Consolidated investment yields were 3.3% for the years ended December 31, 2012 and 2011.
For the year ended December 31, 2012, Risk Solutions and our Agencies generated revenues of $15.7 million compared to $13.1 million for the year ended December 31, 2011 due to higher revenues generated at HIO and Risk Solutions, and the addition of IHC Specialty Benefits in 2012.
Expense ratio represents commissions, administrative fees, premium taxes and other underwriting expenses divided by premiums earned.
The Company recorded a decrease in the combined ratio in the medical stop-loss line of business for the year ended December 31, 2012. An increase in the loss ratio was partially offset by the reversal of profit commissions as evidenced by the profit commission ratio for the year ended December 31, 2012 due to the poor performance on business written through one program.
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 2012 underwriting year at December 31, 2012. The impact of these reasonably likely changes at December 31, 2012, 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 $1.1 million with a corresponding increase or decrease in the pre-tax expense for insurance benefits, claims and reserves in the 2012 Consolidated Statement of Operations.
changes in time delay in submission of claims and the incidence of unusually large claims. The reserving analysis includes a review of claim processing statistical measures and large claim early notifications; the potential impact of any changes in these factors are minimal. The time delay in submission of claims tends to be stable over time and not subject to significant volatility. Since our analysis considered a variety of outcomes related to these factors, the Company does not believe that any reasonably likely change in these factors will have a Material Effect.
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 Operations for trading securities. Fixed maturities and equity securities available-for-sale totaled $60.8 million and $61.7 million at December 31, 2012 and 2011, 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 Operations, using the constant yield method over the period to maturity. Net realized gains and losses on investments are computed using the specific identification method and are reported in the Consolidated Statements of Operations.
assesses whether the present value of the cash flows to be collected from the security is less than its amortized cost basis. To the extent that the present value of the cash flows generated by a debt security is less than the amortized cost basis, a credit loss exists. For any such security, the impairment is bifurcated into (a) the amount of the total impairment related to the credit loss, and (b) the amount of the total impairment related to all other factors. The amount of the other-than-temporary impairment related to the credit loss is recognized by a charge to total other-than-temporary impairment losses in the Consolidated Statements of Operations, establishing a new cost basis for the 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.
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 Operations for the difference between the carrying value and the fair value of the securities. For the purpose of other-than-temporary impairment evaluations, preferred stocks with maturities are treated 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, 2012, compared to the Year Ended December 31, 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, limited medical, 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,
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 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 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.
Net Realized Investment Gains and Other-Than-Temporary Impairment Losses. The Company recorded a net realized investment gain of $603,000 for the year ended December 31, 2012, compared to a gain of $520,000 for the year ended December 31, 2011. 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. For the year ended December 31, 2012 and 2011, the Company recorded $189,000 and $89,000, respectively, of other-than-temporary-impairment losses in earnings. These credit losses were a result of the expected cash flows of a debt security being less than the debt security’s amortized cost.
Other Income. Other income decreased $197,000 from 2011 to 2012 due to lower consulting fees earned by Risk Solutions for the year ended December 31, 2012.
Insurance Benefits, Claims and Reserves. Insurance benefits claims and reserves increased 19%, or $9,081,000 from 2011 to 2012. The increase is primarily comprised of an increase in direct medical stop-loss of $4,563,000 due to higher premiums written, an increase in assumed medical stop-loss of $2,251,000 due to an increase in premiums written, an increase in pet insurance of $2,025,000 due to an increase in premiums written, an increase in direct other fully insured of $1,404,000 due to higher premiums written, an increase in assumed fully insured of $1,793,000 primarily due to an increase in international health premiums written, an increase in direct hospital indemnity of $270,000 due to higher premiums written and a higher loss ratio, and an increase in group disability of $244,000 due to higher LTD premiums assumed, offset by a decrease in direct group major medical of $3,172,000 due to lower premiums written offset by a higher loss ratio, and a decrease in direct individual health of $337,000 due to lower premiums offset by a higher loss ratio.
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.
Net Income attributable to American Independence Corp. The net income attributable to the Company increased to $9,592,000, or $1.16 per share, diluted, for 2012, compared to $2,494,000, or $.29 per share, diluted, for 2011.
Premiums Earned. Premiums earned decreased 2%, or $1,411,000 from 2010 to 2011. The Company currently has three lines of business. Premiums relating to medical stop-loss business decreased $678,000. This is due to a decrease in medical stop-loss premiums assumed by Independence American ($2,597,000), offset by an increase in medical stop-loss premiums written by Independence American ($1,919,000). Premiums relating to fully insured health consisting of group major medical, limited medical, short-term medical, dental, vision, hospital indemnity, and individual health decreased $481,000. The decrease is primarily due to a decrease in group major medical premiums written by Independence American ($1,600,000) and a decrease in fully insured premiums assumed from IHC ($428,000), offset by an increase in hospital indemnity premiums ($734,000) and individual health premiums ($547,000) written by Independence American. Premiums relating to group disability decreased $252,000 primarily due to a DBL premium rate reduction mandated by the State of
New York. For the year ended December 31, 2011, Independence American assumed 10% of IHC’s short-term medical business, approximately 9% of certain of IHC’s group major medical business, 20% of IHC’s DBL business and approximately 20% of IHC’s medical stop-loss business. There were no significant changes to these percentages from the prior year.
Corporate utilizes cash primarily for the payment of general overhead expenses and common stock repurchases.
Net cash used by investing activities for the year ended December 31, 2012 was $4,654,000.
At December 31, 2012, the Company had $24,993,000 of insurance reserves 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 insurance resources does not coincide with future cash flows.
The chart below reflects the maturity distribution of AMIC’s contractual obligations at December 31, 2012 (in thousands):
Total investments, net of amounts due to/from brokers, increased $2,531,000 to $67,165,000 at December 31, 2012 from $64,634,000 at December 31, 2011, primarily due to the purchase of additional fixed maturity securities and repurchase agreements, and an increase in unrealized gains on fixed maturity securities, offset by sales of equity securities.
The Company had receivables from reinsurers of $6,307,000 at December 31, 2012. 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, 2012.
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 $2,124,000 at December 31, 2012. Approximately 99.0% 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, 2012, approximately 1.0% (or $589,000) of the carrying value of fixed maturities was invested in non-investment grade fixed maturities (primarily mortgage securities) (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, 2012.
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, 2012. In 2012, the Company experienced an increase in net unrealized gains of $551,000 (including $170,000 of other-than-temporary impairment losses recorded in other comprehensive income during the year) which increased stockholders' equity by $551,000 (reflecting net unrealized gains of $1,829,000 at December 31, 2012 compared to net unrealized gains of $1,278,000 at December 31, 2011). 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.
We continue to focus on direct-to-consumer distribution initiatives through our newly formed entity IHC Specialty Benefits as we believe this will be a growing means for selling health insurance and ancillary products in the coming years.
Our individual major medical premiums will decline somewhat in 2013 and the decrease may accelerate as we stop writing new business in certain states. Business written in 2014 will not be written on the public exchanges which may limit our ability to sell to certain insureds.
Our small group major medical reinsured premiums are expected to increase in 2013 due to a new program; offset as by IHC’s decision to stop writing new business in certain states and by the expectation that employers may choose to drop group health coverage or self-fund.
We intend to increase our sales of (and reinsurance from IHC’s sales of) short-term and limited medical and ancillary health products, such as dental, hospital indemnity and critical illness to offset the reduction in major medical premiums. We will also increase our DBL reinsurance premiums due to higher sales at IHC.
We have begun selling non-subscriber occupational accident insurance in Texas, and health insurance for groups seeking coverage for ex-patriot employees.
If Independence American, Standard Security Life, and Madison National Life had agreed to increase the average percentage ceded to Independence American by 1% (from approximately 24% ceded for the twelve months ended December 31, 2012) 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 $1.0 million, which is approximately 1.2% of total net premiums earned for the year ended December 31, 2012. 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. The Company does not expect the percentage ceded to it from IHC will change significantly in the next twelve months.
Independence American reinsures 20% of Standard Security Life’s DBL product. Standard Security Life is not contractually obligated to continue to cede this business to Independence American after termination of the current treaty year. Independence American assumed 8% of certain of IHC’s LTD business. Standard Security Life and Madison National Life ceded approximately 8% of their fully insured health business to Independence American. Standard Security Life and Madison National Life are not contractually obligated to continue to cede this business to Independence American after termination of the current treaty years.
The gross medical stop-loss premiums written by IHC increased in 2012 by approximately 5% and premiums earned by AMIC increased 22% in 2012 as a result of an increase in premiums produced by Risk Solutions. Risk Solutions anticipates increasing its production of medical stop-loss business in 2013. Therefore, Independence American anticipates reinsuring a higher amount of medical-stop loss premium ceded by IHC in 2013. IHC has reported that it expects its fully insured and DBL premiums to increase in 2013
profitability. There are a number of market forces that support this expectation. We have observed a trend on the part of our producers of stop loss to consolidate their business with a smaller number of stop loss carriers. The direct writing model employed by Risk Solutions is well suited to take advantage of this trend. There is an increased interest in self-funded options to address concerns about cost and regulatory burdens and we have developed targeted programs to address these needs. Finally there appears to be a market recognition that stop loss buying decisions need to be more about price. Service and fair claims payment practices are also important considerations and the partnership model under which Risk Solutions operates is increasingly recognized as addressing those issues.
In 2007, IPA Family, LLC (“IPA”), a national, career-agent marketing organization, began marketing health plans to individuals and families utilizing Independence American as the carrier. Gross premiums of $9,543,000 and $13,114,000 were written under this program in 2012 and 2011, respectively. The program is administered by IHC Health Solutions, LLC, a wholly owned subsidiary of IHC. AMIC purchased a 51% interest in IPA in April 2008 and increased its interest to 79% in September 2011. On December 31, 2011, the Company acquired an additional 10.6% ownership interest in IPA from non-controlling interests, thereby increasing its ownership in IPA to 89.6%. See Note 18 of Notes to Consolidated Financial Statements.
Consolidated Statements of Operations for the years ended December 31, 2012, 2011
Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011
Summary of investments - Other than investments in related parties as of
As used in this report, unless otherwise required by the context, AMIC and its subsidiaries are sometimes collectively referred to as the "Company" or "AMIC", or are implicit in the terms "we", "us" and "our". Risk Solutions, Specialty Benefits, HIO and IPA are collectively referred to as “our Agencies”.
Certain amounts in prior years' Consolidated Financial Statements and Notes thereto have been reclassified to conform to the 2012 presentation.
Cash and cash equivalents consist of cash and highly liquid securities with maturities of three months or less from date of purchase.
(a) Securities which are held for trading purposes are carried at estimated fair value ("fair value"). Changes in fair value are credited or charged, as appropriate, to net realized investment gains in the Consolidated Statements of Operations.
(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 Operations. 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, 2012 and 2011.
(iv) Fair value is determined using quoted market prices when available. In some cases, we use quoted market prices for similar instruments in active markets and/or model-derived valuations where inputs are observable in active markets. When there are limited or inactive trading markets, we use industry-standard pricing methodologies, including discounted cash flow models, whose inputs are based on management assumptions and available current market information. Further, we retain independent pricing vendors to assist in valuing certain instruments, primarily all the securities in our portfolio classified in Level 2 or Level 3 in the Fair Value Hierarchy.
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 fee income as policy premium payments are earned. Risk Solutions is compensated in two ways. It earns fee income based on the volume of business produced, and collects 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 recent claim development history (“Claim Development Patterns”) can be applied to generate reasonably reliable estimates of ultimate claim levels. Profit-sharing commissions are a function of Risk Solutions attaining certain profitability thresholds and could greatly vary from quarter to quarter. Agency income consists of commissions, fees and lead revenue earned by our Agencies.
Predicting ultimate claims and estimating reserves in medical stop-loss is more complex than first dollar medical and disability business due to the “excess of loss” nature of these products with very high deductibles applying to specific claims on any individual claimant and in the aggregate for a given group. The level of these deductibles makes it more difficult to predict the
amount and payment pattern of such claims. Fluctuations in results for specific coverage are primarily due to the severity and frequency of individual claims, whereas fluctuations in aggregate coverage are largely attributable to frequency of underlying claims rather than severity.
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 2012 and 2011, 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.
measurements. None of the amendments in this update require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. For public entities, this guidance was effective during interim and annual periods beginning after December 15, 2011. The adoption of this guidance, effective January 1, 2012, did not have a material effect on the Company’s consolidated financial statements.
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 to 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 amendments in this Update are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.
In December 2011, 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 between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of IFRS. The amendments in this Update are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods
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. Management has not yet determined the impact that the adoption of this guidance will have on the Company’s consolidated financial statements.
The Company performed its annual test at December 31, 2012 and determined that goodwill was not impaired.
Intangible assets at December 31, 2012 and 2011 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.
Securities purchased under agreements to resell are utilized to invest excess funds on a short-term basis. At December 31, 2012, the Company had $5,234,000 invested in resale agreements, all of which settled on January 2, 2013 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 following tables summarize, for all securities in an unrealized loss position at December 31, 2012 and December 31, 2011, the aggregate fair value and gross unrealized loss by length of time, those securities that have continuously been in an unrealized loss position (in thousands):
Major categories of net investment income for years 2012, 2011 and 2010 are summarized as follows (in thousands):
In the fourth quarter of 2008, the Company became aware of certain activities engaged in by the non-affiliate broker-dealer that managed a trading account of the Company. Net realized investment losses reported in the accompanying Consolidated Statement of Operations for 2010 includes a loss of $1,266,000 consisting of the reversal of $500,000 of anticipated Securities Investor Protection Corporation (“SIPC”) recoveries initially recorded in 2008 and $766,000 of withdrawals by AMIC deemed subject to return. A settlement agreement was entered into with the trustee in the first quarter of 2011 and payment by the Company was made in the third quarter of 2011.
The following tables present our financial assets measured at fair value on a recurring basis at December 31, 2012 and 2011, respectively (in thousands):
It is the Company’s policy to recognize transfers of assets and liabilities between levels of the fair value hierarchy at the end of a reporting period. For the year ending December 31, 2012, there were no transfers of assets and liabilities between Level 1 and Level 2 of the fair value hierarchy. No securities were transferred out of the Level 2 and into the Level 3 category as a result of limited or inactive markets during 2012. The Company does not transfer out of Level 3 and into Level 2 until such time as observable inputs become available and reliable or the range of available independent prices narrow. No securities were transferred out of the Level 3 category during 2012. Two securities were sold out of the Level 3 category in 2012 and three securities were sold out of the Level 3 category in 2011. The changes in the carrying value of Level 3 assets and liabilities for the years ended December 31, 2012 and 2011 are summarized as follows (in thousands):
Fixed maturities with a carrying value of $5,669,000 are on deposit with various state insurance departments at December 31, 2012.
Total share-based compensation expense was $33,000, $43,000 and $74,000 for the twelve months ended December 31, 2012, 2011 and 2010, respectively. Related tax benefits of $11,000, $15,000 and $26,000 were recognized for the twelve months ended December 31, 2012, 2011 and 2010, respectively.
Compensation expense was $33,000, $36,000, and $56,000 for the twelve months ended December 31, 2012, 2011, and 2010, respectively. As of December 31, 2012, there was approximately $48,000 of total unrecognized compensation expense related to non-vested options which will be recognized over the remaining requisite service periods.
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, $7,000, and $18,000 for the twelve months ended December 31, 2012, 2011 and 2010, respectively. There were no restricted stock awards outstanding as of December 31, 2011.
Independence American derives a significant amount of its business from pro rata quota share reinsurance treaties with Standard Security Life and Madison National Life, which are wholly owned subsidiaries of IHC. These treaties were entered into in 2002 and 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 30% to Independence American under most of IHC’s medical stop-loss programs. For the twelve months ended December 31, 2012 and 2011, Standard Security Life and Madison National Life ceded an average of approximately 24% and 20%, respectively, of their medical stop-loss business to Independence American. Commencing in July 2004, Independence American began reinsuring 20% of Standard Security Life’s DBL business. Independence American assumed 8% of certain of IHC’s international health and LTD business. Standard Security Life and Madison National Life ceded approximately 8% and 9% of the majority of its fully insured health business to Independence American in 2012 and 2011, respectively.
Independence American assumes these premiums from Standard Security Life and Madison National Life, and records related insurance income, expenses, assets and liabilities. Independence American pays administrative fees and commissions to subsidiaries of IHC in connection with fully insured health business written by Independence American. Additionally, Risk Solutions markets, underwrites and provides administrative services, medical management, and claims adjudication, for a substantial portion of the medical stop-loss business written by the insurance subsidiaries of IHC. Risk Solutions records related income, assets and liabilities in connection with that business. Risk Solutions performs certain functions for Majestic and Alliance Underwriters (“AU”) (a subsidiary of IHC). Accordingly, Risk Solutions allocates proportionate fees and expenses to Majestic and AU. Such related party information is disclosed on the Consolidated Balance Sheets and Consolidated Statements of Operations. The Company also contracts for several types of insurance coverage (e.g. directors and officers and professional liability coverage) jointly with IHC. The cost of this coverage is split proportionally between the Company and IHC according to the type of risk and the Company’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, 2012, 2011 and 2010 are reconciled to the Company's actual income tax expense as follows (in thousands):
The tax effect of temporary differences that give rise to significant portions of the net deferred tax assets at December 31, 2012 and 2011 are 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, 2012.
Interest expense and penalties related to unrecognized tax benefits for the years ended December 31, 2012, 2011 and 2010 are insignificant.
All premiums included in Assumed From Other Companies for 2012, 2011 and 2010 were assumed from subsidiaries of IHC. Included in Ceded To Other Companies for 2012, 2011 and 2010 are premiums of $1,835,000, $1,250,000, and $1,718,000, respectively, which were ceded to subsidiaries of IHC.
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 $2,000,000 in 2012 and of $1,000,000 in 2011.
Independence American’s statutory capital and surplus was $54,427,000 as of December 31, 2012 and $51,407,000 as of December 31, 2011. Independence American’s statutory net income was $3,271,000 for 2012, $4,542,000 for 2011, and $2,697,000 for 2010.
Independence American is required to maintain a certain minimum amount of statutory surplus to satisfy its state insurance department of domicile. Risk-based capital (“RBC”) requirements are designed to assess capital adequacy and to raise the level of protection that statutory surplus provides for policyholders. At December 31, 2012 and 2011, the statutory capital of Independence American was significantly in excess of regulatory RBC requirements.
Included in accumulated other comprehensive income at December 31, 2012 and 2011 are adjustments of $269,000 and $140,000, respectively, related to the non-credit related component of other-than-temporary impairment losses recorded.