Risk Solutions leases 6,200 square feet of office space in Marlton, New Jersey, which expires on June 30, 2017, 2,478 square feet of office space in Fort Wayne, Indiana, which expires on March 31, 2020, 1,297 square feet of office space in Downers Grove, IL, which expires on December 31, 2016, and 11,230 square feet of office space in Enfield, Connecticut, which expires on November 30, 2018. IPA Family leases 7,000 square feet of office space in Tampa, Florida, which expires on October 31, 2016. IPA Direct leases 2,974 square feet of office space in Lake Mary, Florida, which expires on September 30, 2015, and 2,357 square feet of office space in Fort Lauderdale, Florida, which expires on October 31, 2017. Specialty Benefits leases 3,951 square feet of office space in Eagan, Minnesota, which expires on March 31, 2016.
The following is a summary of selected consolidated financial data of the Company for each of the last five years. The consolidated financial statements and financial information of AMIC reported prior to January 1, 2013 are not directly comparable to the financial statements and financial information of AMIC included in this report as a result of the change in accounting principle as noted in the explanatory note to the financial statements. The differences relate to basis differences in goodwill, intangible assets and related amortization, other assets, other investments, non-controlling interests in subsidiaries, taxes and related tax provisions, net income, additional paid-in capital, retained earnings and total shareholders' equity. In accordance with GAAP, due to our new basis of accounting, our financial statements include a black line denoting that our financial statements covering periods prior to the push down date of January 1, 2013 are not comparable to our financial statements as of and subsequent to this date. References to the “Predecessor” Company refer to reporting dates of the Company through December 31, 2012, reflecting results of operations and cash flows of the Company prior to the push down date on our historical accounting basis; subsequent thereto, the Company is referred to
The Company further reduced the deferred tax asset valuation allowance by $2.5 million and $5.9 million at December 31, 2014 and 2012, respectively, primarily due to the expected increase in future income. No such adjustment was recorded for the year ended December 31, 2013.
For the year ended December 31, 2014, our Agencies generated revenues of $28.3 million compared to $23.0 million for the year ended December 31, 2013 due to higher revenues generated at Risk Solutions, IPAD and Specialty Benefits.
Loss ratio represents insurance benefits, claims and reserves divided by premiums earned.
The combined ratio is equal to the sum of the loss ratio, profit commission expense ratio and the expense ratio.
The Company experienced an increased loss ratio for group disability for the year ended December 31, 2014 as a result of higher losses for the international line of LTD business.
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 reserve estimates are recorded through a charge or credit to its earnings.
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 in accumulated other comprehensive income (loss) in the Consolidated Balance Sheets for available-for-sale securities or as unrealized gains or losses in the Consolidated Statements of Income for trading securities. Fixed maturities and equity securities available-for-sale totaled $74.6 million and $69.2 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.
to recovery. If a decline in fair value is judged by management to be other-than-temporary or management does not have the intent or ability to hold a security, a loss is recognized by a charge to total other-than-temporary impairment losses in the Consolidated Statements of Income for the difference between the carrying value and the fair value of the securities. For the purpose of other-than-temporary impairment evaluations, investment grade redeemable preferred stocks are evaluated in a manner similar to debt securities. Declines in the creditworthiness of the issuer of debt securities with both debt and equity-like features requires the use of the equity model in analyzing the security for other-than-temporary impairment.
increase is primarily due to an increase of $10,188,000 in pet premium written due to an increase in sales, an increase of $8,691,000 in occupational accident business written due to the transfer of business from another carrier, an increase in international medical premiums assumed of $2,458,000, an increase of $2,658,000 in hospital indemnity premiums written, an increase of $3,622,000 in small group stop-loss written, an increase of $1,481,000 in occupational accident premiums assumed, an increase of $705,000 in short-term medical premiums assumed, and an increase in assumed limited medical of $518,000, offset by a decrease in major medical premiums written and assumed of $21,006,000 and a decrease in vision premiums assumed of $1,098,000. Premiums relating to group disability increased $490,000 due to higher DBL premiums assumed. For the year ended December 31, 2014, Independence American assumed 10% of IHC’s short-term medical business, 20% of IHC’s DBL business, 8% of certain of IHC’s LTD business, and approximately 27% of IHC’s medical stop-loss business. There were no significant changes to these percentages from the prior year. For the year ended December 31, 2014 and December 31, 2013, Independence American assumed approximately 10% and 12%, respectively, of certain of IHC’s group major medical business.
Fee and Agency Income. Fee and agency income increased $5,497,000 from 2013 to 2014. Risk Solutions fee income-administration increased $3,774,000 to $11,655,000 for 2014, compared to $7,881,000 for 2013. Risk Solutions fee income-profit commission increased $714,000 to $1,268,000 for 2014, compared to $554,000 for 2013. Profit commissions for a given year are based primarily on the performance of business written during portions of the three preceding years. Therefore, profit commissions for 2014 are based on business written during portions of 2011, 2012 and 2013. In 2014, agency income consisted of commission income and other fees of $1,874,000 and $1,067,000 from IPA Family and IPAD, respectively, and revenue of $5,181,000 and $6,873,000 from HIO and Specialty Benefits, respectively. In 2013, agency income consisted of commission income and other fees of $3,655,000 and $38,000 from IPA Family and IPAD, respectively, and revenue of $8,230,000 and $2,063,000 from HIO and Specialty Benefits, respectively. The decrease in revenue for the two agencies is primarily due to disrupted sales due to changes in the ACA.
Insurance Benefits, Claims and Reserves. Insurance benefits claims and reserves increased 2%, or $1,769,000 from 2013 to 2014. The increase is primarily due to an increase in direct pet health of $6,581,000 due to higher premiums, an increase in direct occupational accident of $6,526,000 due to higher premiums, an increase in assumed medical stop-loss of $3,368,000 due to higher premiums assumed, an increase in small group stop-loss of $2,785,000 due to higher premiums, an increase in assumed international health of $1,827,000 due to higher premiums assumed and a higher loss ratio, an increase in assumed limited medical of $419,000 due to higher premiums and a higher loss ratio, an increase in assumed occupational accident of $677,000 due to higher premiums, an increase of $525,000 in direct hospital indemnity premiums due to higher premiums, an increase in assumed LTD of $235,000 due to a higher loss ratio, an increase in assumed DBL of $140,000 due to higher premiums assumed, and an increase in assumed short-term medical of $385,000 due to higher premiums assumed, offset by a decrease in direct and assumed major medical of $15,971,000 due to lower premiums, a decrease in direct medical stop-loss of $4,799,000 due to lower premiums and a lower loss ratio, and a decrease in assumed vision of $964,000 due to a lower loss ratio and lower premiums.
Selling, General and Administrative. Selling, general and administrative expenses increased $10,874,000 from 2013 to 2014. This increase is due to higher commission expense of $4,671,000 at Independence American due to higher premiums and a change in the mix of business, higher expenses of $4,220,000 and $2,669,000 at Specialty Benefits and Risk Solutions, respectively, primarily due to higher salary expense relating to an increase in sales, and higher expenses of $1,340,000 due to the formation of IPAD in July
Premiums Earned. Premiums earned increased 52%, or $43,425,000 from 2012 to 2013. The Company currently has three lines of business. Premiums relating to medical stop-loss business increased $7,977,000. This is due to an increase of $8,406,000 in medical stop-loss premiums assumed, offset by a decrease of $429,000 in medical stop-loss premiums written. Premiums relating to fully insured health consisting of group major medical, fixed indemnity limited benefit, short-term medical, dental, vision, hospital indemnity, occupational accident, pet insurance, international medical, and individual health increased $33,405,000. The increase is primarily due to an increase of $15,388,000 in pet premiums, an increase of $11,206,000 in group major medical premiums assumed, an increase of $3,072,000 in international medical premiums assumed, an increase in small group business written of $1,319,000, and an increase in occupational accident business written of $954,000. Premiums relating to group disability increased $2,043,000 due to higher DBL and LTD premiums assumed. For the year ended December 31, 2013, Independence American assumed 10% of IHC’s
Other Income. Other income increased $337,000 from 2012 to 2013 due to income from our new equity investment in GAF for the year ended December 31, 2013, compared to the year ended December 31, 2012.
Amortization and Depreciation. Amortization and depreciation expense increased $1,327,000 from 2012 to 2013, primarily due the impact of the application of push down accounting in 2013.
Income Taxes. The provision for income taxes increased $5,466,000 to $1,576,000, an effective rate of 35.4%, for 2013, compared to a tax benefit of $3,890,000, an effective rate of -68.2%, for 2012. Net income for 2013 and 2012 includes a non-cash provision for federal income taxes of $1,477,000 and $1,868,000, respectively. The state tax effective rate decreased to 0.7% for 2013, compared to 1.4% for 2012. In 2012, the Company further reduced the valuation allowance relating to the deferred tax asset by $5,900,000, which caused a corresponding increase in such deferred tax asset. The valuation allowance relates to the probability that AMIC might not be able to fully utilize its prior tax year federal net operating loss carryforwards ("NOLs"). For as long as AMIC utilizes its NOL carryforwards, it will not pay any income taxes, except for federal alternative minimum taxes and state income taxes. Excluding the $5,900,000 reduction in the valuation allowance relating to the deferred tax asset, the effective tax rate was 35.3% for 2012.
Net Income attributable to the non-controlling interest. Net income attributable to the non-controlling interest increased $33,000 from 2012 to 2013. The net income for the years ended December 31, 2013 and 2012 relates to the 49% non-controlling interest in HIO and the 10% non-controlling interest in IPA Family. Also included in the net income for the year ended December 31, 2013 is the 8% non-controlling interest in our new company IPAD.
Corporate derives cash flow funds principally from: dividends and tax payments from its subsidiaries and investment income from corporate liquidity. The ability of Independence American to pay dividends to its parent company is governed by Delaware insurance laws and regulations; otherwise, there are no regulatory constraints on the ability of any of our other subsidiaries to pay dividends to its parent company. For the twelve months ended December 31, 2014, Independence American and our Agencies paid $786,000 in dividends and $2,000,000 in tax payments to Corporate.
The Company had $4.6 million and $4.4 million of cash and cash equivalents as of December 30, 2014 and December 31, 2013, respectively.
At December 31, 2014, the Company had $18,881,000 of restricted cash at Risk Solutions. This amount is directly offset by corresponding liabilities for Premium and Claim Funds Payable of $18,881,000. This asset, in part, represents the premium that is remitted by the insureds and is collected by Risk Solutions on behalf of the insurance carriers they represent. Each month the premium is remitted to the insurance carriers by Risk Solutions. Until such remittance is made the collected premium is carried as an asset on the balance sheet with a corresponding payable to each insurance carrier. In addition to the premium being held at Risk Solutions, Risk Solutions is in possession of cash to pay claims. The cash is deposited by each insurance carrier into a bank
At December 31, 2014, the Company had $33,616,000 of policy benefits and claims that it expects to 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 policy benefits and claims does not coincide with future cash flows.
Total investments, net of amounts due to/from brokers, increased $5,378,000 to $79,137,000 at December 31, 2014 from $73,759,000 at December 31, 2013, due to higher net purchases of fixed maturity securities, and a decrease in net unrealized losses on investments.
Our pet insurance premiums experienced significant growth in 2014, but we expect flat sales in 2015.
We continue to focus on direct-to-consumer distribution initiatives through IPAD, IPA Family and HIO as we believe this will be a growing means for selling health insurance and ancillary products in the coming years.
We will continue to adapt to health care reform by continuing to proactively adjust our distribution strategies and mix of Fully Insured Health products to take advantage of changing market demands.
Our small group major medical reinsured premiums decreased in 2014 as a result of exiting the two states in which Independence American wrote business, and a decrease of premiums reinsured from IHC, and we expect a continued decline in 2015.
While we experienced significant growth in non-subscriber occupational accident insurance in Texas, and health insurance for groups seeking coverage for expatriate employees in 2014, we expect these lines to be relatively flat in 2015.
In 2015 and beyond, the percentage of medical stop-loss ceded to Independence American will depend on how much IHC determines it has available to reinsure and Independence American’s desire to reinsure IHC’s business. Since the percentage being ceded is now well in excess of the contractual minimum, there is no guarantee that IHC will continue to increase the percentage of business ceded to Independence American or, in fact, cede in excess of 15%. However, Risk Solutions is a significant producer of medical stop-loss business for IHC.
Independence American reinsures 20% of Standard Security Life’s DBL product. Standard Security Life is not contractually obligated to continue to cede this business to Independence American after termination of the current treaty year. Independence American assumed 8% of certain of IHC’s LTD business. Standard Security Life and Madison National Life ceded approximately 10% of their fully insured health business to Independence American. Standard Security Life and Madison National Life are not contractually obligated to continue to cede this business to Independence American after termination of the current treaty years.
Summary of investments - Other than investments in related parties (Schedule I)
Management assessed the effectiveness of AMIC's internal control over financial reporting as of December 31, 2014. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control -Integrated Framework (1992). Based on our assessment we concluded that, as of December 31, 2014, AMIC's internal control over financial reporting is effective.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Independence Corp. and subsidiaries as of December 31, 2014 and 2013 (Successor Company), and the results of their operations and their cash flows for the years ended December 31, 2014 and 2013 (Successor Company), and the year ended December 31, 2012 (Predecessor Company), in conformity with U.S. generally accepted accounting principles.
American Independence Corp. is a Delaware corporation (NASDAQ: AMIC). We are a holding company principally engaged in the insurance and reinsurance business through: a) our wholly owned insurance company, Independence American Insurance Company ("Independence American"); b) our full service direct writer of medical stop-loss insurance for self-insured employer groups, IHC Risk Solutions, LLC (“Risk Solutions”); c) our 23% investment in Majestic Underwriters LLC ("Majestic"); d) our 51% ownership in HealthInsurance.org, LLC (“HIO”), a lead generation agency; e) our wholly owned sales and marketing company, IHC Specialty Benefits, Inc. (“Specialty Benefits”); f) our 40% ownership in Global Accident Facilities, LLC (“GAF”), a holding company for a managing general underwriting agency for non-subscriber occupational accident business; g) our 90% ownership in IPA Family, LLC (“IPA Family”), a consumer direct sales agency, and h) our 92% ownership in IPA Direct, LLC (“IPAD”), a consumer direct sales call center.
As used in this report, unless otherwise required by the context, AMIC and its subsidiaries are sometimes collectively referred to as the "Company" or "AMIC", or are implicit in the terms "we", "us" and "our". Risk Solutions, Specialty Benefits, HIO, IPAD and IPA Family are collectively referred to as “our Agencies”.
Since November 2002, AMIC has been affiliated with Independence Holding Company ("IHC"). In October 2013, IHC purchased 762,640 shares of AMIC stock for $10.00 per share in connection with a tender offer for such shares and, as a result, IHC and its subsidiaries further increased its ownership of AMIC to 90.0%. The senior management of IHC provides direction to the Company through a service agreement between the Company and IHC. IHC has also entered into reinsurance treaties through its wholly owned subsidiaries, Standard Security Life Insurance Company of New York (“Standard Security Life”) and Madison National Life Insurance Company, Inc. (“Madison National Life”), whereby the Company assumes reinsurance premiums from the following lines of business: medical stop-loss, New York State Disability Benefits Law ("DBL"), short-term medical, long-term disability (“LTD”) and group major medical.
The consolidated financial statements and financial information of AMIC reported prior to this Form 10-K are not directly comparable to the financial statements and financial information of AMIC included in this report as a result of the above-mentioned change in accounting principle. The differences relate to basis differences in goodwill, intangible assets and related amortization, other assets, other investments, non-controlling interests in subsidiaries, taxes and related tax provisions, net income, additional paid-in capital, retained earnings and total shareholders' equity. The impact of this adoption on AMIC's Consolidated Balance Sheets for the period ended December 31, 2013 and the Consolidated Statements of Income for the twelve months ended December 31, 2013 is presented below (in thousands, except per share data). The cumulative effect of this adoption on AMIC’s total shareholders’ equity at January 1, 2013, is a decrease of $14,668,000.
to maturity. Realized gains and losses on sales of available-for-sale securities are credited or charged, as appropriate, to net realized investment gains in the Consolidated Statements of Income.
(v) The Company reviews its investment securities regularly and determines whether other-than-temporary impairments have occurred. The factors considered by management in its regular review 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
Liabilities for policy benefits and claims on medical stop-loss coverages are computed using completion factors and expected Net Loss Ratios derived from actual historical premium and claim
data. Reserves for medical stop-loss insurance are more volatile in nature than those for fully insured medical insurance. This is primarily due to the excess nature of medical stop-loss, with very high deductibles applying to specific claims on any individual claimant and in the aggregate for a given group. The level of these deductibles makes it more difficult to predict the amount and payment pattern of such claims. Furthermore, these excess claims are highly sensitive to changes in factors such as medical trend, provider contracts and medical treatment protocols, adding to the difficulty in predicting claim values and estimating reserves. Also, because medical stop-loss is in excess of an underlying benefit plan, there is an additional layer of claim reporting and processing that can affect claim payment patterns. Finally, changes in the distribution of business by effective month can affect reserve estimates due to the timing of claim occurrences and the time required to accumulate claims against the stop-loss deductible.
aggregate for a given group. The level of these deductibles makes it more difficult to predict the amount and payment pattern of such claims. Fluctuations in results for specific coverage are primarily due to the severity and frequency of individual claims, whereas fluctuations in aggregate coverage are largely attributable to frequency of underlying claims rather than severity.
Due to the short-term nature of medical stop-loss, redundancies or deficiencies will typically emerge during the course of the following year rather than over a number of years. For employer stop-loss, as noted above, the Company typically maintains its reserves based on underlying assumptions until it determines that an adjustment is appropriate based on emerging experience from its block of business for prior underwriting years. Reserves for HMO reinsurance are adjusted on a policy by policy basis. Because of the small number of HMO reinsurance policies it writes or reinsures, the Company is able to evaluate each policy individually for potential liability by reviewing open claims with each HMO and applying completion factors using historical data.
1, 2014. The liability for the mandated fees payable to the Federal Government is immaterial for the Company.
In May 2014, the FASB issued revenue recognition guidance for entities that either enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards such as insurance contracts or lease contracts. The amendment provides specific steps that an entity should apply in order to achieve its main objective which is recognizing revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For public entities, this guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and requires one of two specified retrospective methods of application. Early application is prohibited. Management has not yet determined the impact that the adoption of this guidance will have on the Company’s consolidated financial statements.
Intangible assets at December 31, 2014 and 2013 consist of the following (in thousands):
Securities purchased under agreements to resell are utilized to invest excess funds on a short-term basis. At December 31, 2014, the Company had $3,143,000 invested in resale agreements, all of which settled on January 2, 2015 and were subsequently reinvested. The Company maintains control of securities purchased under resale agreements, values the collateral on a daily basis and obtains additional collateral, if necessary, to protect the Company in the event of default by the counterparties.
We recognize an other-than-temporary impairment loss in earnings in the period that we determine: 1) we intend to sell the security; 2) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis; or 3) the security has a credit loss. Any non-credit portion of the other-than-temporary impairment loss is recognized in other comprehensive income. For the years ended December 31, 2014, 2013 and 2012, other-than-temporary impairments recognized in earnings of $0, $0 and $189,000, respectively, represent credit losses on fixed maturities as a result of the expected cash flows of certain securities being less than the securities’ amortized cost.
Available-for-sale securities included in Level 1 are equity securities with quoted market prices. Level 2 is primarily comprised of our portfolio of corporate fixed income securities, government agency mortgage-backed securities, government sponsored enterprises, certain CMO securities, municipals and certain preferred stocks that were priced with observable market inputs. Level 3 securities consist of one CMO security backed by commercial mortgages. For these securities, we use industry-standard pricing methodologies, including discounted cash flow models, whose inputs are based on management’s assumptions and available market information. Significant unobservable inputs used in the fair value measurement of CMO’s are prepayment rates, probability of default, and loss severity in the event of default. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for loss severity and a directionally opposite change in the assumption used for prepayment rates. Further we retain independent pricing vendors to assist in valuing certain instruments.
Trading securities included in Level 1 are equity securities with quoted market prices.
It is the Company’s policy to recognize transfers of assets and liabilities between levels of the fair value hierarchy at the end of a reporting period. For the year ending December 31, 2014, there were no transfers of assets and liabilities between Level 1 and Level 2 of the fair value hierarchy. No securities were transferred out of the Level 2 and into the Level 3 category as a result of limited or inactive markets during 2014. The Company does not transfer out of Level 3 and into Level 2 until such time as observable inputs become available and reliable or the range of
available independent prices narrow. No securities were transferred out of the Level 3 category during 2014 and 2013. The changes in the carrying value of Level 3 assets and liabilities for the years ended December 31, 2014 and 2013 are summarized as follows (in thousands):
At December 31, 2014 and December 31, 2013, the Company had an equity investment in Majestic with a carrying value of $168,000 and $89,000, respectively. For years 2014, 2013 and 2012, the Company recorded $79,000, $(20,000) and $57,000, respectively, for its share of income (loss) from its investment in other income in the Consolidated Statements of Income.
Total share-based compensation expense was $52,000, $42,000 and $33,000 for the twelve months ended December 31, 2014, 2013 and 2012, respectively. Related tax benefits of $18,000, $15,000 and $11,000 were recognized for the twelve months ended December 31, 2014, 2013 and 2012, respectively.
The Company’s stock option activity for the year ended December 31, 2014 was as follows:
Compensation expense was $52,000, $42,000, and $33,000 for the twelve months ended December 31, 2014, 2013, and 2012, respectively. As of December 31, 2014, there was approximately $83,000 of total unrecognized compensation expense related to non-vested options which will be recognized over the remaining requisite service periods.
The fair value of an option award is estimated on the date of grant using the Black-Scholes option valuation model. The weighted average grant-date fair-value of options granted during the twelve months ended December 31, 2014, 2013 and 2012 was $5.70, $4.04 and $0 per share, respectively. The assumptions set forth in the table below were used to value the stock options granted during the twelve months ended December 31, 2014 and 2013. No options were granted in 2012.
Independence American derives a significant amount of its business from pro rata quota share reinsurance treaties with Standard Security Life and Madison National Life, which are wholly owned subsidiaries of IHC. These treaties, which were to terminate on December 31, 2014, have been amended to extend the termination date to December 31, 2019. Standard Security Life and Madison National Life must cede at least 15% of their medical stop-loss business to Independence American under these treaties. Additionally, Standard Security Life and Madison National Life have received regulatory approval to cede up to 50% to Independence American under most of IHC’s medical stop-loss programs. For the twelve months ended December 31, 2014 and 2013, Standard Security Life and Madison National Life ceded an average of approximately 27% and 26%, respectively, of their medical stop-loss business to Independence American. Commencing in July 2004, Independence American began reinsuring 20% of Standard Security Life’s DBL business. Independence American assumed 8% of certain of IHC’s international health and LTD business. Standard Security Life and Madison National Life ceded approximately 10% and 12% of the majority of its fully insured health business to Independence American in 2014 and 2013, respectively.
The current federal income tax provision for the periods ending December 31, 2014, 2013 and 2012 represents only federal alternative minimum tax due to the Company’s federal net operating loss carryforwards.
For the years ended December 31, 2014 and 2013, net deferred tax assets includes $12,025,000 and $11,172,000 of net federal deferred tax assets, respectively, and $557,000 and $504,000 of net state deferred tax liabilities, respectively. The valuation allowance at December 31, 2014 and 2013 was primarily related to net operating loss carryforwards that, in the judgment of management, were not considered realizable. During the years ended December 31, 2014 and 2013 the Company decreased its valuation allowance by $3,062,000 and $1,661,000, respectively. The valuation allowance decrease in the year ended December 31, 2014 included $2,500,000 for the projected utilization of federal net operating losses which was allocated to operations, and a decrease of $699,000 due to deferred tax on unrealized losses allocated to equity, offset by an increase of $137,000 due to an adjustment to net deferred tax assets. The valuation allowance decrease in the year ended December 31, 2013 included a $3,054,000 adjustment to deferred tax assets for expired state NOL carryforwards, offset by an increase of $1,393,000 due to deferred tax on unrealized losses allocated to equity.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Management believes that it is more likely than not that the Company will realize the benefits of these net deferred tax assets recorded at December 31, 2014.
At December 31, 2014, the Company had federal NOL carryforwards of approximately $263,985,000 expiring in varying amounts through the year 2028 with a significant portion expiring in 2020.
As of December 31, 2014, AMIC believes there were no material uncertain tax positions that would require disclosure under GAAP.
The Company maintains loss reserves to cover its estimated liability for unpaid losses and loss adjustment expenses, including legal and other fees and a portion of the Company's general expenses, for reported and unreported claims incurred as of the end of each accounting period. These loss reserves are based on actuarial assumptions and are maintained at levels that are in accordance with U.S. GAAP. Many factors could affect these reserves, including economic and social conditions, inflation, healthcare costs, changes in doctrines of legal liability and damage awards in litigation. Therefore, the Company's reserves are necessarily based on estimates, assumptions and analysis of historical experience. The Company's results depend upon the variation between actual claims experience and the assumptions used in determining reserves and pricing products. Reserve assumptions and estimates require significant judgment and, therefore are inherently uncertain. The Company cannot determine with precision the ultimate amounts that will be paid for actual claims or the timing of those payments.
The preceding schedule reflects (i) due and unpaid claims, (ii) claims in the course of settlement, (iii) estimated incurred but not reported reserves and (iv) the present value of amounts not yet due on claims. The incurred and paid data above reflects all activity for the year. The amount incurred in 2014 for prior years of $380,000 is a result of a deficiency of $1,015,000 of fully insured health reserves, offset by a redundancy of $271,000 of medical stop-loss reserves and $364,000 of DBL reserves. The unfavorable development in fully insured health of $1,015,000 primarily relates to claims development experience associated with the small group stop-loss and occupational accident business written in 2013. The amount incurred in 2013 for prior years of $169,000 is a result of a deficiency of $465,000 of medical stop-loss reserves, offset by a redundancy of $5,000 of fully insured health reserves and $291,000 of DBL reserves. Fluctuations are generally the result of on-going analysis of recent loss development trends.
The effect of reinsurance on premiums earned and insurance benefits is as follows (in thousands):
Independence American’s statutory capital and surplus was $60,168,000 as of December 31, 2014 and $57,875,000 as of December 31, 2013. Independence American’s statutory net income was $3,127,000 for 2014, $3,176,000 for 2013, and $3,271,000 for 2012.
Included in accumulated other comprehensive income at both December 31, 2014 and 2013 is an adjustment of $269,000 related to the non-credit related component of other-than-temporary impairment losses recorded.
The quarterly results of operations for the years ended December 31, 2014 and 2013 are summarized below (in thousands, except per share data):