The Company further reduced the deferred tax asset valuation allowance by $5.9 million at December 31, 2012 primarily due to the expected increase in future income and due to the utilization of deferred taxes in the past several years. No such adjustment was recorded for the years ended December 31, 2011 and 2013.
At December 31, 2013, 99.4% of the Company's fixed maturities were investment grade.
Consolidated investment yields were 3.2% and 3.3% for the years ended December 31, 2013 and 2012, respectively.
Premiums earned increased 52% to $127.2 million for the year ended December 31, 2013 from $83.8 million for the year ended December 31, 2012, primarily due to higher pet premiums, higher assumed medical stop-loss premiums, higher assumed international premiums, higher group disability premiums, and higher assumed group major medical premiums.
For the years ended December 31, 2013 and 2012, Independence American wrote $6.4 million and $9.5 million, respectively, of individual health business produced by our marketing organization IPA Family.
For the year ended December 31, 2013, our Agencies generated revenues of $23.0 million compared to $15.7 million for the year ended December 31, 2012 due to higher revenues generated at HIO, Risk Solutions and Specialty Benefits.
Underwriting experience, as indicated by its GAAP Combined Ratios on our three lines of business for the years ended December 31, 2013, 2012 and 2011 are as follows (in thousands):
The Company recorded a decrease in the loss ratio in the medical stop-loss line of business for the year ended December 31, 2013. This is due to favorable claims experience on direct business, offset by unfavorable claims experience on assumed business emanating from a non-owned MGU program that was terminated effective December 31, 2013. The company recorded an increase in the profit commission expense ratio due to the profitability of certain programs.
The Company experienced a higher loss ratio for group disability for the year ended December 31, 2013 as a result of a higher frequency of DBL claims due to an increase in premiums from larger groups in 2013.
The Company maintains loss reserves to cover its estimated liability for unpaid losses and loss adjustment expenses, where material, including legal and other fees, 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 estimated in accordance with GAAP. The Company’s estimate of loss reserves represents management’s best estimate of the Company’s liability at the balance sheet date.
Management believes that the Company's methods of estimating the liabilities for policy benefits and claims provided appropriate levels of reserves at December 31, 2013. Changes in the Company's reserve estimates are recorded through a charge or credit to its earnings.
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 to the Company’s underwriting guidelines. Changes in these underlying factors are what determine the reasonably likely changes in the Projected Net Loss Ratio as discussed above.
Amounts recoverable or paid for under reinsurance contracts are included in total assets or total liabilities as due from reinsurers or due to reinsurers. In 2013, Independence American derived 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 terminate on December 31, 2014, unless terminated sooner by Independence American. 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 each of the twelve months ended December 31, 2013 and 2012, Standard Security Life and Madison National Life ceded an average of approximately 26% and 24%, respectively, of their medical stop-loss business to Independence American. Independence American reinsures 20% of Standard Security Life’s DBL business and 8% of certain of IHC’s LTD business. Standard Security Life and Madison National Life also ceded approximately 12% of the majority of their fully insured health business lines to Independence American. In addition, in 2013, Independence American ceded 9% of its fully insured health business lines to unaffiliated 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 2028.
Equity securities may experience other-than-temporary impairment in the future based on the prospects for full recovery in value in a reasonable period of time and the Company’s ability and intent to hold the security 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, 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.
Results of Operations for the Year Ended December 31, 2013, compared to the Year Ended December 31, 2012
Insurance Benefits, Claims and Reserves. Due to the increase in premiums, insurance benefits claims and reserves increased 53%, or $30,269,000 from 2012 to 2013. The increase is primarily due to an increase in assumed group major medical of $10,133,000 due to higher premiums assumed and a higher loss ratio, an increase in direct pet insurance of $9,726,000 due to a higher premiums written and a higher loss ratio, an increase in assumed medical stop-loss of $8,049,000 due to an increase in premiums assumed and a higher loss ratio, an increase in assumed international medical of $1,521,000 due to higher premiums assumed offset by a lower loss ratio, an increase in DBL of $1,272,000 due to higher premiums assumed and a higher loss ratio, and an increase in small group of $1,034,000 due to higher premiums written, offset by a decrease in direct medical stop-loss of $2,861,000 due to a lower loss ratio, and a decrease in direct group major medical of $847,000 due to a decrease in premiums written.
Amortization and Depreciation. Amortization and depreciation expense increased $472,000 from 2012 to 2013, primarily due to the amortization of intangible assets acquired in the fourth quarter of 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 year 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 7.8% non-controlling interest in our new company IPAD.
Net Income attributable to American Independence Corp. The net income attributable to the Company decreased to $3,435,000, or $.43 per share, diluted, for 2013, compared to $9,592,000, or $1.16 per share, diluted, for 2011.
Premiums Earned. Premiums earned increased 16%, or $11,330,000 from 2011 to 2012. The Company currently has three lines of business. Premiums relating to medical stop-loss business increased $8,962,000. This is due to an increase of $4,706,000 in medical stop-loss premiums assumed by Independence American and an increase of $4,256,000 in medical stop-loss premiums written by Independence American. Premiums relating to fully insured health consisting of group major medical, fixed indemnity limited benefit, short-term medical, dental, vision, hospital indemnity, pets health, international medical and individual health increased $1,849,000. The increase is primarily due to an increase of $3,271,000 in pet insurance premiums written, an increase of $1,395,000 in other fully insured premiums written, an increase of $428,000 in group major medical assumed, and a $1,971,000 increase in international medical premiums assumed by Independence American, offset by a decrease of $4,126,000 in group major medical premiums written, and a decrease of $1,509,000 in individual health premiums written. Premiums relating to group disability increased $519,000 primarily due to an increase in LTD premiums assumed by Independence American. For the year ended December 31, 2012, Independence American assumed 10% of IHC’s short-term medical business, 20% of IHC’s DBL business, approximately 8% of certain of IHC’s international health and LTD business, and approximately 24% of IHC’s
medical stop-loss business. There were no significant changes to these percentages from the prior year other than new lines of business.
Fee and Agency Income. Fee and agency income increased $2,794,000 from 2011 to 2012. Risk Solutions fee income-administration increased $530,000 to $5,480,000 for 2012, compared to $4,950,000 for 2011. Risk Solutions fee income-profit commission increased $515,000 to $1,186,000 for 2012, compared to $671,000 for 2011. 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 2012 are based on business written during portions of 2009, 2010 and 2011. In 2012, income from our Agencies consisted of commission income and other fees of $4,303,000 from IPA Family and revenue of $3,497,000 and $975,000 from HIO and our new company Specialty Benefits, respectively. In 2011, income from our Agencies consisted of commission income and other fees of $4,852,000 from IPA Family and revenue of $2,174,000 from HIO. The increase in fee income at HIO is due to increases in Internet lead and referral business.
Amortization and Depreciation. Amortization and depreciation expense decreased $346,000 from 2011 to 2012.
Income Taxes. The provision for income taxes decreased $5,197,000 to a tax benefit of $3,890,000, an effective rate of -68.2%, for 2012, compared to a tax provision of $1,307,000, an effective rate of 34.4%, for 2011. Net income for 2012 and 2011 includes a non-cash provision for federal income taxes of $1,868,000 and $1,258,000, respectively. The state tax effective rate increased to 1.4% for 2012, compared to 1.3% for 2011. 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"). AMIC reviews the valuation allowance quarterly to determine the reasonableness of the amount, and previously reduced it in 2002, 2003 and 2005. Based upon AMIC's profitability in 2012 and projected continuing profitable results, it was management's view that it was appropriate to further reduce the valuation allowance in the fourth quarter of 2012 which resulted in an increase in net income. 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.
At December 31, 2013, the Company had $10,067,000 of restricted cash at Risk Solutions. This amount is directly offset by corresponding liabilities for Premium and Claim Funds Payable of $10,067,000. 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 account that Risk Solutions can access to reimburse claims in a timely manner. The cash is used by Risk Solutions to pay claims on behalf of the insurance carriers they represent.
At December 31, 2013, the Company had $35,252,000 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.
The chart below reflects the maturity distribution of AMIC’s contractual obligations at December 31, 2013 (in thousands):
Total investments, net of amounts due to/from brokers, increased $6,594,000 to $73,759,000 at December 31, 2013 from $67,165,000 at December 31, 2012, due to higher net purchases of fixed maturity securities, offset by unrealized losses on fixed maturity securities and net sales of preferred stock.
The nature and quality of insurance company investments must comply with all applicable statutes and regulations, which have been promulgated primarily for the protection of policyholders. The Company's gross unrealized gains on available-for-sale securities totaled $555,000 at December 31, 2013. Approximately 99.4% of the Company’s fixed maturities were investment grade. The Company marks all of its available-for-sale securities to fair value through accumulated other comprehensive income or loss. Higher grade investments tend to carry less default risk and, therefore, lower interest rates than other types of fixed maturity investments. At December 31, 2013, approximately 0.6% (or $390,000) of the carrying value of fixed maturities was invested in non-investment grade fixed maturities (primarily commercial mortgage obligations) (investments in such securities have different risks than investment grade securities, including greater risk of loss upon default, and thinner trading markets). The Company does not have any non-performing fixed maturity investments at December 31, 2013.
Approximately 2.0% of fixed maturities, primarily municipal obligations, in our investment portfolio are insured by financial guaranty insurance companies. The purpose of this insurance is to increase the credit quality of the fixed maturities and their credit ratings. If the obligations of these financial guarantors ceased to be valuable, either through a credit rating downgrade or default, these debt securities would likely receive lower credit ratings by the rating agencies that would reflect the creditworthiness of the various obligors as if the fixed maturities were uninsured. The following table summarizes the credit quality of our fixed maturity portfolio as rated, and as rated if the fixed maturities were uninsured, at December 31, 2013:
The Company reviews its investments regularly and monitors its investments continually for impairments as discussed in Note 1 (H) (v) of the Notes to Consolidated Financial Statements. The Company did not record
significant adverse impact on the number of shares available for sale and therefore the trading potential of AMIC 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.
The majority of Independence American’s revenue is from reinsurance premiums, although Independence American continues to increase the premiums written on its paper. During 2013, Independence American wrote group major medical, medical stop-loss, pet insurance, major medical plans for individuals and families, hospital indemnity, a small amount of short-term medical, fixed indemnity limited benefit and dental. Independence American has ceased writing major medical plans for individuals and families and has curtailed writing small group major medical. Given its A- (Excellent) rating from A.M. Best, Independence American expects to expand the distribution of its pet insurance, occupational accident and ancillary health products. The majority of major medical plans for individuals and families was written through IPA Family. IPA Family and IPAD have begun to write major medical through well-known national insurance companies while continuing to focus on Independence American’s and IHC’s ancillary products.
Our pet insurance premiums experienced significant growth in 2013 and is expected to continue in 2014.
Our small group major medical reinsured premiums are expected to decrease in 2014 as a result of exiting the two states in which Independence American wrote business, and a decrease of premiums reinsured from IHC.
Significant growth in non-subscriber occupational accident insurance in Texas, and health insurance for groups seeking coverage for expatriate employees.
In 2014 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.
While maintaining our current profitability levels, we experienced significant growth of our stop-loss business in 2013, our largest core business, which we attribute to the more efficient and controlled model of writing the majority of our medical stop-loss on a direct basis. At present, all indicators point to a continuation of these trends for business produced by Risk Solutions in 2014.
We will continue to focus on our strategic objectives, including expanding our distribution network. However, the success of a portion of our Fully Insured Health business has been affected by the passage of the Patient Protection and Affordable Care Act of 2010, as amended, and its subsequent interpretations by state and federal regulators. We are continuing our comprehensive review of all the options for AMIC and we are continuing our evaluation of our portfolio of health insurance products. While the law has influenced our decision, and that of many other insurers, to exit or reduce their presence in major medical essential health
Our results depend on the adequacy of our product pricing, our underwriting, the accuracy of our reserving methodology, returns on our invested assets, and our ability to manage expenses. We will also need to be diligent with the increased rate review scrutiny to effect timely rate changes and will need to stay focused on the management of medical cost drivers as medical trend levels cause margin pressures. Therefore, factors affecting these items, as well as, unemployment and global financial markets, may have a material adverse effect on our results of operations and financial condition.
Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012
Management assessed the effectiveness of AMIC's internal control over financial reporting as of December 31, 2013. 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, 2013, AMIC's internal control over financial reporting is effective.
We have audited the accompanying consolidated balance sheets of American Independence Corp. and subsidiaries (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2013. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.
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% at December 31, 2013. 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 statutory disability (“DBL”), short-term medical, long-term disability (“LTD”) and group major medical.
Goodwill and intangible assets with indefinite lives, which consist of licenses, are not amortized but are evaluated for impairment in the aggregate at the end of the fourth quarter of each year, or more frequently if indicators arise. If the fair value of the Company is less than its carrying amount (including goodwill), further evaluation is required to determine if a write-down of goodwill is
(ii) Financial instruments sold, but not yet purchased, represent obligations to replace borrowed securities that have been sold. Such transactions occur in anticipation of declines in the fair value of the securities. The Company's risk is an increase in the fair value of the securities sold in excess of the consideration received, but that risk is mitigated as a result of relationships to certain securities owned. Unrealized gains or losses on open transactions are credited or charged, as appropriate, to net realized investment gains in the Consolidated Statements of Income. While the transaction is open, the Company will also incur an expense for any accrued dividends or interest payable to the lender of the securities. When the transaction is closed, the Company realizes a gain or loss in an amount equal to the difference between the price at which the
securities were sold and the cost of replacing the borrowed securities. There were no such transactions outstanding at December 31, 2013 and 2012.
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 pricing information is used to determine fair value. In these instances, management will assess the quality of the data sources, the underlying assumptions and the reasonableness of the broker quotes based on the current market information available. To determine if an exception represents an error, management will often have to exercise judgment. Procedures to resolve an exception vary depending on the significance of the security and its related class, the frequency of the exception, the risk of material misstatement, and the availability of information for the security. These procedures include, but are not limited to; (i) a price challenge process with the vendor; (ii) pricing from a different vendor; (iii) a reasonableness review; (iv) a change in price based on better information, such as an actual market trade, among other things. Management considers all facts and relevant information obtained during the above procedures to determine the proper classification of each security in the Fair Value Hierarchy.
security. The amount of the other-than-temporary impairment related to all other factors is recognized in other comprehensive income in the Consolidated Balance Sheets. It is reasonably possible that further declines in estimated fair values of such investments, or changes in assumptions or estimates of anticipated recoveries and/or cash flows, may cause further other-than-temporary impairments in the near term, which could be significant.
are developed and are based on Claim Development Patterns. The Company uses the Projected Net Loss Ratio to establish reserves until developing losses provide a better indication of ultimate results and it is feasible to set reserves based on Claim Development Patterns. The Company has concluded that a reasonably likely change in the Projected Net Loss Ratio assumption could have a material effect on the Company’s financial condition, results of operations, or liquidity (“Material Effect”) but a reasonably likely change in the Claim Development Pattern would not have a Material Effect.
Management believes that the Company's methods of estimating the liabilities for policy benefits and claims provided appropriate levels of reserves at December 31, 2013 and December 31, 2012. Changes in the Company's reserve estimates are recorded through a charge or credit to its earnings in the period in which they arise.
The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial carrying amounts of existing assets and liabilities and their respective tax basis, and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets when it is more likely than not that the deferred tax asset will not be realized (see Note 12 of Notes to Consolidated Financial Statements). A liability for uncertain tax positions is recorded when it is more likely than not that a tax position will not be sustained upon examination by taxing authorities.
Basic income per common share is computed using the weighted average number of common stock shares outstanding during the period. Diluted income per common share is computed using the weighted average number of common stock shares and common stock equivalent shares outstanding during the period. Common stock equivalents consist of stock options and restricted stock (using the "treasury stock" method). Common stock equivalent shares are excluded from the computation if the effect is anti-dilutive. As a result of the anti-dilutive effect, common stock equivalent shares have been excluded from the computation of diluted earnings per share for periods presented with a net loss. Included in the diluted earnings per share calculation for year ended December 31, 2013 are approximately 8,000 shares from the assumed exercise of options using the treasury stock method. For the year ended December 31, 2012, shares from the assumed dilution due to the exercise of common stock options using the treasury stock method were deemed anti-dilutive. Net income does not change as a result of the assumed dilution.
In July 2012, the FASB issued guidance to revise the subsequent measurement requirements for indefinite-lived intangible assets. In accordance with the amendments in this Update, an entity will have the option to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that an indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. The adoption of this guidance, effective January 1, 2013, did not have a material effect on the Company’s consolidated financial statements.
In December 2011 and March 2013, the FASB issued guidance to amend the disclosure requirements on offsetting financial instruments and related derivatives. Entities are required to provide both net and gross information for these assets and liabilities in order to enhance comparability. The adoption of this guidance, effective January 1, 2013, did not have a material effect on the Company’s consolidated financial statements.
In July 2011, the FASB issued guidance specifying that the liability for the fees paid to the Federal Government by health insurers as a result of recent healthcare reform legislation should be estimated and recorded in full once the entity provides qualifying health insurance in the applicable calendar year in which the fee is payable with a corresponding deferred cost that is amortized to expense using a straight-line method of allocation unless another method better allocates the fee over the calendar year that it is payable. The amendments in this Update are effective for calendar years beginning after December 31, 2013, when the fee initially becomes effective. The estimated liability for the mandated fees payable to the Federal Government is expected to be immaterial for the Company.
The Company had goodwill of $23,561,000 at December 31, 2013 and 2012.
At December 31, 2013, 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 AMIC stock in 2013, 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) IHC owns 90% 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 AMIC stock, and (iii) lack of analyst coverage of the Company. If the Company experiences a sustained decline in its results of operations and cash flows, or other indicators of impairment exist, the Company may incur a material non-cash charge
Intangible assets at December 31, 2013 and 2012 consist of the following (in thousands):
In November 2012, AMIC entered into a consulting agreement to continue writing certain medical stop-loss business for an aggregate fee of $1,100,000. The fee consisted of $500,000 in cash and $600,000 in contingent consideration expected to be paid in 2013 and 2014 based on the expected block of business. AMIC recorded other intangible assets representing broker relationships, which will be amortized over a weighted average period of 7.0 years. In accordance with the terms of the agreement, $300,000 of the contingent consideration was paid in the fourth quarter of 2013, and the remaining $300,000 is expected to be paid in 2014.
Securities purchased under agreements to resell are utilized to invest excess funds on a short-term basis. At December 31, 2013, the Company had $3,563,000 invested in resale agreements, all of which settled on January 2, 2014 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.
The amortized cost and fair value of fixed maturities at December 31, 2013, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. CMOs and MBSs are shown separately, as they are not due at a single maturity.
investments before recovery of their amortized cost bases, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2013.
For the twelve months ended December 31, 2013, the Company recorded realized gross gains of $1,377,000 and gross losses of $306,000 on sales of available-for-sale securities. For the twelve months ended December 31, 2012, the Company recorded realized gross gains of $937,000 and gross losses of $353,000 on sales of available-for-sale securities. For the twelve months ended December 31, 2011, the Company recorded realized gross gains of $1,042,000 and gross losses of $522,000 on sales of available-for-sale securities.
At December 31, 2013 and December 31, 2012, the Company had an equity investment in Majestic with a carrying value of $744,000 and $768,000, respectively. For years 2013, 2012 and 2011, the Company recorded $(24,000), $57,000 and $9,000, respectively, for its share of income (loss) from its investment in other income in the Consolidated Statements of Income.
Fixed maturities with a carrying value of $6,152,000 are on deposit with various state insurance departments at December 31, 2013.
The Company’s stock option activity for the year ended December 31, 2013 was as follows:
The following table summarizes information regarding outstanding and exercisable options as of December 31, 2013:
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, 2013, 2012 and 2011 was $4.04, $0 and $3.02 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, 2013 and 2011. No options were granted in 2012.
The Company issued 12,000 restricted stock awards in the second quarter of 2008, with a weighted average grant-date fair value of $6.92 per share. No restricted stock awards have been issued since then. Restricted stock expense was $0, $0, and $7,000 for the twelve months ended December 31, 2013, 2012 and 2011, respectively. There were no restricted stock awards outstanding as of December 31, 2013, 2012 and 2011.
Taxes computed at the federal statutory rate of 35% for the years ended December 31, 2013, 2012 and 2011 are reconciled to the Company's actual income tax expense as follows (in thousands):
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, 2013.
At December 31, 2013, the Company had federal NOL carryforwards of approximately $265,851,000 expiring in varying amounts through the year 2028 with a significant portion expiring in 2020.
As of December 31, 2013, AMIC believes there were no material uncertain tax positions that would require disclosure under GAAP.
Reserves are based on approved actuarial methods, but necessarily include assumptions about expenses, mortality, morbidity, lapse rates and future yield on related investments.
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 December 31 next preceding. Such dividends may be paid as long as they have not been disapproved by the Delaware Insurance Commissioner within 30 days of its receipt of notice thereof. Independence American paid dividends of $0 in 2013 and of $2,000,000 in 2012. There are no regulatory restrictions on the ability of our holding company, AMIC, to pay dividends. Under Delaware law, AMIC is permitted to pay dividends from surplus or net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. Dividends to shareholders are paid from funds available at the corporate holding company level. No dividend on the Company’s stock was declared during 2013.
Independence American’s statutory capital and surplus was $57,875,000 as of December 31, 2013 and $54,427,000 as of December 31, 2012. Independence American’s statutory net income was $3,176,000 for 2013, $3,271,000 for 2012, and $4,542,000 for 2011.
The quarterly results of operations for the years ended December 31, 2013 and 2012 are summarized below (in thousands, except per share data):