The Selected Financial Data should be read in conjunction with the accompanying Consolidated Financial Statements and Notes thereto included in Item 8 of this report. Total assets, stockholders’ equity and book value per common share data for prior years have been revised to reflect an immaterial error correction related to deferred tax assets and liabilities. For further discussion of this error refer to Note 1 of the Notes to Consolidated Financial Statements included in Item 8 of this report.
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"), our wholly owned sales and marketing company, IHC Specialty Benefits, Inc. (“Specialty Benefits”), our wholly owned consumer direct sales agency, IPA Family LLC (“IPA Family”), our 92% owned consumer direct sales call center, IPA Direct, LLC (“IPAD”), our 80% owned holding company for agencies that primarily produce occupational accident and injured on duty business, Global Accident Facilities, LLC (“GAF”), and our 51% owned lead generation agency, HealthInsurance.org (“HIO”). Prior to March 31, 2016, we sold medical stop-loss insurance for self-insured employer groups through our wholly owned full service direct MGU, IHC Risk Solutions, LLC (“Risk Solutions”). Since November 2002, AMIC has been affiliated with Independence Holding Company ("IHC"), which owned approximately 92% of AMIC's stock as of December 31, 2015. The senior management of IHC provides direction to the Company through a service agreement between the Company and IHC. In 2015, a significant amount of Independence American’s revenue was from reinsurance premiums. The majority of these premiums are ceded to Independence American from IHC under reinsurance treaties to cede its gross medical stop-loss premiums written to Independence American. In addition, Independence American assumes fully insured health, New York State Disability Benefits Law ("DBL"), and long-term disability (“LTD”) premiums from IHC, and assumed medical stop-loss premiums from unaffiliated carriers. Independence American writes pet insurance, medical stop-loss, short-term medical, occupational accident, dental and other ancillary products. Given its broad licensing, A- (Excellent) rating from A.M. Best, and that it is the only property and casualty company in IHC, Independence American expects to expand the distribution of its pet and specialty health products.
The book value of the Company’s stockholders’ equity increased to $12.85 per share at December 31, 2015 compared to $12.39 per share at December 31, 2014.
The Company further reduced the deferred tax asset valuation allowance by $2.5 million at December 31, 2014 primarily due to the expected increase in future income. No such adjustment was recorded for the year ended December 31, 2015.
At December 31, 2015, 99.6% of the Company's fixed maturities were investment grade.
Consolidated investment yields were 2.7% and 2.9% for the years ended December 31, 2015 and 2014, respectively.
For the year ended December 31, 2015, our Agencies generated revenues of $31.9 million compared to $28.3 million for the year ended December 31, 2014. Excluding income related to GAF, totaling $3.8 million, total revenues decreased $0.2 million due to lower revenues generated at HIO, IPA Family and Specialty Benefits primarily due to the exit from major medical lines of business resulting in less fee income, offset by higher revenues generated at Risk Solutions and IPAD.
Agency net loss increased $0.4 million from $2.0 million for the year ended December 31, 2014 to $2.4 million for the year ended December 31, 2015 primarily due to the exit from major medical lines of business resulting in less fee income. In addition, the fully insured agencies have increased expenses due to building marketing tools and system enhancements that will allow them to maximize the forecasted growth in the direct to consumer sales. These tools, which focus on transparent cross-selling capabilities and data warehousing can also be leveraged for producer assisted sales.
Underwriting experience, as indicated by its GAAP Combined Ratios on our three lines of business for the years ended December 31, 2015, 2014 and 2013 are as follows (in thousands):
Profit commission expense ratio represents profit commissions divided by premiums earned.
The Company recorded a higher combined ratio in the medical stop-loss line of business for the year ended December 31, 2015 due to an increase in loss ratio caused by an adverse development on one block of business produced by an affiliated MGU, offset by a reduction in expense ratios associated with a change in the mix of business, and offset by a reduction in profit commission expense ratio.
The Company recorded an improvement in the loss ratio in the fully insured health line of business for the year ended December 31, 2015 primarily due to a decrease in loss ratio as the Company moves to
specialty health lines and moves away from major medical, offset by an increase in the expense ratio due to the change to specialty health lines that have higher commission and expenses structures.
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 2014, 2013 and 2012 underwriting years that increased (decreased) by 9.1, 0.4, and 0.8 Loss Ratio points, respectively. While the Company believes that larger variations are possible, based on the Company’s experience to date, it is reasonably likely that the actual
experience will fall within a range up to five Net Loss Ratio points above or below the expected Projected Net Loss Ratio for the 2015 underwriting year at December 31, 2015. The impact of these reasonably likely changes at December 31, 2015, 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 $1.8 million with a corresponding increase or decrease in the pre-tax expense for insurance benefits, claims and reserves.
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 2018 and 2028 with a significant portion expiring in 2020.
The Company has classified all of its investments as either available-for-sale or trading securities. These investments are carried at fair value with unrealized gains and losses reported in accumulated other comprehensive income (loss) in the Consolidated Balance Sheets for available-for-sale securities or as unrealized gains or losses in the Consolidated Statements of Income for trading securities. Fixed maturities and equity securities available-for-sale totaled $87.5 million and $74.6 million at December 31, 2015 and 2014, respectively. Premiums and discounts on debt securities purchased at other than par value are amortized and accreted, respectively, to interest income in the Consolidated Statements of Income, using the constant yield
Results of Operations for the Year Ended December 31, 2015, compared to the Year Ended December 31, 2014
Insurance Benefits, Claims and Reserves. Insurance benefits claims and reserves increased 11%, or $9,854,000 from 2014 to 2015. The increase is primarily due to an increase in assumed medical stop-loss of $9,711,000 due to higher premiums assumed, an increase in small group stop-loss of $8,480,000 due to higher premiums and higher claims, an increase in direct occupational accident of $1,620,000 due to higher premiums and higher claims, an increase in pet of $2,029,000 due to higher premiums, and an increase in assumed international health of $1,938,000 due to higher premiums assumed, offset by a decrease in direct and assumed major medical of $9,611,000 due to lower premiums, and a decrease in direct medical stop-loss of $4,463,000 due to lower premiums.
Net Income attributable to the non-controlling interest. Net income attributable to the non-controlling interest increased $189,000 from 2014 to 2015, due to higher income at HIO and GAF. The net income for the year ended December 31, 2015 relates to the 49% non-controlling interest in HIO, the 20% non-controlling interest in GAF, and the 8% non-controlling interest in IPAD. The net income for the year ended December 31, 2014 relates to the 49% non-controlling interest in HIO, the 10% non-controlling interest in IPA Family, and the 8% non-controlling interest in IPAD.
Results of Operations for the Year Ended December 31, 2014, compared to the Year Ended December 31, 2013
Selling, General and Administrative. Selling, general and administrative expenses increased $10,874,000 from 2013 to 2014. This increase is due to higher commission expense of $4,671,000 at Independence American due to higher premiums and a change in the mix of business, higher expenses of $4,220,000 and $2,669,000 at Specialty Benefits and Risk Solutions, respectively, primarily due to higher salary expense relating to an increase in sales, and higher expenses of $1,340,000 due to the formation of IPAD in July 2013, offset by a decrease in expenses of $1,206,000 and $893,000 at HIO and IPA Family, respectively due to lower revenue.
Corporate derives cash flow funds principally from: dividends and tax payments from its subsidiaries and investment income from corporate liquidity. The ability of Independence American to pay dividends to its parent company is governed by Delaware insurance laws and regulations; otherwise, there are no regulatory constraints on the ability of any of our other subsidiaries to pay dividends to its parent company. For the twelve months ended December 31, 2015, Independence American and our Agencies paid $3,423,000 in dividends and $1,515,000 in tax payments to Corporate.
Corporate utilizes cash primarily for the payment of general overhead expenses, to make acquisitions, and common stock repurchases.
The Company had $5.8 million and $4.6 million of cash and cash equivalents as of December 31, 2015 and December 31, 2014, respectively.
For the year ended December 31, 2015, operating activities provided the Company with $16.6 million of cash, whereas $14.7 million of cash was utilized by investing activities primarily due to higher net purchases of fixed maturity securities. Financing activities utilized $0.7 million for the period due to payments made on debt, and the purchase of the remaining non-controlling ownership interest in IPA Family.
The chart below reflects the maturity distribution of AMIC’s contractual obligations at December 31, 2015 (in thousands):
Total investments, net of amounts due to/from brokers, increased $14,037,000 to $93,173,000 at December 31, 2015 from $79,136,000 at December 31, 2014, due to higher net purchases of fixed maturity securities.
The increase in total policy benefits and claims of $10,148,000 is primarily attributable to an increase in premiums written for assumed stop-loss, assumed international medical business, occupational accident, small group stop-loss, and pet health, offset by a decrease in direct stop-loss and major medical business.
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. Although the Company's gross unrealized losses on available-for-sale securities totaled $875,000 at December 31, 2015, approximately 99.6% 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, 2015, approximately 0.4% (or $359,000) of the carrying value of fixed maturities was invested in non-investment grade fixed maturities (consisting of one commercial mortgage obligation) (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, 2015.
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, 2015. In 2015, the Company experienced an increase in net unrealized losses of $43,000, which decreased stockholders' equity by $43,000 (reflecting net unrealized losses of $197,000 at December 31, 2015 compared to net unrealized losses of $154,000 at December 31, 2014). 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, a continuation of the current imbalances in liquidity that exist in the marketplace, a continuation or worsening of the current economic recession, or additional 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.
Continued significant increase in specialty health premiums (including short-term and supplemental health products, such as dental, short-term medical, critical illness and occupational accident products), and continued decrease in major medical premiums, which is in run-off. Increasing emphasis on direct-to-consumer and career advisor distribution initiatives as we believe this will be a growing means for selling health insurance in the coming years, and accompanying start-up costs of expanding our sales through our call center, career model (including our newly launched Aspira A Mas outreach to the Hispanic community) and transactional websites.
Increasing retention in our group disability lines of business. In 2016, we expect a continuation of the increase in group long-term and short-term disability products driven by higher retention amounts and a full year of premiums generated by a relatively new distribution partnership.
On March 31, 2016, IHC and its subsidiary Independence American Holdings Corp. sold the stock of Risk Solutions. In addition, under the purchase and sale agreement, all of the in-force stop-loss business of Standard Security Life and Independence American produced by Risk Solutions was co-insured by Westport as of January 1, 2016. The aggregate purchase price was $152,500,000 in cash, subject to adjustments and settlements. This transaction resulted in a gain on the sale estimated at approximately $114 million. As a result of the transaction, AMIC is highly liquid and has excess capital, however, its Medical Stop-Loss line of business will be in run-off, which will have a negative impact on future earnings.
The Sale is not part of a going-private transaction for the Company. Although the board of directors of IHC has preliminarily determined to take the steps necessary to take AMIC private in 2016, neither the Sale nor any such going-private transaction (should the board of directors of IHC ultimately determine to take AMIC private) is connected with, or contingent upon, the other.