PetPartners leases 5,963 square feet of office space in Raleigh, North Carolina as its corporate headquarters.
The following is a summary of selected consolidated financial data of the Company for each of the last five years.
under their employer’s group medical plan. The dental and vision products are marketed to large and small groups as well as individuals. With respect to IHC’s life and disability business, Madison National Life has historically sold almost all of this business through one distribution source specializing in serving school districts and municipalities.
Income from continuing operations of $2.63 per share, diluted, for the year ended December 31, 2017 compared to $1.27 per share, diluted, for the same period in 2016.
oThe Company reduced AMIC’s deferred tax asset valuation allowance by $20.3 million at December 31, 2017 primarily due to an increase in projected future income and associated utilization of Federal net operating losses. No such adjustment was recorded for the years ended December 31, 2016 or 2015.
Consolidated investment yields (on an annualized basis) of 3.2% in 2017 compared to 2.7% in 2016; and
oAlthough the loss ratios in 2017 are lower than in the comparable periods in 2016, the expense ratios are higher in 2017 because of changes in the mix of products within the Specialty Health segment and as a result of the reallocation of certain fixed costs from the Medical Stop-Loss segment to the Specialty Health segment as the premium volume of one segment shrinks and the other one grows.
The Medical Stop-Loss segment reported income before taxes of $2.8 million for the year ended December 31, 2017 as compared to income before taxes of $16.7 million for the year ended December 31, 2016. The reduction in income in 2017 in the Medical Stop-loss segment is principally due to the sale of Risk Solutions and exit from the medical stop-loss business. Premiums earned and amounts recorded for benefits, claims and reserves in the Medical Stop-Loss segment represent the activity of the medical stop-loss business in run-off;
Loss before tax from the Corporate segment for the year ended December 31, 2017 decreased $0.7 million over the same period in 2016 primarily due to changes in share-based compensation, consulting, legal and accounting expenses; and
With respect to DBL, the liability for policy benefits and claims for the most recent quarter of earned premium is established using a Net Loss Ratio methodology. The Net Loss Ratio is determined by applying the completed prior four quarters of historical Net Loss Ratios to the last quarter of earned premium. Policy benefits and claims associated with the premium earned prior to the last quarter are established using a completion factor methodology. The completion factors are developed using the historical payment patterns for DBL.
The liability for future policy benefits consists of the liabilities related to insured events for the Company’s long-duration contracts, primarily its life and annuity products. For traditional life insurance
Other policyholders’ funds represent interest-bearing liabilities arising from the sales of products, such as universal life, interest-sensitive life and annuities. Policyholder funds are primarily comprised of deposits received and interest credited to the benefit of the policyholder less surrenders and withdrawals, mortality charges and administrative expenses.
The Company periodically reviews and assesses the vendor’s qualifications and the design and appropriateness of its pricing methodologies. Management will on occasion challenge pricing information on certain individual securities and, through communications with the vendor, obtain information about the assumptions, inputs and methodologies used in pricing those securities, and corroborate it against documented pricing methodologies. Validation procedures are in place to determine completeness and accuracy of pricing information, including, but not limited to: (i) review of exception reports that (a) identify any zero or un-priced securities; (b) identify securities with no price change; and (c) identify securities with significant price changes; (ii) performance of trend analyses; (iii) periodic comparison of pricing to alternative pricing sources; and (iv) comparison of pricing changes to expectations based on rating changes, benchmarks or control groups. In certain circumstances, pricing is unavailable from the vendor and broker
In assessing corporate debt securities for other-than-temporary impairment, the Company evaluates the ability of the issuer to meet its debt obligations and the value of the company or specific collateral securing the debt position. For mortgage-backed securities where loan level data is not available, the Company uses a cash flow model based on the collateral characteristics. Assumptions about loss severity and defaults used in the model are primarily based on actual losses experienced and defaults in the collateral pool. Prepayment speeds, both actual and estimated, are also considered. The cash flows generated by the collateral securing these securities are then determined with these default, loss severity and prepayment assumptions. These collateral cash flows are then utilized, along with consideration for the issue’s position in the overall structure, to determine the cash flows associated with the mortgage-backed security held by the Company. In addition, the Company evaluates other asset-backed securities for other-than-temporary impairment by examining similar characteristics referenced above for mortgage-backed securities. The Company evaluates U.S. Treasury securities and obligations of U.S. Government corporations, U.S.
Government agencies, and obligations of states and political subdivisions for other-than-temporary impairment by examining the terms and collateral of the security.
Goodwill carrying amounts are evaluated for impairment, at least annually, at the reporting unit level that is equivalent to an operating segment. If the fair value of a reporting unit is less than its carrying amount, further evaluation is required to determine if a write-down of goodwill is required. In determining the fair value of each reporting unit, we used an income approach, applying a discounted cash flow method that included a residual value. Based on historical experience, we make assumptions as to: (i) expected future performance and future economic conditions, (ii) projected operating earnings, (iii) projected new and renewal business as well as profit margins on such business, and (iv) a discount rate that incorporated an appropriate risk level for the reporting unit. Any impairment of goodwill would be charged to expense.
At December 31, 2017, the Company’s market capitalization was less than its book value indicating a potential impairment of goodwill. As a result, the Company assessed the factors contributing to the performance of IHC stock in 2017, and concluded that the market capitalization does not represent the fair value of the Company. The Company noted several factors that have led to a difference between the market capitalization and the fair value of the Company, including (i) the Company’s stock is thinly traded and a sale of even a small number of shares can have a large percentage impact on the price of the stock, (ii) Geneve Corporation and insiders own approximately 67% of the outstanding shares, which has had a significant adverse impact on the number of shares available for sale and therefore the trading potential of IHC stock, and (iii) lack of analyst coverage of the Company. 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. No impairment charge for goodwill was required in 2017, 2016 or 2015.
In 2017, premiums earned increased $19.6 million over the comparable period of 2016. The increase is primarily due to: (i) an increase of $27.5 million in the Specialty Health segment principally as a result of a $36.7 million increase in the fixed indemnity limited benefit line, a $9.7 million increase in premiums from the short term medical line of business, and a $0.9 million increase in the pet line of business, partially offset by a decrease of $9.9 million in occupational accident business premiums due to the run-off of this line following the sale of our primary producer of this business, in the third quarter of 2016, a decrease of $4.1 million in the dental line of business and a $5.9 million decline in international premiums; (ii) a $3.7 million increase in earned premiums from the Group disability, life, annuities and DBL segment primarily due to increased volume in the LTD, DBL and group term life lines; and (iii) an increase of $0.2 million in the Individual life, annuities and other segment; partially offset by (iv) a decrease of $11.8 million in the Medical Stop-Loss segment as a result of the sale of Risk Solutions and exit from the medical stop-loss business, further described in Note 3.
The annualized investment yields on bonds, equities and short-term investments for the years ended December 31, 2017 and 2016 were 3.0% and 2.9%, respectively. IHC has approximately $176.9 million in highly rated shorter duration securities earning on average 1.8%. 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 $2.5 million in 2017 compared to $4.5 million in 2016. 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.
Other income in 2017 decreased $9.6 million from the same period in 2016 primarily due to the run-off of fees received in conjunction with the diminished administration of the Medical Stop-Loss segment.
In 2017, insurance benefits, claims and reserves decreased $10.1 million over the comparable period in 2016. The decrease is primarily attributable to: (i) a decrease of $12.8 million in the Medical Stop-Loss segment primarily as a result of the sale of Risk Solutions and exit from the medical stop-loss business, further described in Note 3; (ii) a decrease of $1.1 million in the Individual life, annuity and other segment; partially offset by (iii) an increase of $3.2 million in the Specialty Health segment, primarily due to an increase of $3.8 million in the small group major medical line of business due to favorable development of this line in 2016 with no comparable amount in 2017, and increases of $8.6 million, $6.3 million and $1.3 million in the benefits and claims of fixed indemnity limited benefit, short term medical and pet lines of business, respectively, due to increases in volume, partially offset by a $9.4 million decrease in benefits, claims and reserves related to the run-off of the occupational accident line of business and decreases of $4.6 million and $2.6 million in the dental and international lines, respectively, due to lower premiums; and (iv) an increase of $0.6 million in benefits, claims and reserves in the Group disability, life, annuities and DBL segment, primarily due to growth in this line partially offset by improved experience in the DBL line.
The effective tax (benefit) rate was (48.7)% in 2017 compared to 29.8% for the same period in 2016. The Company has completed its accounting for the impact of the Tax Act as of December 31, 2017 and recorded a deferred income tax expense of $9.4 million due to the re-measurement of deferred tax assets, liabilities and related valuation allowance. Also in 2017, the Company wound down the operations and dissolved a subsidiary recognizing an estimated $11.6 million income tax benefit on a worthless stock deduction of $33.1 million, representing the Company’s tax basis on its unrecovered investment in that subsidiary. In addition, the Company recorded a $20.3 million credit to federal income taxes in 2017 as a result of the reduction in AMIC’s valuation allowance for increased income projections and associated utilization of Federal net operating loss carryforwards. AMIC’s valuation allowance was due to the probability that AMIC might not be able to fully utilize its prior tax year federal net operating loss carryforwards ("NOLs"). Income taxes for the year ended December 31, 2016, also include an income tax benefit of $3.9 million on a worthless stock deduction of $11.2 million representing the Company’s tax basis in its unrecovered investment in a subsidiary.
Results of Operations for the Year Ended December 31, 2016 Compared to the Year Ended December 31, 2015
In the third quarter of 2015, the Company finalized a joint venture with Ebix, Inc. in which IHC sold its wholly owned administrative subsidiary, IHC Health Solutions (now known as Ebix Health Administration Exchange, Inc.), in exchange for a 60% ownership interest in Ebix Health Exchange and $6.0 million in cash proceeds. The transaction resulted in a loss of control over the subsidiary (due to a lack of the majority of the voting interest on the Board of Managers) and therefore the subsidiary was deconsolidated from the Company’s financial statements. The Company recognized a net gain of $9.9 million, pre-tax, on the transaction (see Note 7). There was no comparable transaction in 2016.
In 2016, insurance benefits, claims and reserves decreased $161.9 million over the comparable period in 2015. The decrease is primarily attributable to: (i) a decrease of $143.5 million in the Medical Stop Loss segment primarily as a result of the sale of Risk Solutions and exit from the medical stop-loss business, further described in Note 3; (ii) a decrease of $12.7 million in the Specialty Health segment, primarily due to a decrease of $23.8 million in benefits, claims and reserves related to the run-off of the Major Medical business, a $3.5 million decrease due to lower volume in the fixed indemnity business, and a $2.1 million decrease due to lower retention in the international line; partially offset by increases of $5.4 million in claims in the occupational accident lines due to higher claim activity and increases of $9.3 million and $2.3 million in the short term medical and pet, respectively, due to the increase in volume of both lines of business; and (iii) a decrease of $10.3 million in the Individual life, annuity and other segment, primarily as a result of business in run-off; partially offset by (iv) an increase of $4.6 million in benefits, claims and reserves in the group disability, life, annuities and DBL segment, primarily due to increased retention and higher loss ratios on LTD lines.
The Insurance Group normally provides cash flow from: (i) operations; (ii) the receipt of scheduled principal payments on its portfolio of fixed maturities; and (iii) earnings on investments. Such cash flow is partially used to fund liabilities for insurance policy benefits. These liabilities represent long-term and short-term obligations.
Operating activities provided $28.6 million of cash. Investment activities provided $27.6 million of cash, primarily the result of sales of investment securities, partially offset by $12.3 million net cash outflow to acquire PetPartners. Financing activities utilized $51.7 million of cash, of which $46.4 million was utilized for treasury share purchases.
At December 31, 2017, the Company had $544.1 million of insurance liabilities 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, 2017, cash received from the maturities and other repayments of fixed maturities was $28.4 million.
The Company had receivables from reinsurers of $380.6 million at December 31, 2017 compared to $440.3 million at December 31, 2016. All of such reinsurance receivables are from highly rated companies or are adequately secured. No allowance for doubtful accounts was necessary at December 31, 2017.
The Company reviews its investments regularly and monitors its investments continually for impairments, as discussed in Note 1(F) (iv) of the Notes to Consolidated Financial Statements in Item 8 of this report. The Company did not record any other-than-temporary impairment losses in 2017. The Company recognized $1.5 million of other-than-temporary impairment losses on certain fixed maturities available-for-sale during 2016. The Company determined that it was more likely than not that we will sell the securities before recovery of their amortized cost basis. At December 31, 2017, there were no securities with fair values less than 80% of their amortized cost.
The unrealized losses on all available-for-sale securities have been evaluated in accordance with the Company's impairment policy and were determined to be temporary in nature at December 31, 2017. From time to time, as warranted, the Company may employ investment strategies to mitigate interest rate and other market exposures. Further deterioration in credit quality of the companies backing the securities, further deterioration in the condition of the financial services industry, imbalances in liquidity that exist in the marketplace, worsening of the current economic recession, or declines in real estate values may further affect the fair value of these securities and increase the potential that certain unrealized losses be designated as other-than-temporary in future periods and the Company may incur additional write-downs.
Based upon the goodwill impairment testing performed at December 31, 2017, the fair value of each reporting unit exceeded its carrying value and no impairment charge was required. Fair value exceeded carrying value by more than 10% in the Specialty Health segment.
In determining the fair value of each reporting unit, we used an income approach, applying a discounted cash flow method that included a residual value. Based on historical experience, we made assumptions as to: (i) expected future performance and future economic conditions, (ii) projected operating earnings, (iii) projected new and renewal business as well as profit margins on such business, and (iv) a discount rate that incorporated an appropriate risk level for the reporting unit.
Due to the long-term nature of LTD, in establishing the liability for policy benefits and claims, the Company must make estimates for case reserves, IBNR, and reserves for Loss Adjustment Expenses (“LAE”). Case reserves generally equal the actuarial present value of the liability for future benefits to be paid on claims incurred as of the balance sheet date. The IBNR reserve is established based upon historical trends of existing incurred claims that were reported after the balance sheet date. The LAE reserve is calculated based on an actuarial expense study. Since the LTD block of policies is relatively small, with the potential for very large claims on individual policies, results can vary from year to year. If a small number of claimants with large claim reserves were to recover or several very large claims were incurred, the results could distort the Company’s policy benefits and claims estimates from year to year. With respect to DBL, the liability for policy benefits and claims for the most recent quarter of earned premium is established using a Net Loss Ratio methodology. The Net Loss Ratio is determined by applying the completed prior four quarters of historical Net Loss Ratios to the last quarter of earned premium. Policy
benefits and claims associated with the premium earned prior to the last quarter are established using a completion factor methodology. The completion factors are developed using the historical payment patterns for DBL. The favorable DBL development is due to lower than anticipated claims, in addition, the Company establishes a reserve for a potential premium refund for better than mandated experience which was not required to be paid in 2017.
All other lines, primarily life and other individual health products, experienced favorable development of $3.1 million. The favorable development in life reserves is partially due to a decrease in Paid Up Life (“PUL”) and additional reserves within the group term life line of business. The PUL change was due to a decrease in the number of eligible members and a decrease in the number of groups with the PUL benefit. Additionally, the Ordinary line of business had a pre-reinsurance true-up and released the remaining pre-reinsurance IBNR reserves.
Continue to diversify the distribution and administration of our pet insurance as a result of the acquisition of Pet Partners Inc. and several new distribution relationships that we expect to begin selling through in 2018.
Effective January 1, 2018, Standard Security Life began selling a new rider (“Paid Family Leave” or “PFL”) as part of our New York DBL policies in 2018. This is a result of New York State requiring employers to provide PFL, which would cover job-protected paid leave to care for a new child or sick family member or to assist when someone is called to active military service. Standard Security Life anticipates that the implementation of this coverage will more than double our current $30 million DBL block. The rates for PFL are set by New York State and as this is a new product, with no historical experience, there is no certainty as to the adequacy of the rate and therefore underwriting profitability.
Experience increases in both long-term and short-term disability premiums in 2018 generated from new distribution relationships.
Continue to evaluate strategic transactions. We plan to continue to deploy some of our cash to make additional investments and acquisitions that will continue to bolster existing or new lines of business.
Subject to making additional repurchases, acquisitions, investments and capital contributions to support growth, the Company will remain highly liquid in 2018 as a result of the continuing shorter duration of the portfolio. IHC has approximately $176.9 million in highly rated shorter duration securities earning on average 1.8%; our portfolio as a whole is rated, on average, AA. The low duration of our portfolio enables us, if we deem prudent, the flexibility to reinvest in much higher yielding longer-term securities, which would significantly increase investment income in the future. A low duration portfolio such as ours also mitigates the adverse impact of potential inflation. IHC will continue to monitor the financial markets and invest accordingly.