We are an insurance holding company engaged in the insurance and reinsurance business through our wholly owned insurance company, Independence American Insurance Company ("Independence American") and our marketing organizations, including our three medical stop-loss managing general underwriter subsidiaries (“our MGUs"). Since November 2002, AMIC has been affiliated with Independence Holding Company ("IHC"), which currently owns 49.7% of AMIC's stock, and IHC's senior management has provided direction to the Company through service agreements between the Company and IHC. In 2007, Independence American’s primary source of revenue was reinsurance premiums. The majority of these premiums are ceded to Independence American from IHC under long-term reinsurance treaties to cede its gross medical stop-loss premiums written to Independence American. In addition, Independence American assumes fully insured health and short-term statutory disability benefit product in New York State ("DBL") premiums from IHC, and assumes medical stop-loss premiums from unaffiliated carriers. In 2007, Independence American began writing small-group major medical, medical stop-loss, major medical plans for individuals and families, and short-term medical. Given its enhanced A- (Excellent) rating from A.M. Best, Independence American expects to expand the distribution of its medical stop-loss products through our MGUs, and increase significantly the business written on its paper, especially major medical plans for individuals and families.
Of the aggregate carrying value of the Company’s investment assets, approximately 93.9% was invested in investment grade fixed maturities, securities purchased under resale agreements, and cash and cash equivalents at December 31, 2007. Also at such date, approximately 99.7% of the Company's fixed maturities were investment grade.
On October 5, 2007, the Company acquired certain assets, including a 51% interest in HealthInsurance.org, LLC.
In the fourth quarter of 2007, Independence American’s rating by A.M. Best Company was upgraded to A- (Excellent).
Premiums earned increased 56.5% to $106.1 million for the year ended December 31, 2007 from $67.8 million for the year ended 2006, primarily due to the Company’s agreement with Employers Direct Health (“EDH”) (see Note 18 of Notes to Consolidated Financial Statements) and the increase in fully insured health premiums assumed from IHC.
Independence American added three additional licenses in 2007, bringing its total to 46 states and the District of Columbia.
In 2007, our MGUs wrote an aggregate of $87.2 million of annualized gross premium which generated pre-tax income of $2.0 million, as compared to $94.3 million and $1.2 million in 2006, respectively. Our MGUs wrote less premiums due, in part, to stricter underwriting guidelines and the continuing generally "soft" market. Pre-tax income increased primarily due to an increase in profit commissions and a decrease in operating expenses.
In 2007, our MGUs generated revenues of $9.8 million, as compared to $10.8 million in 2006, a decrease of 9%, due to the lower volume of premium underwritten.
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 2004, 2005 and 2006 underwriting years which deviated by 11.7, 8.1 and 7.8 Net Loss Ratio points, respectively. After the recorded reserve increase 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 2007 at December 31, 2007. The impact of these reasonably likely changes at December 31, 2007, 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 $1.4 million with a corresponding increase or decrease in the pre-tax expense for insurance benefits, claims and reserves in the 2007 Consolidated Statement of Operations.
Major factors that affect the Projected Net Loss Ratio assumption in reserving for medical stop-loss relate to: (i) frequency and severity of claims; (ii) changes in medical trend resulting from the influences of underlying cost inflation, changes in utilization and demand for medical services, the impact of new medical technology and changes in medical treatment protocols; and (iii) the adherence by the MGUs that produce and administer this business to applicable underwriting guidelines. Changes in these underlying factors are what determine the reasonably likely changes in the Projected Net Loss Ratio as discussed above.
Company. In addition, in 2007, Independence American ceded 50% of its short-term medical (“STM”) and major medical for individuals and families business to unrelated reinsurers.
The Company has net operating loss carryforwards for federal income tax purposes available to reduce future income subject to income taxes. The net operating loss carryforwards expire between 2019 and 2026.
Declines in value of securities available-for-sale that are judged to be other-than-temporary are determined based on the specific identification method and are reported in the Consolidated Statements of Operations as net realized losses. The factors considered by management in determining when a decline is other than temporary include but are not limited to: the length of time and extent to which the fair value has been less than cost; the financial condition and near-term prospects of the issuer; adverse changes in ratings announced by one or more rating agencies; whether the issuer of a debt security has remained current on principal and interest payments; whether the decline in fair value appears to be issuer specific or, alternatively, a reflection of general market or industry conditions (including, in the case of fixed maturities, the effect of changes in market interest rates); and the Company's intent and ability to hold the security for a period of time sufficient to allow for a recovery in fair value.
Results of Operations for the Year Ended December 31, 2007, Compared to the Year Ended December 31, 2006
Net Income. The Company’s net income decreased 22% to $1,138,000, or $.13 per share, diluted, for 2007, compared to $1,454,000, or $.17 per share, diluted, for 2006.
Premiums Earned. Premiums earned increased 57%, or $38,323,000, to $106,100,000 for 2007, compared to $67,777,000 for 2006. The Company currently has three lines of business. Premiums relating to medical stop-loss business were $63,483,000 and $56,179,000 for 2007 and 2006, respectively. The increase is primarily due to an increase in medical stop-loss written by Independence American as a result of the Company’s agreement with EDH ($4,701,000), an increase in medical stop-loss premiums assumed by Independence
American ($4,014,000), and a decrease in provider excess premiums written ($753,000). Premiums relating to group medical, short-term medical (“STM”) and individual health were $39,136,000 and $7,685,000 for 2007 and 2006, respectively. The increase is primarily due to production of group medical resulting from the Company’s agreement with EDH ($21,510,000) and an increase in premiums assumed from IHC ($9,838,000). Premiums relating to DBL were $3,481,000 and $3,913,000 for 2007 and 2006, respectively. For 2007, Independence American assumed 10% of IHC’s group medical business and STM business, 20% of IHC’s DBL business and 22.7% of IHC’s medical stop-loss business.
MGU Fee Income. MGU fee income decreased $958,000 to $9,398,000 for 2007, compared to $10,356,000 for 2006. MGU fee income-administration decreased $1,097,000 to $9,141,000 for 2007, compared to $10,238,000 for 2006, as our MGUs have decreased their volume of business as a result of stricter underwriting guidelines. MGU fee income-profit commission increased $139,000 to $257,000 for 2007, compared to $118,000 for 2006 from certain of our MGUs that experienced loss ratios at a level that generated profit commissions. Profit commissions for a given year are primarily based on the performance of business written by an MGU during portions of the three preceding years. Therefore, profit commissions for 2007 are based on business written during portions of 2004, 2005 and 2006.
Net Realized Investment Gains (Loss). Net realized investment gains (loss) decreased $154,000 to a loss of $(88,000) for 2007, compared to a gain of $66,000 for 2006. The Company's decision as to whether to sell securities is based on management’s ongoing evaluation of investment opportunities and economic market conditions, thus creating fluctuations in realized gains or losses from period to period. Included in 2007 and 2006 is an unrealized loss of $409,000 and $96,000 respectively, representing an increase in the value of the derivative liability relating to the agreement with EDH (see Note 18 of Notes to Consolidated Financial Statements). For 2007 and 2006, there were no losses on securities whose decline in value the Company deemed to be other than temporary in nature. See Note 5 of Notes to Consolidated Financial Statements for additional information.
Insurance Benefits, Claims and Reserves. Insurance benefits claims and reserves increased 64%, or $30,819,000, to $78,618,000 for 2007, compared to $47,799,000 for 2006. The increase is mainly due to an increase in the volume of group medical written by Independence American and assumed from IHC, an increase in the volume of medical stop-loss, and the $4,536,000 strengthening of medical stop-loss reserves as described below. The increase of $30,819,000 for 2007 is comprised of a $24,011,000 increase in group medical and STM, a $6,775,000 increase in medical stop-loss, and an increase of $33,000 relating to DBL.
individual claims. Due to the short-term nature of medical stop-loss, redundancies and deficiencies will typically emerge during the following year rather than over a number of years.
Consistent with our experience, the industry as a whole has succumbed to the pricing pressures caused by an unexpectedly long down cycle (or "soft" market) for medical stop-loss business. The medical stop-loss market has been “soft” for the past four years, including cases written in 2006 and 2007, which means that many of the Company’s competitors have been willing to write business at little or no margin. We had been aware of these market conditions and had curtailed our growth in order to attempt to achieve higher profit margins. The Company believed that it had taken sufficient action to insure that business written in 2006 would produce better margins than that written in 2005 and formulated a Projected Net Loss Ratio reflecting such expectations. As is typical with medical stop-loss business, MGUs do have some discretion within our underwriting guidelines to make pricing concessions on certain cases, particularly as it relates to maintaining their core renewal business and production sources.
In the third quarter of 2007, during our quarterly review of Claim Development Patterns, we identified a material increase in claims and reserves with respect to business written in 2006. Such adverse development was primarily driven by the frequency of claims relative to the business written in that year proving significantly higher than what would have been predicted by prior loss development patterns. This increased frequency of medical stop-loss claims was due, in part, to increased severity of primary claims. The Company determined that this increase in claims was an indication of a pattern of higher loss frequency. While claims related to business written in 2007 had not yet developed to a level where Claim Development Patterns would provide reliable estimates of ultimate claim levels, we determined that it was appropriate to re-estimate the 2007 Projected Net Loss ratio to take into account developing losses with respect to business written in 2006.
Amortization and Depreciation. Amortization and depreciation expense increased $282,000 to $971,000 for 2007, compared to $689,000 for 2006. The increased expense primarily relates to the amortization of the intangible asset representing the value of the Company’s agreement with EDH (see Note 18 of Notes to Consolidated Financial Statements), slightly offset by the decrease in amortization related to the value of broker/TPA relationships of our MGUs.
Minority Interest. The Company recorded $215,000 for 2007 and $262,000 for 2006 of expense related to the 20% minority interest in Marlton.
long as AMIC utilizes its net operating loss carry forwards, it will not pay any income taxes, except for federal alternative minimum taxes and state income taxes.
Gain/Loss on Discontinued Operations. Loss on discontinued operations, net of tax was $0 for 2007, compared to $54,000 for 2006. The loss of $54,000 for 2006 was a result of unanticipated property taxes relating to Intellicom. For 2007, the Company has accrued for future property taxes relating to Intellicom.
Corporate derives cash flow funds principally from dividends and tax payments from its subsidiaries and investment income from corporate liquidity. There are no regulatory constraints on our MGUs’ ability to dividend to the parent company, however, state insurance laws have provisions relating to the ability of the parent company to use cash generated by Independence American. For the twelve months ended December 31, 2007, our MGUs paid $1,733,000 in dividends to Corporate.
Pursuant to the terms of a put/call arrangement entered into at the time of acquisition, the Company expects to acquire the remaining 20% interest in Marlton at the end of March 2008.
At December 31, 2007, the Company had $15,201,000 of restricted cash at our MGUs. The amount at our MGUs is directly offset by corresponding liabilities for Premium and Claim Funds Payable of $15,201,000. This asset, in part, represents the premium that is remitted by the insureds and is collected by our MGUs on behalf of the insurance carriers they represent. Each month the premium is remitted to the insurance carriers by our MGUs. Until such remittance is made the collected premium is carried as an asset on the balance sheet of each of our MGUs with a corresponding payable to each insurance carrier. In addition to the premium being
held at our MGUs, our MGUs are in possession of cash to pay claims “Claim Funds”. The cash is deposited by each insurance carrier into a bank account that our MGUs can access. The cash is used by our MGUs to pay claims on behalf of the insurance carriers they represent. The availability of cash enables our MGUs to reimburse claims in a timely manner.
The Company believes it has sufficient cash to meet its currently anticipated business requirements over the next twelve months including the funding of discontinued operations, working capital requirements, and capital investments. The Company expects continued cash usage similar to the amount used in 2007 for its discontinued operations, which are primarily lease obligations, for the year ending December 31, 2008.
The composition of the Company's fixed maturities at December 31, 2007, utilizing Standard and Poor's rating categories, was as follows:
Total investments increased $3,851,000 to $61,066,000 at December 31, 2007 from $57,215,000 at December 31, 2006, due to income from continuing operations before income tax and the timing of insurance liabilities. The $1,593,000 increase in total stockholders' equity is primarily due to net income of $1,138,000 generated during 2007, and the exercise of stock options.
The Company had receivables from reinsurers of $10,845,000 at December 31, 2007. Substantially all of the business ceded to such reinsurers is of short duration. All of such receivables are either due from related parties, highly rated companies or are adequately secured. No allowance for doubtful accounts was deemed necessary at December 31, 2007.
Due to its strong capital ratio and excellent asset quality and credit-worthiness, the Company remains well positioned to increase or diversify its current activities. It is anticipated that future acquisitions or other expansion of operations will be funded internally from existing capital and surplus and parent company liquidity. In the event additional funds are required, it is expected that they would be borrowed or raised in the public or private capital markets to the extent determined to be necessary or desirable.
In accordance with SFAS No. 115, the Company may carry its portfolio of fixed income securities either as held to maturity (carried at amortized cost), as trading securities (carried at fair value) or as available-for-sale (carried at fair value). The Company has chosen to carry its fixed maturity securities as available-for-sale. The Company experienced a change in net unrealized loss of $13,000 reflecting a net unrealized loss of $1,204,000 at December 31, 2007 from a net unrealized loss of $1,191,000 at December 31, 2006. From time to time, as warranted, the Company employs investment strategies to mitigate interest rate and other market exposures.
In 2007, Independence American began writing small-group major medical, medical stop-loss, major medical plans for individuals and families, and short-term medical. Given its enhanced A- (Excellent) rating from A.M. Best, Independence American expects to expand the distribution of its medical stop-loss products through
our MGUs, and increase meaningfully the business written on its paper, especially major medical plans for individuals and families.
Upon renewal of each of the programs underlying the IHC Treaties, Standard Security Life and Madison National Life determine the maximum percentage of risk to be offered to Independence American and Independence American determines the percentage that it wishes to accept. A typical pro rata quota share reinsurance treaty is for a twelve month period in which the ceding company and the reinsurer share the premiums as well as the losses and expenses in an agreed proportion for all policies written with an effective date within this period. Most treaties run from January 1 to December 31, but others could begin and end in other periods. Therefore the percentage ceded could change as the year progresses. If Independence American, Standard Security Life, and Madison National Life had agreed to increase the average percentage ceded to Independence American by 1% (from the 22.7% ceded for the twelve months ended December 31, 2007) and Standard Security Life’s and Madison National Life’s gross written premium had remained unchanged, Independence American’s premium would have increased by approximately $1.9 million, which is approximately 1.8% of total net premiums earned for the year ended December 31, 2007. That increase in premium, however, would not have flowed directly to pre-tax operating income because of corresponding changes in insurance benefits, claims and reserves and other expenses attributable to the increase in premiums.
Therefore, the impact on the Company’s operating results relating to the IHC Treaties can be summarized as follows: (i) assuming the underlying business is profitable, the Company’s results would be positively impacted if IHC were to cede a higher percentage and adversely affected if IHC were to cede less; (ii) Independence American’s income would be negatively impacted if IHC’s gross premium written were to decrease, and (iii) Independence American’s income in future years would be positively affected if IHC were to produce higher profit margins, and negatively impacted if loss ratios increase.
Consolidated Statements of Operations for the years ended December 31, 2007 and 2006
Consolidated Statements of Cash Flows for the years ended December 31, 2007 and 2006
Management assessed the effectiveness of AMIC's internal control over financial reporting as of December 31, 2007. 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. Based on our assessment we concluded that, as of December 31, 2007, 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, 2007 and 2006, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
Accrued fee income ($782 and $239, respectively, due from related parties)
Since November 2002, AMIC has been affiliated with Independence Holding Company ("IHC"), an insurance holding company, which held 48% of AMIC’s outstanding common stock at December 31, 2007. Subsequent to December 31, 2007, IHC acquired an additional 1.7% to bring its ownership to 49.7%. The senior management of IHC provides direction to the Company through a service agreement between the Company and IHC. IHC has also entered into long-term reinsurance treaties to cede medical stop-loss to the Company. Additionally, the Company reinsures IHC’s New York statutory disability business, IHC’s short-term medical (“STM”) business and group major medical business.
Goodwill and intangible assets with indefinite lives, which consist of licenses, are not amortized but are tested for impairment, on a reporting unit basis, at the end of the third quarter of each year, or more frequently if indicators arise. The Company defines its reporting units on a segment basis.
Cash and cash equivalents consist of cash and highly liquid securities with maturities of three months or less from date of purchase. Restricted cash primarily consists of funds held by our MGUs for the benefit of their insurers and reinsurers. These funds are restricted and are to be used to facilitate expeditious payment of approved claims. The funds are replenished by the insurers and reinsurers as claims are paid by our MGUs.
deemed temporary are credited or charged, as appropriate, directly to accumulated other comprehensive income (a component of stockholders' equity). 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 Operations, using the constant yield method over the period to maturity. Realized gains and losses on sales of available-for-sale securities, and unrealized losses considered to be other than temporary, are credited or charged to net realized investment gains in the Consolidated Statements of Operations.
(iv) The Company enters into derivative transactions, such as put and call option contracts and options on interest rate futures contracts, to minimize losses on portions of the Company's fixed income portfolio in a rapidly changing interest rate environment. Equity index options are entered into to offset price fluctuations in the equity markets. These derivative financial instruments are all readily marketable and are carried on the Consolidated Balance Sheets at their current fair value with changes in fair value (unrealized gains or losses), credited or charged, as appropriate, to net realized investment gains in the Consolidated Statements of Operations. All realized gains and losses are reflected currently in the Consolidated Statements of Operations. Losses on these instruments were $480,000 and $19,000 during 2007 and 2006, respectively. There were no such derivative transactions outstanding at December 31, 2007 and 2006.
Fixed assets are stated at cost net of accumulated depreciation. Improvements are capitalized, while repair and maintenance costs are charged to operations as incurred. Depreciation of property and equipment has been provided on the straight-line method over the estimated useful lives of the respective assets (3 years for computer equipment and 7 years for
Direct and assumed premiums from short-duration contracts are recognized as revenue over the period of the contracts in proportion to the amount of insurance protection provided. The Company records MGU fee income as policy premium payments are earned. Our MGUs are compensated in two ways. They earn fee income based on the volume of business produced, and collect profit-sharing commissions if such business exceeds certain profitability benchmarks. Profit-sharing commissions are accounted for beginning in the period in which the Company believes they are reasonably estimable, which is typically at the point that claims have developed to a level where Claim Development Patterns can be applied to generate reasonably reliable estimates of ultimate claim levels. Profit-sharing commissions are a function of an MGU attaining certain profitability thresholds and could greatly vary from quarter to quarter.
Liabilities for insurance reserves for fully insured medical business are established to provide for the liability for incurred but not paid claims. Reserves are calculated using standard actuarial methods and practices. Historical paid claim patterns are reviewed and estimated development factors are applied to immature incurred months to calculate these reserves. The primary assumption in the determination of fully insured reserves is that historical claim development patterns are representative of future claim development patterns. Factors which may affect this assumption include changes in claim payment processing times and procedures, changes in time delay in submission of claims and the incidence of unusually large claims. Liabilities for fully insured medical reserves and disability coverages are computed using completion factors and expected Net Loss Ratios derived from actual historical premium and claim data. The reserving analysis includes a review of claim processing statistical measures and large claim early notifications; the potential impacts of any changes in these factors are not material. The delay in submission of claims tends to be stable over time and not subject to significant volatility.
31, 2006. Changes in the Company's reserve estimates are recorded through a charge or credit to its earnings in the period in which they arise.
In June 2006, the Financial Accounting Standards Board (the “FASB”) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109 ("Interpretation 48"), which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Interpretation 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Interpretation 48 is effective for fiscal years beginning after December 15, 2006. The adoption of Interpretation 48 on January 31, 2007 did not have a material effect on the Company’s financial statements and the Company believes there are no significant tax positions that would require disclosure under Interpretation 48. The Internal Revenue Service is currently auditing our 2003 and 2004 consolidated income tax returns. It is anticipated that this examination will be completed within the next twelve months. Management believes that it has made adequate provision for all income tax uncertainties, such that the outcome of any unresolved issues or claims will not result in a material change to our financial position or results of operations.
On January 1, 2006, the Company adopted the provisions of SFAS No. 123 (R), "Share Based Payment", which requires compensation cost relating to share-based payment transactions to be recognized in the financial statements, based upon the fair value of the instruments issued. SFAS No. 123 (R) covers a wide range of share-based compensation arrangements including share options, restricted stock plans, performance-based awards, share appreciation rights and employee purchase plans. SFAS No. 123 (R) replaces SFAS No. 123. In March 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 107 (SAB 107) regarding the SEC's interpretation of SFAS No. 123 (R) and the valuation of share-based payments for public companies. The company has applied the provisions of SAB 107 in its adoption of SFAS No. 123 (R) and accordingly recorded share-based payment expense in selling, general and administrative expenses. Since the Company previously adopted the provisions of SFAS No. 123, effective November 14, 2002, the adoption of SFAS No. 123 (R) did not have a material impact on the Company's Consolidated Financial Statements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements. FASB Staff Position FIN 157-2, "Effective Date of FASB Statement No. 157", amends SFAS 157 to defer its effective date to fiscal years beginning after November 15, 2008, and for interim periods within those fiscal years. The delayed effective date applies to all non-financial assets and non-financial liabilities except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company is in the process of analyzing the effects of adoption of SFAS 157 on the Company’s consolidated financial statements.
The Company completed its annual impairment testing of goodwill and determined an impairment charge was not required as of December 31, 2007.
Intangible assets at December 31, 2007 and 2006 consist of the following (in thousands):
Intangible asset additions of $3,243,000 in 2006 are a result of the Company’s agreement with EDH as further described in Note 18 of Notes to Consolidated Financial Statements.
Substantially all of the unrealized losses at December 31, 2007 and 2006 relate to investment grade securities and are attributable to changes in market interest rates and general disruptions in the credit market subsequent to purchase. The Company reviews its investments regularly and monitors its investments for impairments. At December 31, 2007, the Company had $1.6 million invested in whole loan CMOs backed by Alt-A mortgages, all of which were rated AAA. Of this amount, 79.0% were in CMOs that originated in 2005 or earlier and 21.0% were in CMOs that originated in 2006. The decline in market value for the equity securities was primarily due to wider spreads for preferred stocks issued by financial institutions following the disruption in credit markets in late 2007.
A total of 24 securities were in a continuous unrealized loss position for less than 12 months and 51 securities for 12 months or longer as of December 2007. A total of 31 securities were in a continuous unrealized loss position for less than 12 months and 54 securities for 12 months or longer as of December 31, 2006. For fixed maturities, there are no securities past due or securities for which the Company currently believes it is not probable that it will collect all amounts due according to the contractual terms of the investment. Based on management's review of the portfolio, which considered the various factors described in Note 2 of Notes to Consolidated Financial Statements, including management’s expectations for recovery in fair value and the Company's intent and ability to hold securities for a period of time sufficient to allow for such
recovery in fair value, the Company did not consider these investments to be other-than-temporarily impaired at December 31, 2007 and 2006.
Major categories of net investment income for years 2007 and 2006 are summarized as follows:
At December 31, 2007 and December 31, 2006, the Company had an equity investment in Majestic with a carrying value of $918,000 and $1,009,000, respectively. For years 2007 and 2006, the Company recorded $(28,000) and $102,000, respectively, for its share of income (loss)
Future minimum lease payments under non-cancelable operating leases as of December 31, 2007, are as follows (in thousands):
Total share-based compensation expense was $231,000 and $235,000 for the twelve months ended December 31, 2007 and 2006, respectively. Related tax benefits of $81,000 and $82,000 for the twelve months ended December 31, 2007 and 2006, respectively. As of December 31, 2007, there was approximately $226,000 of total unrecognized compensation expense related to non-vested options which will be recognized over the remaining requisite service periods.
this coverage is split proportionally between the Company and IHC according to the type of risk and AMIC’s portion is recorded in Selling, General and Administrative Expenses.
Taxes computed at the Federal statutory rate of 35% for the years ended December 31, 2007 and 2006 are reconciled to the Company's actual income tax expense (benefit) as follows:
The tax effect of temporary differences that give rise to significant portions of the net deferred tax assets at December 31, 2007 and 2006 are as follows:
At December 31, 2007, the Company had Federal net operating loss carryforwards of approximately $275,104,000 which expire as follows (in thousands).
AMIC's ability to utilize its Federal Net Operating Loss Carrryforwards ("NOLs") would be substantially reduced if AMIC were to undergo an "ownership change" within the meaning of Section 382(g)(1) of the Internal Revenue Code. AMIC will be treated as having had an "ownership change" if there is more than a 50% increase in stock ownership during a three year '"testing period" by "5% stockholders." In order to reduce the risk of an ownership change, in November 2002, AMIC's stockholders approved an amendment to its Certificate of Incorporation restricting transfers of shares of its common stock that could result in the imposition of limitations on the use, for federal, state and city income tax purposes, of AMIC's carryforwards of net operating losses and certain federal income tax credits. The Certificate of Incorporation generally restricts any person from attempting to sell, transfer or dispose, or purchase or acquire any AMIC stock, if such transfer would affect the percentage of AMIC stock owned by a 5% stockholder. Any person attempting such a transfer will be required, prior to the date of any proposed transfer, to request in writing that the board of directors review the proposed transfer and authorize or not authorize such proposed transfer. Any transfer attempted to be made in violation of the stock transfer restrictions will be null and void. In the event of an attempted or purported transfer involving a sale or disposition of
capital stock in violation of stock transfer restrictions, the transferor shall remain the owner of such shares. Notwithstanding such transfer restrictions, there could be circumstances under which an issuance by AMIC of a significant number of new shares of Common Stock or other new class of equity security having certain characteristics (for example, the right to vote or convert into Common Stock) might result in an ownership change under the Code.
All of the Company's short-duration contracts are generated from our accident and health business, and are accounted for based on actuarial estimates of the amount of loss inherent in that period's claims, including losses incurred for which claims have not been reported. Short-duration contract loss estimates rely on actuarial observations of ultimate loss experience for similar historical events.
The preceding schedule reflects (i) the due and unpaid, (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
Dividends from Independence American to its parent, a subsidiary of AMIC, are subject to the prior notification to the Delaware Insurance Commissioner, if such dividends, together with the fair market value of other dividends or distributions made within the preceding twelve months, exceed the greater of (i) 10% of surplus as regards policyholders as of the preceding December 31 or (ii) net income, not including realized capital gains, for the twelve-month period ending the 31st day of December next preceding. Such dividends may be paid so long as they have not been
Management has expanded previously reported segment information for Independence American. Management believes that this additional information clarifies the diversified lines of business within the Independence American segment. Identifiable assets by segment are those assets that are utilized in each segment and are allocated based upon the mean reserves of each such segment. Corporate assets are composed principally of cash equivalents, resale agreements, and partnership interests. Information by business segment for the years ended December 31, 2007 and 2006 is presented below (in thousands):
In February 2006, Independence American entered into an agreement with Employers Direct Health (“EDH”). Under this agreement, EDH began writing employer medical stop-loss for Independence American in 2006, and moved the majority of its existing block of employer-sponsored group major medical and medical stop-loss to Independence American during 2007. The employer-sponsored group major medical product is part of the Company’s fully insured health line of business. In 2006, Independence American paid EDH $2,500,000, which EDH simultaneously paid to Independence Holding Company (“IHC”) in consideration of IHC issuing 125,000 shares of IHC common stock (“IHC Stock”) to EDH. The IHC stock will be released to EDH upon aggregate annualized premiums generated by EDH reaching $30 million, less such number of shares necessary to satisfy EDH’s obligation under the agreement to provide certain collateral to Independence American. As of December 31, 2007, Independence American received $26,895,000 of earned premiums under this agreement.
The Company has classified the $2,500,000 payment and $743,000 original value of the derivative as an intangible asset that will be amortized over the five year contract period. Such amortization started January 1, 2007 to coincide with the transfer of business on January 1, 2007.
In addition, the Company began marketing health plans to individuals and families utilizing Independence American as the carrier during the third quarter of 2007. Independence American retains 50% of the risk on this business. The program is administered by Insurers Administrative Corporation, a wholly owned subsidiary of IHC.