FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended:  **MARCH 31, 2003
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 _
Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes __. No. _X_.

 
**7,760,955 SHARES OF COMMON STOCK, $1.00 PAR VALUE**
Common stock outstanding as of May 14, 2003
**INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

INDEX

 
**PART I - FINANCIAL INFORMATION**PAGE NO.  
Item 1. Financial Statements     
Consolidated Balance Sheets -  
March 31, 2003 (unaudited) and December 31, 2002
3   
Consolidated Statements of Operations -  
Three Months Ended March 31, 2003 and 2002 (unaudited)
4   
Consolidated Statements of Cash Flows -  
Three Months Ended March 31, 2003 and 2002 (unaudited)
5   
Notes to Consolidated Financial Statements (unaudited)
6  
Item 2. Management's Discussion and Analysis of Financial Condition and
11 
Results of Operations   
Item 3. Quantitative and Qualitative Disclosures about Market Risk
16  
Item 4. Controls and Procedures
16  **PART II - OTHER INFORMATION    
Item 1.  Legal Proceedings
18    
Item 2.  Changes in Securities and Use of Proceeds
18    
Item 3.  Defaults upon Senior Securities
18    
Item 4.  Submission of Matters to a Vote of Security Holders
18    
Item 5.  Other Information
18   
Item 6.   Exhibits and Reports on Form 8-K
18   
Signatures
      19     
Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
      20
									
**INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)
    **March 31,   **December 31,    **2003   **2002    **(Unaudited) **ASSETS:         
Investments:         
Short-term investments  
$
1,455  
$
1,101 
Securities purchased under agreements to resell   
18,456   
25,805 
Fixed maturities   
451,368   
429,217 
Equity securities   
17,355   
14,745 
Other investments   
69,221   
73,768          
Total investments   
557,855   
544,636            
Cash and cash equivalents   
18,138   
13,292 
Due from brokers   
9,996   
6,878 
Deferred acquisition costs   
27,047   
26,427 
Due and unpaid premiums   
7,477   
7,303 
Due from reinsurers   
128,615   
125,874 
Notes and other receivables   
7,302   
7,989 
Other assets   
12,899   
11,729          **TOTAL ASSETS  
$
769,329  
$
744,128         **LIABILITIES AND STOCKHOLDERS' EQUITY:        **LIABILITIES:         
Future insurance policy benefits  
$
312,097  
$
308,611 
Funds on deposit   
193,000   
191,386 
Unearned premiums   
18,297   
16,502 
Policy claims   
8,030   
7,654 
Other policyholders' funds   
4,995   
4,686 
Due to brokers   
40,507   
32,488 
Due to reinsurers   
9,849   
6,232 
Accounts payable, accruals and other liabilities   
10,018   
14,413 
Debt   
16,562   
8,438          **TOTAL LIABILITIES   
613,355   
590,410         **STOCKHOLDERS' EQUITY:         
Preferred stock (none issued)   
-   
- 
Common stock,  7,787,705 and 7,746,262 shares          
issued and outstanding, net of  1,996,951 and         
2,038,394  shares in treasury   
7,788   
7,746 
Paid-in capital   
76,941   
77,539 
Accumulated other comprehensive income:          
   Unrealized gains on investments, net   
70   
1,695 
Retained earnings   
71,175   
66,738          
TOTAL STOCKHOLDERS' EQUITY   
155,974   
153,718 **TOTAL LIABILITIES AND          **STOCKHOLDERS' EQUITY  
$
769,329  
$
744,128** 

 

 

 

 

See accompanying Notes to consolidated financial statements.
**INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

THREE MONTHS ENDED MARCH 31,
**2003**2002**(Unaudited)**REVENUES
Premiums earned 
$
33,871
$
28,655
Net investment income 
8,811
9,595
Net realized gains 
340
184
Other (expense) income 
(532)
1,494
42,490
39,928**EXPENSES
Insurance benefits, claims and reserves
23,070
22,222
Amortization of deferred acquisition costs 
1,676
1,327
Selling, general and administrative expenses
10,724
10,224
Interest expense on debt
100
103
35,570
33,876
Income before income taxes
6,920
6,052
Income tax expense
2,483
2,103**NET INCOME
$
4,437
$
3,949**Basic income per common share
$
.57
$
.51
WEIGHTED AVERAGE BASIC COMMON 
SHARES 
7,816
7,790**Diluted income per common share
$
.56
$
.49
WEIGHTED AVERAGE DILUTED COMMON
SHARES
7,956
7,989
 

 

 

 

 

 

 

 

 

 

 
**See accompanying Notes to consolidated financial statements.

INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)

THREE MONTHS ENDED MARCH 31,
****2003****2002**(Unaudited)**CASH FLOWS FROM OPERATING ACTIVITIES
Net income
$
4,437
$
3,949
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred policy acquisition costs
1,676
1,327
Net realized gains on investments
(340)
(184)
Depreciation and amortization
184
196
Deferred tax benefit
(157)
(54)
Other
(568)
(48)
Changes in assets and liabilities:
Change in insurance liabilities
6,344
9,440
Additions to deferred acquisition costs
(1,620)
(1,360)
Change in net amounts due from and to reinsurers
876
(3,611)
Change in income tax liability
(1,426)
44
Change in due and unpaid premiums
(174)
728
Other
(2,765)
1,448
Net cash provided by operating activities
         6,467
11,875**CASH FLOWS FROM INVESTING ACTIVITIES
Change in net amount due from and to brokers
4,900
2,026
Net purchases of short-term investments
(354)
(1,771)
Net sales (purchases) of securities under resale agreements
7,349
(2,025)
Sales and maturities of fixed maturities
399,743
344,162
Purchases of fixed maturities
(425,137)
(351,369)
Sales of equity securities
3,638
6,620
Purchases of equity securities 
(5,918)
(4,806)
Sales of other investments
10,526
982
Additional investments in other investments, net 
of distributions
(5,413)
(4,040)
Acquisition of companies
-
(2,125)
Net change in notes receivable
430
(235)
Other
312
64
Net cash used by investing activities
(9,924)
(12,517)
 

 **CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of debt
10,000
-
Repayment of debt
(1,875)
-
Payments of investment-type insurance contracts
1,235
(107)
Exercise of common stock options
1,996
-
Repurchase of common stock 
(2,666)
(55)
Dividends paid
(387)
(389)
Net cash provided (used) by financing activities
8,303
(551)
Increase (decrease) in cash and cash equivalents
4,846
(1,193)
Cash and cash equivalents, beginning of year
13,292
          10,395
Cash and cash equivalents, end of period
$
18,138
$
9,202**See Accompanying Notes to Consolidated Financial Statements.

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") and Madison National Life Insurance Company, Inc. ("Madison Life") 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 (collectively, "Geneve") held approximately 58% of IHC's outstanding common stock at March 31, 2003.
**(B)	Principles of Consolidation and Preparation of Financial Statements

	The consolidated financial statements have been prepared in accordance with the requirements for quarterly reports on Form 10-Q. In the opinion of management, all adjustments (consisting only of normal recurring accruals) that are necessary for a fair presentation of the consolidated results of operations for the interim periods have been included. The consolidated results of operations for the three months ended March 31, 2003 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, 2002. Certain amounts in the prior year's consolidated financial statements and have been reclassified to conform to the 2003 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.

	**(C)	Stock-Based Compensation**
The Company applies Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations in accounting for its stock option plan. Since stock options under the plan are issued with an exercise price equal to the stock's fair value on date of grant, no compensation cost has been recognized in the Consolidated Statements of Operations. The Company follows the disclosure provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation". In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation- Transition and Disclosure" ("SFAS 148"). SFAS 148 amends SFAS 123 to provide alternative methods of transition for a voluntary change from the intrinsic value method to the fair value based method of accounting for stock-based compensation. At March

I**NDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
**NOTE 1.  	Significant Accounting Policies and Practices  (Continued)**
	**(C)	Stock-Based Compensation**
31, 2003, the Company continued to apply the intrinsic value method. SFAS 148 also requires more prominent disclosures in both annual and interim financial statements about the method used and its effect on reported results. 
****
SFAS No. 123 establishes a fair value based method of accounting for stock-based compensation plans as an alternative to APB Opinion No. 25. Under SFAS No. 123, the compensation cost for options is measured at the grant date based on the value of the award, and such cost is recognized as an expense over the vesting period of the options. Compensation cost for stock appreciation rights ("SARs") is recognized over the service period of the award under both APB Opinion No. 25 and SFAS No. 123. Had the Company applied SFAS No. 123 in accounting for stock-based compensation awards, net income and net income per share for the three months ended March 31, 2003 and 2002 would have been as follows:
******2003**2002
**(in thousands, except per share data)**

Net income, as reported
$
4,437
$
3,949
Add SAR expense included in reported
net income, net of tax
-
33
Deduct SAR and stock option expense 
under SFAS No. 123, net of tax
(73)
(132)
Pro forma net income
$
4,364
$
3,850**Basic income per common share:
As reported
$
.57
$
.51
Pro forma
$
.56
$
.49**Diluted income per common share:
As reported
$
.56
$
.49
Pro forma
$
.55
$
.48**NOTE 2.	INCOME PER COMMON SHARE

	Included in the diluted earnings per share calculation for 2003 and 2002, respectively, are 140,000 and 199,000 shares from the assumed exercise of options using the treasury stock method. Net income does not change as a result of the assumed dilution of options. 
**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
**INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
**NOTE 3.	INCOME TAXES**
for the current year.

The income tax benefit for the three months ended March 31, 2003 allocated to stockholders' equity for the decrease in the net unrealized gains on investment securities was $948,000. The related deferred tax liability decreased to $25,000 at March 31, 2003 from $973,000 at December 31, 2002.
**NOTE 4.	SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION**
Cash payments for income taxes were $1,852,000 and $2,168,000 for the three months ended March 31, 2003 and 2002, respectively. Cash payments for interest were $89,000 and $69,000 for the three months ended March 31, 2003 and 2002, respectively.
**NOTE 5.	COMPREHENSIVE INCOME**
The components of comprehensive income include net income or loss reported in the consolidated statements of operations and unrealized gains and losses reported directly in stockholders' equity. The latter amounts consist of unrealized (losses) gains on available-for-sale securities net of taxes and deferred acquisition costs. Comprehensive income for the three months ended March 31, 2003 and 2002 is as follows:
**** **2003**2002 **(in thousands)     
Net  income
$
4,437
$
3,949
Unrealized losses 
(1,625) 
(3,450)
Comprehensive income
$
2,812
$
499**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 ended March 31, 2003 and 2002 is as follows:

 

 **2003**2002**(in thousands)**Revenues:
Medical stop-loss
$
16,569
$
14,113
Group disability, life, annuities and DBL
11,000
11,413
Individual life, annuities and other
9,671
10,879
Credit life and disability 
4,528
3,069
Corporate
382
270
42,150
39,744
Net realized and unrealized gains
340
184
$
42,490
$
39,928**INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

													
**NOTE 6. 	SEGMENT REPORTING  (Continued)**
**2003**2002**(in thousands)**Income before income taxes:
Medical stop-loss
$
3,244
$
2,195
Group disability, life, annuities and DBL
1,254
1,644
Individual life, annuities and other
2,035
2,250
Credit life and disability 
440
531
Corporate
(293)
(649)
6,680
5,971
Interest expense
(100)
(103)
Net realized and unrealized gains
340
184
$
6,920
6,052**Note 7.	New Accounting Pronouncements**
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"), which addresses costs associated with an exit activity (including restructuring) or with disposal of long-lived assets. Those activities can include eliminating or reducing product lines, terminating employees and contracts, and relocating facilities and personnel. The provisions of SFAS 146 will not supersede the accounting requirements for costs to restructure operations acquired in a business combination. Under SFAS 146, companies are required to record a liability for a cost associated with an exit or disposal activity when that liability is incurred and can be measured at fair value. The new requirements are effective prospectively for exit and disposal activities initiated after December 31, 2002. The adoption of SFAS 146 effective as of January 1, 2003 did not affect the Company's consolidated financial statements.

In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45").  This interpretation requires that certain disclosures be made by a guarantor in its financial statements about its obligations under guarantees, effective for financial statements for periods ending after December 15, 2002.  FIN 45 also requires the recognition, at fair value, of a liability by a guarantor at the inception of certain guarantees issued or modified after December 31, 2002.  The adoption of FIN 45 did not have a material effect on the Company's consolidated financial statements.

In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). This interpretation provides guidance on the identification of entities controlled through means other than voting rights.  FIN 46 specifies how a business enterprise should evaluate its interests in a variable interest entity to determine whether to
**INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

													
**Note 7.	New Accounting Pronouncements  (Continued)**
consolidate that entity.  A variable interest entity must be consolidated by its primary beneficiary if the entity does not effectively disperse risks among the parties involved. A public company with a variable interest in an entity created before February 1, 2003 must apply FIN 46 in the first interim or annual period beginning after June 15, 2003. The adoption of FIN 46 is not expected to have a material effect on the Company's consolidated financial statements.

 
**Note 8.	 American Independence Corp.**
	At March 31, 2003, the Company owned 19.9% of American Independence Corp. ("AMIC") and accounted for its investment under the equity method of accounting. The carrying value of the Company's investment in AMIC was $11,570,000 at March 31, 2003 and its equity income was $401,000 for the three months ended March 31, 2003. The Company completed a cash tender offer for an additional 1,000,000 shares (approximately 12%) of AMIC's outstanding common stock on April 22, 2003, at a cost of $9,000,000. The Company currently owns 31.7% of AMIC. AMIC is an insurance holding company that does business with the Insurance Group.
**Note 9.	Trust Preferred Debt**
On March 27, 2003, Independence Preferred Trust I (the "Trust "), a statutory business trust and wholly-owned subsidiary of the Company, issued securities having an aggregate liquidation amount of $10,000,000 (the "Capital Securities") to institutional buyers in a pooled trust preferred issue. The Trust received gross proceeds of $10,000,000 from the issuance of the Capital Securities, which the Trust then loaned to the Company to use for general corporate purposes. Trust preferred debt is included as debt in the consolidated balance sheet at March 31, 2003. Issuance costs included in other assets from the March 27, 2003 sale totaled approximately $300,000.

The distributions payable on the Capital Securities are cumulative and payable quarterly in arrears. The Company has the right, subject to events of default, to defer payments of interest on the Capital Securities for a period not to exceed 20 consecutive quarters, provided that no extension period may extend beyond the maturity date of April 7, 2033. The Company has no current intention to exercise its right to defer payments of interest on the Capital Securities. 

The rate is fixed at 7.4% through a swap for the first five years and is set at approximately 400 basis points over the three month LIBOR thereafter. The Capital Securities are mandatorily redeemable upon maturity on April 7, 2033. The Company has the right to redeem the Capital Securities on or after April 7, 2008. If the Capital Securities were redeemed on or after April 7, 2008, the redemption price would be 100% of the principal amount plus accrued and unpaid interest. 
**ITEM 2. 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") and Madison National Life Insurance Company, Inc. ("Madison Life"), and their subsidiaries (collectively, the "Insurance Group"). IHC and its subsidiaries (including the Insurance Group) are collectively referred to as the "Company."  Corporate consists of investment income from parent company liquidity, interest expense on debt and general expenses associated with parent company activities.
**CRITICAL ACCOUNTING POLICIES

	The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States ("GAAP") and to general practices within the insurance industry. The preparation of the financial statements in conformity with GAAP requires 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.  Management has identified the accounting policies described below 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 management's discussion and analysis.
**Insurance Reserves 

	The Company maintains loss reserves to cover its estimated liability for unpaid losses and loss adjustment expenses, including legal and other fees as well as a portion of the Company's general expenses, for reported and unreported claims incurred as of the end of each accounting period.

The Company computes future insurance policy benefits primarily using the net premium method based on anticipated investment yield, mortality (morbidity on health insurance) and withdrawals. Liabilities for future insurance policy benefits on certain short-term medical coverages were computed using completion factors and expected loss ratios derived from actual historical premium and claim data. These methods are widely used in the life and health insurance industry to estimate the liabilities for future insurance policy benefits. Inherent in these calculations are management and actuarial judgments and estimates (within industry standards) which could significantly impact the ending reserve liabilities and, consequently, operating income.  Actual results may differ, and these estimates are subject to interpretation and change. Management believes that the Company's method of estimating the liabilities for future insurance policy benefits provides a reasonably accurate level of reserves at March 31, 2003, however, if the Company's reserves are insufficient to cover its actual losses and loss adjustment expenses, the Company would have to augment its reserves and incur a charge to its earnings, and these charges could be material. 
**Investments

	The Company accounts for its investments in debt and equity securities under Statement of Financial Accounting Standards No. 115 ("SFAS 115"), *Accounting for Certain Investments in Debt and Equity Securities.* The Company has classified all of its investments as available-for-sale securities. These investments are carried at fair value based on quoted market prices with unrealized gains and losses reported in accumulated other comprehensive income (loss) in the accompanying consolidated balance sheets. Net realized gains and losses on investments are computed using the specific identification method and are reported in the accompanying consolidated statements of operations. Declines in value judged to be other-than-temporary are determined based on the specific identification method and are reported in the accompanying consolidated statements of operations as net realized losses. The factors considered by management in determining when a decline is other than temporary include but are not limited to:  the length of time and extent to which the fair value has been less than cost; the financial condition and near-term prospects of the issuer; adverse changes in ratings announced by one or more rating agencies; whether the issuer of a debt security has remained current on principal and interest payments; whether the decline in fair value appears to be issuer specific or, alternatively, a reflection of general market or industry conditions; and the Company's intent and ability to hold the security for a period of time sufficient to allow for a recovery in fair value.  For securities within the scope of Emerging Issues Task Force Issue 99-20, such as purchased interest-only securities, an impairment loss is recognized when there has been a decrease in expected cash flows combined with a decline in the security's fair value below cost.
**RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002

The Company's pre-tax income was $6.9 million for the period ended March 31, 2003 compared to $6.1 million for the same period of 2002. The Company had net realized and unrealized gains of $.3 million in 2003 and $.2 million in 2002. 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, pre-tax income increased 11.9% to $6.6 million in 2003 from $5.9 million in 2002. Net income was $4.4 million, or $.56 per share, diluted, for the quarter ended March 31, 2003 versus $3.9 million, or $.49 per share, diluted, in 2002. 
**Insurance Group

The Insurance Group's pre-tax income increased $.5 million to $7.3 million in 2003 from $6.8 million in 2002. These results include net realized and unrealized gains of $.3 million in 2003 compared to $.2 million in 2002. Pre-tax income excluding net realized and unrealized gains increased to $7.0 million in 2003 compared to $6.6 million in 2002. 

Premium revenues grew $5.2 million to $33.9 million in 2003 from $28.7 million in 2002; premium revenues increased $2.2 million at Madison Life and $3.0 million at Standard Life. The change at Madison Life is comprised of: a $1.4 million increase in the credit line of business due to the termination of a reinsurance treaty January 1, 2002; and an increase of $.8 million from the medical stop-loss line of business which commenced writing premium in 2002. The change at Standard Life is comprised of the following increases: $2.3 million in medical stop-loss premiums due to higher volume in 2003; $.5 million in the provider excess line; and $.2 million net from all other lines of business.

Total net investment income decreased $1.4 million due to an overall decrease in yield on assets. The annualized return on investments of the Insurance Group was 6.4% in the first quarter of 2003 and 7.4% in the first quarter of 2002. Included in net investment income is $.4 million of income from the Company's investment in American Independence Corp. ("AMIC").

Other income decreased $1.6 million due to a $.9 million decrease at Standard Life and a $.7 million decrease at Madison Life in each case resulting from the sale of MGU subsidiaries to AMIC in the fourth quarter of 2002. In addition, Standard Life experienced other expense in the three months ended March 31, 2003, due to surrenders from a modified coinsurance agreement that is in runoff status.

	Insurance benefits, claims and reserves increased $.8 million, reflecting increases of $.4 million at Madison Life and $.4 million at Standard Life. Madison Life's increase resulted from: $.6 million growth in the credit business partially offset by a $.1 million decrease in LTD claims and a $.1 million decrease in the group term life line of business. The change at Standard Life is comprised of: higher claims and reserves of $1.4 million from the medical stop-loss line due to the greater volume; offset by a decrease in reserves of $.5 million attributable to a reduction in the ordinary life line of business, which is in runoff and a $.5 million decrease in all other lines.

	Amortization of deferred acquisition costs and general and administrative expenses for the Insurance Group increased $1.1 million. Madison Life's expenses increased $1.2 million due to greater commission expense, partially offset by lower general expenses due to the sale of a subsidiary.
**Corporate

	The pre-tax loss for corporate decreased $.4 million to $.4 million for the quarter ended March 31, 2003 from $.8 million for the quarter ended March 31, 2002. The lower loss is primarily attributable to an increase in investment income of $.1 million and a reduction in compensation expense of $.3 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 partially used to finance liabilities for insurance policy benefits. These liabilities represent long-term and short-term obligations which are calculated using certain assumed interest rates.

	**Asset Quality**
	The nature and quality of insurance company investments must comply with all applicable statutes and regulations, which have been promulgated primarily for the protection of policyholders. Of the aggregate carrying value of the Insurance Group's investment assets, approximately 86.6% was invested in investment grade fixed income securities, resale agreements, policy loans and cash and cash equivalents at March 31, 2003.  Also at such date, approximately 96.6% of the Insurance Group's fixed maturities were investment grade. These investments carry less risk and, therefore, lower interest rates than other types of fixed maturity investments. At March 31, 2003, approximately 3.4% 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). The Company has a negligible amount invested in mortgage loans. The Company's had no non-performing fixed maturities at March 31, 2003.

	
**Investment Impairments**
	The Company reviews its investments quarterly and monitors its investments continually for impairments. For the three months ended March 31, 2003 and 2002, the Company recorded a realized loss for other than temporary impairments of $3.8 million and $1.6 million, respectively. In 2003, $3.6 million of the loss relates to an interest related impairment recognized on certain interest only securities ("IO Securities") resulting from expected prepayments of the mortgage obligations underlying the IO Securities due to falling interest rates. The Company has invested in IO Securities to help actively manage its interest rate exposure. Typically these securities account for less than 2% of IHC's total portfolio assets and are rated AAA or better. In a rising interest rate environment, IO Securities will increase in value which acts to mitigate the loss on the balance of the bond portfolio. In a decreasing interest rate environment, IO Securities will lose value, but there will be gains in the rest of the bond portfolio. Although these securities performed as expected, the Company applies the methodology of Emerging Issues Task Force 99-20, "Recognition of Interest Income and Impairment of Purchased and Retained Beneficial Interests in Securitized Financial Assets" ("EITF 99-20") in determining when an IO Security is considered other than temporarily impaired. The Company recorded a realized loss in the three months ended March 31, 2003 under EITF 99-20, since there had been a decrease in expected cash flows combined with a decline in the IO Securities' fair value below cost. 

The Company's gross unrealized losses on fixed maturities totaled $7.4 million at March 31, 2003. Substantially all of these securities were investment grade. The remaining unrealized losses, primarily within the corporate securities portfolio, have been evaluated in accordance with the Company's policy and were determined to be temporary in nature at March 31, 2003.

	The Company holds all securities as available-for-sale and accordingly marks all of its securities to market through accumulated other comprehensive income.  Therefore, any realized loss generated by impairment losses will have no economic impact on the Company's total stockholders' equity. Moreover, since every security is marked to market through stockholders' equity, the Company is never in a position where a decline in the market value of a security would have an unexpected economic impact on the net worth of the Company.
**Balance Sheet

	Total investments increased $13.3 million to $557.9 million at March 31, 2003.  Such increase was slightly offset by an increase in due to brokers of $8.0 million due to the timing of securities trades. An increase in fixed maturities was offset by a decrease in securities purchased under agreements to resell. The $3.5 million increase in future insurance policy benefits reflects growth in the business. A net increase of $8.1 million in debt is due to the issuance of $10.0 million in trust preferred debt, partially offset by debt repayments of $1.9 million.  The $2.2 million positive change in total stockholders' equity is due to net income generated in the three months ended March 31, 2003, partially offset by the net purchase of the Company's common stock and a decrease in unrealized gains on fixed maturity investments.

	The Company had net receivables from reinsurers of $118.8 million at March 31, 2003.  Substantially all of the business ceded to such reinsurers is of short duration. All of these receivables are either due from highly rated companies or are adequately secured. Accordingly, no allowance for doubtful accounts was necessary at March 31, 2003.
**Corporate

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

	Total corporate liquidity (cash, cash equivalents, resale agreements and marketable securities) amounted to $17.9 million at March 31, 2003. 
**Trust Preferred Debt**
On March 27, 2003, Independence Preferred Trust I (the "Trust "), a statutory business trust and wholly-owned subsidiary of the Company, issued securities having an aggregate liquidation amount of $10,000,000 (the "Capital Securities") to institutional buyers in a pooled trust preferred issue. The Trust received gross proceeds of $10,000,000 from the issuance of the Capital Securities, which the Trust then loaned to the Company to use for general corporate purposes. Issuance costs from the March 27, 2003 sale totaled approximately $300,000.
**CAPITAL RESOURCES**
	Due to its strong 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 SFAS No. 115, the Company may carry its portfolio of fixed income securities either as held to maturity (carried at amortized cost), as trading securities (carried at fair market value) or as available-for-sale (carried at fair market value). The Company has chosen to carry all of its debt securities as available-for-sale. The Company experienced a decrease in unrealized gains of $1.6 million, net of deferred tax benefit and deferred policy acquisition costs, in accumulated other comprehensive income, reflecting net unrealized gains of $.1 million at March 31, 2003 versus $1.7 million at December 31, 2002. From time to time, as warranted, the Company employs investment strategies to mitigate interest rate and other market exposures.

On April 22, 2003, the Company completed a cash tender offer for an additional 1.0 million shares of AMIC at a total cost of $9.0 million.
**ITEM 3.         QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	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. Options may be utilized 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 March 31, 2003 given a 100 to 300 basis point rise or decline in interest rates is not materially different than the expected change at December 31, 2002. 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.
**ITEM 4. CONTROLS AND PROCEDURES
Independence Holding Company's management, including the Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of disclosure controls and procedures pursuant to Exchange Act Rule 13a-14.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this quarterly report has been made known to them in a timely fashion.  There have been no significant changes in internal controls, or in factors that could significantly affect internal controls, subsequent to the date the Chief Executive Officer and Chief Financial Officer completed their evaluation.
**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 1.		Legal Proceedings**
	None
**Item 2.		Changes in Securities and Use of Proceeds**
	Not Applicable**	
Item 3.	     	Defaults upon Senior Securities**
	Not Applicable
**Item 4.**Submission of Matters to a Vote of Security Holders**
	

	Not Applicable
**Item 5.	**Other Information**
	Not Applicable
**Item 6. 	  Exhibits and Reports on Form 8-K
a.	Exhibit 99. Certifications pursuant to Section 906 of The Sarbanes-Oxley Act of 2002

b.	A report on Form 8-K was filed on May 9, 2003 to announce 2003 first quarter record earnings. 

c.	A report on Form 8-K was filed on March 4, 2003 to announce 2002 fourth quarter and record net income from operations for 2002 year.
**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)

 

 

                                                                             By: /s/ Roy T.K. Thung________________

                                                                            Chief Executive Officer and

                                                                             President

 

 

                                                                             By: /s/ Teresa A. Herbert		  
                                                                                                             Teresa A. Herbert

                                                                             Vice President and

                                                                                                          Chief Financial Officer

Dated:  May 15, 2003

 
**CERTIFICATIONS PURSUANT TO

SECTION 302 OF 

THE SARBANES-OXLEY ACT OF 2002 

CERTIFICATION 

I, Roy T.K. Thung, certify that: 

1. I have reviewed this quarterly report on Form 10-Q of Independence Holding Company; 

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: 

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; 

b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and 

c)  presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): 

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in the internal controls; and 

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 

6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 

 

 

/s/*Roy T.K. Thung*	

Roy T.K. Thung

Chief Executive Officer and President
 

Date:
 

May 15, 2003	
 
**CERTIFICATION**
I, Teresa A. Herbert, certify that: 

1. I have reviewed this quarterly report on Form 10-Q of Independence Holding Company;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: 

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; 

b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filling date of this quarterly report (the "Evaluation Date"); and 

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): 

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and 

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 

6.  The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 

 

 

/s/*Teresa A. Herbert*	

Teresa A. Herbert

Vice President and Chief Financial Officer
 

Date:
 

May 15, 2003	******************************************************************************************************************************************************************