President and

                                                   Chief Financial Officer********************************************************************************************************************************************************************************************