FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended: **SEPTEMBER 30, 2001
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.

 

 

                      **7,785,617 SHARES OF COMMON STOCK, $1.00 PAR VALUE**
Common stock outstanding as of November 12, 2001
**INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

INDEX

 
**PART I - FINANCIAL INFORMATION**PAGE NO.   
Consolidated Balance Sheets -  
September 30, 2001 (unaudited) and December 31, 2000 
3   
Consolidated Statements of Operations -  
Three Months and Nine Months Ended September 30, 2001   
and 2000 (unaudited) 
4   
Consolidated Statements of Cash Flows -  
Nine Months Ended September 30, 2001 and 2000 (unaudited) 
5   
Notes to Consolidated Financial Statements (unaudited) 
6 - 9   
Management's Discussion and Analysis of Results of Operations and  
Financial Condition 
10 - 15  **PART II - OTHER INFORMATION    
Item 6 - Exhibits and Reports on Form 8-K 
15   
Signatures 
16
									
**INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES****CONSOLIDATED BALANCE SHEETS**SEPTEMBER 30,**DECEMBER 31,**2001**2000**(UNAUDITED)**ASSETS:
Investments:
Short-term investments
$
1,791,000
$
5,455,000
Securities purchased under agreements
to resell 
20,392,000
22,253,000
Fixed maturities 
425,907,000
378,745,000
Equity securities 
30,783,000
18,770,000
Other investments 
69,007,000
65,284,000
Total investments
547,880,000
490,507,000
Cash and cash equivalents
7,721,000
18,024,000
Due from brokers
8,979,000
2,187,000
Deferred acquisition costs 
23,574,000
26,731,000
Due and unpaid premiums
7,952,000
7,977,000
Due from reinsurers
144,155,000
152,872,000
Notes and other receivables
5,661,000
15,601,000
Other assets 
12,548,000
10,729,000**TOTAL ASSETS
$
758,470,000
$
724,628,000**LIABILITIES AND STOCKHOLDERS' EQUITY:**LIABILITIES:
Future insurance policy benefits 
$
307,081,000
$
308,145,000
Unearned premiums
20,144,000
20,485,000
Funds on deposit
184,055,000
185,696,000
Policy claims 
6,831,000
7,224,000
Other policyholders' funds
4,887,000
4,642,000
Financial instruments sold, but not 
yet purchased 
601,000
-
Due to brokers
46,636,000
24,597,000
Due to reinsurers
10,327,000
8,853,000
Accounts payable, accruals and other
liabilities
16,744,000
20,311,000
Income taxes 
6,515,000
3,142,000
Long-term debt 
14,063,000
15,000,000**TOTAL LIABILITIES
617,884,000
598,095,000**STOCKHOLDERS' EQUITY: 
Preferred stock (none issued)
-
-
Common stock, 7,785,617 and
7,878,813 shares issued and outstanding,           
respectively, net of 1,998,537 and 
1,784,906 shares in treasury, respectively
7,786,000
7,879,000
Paid-in-capital
78,368,000
80,099,000
Accumulated other comprehensive income:
Unrealized gains on investments, net
              6,101,000
1,237,000
Retained earnings
48,331,000
37,318,000**TOTAL STOCKHOLDERS' EQUITY
140,586,000
126,533,000**TOTAL LIABILITIES AND**STOCKHOLDERS' EQUITY
$
758,470,000
$
724,628,000** 

See Accompanying Notes to Consolidated Financial Statements.
**INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES**CONSOLIDATED STATEMENTS OF OPERATIONS**(UNAUDITED)**THREE MONTHS ENDED**NINE MONTHS ENDED **SEPTEMBER 30,**SEPTEMBER 30, **2001**2000**2001**2000     **REVENUES:
         
Premiums earned
$
26,866,000
$
23,322,000
$
79,061,000
$
  65,506,000 
Net investment income
7,638,000
9,056,000
26,244,000
      27,072,000 
Net realized and     
unrealized gains (losses)
1,142,000
441,000
3,528,000
(365,000) 
Other income  
1,212,000 
951,000 
3,652,000 
785,000       
36,858,000 
33,770,000 
112,485,000 
92,998,000     **EXPENSES:     
Insurance benefits, claims     
and reserves
21,732,000
18,665,000
62,701,000
51,700,000 
Amortization of deferred     
acquisition costs
1,488,000
2,033,000
4,865,000
4,681,000 
Selling, general and     
administrative expenses
8,859,000
7,637,000
27,046,000
22,095,000 
Interest expense on     
long-term debt 
216,000 
335,000 
745,000 
952,000       
32,295,000 
28,670,000 
95,357,000 
79,428,000      
Operating income before     
income taxes
4,563,000
5,100,000
17,128,000
13,570,000 
Income tax expense 
1,539,000 
1,785,000 
6,115,000 
4,440,000     **NET INCOME
$
3,024,000
$
3,315,000
$
11,013,000
$
9,130,000     **BASIC INCOME PER     **COMMON SHARE
$
.38
$
.42
$
1.40
$
1.16     
WEIGHTED AVERAGE     
COMMON SHARES     
OUTSTANDING 
7,927,000 
7,898,000 
7,893,000 
7,898,000     **DILUTED INCOME PER     **COMMON SHARE
$
.37 
.41
$
1.37
$
1.14     
WEIGHTED AVERAGE     
DILUTIVE SHARES     
OUTSTANDING 
8,094,000 
8,006,000 
8,036,000 
7,986,000**See Accompanying Notes to Consolidated Financial Statements.

INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)****NINE MONTHS ENDED SEPTEMBER 30,**2001**2000

**CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
$
11,013,000
$
9,130,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred policy acquisition costs
4,865,000
4,681,000
Realized (gains) losses on sales of
investments 
(4,514,000)
553,000
Unrealized losses (gains) on trading securities
986,000
(188,000)
Depreciation 
1,026,000
665,000
Deferred tax benefit
(1,251,000)
(719,000)
Other
(1,075,000)
(892,000)
Changes in assets and liabilities:
Net sales of trading securities
(7,720,000)
 335,000
Decrease in insurance liabilities
(1,026,000)
(2,997,000)
Additions to deferred acquisition costs
(4,014,000)
(581,000)
Change in net amounts due from and to
reinsurers
10,192,000
(14,111,000)
Change in income tax liability
1,910,000
(220,000)
Change in due and unpaid premiums
                 25,000
3,981,000
Other
(3,197,000)
        442,000
Net cash provided by 
operating activities
7,220,000
79,000**CASH FLOWS FROM INVESTING ACTIVITIES:
Change in net amount due from and to brokers
15,247,000
8,094,000
Sales and maturities of short-term investments
27,113,000
66,406,000
Purchases of short-term investments
(23,284,000)
(61,019,000)
Net sales (purchases) of resale agreements
1,861,000
(1,276,000)
Sales of fixed maturities
1,129,467,000
399,824,000
Purchases of fixed maturities
(1,162,366,000)
(424,056,000)
Sales of equity securities
20,100,000
57,349,000
Purchases of equity securities 
(24,225,000)
(66,793,000)
Proceeds on sale of other investments
5,096,000
5,859,000
Additional investments in other investments, net 
of distributions
(8,374,000)
(8,931,000)
Acquisition of companies
(1,756,000)
-
Net change in notes receivable
10,558,000
28,312,000
Other
(1,637,000)
2,181,000
Net cash (used) provided by
investing activities
(12,200,000)
5,950,000
 

 **CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt
     (937,000)
-
Exercise of common stock options and warrants
1,726,000
2,000
Payments of investment-type insurance 
contracts
(2,168,000)
(1,818,000)
Repurchase of common stock and warrants
(3,550,000)
-
Dividends paid
(394,000)
(369,000)
Net cash used by financing activities
(5,323,000)
(2,185,000)
(Decrease) increase in cash and cash
equivalents
(10,303,000)
3,844,000
Cash and cash equivalents, beginning of year
18,024,000
6,689,000
Cash and cash equivalents, end of period
$
7,721,000
$
10,533,000**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") 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.

**(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 and nine months ended September 30, 2001 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, 2000. Certain amounts in the prior year's consolidated financial statements and have been restated to conform to the 2001 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 September 30, 2001 and 2000, respectively, are 167,000 and 108,000 shares and 143,000 and 88,000 shares for the nine months ended September 30, 2001 and 2000, respectively. Net income does not change as a result of the assumed dilution of options. All of the Company's share purchase warrants expired on June 30, 2001.
**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. 

The income tax expense for the nine months ended September 30, 2001 allocated to stockholders' equity for unrealized gains on investment securities was $2,714,000, representing the change in the deferred tax liability of $3,447,000 at September 30, 2001 from a deferred tax liability of  $733,000 at December 31, 2000.
**NOTE 4.	SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION**
Cash payments for income taxes were $5,481,000 and $5,235,000 for the nine months ended September 30, 2001 and 2000, respectively. Cash payments for interest were $747,000 and $570,000 for the nine months ended September 30, 2001 and 2000, respectively.
**NOTE 5.	COMPREHENSIVE INCOME**
The components of comprehensive income include net income and certain amounts previously reported directly in equity. Comprehensive income for the three months and nine months ended September 30, 2001 and 2000 is as follows:
 **THREE MONTHS ENDED**NINE MONTHS ENDED **2001**2000**2001**2000 **(IN THOUSANDS)  
Net income
$
3,024
$
3,315
$
11,013
$
9,130
Unrealized gains, on

 
available-for-sale securities 
       6,051 
       3,153 
         4,864 
3,889
Comprehensive income 
$
 9,075
$
6,468
$
15,877
$
13,019
 
**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 nine months ended September 30, 2001 and 2000 is as follows:
 **THREE  MONTHS ENDED**NINE MONTHS ENDED **2001**2000**2001**2000 **(IN THOUSANDS)     **Revenues:     

  
Medical Stop-Loss
$
8,295
$
6,927
$
22,848
$
17,359
DBL
5,156
5,019
15,421
14,797
Group Term Disability and     
Term Life and Annuities
5,724
4,952
17,417
15,509
Credit Life and Disability
3,752
3,916
10,043
12,116
Managed Health Care
2,707
1,731
9,361
4,495
Special Disability
247
191
416
463
Individual Life and Annuities
8,669
9,945
28,780
24,630
Other Business
1,194
112
3,758
2,449
Corporate 
(28) 
536 
913 
1,545 
35,716
33,329
108,957
93,363
Net Realized and Unrealized     
Gains (Losses)  
1,142 
441 
3,528 
(365) 
$
36,858
$
33,770
$
112,485
$
92,998     **Operating Income (Loss):     

 
Medical Stop-Loss
$
1,895
$
1,286
$
5,072
$
3,794
DBL
801
504
2,053
1,391
Group Term Disability and     
Term Life and Annuities
853
              733
1,625
1,611
Credit Life and Disability
             313
247
              261
427
Managed Health Care
187
                83
995
131
Special Disability
302
203
490
517
Individual Life and Annuities
308
2,078
4,884
7,035
Other Business
336
371
1,204
971
Corporate 
(1,358) 
(511) 
(2,239) 
(990) 
3,637
4,994
14,345
14,887
Interest Expense
           (216)
              (335)
(745)
(952)
Net Realized and Unrealized     
Gains (Losses) 
1,142 
441 
3,528 
(365) 
$
4,563
$
5,100
$
17,128
$
13,570** 

INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 7. 	NEW ACCOUNTING PRONOUNCEMENTS**
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations", SFAS No. 142 "Goodwill and Other Intangible Assets" and SFAS No. 143 "Accounting for Asset Retirement Obligations".  In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for using one method - the purchase method.  SFAS No. 142 addresses how intangible assets that are acquired individually or with a group of other assets should be accounted for in financial statements upon their acquisition. SFAS No. 142 also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. SFAS No. 142 is required to be applied starting with fiscal years beginning after December 15, 2001.  The Company is currently evaluating the impact of SFAS No. 142, but does not expect it to have a material impact on the Company. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs, and is effective for fiscal years beginning after June 15, 2002. SFAS No. 144 is effective for financial statements issued after December 15, 2001. The adoption of SFAS No. 143 and SFAS No. 144 will not have a material impact on the Company.

 
**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") 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." All remaining expenses and income, principally income from parent company liquidity, are included in Corporate.
**RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2000

The Company's operating income was $4.6 million for the three months ended September 30, 2001 compared to $5.1 million for the same period of 2000. The Company had net realized and unrealized gains of $1.1 million in 2001 and $.4 million in 2000. 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 decreased to $3.5 million in 2001 as compared to $4.7 million in 2000 (see Note 6 of Notes to Consolidated Financial Statements). Net income was $3.0 million, or $.37 per share, diluted, for the quarter ended September 30, 2001 versus $3.3 million, or $.41 per share, diluted, in 2000. 
**Insurance Group

The Insurance Group's operating income increased $.2 million to $6.1 million in 2001 from $5.9 million in 2000. Operating income includes net realized and unrealized gains of $1.1  million in 2001 compared to $.4 million in 2000. Operating income excluding net realized and unrealized gains was $5.0 million in 2001 compared to $5.5 million in 2000. 

Premium revenues increased $3.6 million to $26.9 million in 2001 from $23.3 million in 2000; premium revenues decreased $.2 million at Madison Life and increased $3.8 million at Standard Life. The change at Madison Life is comprised of: a $.4 million increase in long-term disability ("LTD") premiums as a result of an increase in premiums written in 2001 offset by a $.5 million decrease in ordinary life and individual accident and health premiums and a $.1 million decrease in all other lines. The increase at Standard Life is comprised of: a $2.5 million increase in stop-loss premiums due to higher retention and increased volume in 2001; a $.3 million increase in HMO reinsurance due to an increase in volume and a coinsurance agreement entered into in 2001; a $.3 million increase in group life premiums; a $.4 million increase in the new blanket accident line; and a $.3 million increase in all other lines.

Total net investment income decreased $.8 million. This decrease was primarily the result of lower returns on certain market neutral partnership investments which earned $.1 million in 2001 as compared to $1.1 million in 2000. (The S&P 500 Index lost 14.7% during the third quarter of 2001). The annualized return on investments of the Insurance Group in the third quarter of 2001 was 6.3% compared to 7.3% in the third quarter of 2000.

Other income increased $.2 million from a $.3 million increase in fee income at IndependenceCare due to the increase in premiums written, offset by $.1 million less fee income earned by Madison Life's majority owned managing general underwriter ("MGU"). 

	Insurance benefits, claims and reserves increased $3.1 million, reflecting an increase of $.1 million at Madison Life and an increase of $3.0 million at Standard Life. The change at Standard Life is comprised of: a $1.4 million increase in stop-loss reserves due to the increase in premiums, slightly offset by lower loss ratios; a $1.0 million increase in the group life and annuity lines of business ($.4 million of which is due to losses on the Volunteer Firefighters Division as a consequence of the September 11th tragedy); a $.3 million increase in the HMO Reinsurance line due to the increase in volume; and a $.3 million increase in all other lines.

	Amortization of deferred acquisition costs and general and administrative expenses for the Insurance Group increased $.4 million. Madison Life's expenses decreased $.2 million. The decrease at Madison Life is due to a decrease in commission expense. Standard Life's increased $.2 million, due to higher administrative fees attributable to the increase in volume. IndependenceCare's expenses increased $.4 million due to the increase in volume and the acquisitions in 2001.
**Corporate

	Operating income for the quarter ended September 30, 2001 decreased by $.7 million from 2000 to a loss of $1.5 million due to higher general expenses of $.2 million, lower returns on certain market neutral partnership investments of $.6 million; offset by lower interest expense of $.1 million due to a decrease in interest rates in 2000.
**NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2000

The Company's operating income was $17.1 million for the nine month period ended September 30, 2001 compared to $13.6 million for the same period of 2000. The Company had net realized and unrealized gains of $3.5 million in 2001 and losses of $.4 million in 2000. Excluding net realized and unrealized gains, operating income decreased to $13.6 million in 2001 as compared to $14.0 million in 2000 (see Note 6 of Notes to Consolidated Financial Statements). Net income was $11.0 million, or $1.37 per share, diluted, for the nine months ended September 30, 2001 versus $9.1 million, or $1.14 per share, diluted, in 2000. 
**Insurance Group

The Insurance Group's operating income increased $4.5 million to $20.0 million in 2001 from $15.5 million in 2000. Operating income includes net realized and unrealized gains of $3.5million in 2001 compared to losses of $.4 million in 2000. Operating income excluding net realized and unrealized gains was $16.5 million in 2001 compared to $15.9 million in 2000. 
Premium revenues increased $13.6 million to $79.1 million in 2001 from $65.5 million in 2000; premium revenues increased $2.0 million at Madison Life and $11.6 million at Standard Life. The change at Madison Life is comprised of: a $1.4 million increase in long-term disability ("LTD") premiums as a result of an increase in premiums written in 2001; a $2.3 million increase in ordinary life and individual accident and health premiums due to previously reported acquisition activity; and a $.1 million increase in group term life; such increases were offset by: a $1.8 million decrease in the credit lines of business, primarily due to the runoff of acquisitions of two single premium blocks of business effective in 1997. The increase at Standard Life is comprised of: a $7.0 million increase in stop-loss premiums due to higher retention ($6.2 million) and increased  volume in 2001 ($.8 million); a $2.2 million increase in HMO reinsurance due to an increase in volume from a coinsurance agreement on a new block of business; a $1.0 million increase in provider excess premiums due to an assumed block; a $1.0 million increase in the new blanket accident line and a $.4 million increase in all other lines.

Total net investment income decreased $.2 million due to an increase in assets slightly offset by a decrease in the annualized return due to lower returns on certain market neutral partnership investments. The annualized return on investments of the Insurance Group in 2001 was 7.0% compared to 7.2% in 2000.

Other income increased $2.7 million due to a $2.3 million increase at Standard Life comprised of a decrease in coinsurance reserves due to the surrender by a large group of policyholders in a modified coinsurance treaty in 2000 with no corresponding amount in 2001 (such increase in other income is offset by an increase in insurance benefits and claims) and a $1.2 million increase in fee income at IndependenceCare due to an increase in premiums written in 2001 and due to the acquisition of two subsidiary MGU's; offset by $.8 million less fee income earned by Madison Life's majority owned managing general underwriter ("MGU"). 

	Insurance benefits, claims and reserves increased $11.0 million, reflecting an increase of $1.8 million at Madison Life and an increase of $9.2 million at Standard Life. Madison Life's increase resulted from: a $1.9 million increase in ordinary life, annuities, and individual accident and health reserves, claims and surrenders due to the increase in volume; and a $.8 million increase in LTD claims due to the increase in premiums and higher loss ratios; such increases were offset by a $.9 million decrease in the credit line of business due to the decrease in volume. The change at Standard Life is comprised of: a $3.9 million increase in stop-loss reserves due to the increase in premiums slightly offset by lower loss ratios; a $1.8 million increase in the closed block of ordinary life business due to the surrender by a large group of policyholders in 2000 offsetting the increase in other income; a $.5 million increase in blanket accident reserves due to this new line of business; a $1.3 million increase in the HMO reinsurance line due to the increase in volume; a $1.3 million increase in provider excess reserves due to the increase in volume; and a $.4 million increase in all other lines.

Amortization of deferred acquisition costs and general and administrative expenses for the Insurance Group increased $4.5 million. Madison Life's expenses increased $.5 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 due to the higher level of premiums and a $1.2 million increase in general expenses due to higher administrative fees from the increase in volume and an increase in salary and related expenses due to the addition of several new employees associated with the increase in volume. IndependenceCare's expenses increased $1.1 million due to the increase in premium volume and acquisition of two subsidiary MGU's. 
**Corporate

	Operating income for the period ended September 30, 2001 decreased by $1.0 million from 2000 to a loss of $2.9 million. This decrease is due to lower investment income from partnerships in 2001 of $.8 million; an increase in general expenses of $.5 million slightly offset by an increase in other income of $.1 million and a decrease in interest expense of $.2 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 partially to 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 2001, the Insurance Group purchased all of the assets of two managed care MGU's and acquired an equity interest in a medical stop-loss MGU.

	**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 87% was invested in investment grade fixed income securities, resale agreements, policy loans and cash and cash equivalents at September 30, 2001.  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 September 30, 2001, 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 was represented by real estate and mortgage loans. The Company has no non-performing fixed maturities.

	**Risk Management**
	The Company manages interest rate risk by seeking to maintain a portfolio with a duration and average life that falls within the band of the duration and average life of the applicable liabilities, and may utilize 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 September 30, 2001 given a 100 to 300 basis point rise or decline in interest rates is not materially different than the expected change at December 31, 2000. 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 fixed maturities is offset by a decrease in cash and an increase in due to brokers due to the timing of securities trades that settled after September 30, 2001 and due to the final payment of the notes receivable from acquisitions in the first quarter of 2001.

	The Company had net receivables from reinsurers of $133.8 million at September 30, 2001.  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 September 30, 2001.
**Corporate

	On September 4, 2001 the Company completed its "Modified Dutch Auction" tender offer by repurchasing 202,680 shares of its Common Stock at a purchase price of $16.75 per share or $3.4 million.

In the second quarter of 2001, the Company received $1.7 million upon exercise of  68,100 of IHC's Share Purchase Warrants ("Warrants") for 114,337 shares of Common Stock. All unexercised Warrants have now expired in accordance with their terms.

	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 $9.0 million at September 30, 2001. 
**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 Statement of Financial Accounting Standards ("SFAS") No. 115, the Company may carry its portfolio of fixed income securities either as held to maturity (carried at amortized cost), as trading securities (carried at fair market value) or as available-for-sale (carried at fair market value); the Company has chosen to carry all of its debt securities as available-for-sale. The Company experienced an increase in unrealized gains of $4.9 million, net of deferred tax expense and deferred policy acquisition costs, in total stockholders' equity, reflecting unrealized gains of $6.1 million at September 30, 2001 versus $1.2 million at December 31, 2000. From time to time, as warranted, the Company employs investment strategies to mitigate interest rate and other market exposures.

	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 6.		Exhibits and Reports on Form 8-K
		a)   	Exhibit 11.  Statement re:  computation of per share earnings.

b)	No report on Form 8-K was filed during the quarter ended September 30, 2001.
**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: November 13, 2001		          By:/s/ Teresa A. Herbert		  
                                Teresa A. Herbert

                                Vice President and

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