IHC has entered into a renewable short-term arrangement with Geneve Corporation, an affiliate, for the use of 6,750 square feet of office space as its corporate headquarters in Stamford, Connecticut.
IHC’s health insurance products serve niche sectors of the commercial market through multiple classes of business and varied distribution channels. Medical Stop-Loss is marketed to employer groups that self-insure their medical risks; in 2014 the Company’s average case size was 228 covered employee lives. This niche is expected to grow as result of federal health care reform. The SGMM product is purchased by employers with between two and 50 covered lives. With regard to those persons in the growing individual market, IHC’s products offer coverage for individuals and families with STM needs,
Consolidated investment yield (on an annualized basis) of 3.3% in 2014 compared to 3.8% in 2013; and
Book value of $16.76 per common share at December 31, 2014 compared to $15.22 at December 31, 2013.
The Medical Stop-Loss segment reported income before taxes of $21.9 million and $12.7 million for the years ended December 31, 2014 and 2013, respectively. The increase is largely a result of lower combined loss and expense ratios in 2014;
Underwriting experience for the Medical Stop-Loss segment, as indicated by its U.S. GAAP Combined Ratios, is as follows for the years indicated (in thousands):
The lower expense ratios in 2014 are primarily the result of lower commission expenses due to the mix of business.
The Fully Insured Health segment reported a loss of $2.0 million before taxes for the year ended December 31, 2014 as compared to $0.8 million of income before taxes for the year ended December 31, 2013. The decrease is primarily due to lower fee income in 2014 as a result of the planned run-off of major medical health plans for individuals and families (“IMM”), which we exited in 2013, and higher expense ratios as we adjust our mix of business from major medical to specialty health insurance;
Underwriting experience, as indicated by its U.S. GAAP Combined Ratios, for the Fully Insured segment are as follows for the years indicated (in thousands):
The loss ratios are largely dependent on the mix of business in each year. In 2013 and 2014, loss ratios were generally favorable in the specialty health lines of business, which have an increasing premium base, but were unacceptably high in both years on the decreasing major medical premium base, which we are exiting. In 2013 and 2014, the Company recorded an increase in claims experience on major medical, which we attribute, in large part, to changes brought on by health care reform, and 2014 includes the new health insurance tax. The 2013 year was also adversely impacted by a reserve adjustment related to business written through an MGU that was previously terminated. As we adjust our mix of business from major medical to that of a specialty health insurance company, we anticipate loss ratios lower than 2014 (since we will have less major medical) and an expense ratio similar to that of 2014.
Income before taxes from the Group disability, life, annuities and DBL segment in 2014 increased $3.6 million compared to prior year results. The increase is primarily the result of better loss ratios in the DBL and group term life lines;
Losses before taxes from the Individual life, annuities and other segment decreased $3.8 million for the year ended December 31, 2014. While the results for 2014 reflect lower investment income and higher general expenses due to $3.5 million of amortization of deferred costs in correlation with the assumptions of certain ceded life and annuity policies, the results for 2013 include a $9.3 million write-off of deferred acquisition costs in connection with a coinsurance agreement;
Losses before tax from the Corporate segment increased $2.2 million for the year ended December 31, 2014 compared to the prior year primarily due to employee compensation expenses that vary with changes in IHC’s stock price and book value;
Information pertaining to the Company's business segments is provided in Note 16 of Notes to Consolidated Financial Statements included in Item 8.
While the Company establishes a best estimate of the Projected Net Loss Ratio, actual experience may deviate from this estimate. This was the case with the 2011, 2012 and 2013 underwriting years which deviated by 4.6, 0.3 and 1.7 Net Loss Ratio points, respectively. After the recorded reserve estimate, it is reasonably likely that the actual experience will fall within a range up to five Net Loss Ratio points above or below the expected Projected Net Loss Ratio for the 2014 underwriting year at December 31, 2014. The impact of these reasonably likely changes at December 31, 2014, would be an increase in net reserves (in the case of a higher ratio) or a decrease in net reserves (in the case of a lower ratio) of up to approximately $4.4 million with a corresponding increase or decrease in the pre-tax expense for insurance benefits, claims and reserves in the Consolidated Statement of Income.
Management believes that the Company's methods of estimating the liabilities for policy benefits and claims provided appropriate levels of reserves at December 31, 2014. Changes in the Company's policy benefits and claims estimates are recorded through a charge or credit to its earnings.
The liability for future policy benefits consists of the liabilities associated with the Company’s long-duration contracts, primarily its life and annuity products. For traditional life insurance products, the Company computes the liability for future policy benefits primarily using the net premium method based on anticipated investment yield, mortality, and withdrawals. These methods are widely used in the life insurance industry to estimate the liabilities for insurance reserves. Inherent in these calculations are management and actuarial judgments and estimates that could significantly impact the ending reserve liabilities and, consequently, operating results. Actual results may differ, and these estimates are subject to interpretation and change.
For long duration type contracts, such as annuities and universal life business, amortization of DAC is charged to expense over the life of the underlying contracts based on the present value of the estimated gross profits ("EGPs") expected to be realized over the life of the book of contracts. EGPs consist of margins based on expected mortality rates, persistency rates, interest rate spreads, and other revenues and expenses. The Company regularly evaluates its EGPs to determine if actual experience or other evidence suggests that earlier estimates should be revised. If the Company determines that the current assumptions underlying the EGPs are no longer the best estimate for the future due to changes in
The Company has classified all of its investments as either available-for-sale or trading securities. These investments are carried at fair value with unrealized gains and losses reported through other comprehensive income (loss) for available-for-sale securities or as unrealized gains or losses in the Consolidated Statements of Income for trading securities. Available-for-sale securities totaled $597.8 million and $554.1 million at December 31, 2014 and 2013, respectively. Premiums and discounts on debt securities purchased at other than par value are amortized and accreted, respectively, to interest income in the Consolidated Statements of Income, using the constant yield method over the period to maturity. Net realized gains and losses on investments are computed using the specific identification method and are reported in the Consolidated Statements of Income on the trade date.
regularly and determines whether other-than-temporary impairments have occurred. The factors considered by management in its regular review to identify and recognize other-than-temporary impairment losses on fixed maturities include, but are not limited to: the length of time and extent to which the fair value has been less than cost; the Company's intent to sell, or be required to sell, the debt security before the anticipated recovery of its remaining amortized cost basis; the financial condition and near-term prospects of the issuer; adverse changes in ratings announced by one or more rating agencies; subordinated credit support; whether the issuer of a debt security has remained current on principal and interest payments; current expected cash flows; whether the decline in fair value appears to be issuer specific or, alternatively, a reflection of general market or industry conditions including the effect of changes in market interest rates. If the Company intends to sell a debt security, or it is more likely than not that it would be required to sell a debt security before the recovery of its amortized cost basis, the entire difference between the security's amortized cost basis and its fair value at the balance sheet date would be recognized by a charge to total other-than-temporary impairment losses in the Consolidated Statement of Income. If a decline in fair value of a debt security is judged by management to be other-than-temporary and; (i) the Company does not intend to sell the security; and (ii) it is not more likely than not that it will be required to sell the security prior to recovery of the security’s amortized cost, the Company assesses whether the present value of the cash flows to be collected from the security is less than its amortized cost basis. To the extent that the present value of the cash flows generated by a debt security is less than the amortized cost basis, a credit loss exists. For any such security, the impairment is bifurcated into (a) the amount of the total impairment related to the credit loss, and (b) the amount of the total impairment related to all other factors. The amount of the other-than-temporary impairment related to the credit loss is recognized by a charge to total other-than-temporary impairment losses in the Consolidated Statement of Income, establishing a new cost basis for the security. The amount of the other-than-temporary impairment related to all other factors is recognized in other comprehensive income (loss). It is reasonably possible that further declines in estimated fair values of such investments, or changes in assumptions or estimates of anticipated recoveries and/or cash flows, may cause further other-than-temporary impairments in the near term, which could be significant.
If we experience a sustained decline in our results of operations and cash flows, or other indicators of impairment exist, we may incur a material non-cash charge to earnings relating to impairment of our goodwill, which could have a material adverse effect on our results.
Results of Operations for the Year Ended December 31, 2014 Compared to the Year Ended December 31, 2013
In 2014, premiums earned decreased $16.9 million over the comparable period of 2013. The decrease is primarily due to: (i) a decrease of $29.9 million from the Fully Insured Health segment primarily as a result of a $76.1 million decrease in premiums from exiting the IMM line and the New York vision block and from a decrease in the small group major medical line, partially offset by increases in the ancillary lines (primarily short-term medical ($7.0 million) and fixed indemnity limited benefit ($4.6 million)), pet insurance ($10.2 million), international ($4.9 million) and occupational accident ($11.7 million) lines of business as a result of higher volume; and (ii) a decrease of $1.9 million of earned premiums in the Individual life, annuities and other segment, primarily as a result of business ceded in connection with a coinsurance agreement during the second quarter of 2013; partially offset by (iii) a $10.6 million increase in earned premiums from the Medical Stop-Loss segment as a result of higher volume; and (iv) a $4.3 million increase in the Group disability, life, annuities and DBL segment primarily due to increased premiums from the DBL and LTD lines.
Results of Operations for the Year Ended December 31, 2013 Compared to the Year Ended December 31, 2012
Information by business segment for the year ended December 31, 2013 and 2012 is as follows:
Total net investment income decreased $5.9 million. The overall annualized investment yields were 3.8% and 4.1% (approximately 3.8% and 4.2%, on a tax advantaged basis) for 2013 and 2012, respectively. The overall decrease was primarily a result of a decrease in investment income on bonds, equities and short-term investments due to the transfer of $215.1 million of invested assets in the second quarter of 2013 related to a coinsurance treaty. The annualized investment yields on bonds, equities and short-term investments were 3.5% and 3.8% in 2013 and 2012, respectively. IHC has approximately $144.0 million in highly rated shorter duration securities earning on average 1.4%. A portfolio that is shorter in duration enables us, if we deem prudent, the flexibility to reinvest in much higher yielding longer-term securities, which would significantly increase investment income.
The Company had net realized investment gains of $19.8 million in 2013 compared to $5.1 million in 2012. These amounts include gains and losses from sales of fixed maturities and equity securities available-for-sale and other investments. Decisions to sell securities are based on management's ongoing evaluation of investment opportunities and economic and market conditions, thus creating fluctuations in gains and losses from period to period. A significant portion of the net realized investment gains in 2013 resulted from sales of invested assets in connection with the transfer of assets, during the second quarter, in accordance with the terms of a coinsurance agreement.
The Company did not record any other-than-temporary impairment losses in 2013 but recorded $0.7 million in 2012 consisting of credit losses resulting from expected cash flows of debt securities that are less than their amortized cost basis.
Fee income decreased $2.3 million for the year ended December 31, 2013 compared to the year ended December 31, 2012 primarily as a result of increased retentions in certain lines of the Fully Insured Health segment partially offset by a $4.8 million increase in fees at our online marketing company, Healthinsurance.org LLC (“HIO”). As a result of the implementation of healthcare reforms, HIO experienced a high number of submitted applications through its site in the fourth quarter of 2013.
In 2013, insurance, benefits, claims and reserves increased $110.0 million over the comparable period in 2012. The increase is primarily attributable to: (i) an increase of $82.6 million in the Fully Insured Health segment, principally due to the increase in premiums on the major medical business for groups and individuals and short term medical lines of business in addition to the new pet and international lines of business and higher loss ratios; (ii) an increase of $25.2 million in the Medical Stop-Loss segment as a result of an increase in premium volume and higher loss ratios; (iii) an increase of $9.8 million in the group disability, life, annuities and DBL segment primarily due to an increase in the DBL line as a result of increased volume; offset by (iv) a $7.6 million decrease in the Individual life, annuity and other segment primarily a result of decreased volume from the coinsurance agreement and from lines in run-off.
In the second quarter of 2013, the Company wrote-off $9.3 million of deferred acquisition costs in connection with a coinsurance agreement. Excluding this write-off, amortization of deferred acquisition costs decreased $0.8 million.
In accordance with the terms of its amortizing term loan, the Company made a $2.0 million principal debt repayment in each of 2012, 2013 and 2014.
The Company had $25.1 million and $24.2 million of cash and cash equivalents as of December 30, 2014 and December 31, 2013, respectively.
For year ended December 31, 2014, operating activities of the Company provided $27.3 million of cash, investment activities utilized $15.9 million of cash and financing activities utilized $10.6 million
The Company has $513.8 million of liabilities for future policy benefits and policy benefits and claims that it expects to ultimately pay out of current assets and cash flows from future business. If necessary, the Company could utilize the cash received from maturities and repayments of its fixed maturity investments if the timing of claim payments associated with the Company's insurance resources does not coincide with future cash flows. For the year ended December 31, 2014, cash received from the maturities and other repayments of fixed maturities was $45.1 million.
The Company had net receivables from reinsurers of $230.3 million at December 31, 2014 compared to $343.1 million at December 31, 2013. The decrease in the net reinsurance balance is primarily due to the assumption of ceded life and annuity reserves by an unaffiliated reinsurer. No allowance for doubtful accounts was necessary at December 31, 2014.
Based upon the goodwill impairment testing performed at December 31, 2014, the fair value of each reporting unit exceeded its carrying value and no impairment charge was required. Fair value exceeded carrying value by 10% or more in both the Fully Insured Health and the Medical Stop Loss segments.
The following sections describe, for each segment, the unfavorable (favorable) development in the liability for policy benefits and claims experienced in 2014, together with the key assumptions and changes therein affecting the reserve estimates.
The Company experienced a net unfavorable development of $0.1 million in the Medical Stop-Loss segment.
The Fully Insured Health segment had a favorable development of $0.4 million primarily related to benefits and claims experience associated with business written in 2013.
There were normal fluctuations to the Company's experience factor. The IBNR factors were updated to reflect the current experience. The reserving process used by management was consistent from 2013 to 2014.
All other lines, primarily blanket and other individual health products, experienced favorable development of $0.4 million.
Increasing emphasis on direct-to-consumer distribution initiatives as we believe this will be a growing means for selling health insurance in the coming years, and accompanying start-up costs of expanding our sales through our call center and transactional websites;
Increasing sales of short-term and supplemental health products, such as dental, accidental medical, gap and critical illness products partially offset by a decrease in fixed indemnity limited benefit plans due to a change in the law;
Increasing sales of individual major medical products and increased administrative revenue from non-affiliated nationally recognized insurance companies; and
In 2014, we continued to achieve significant growth in our controlled direct written stop-loss business through Risk Solutions. This growth was achieved while maintaining underwriting profitability consistent with the prior year. Our overall results in 2013 were adversely impacted by business written through two non-owned MGU’s, both of which have been terminated, although run-off continued in 2014. This result reemphasizes the importance of our decision to focus our stop-loss business through our direct writing model. The favorable results of Risk Solutions are a direct result of their positioning to take advantage of market trends, including consolidation of relationships by producers and increased interest in stop-loss as a result of health care reform. We see these trends continuing and strengthening as we move into 2014 and beyond. Risk Solutions has established a reputation in the market for delivering innovative solutions for small to medium sized employer groups looking for self-funded alternatives. Risk Solutions has also established a reputation in the market for fair and responsible pricing and superior service levels. We foresee continued growth and favorable underwriting results as more of our stop-loss business comes through the Risk Solutions platform.
We will continue to focus on our strategic objectives, including expanding our distribution network. However, the success of a portion of our Fully Insured Health business has been affected by the passage of the Patient Protection and Affordable Care Act of 2010, as amended, and its subsequent interpretations by state and federal regulators. While the law has influenced our decision, and that of many other insurers, to exit or reduce their presence in major medical essential health benefit (“EHB”)
plans in the small employer and individual markets, non-EHB lines of business and medical stop-loss have been impacted by health care reform minimally or not at all.