IHC Specialty Benefits leases 8,479 square feet of office space in Minneapolis, Minnesota as its corporate headquarters and 14,209 square feet of office space in Tampa, Florida for a call center.
Income from operations of $.83 per share, diluted, for the year ended December 31, 2019 compared to $1.89 per share, diluted, for the same period in 2018;
oIncome taxes for the year ended December 31, 2019 include a $7.9 million increase in AMIC’s valuation allowance due to the reduction of estimated tax benefits from the expected utilization of AMIC’s net operating loss carryforwards expiring in 2020 and 2021. Earnings expectations decreased relative to the remaining period that AMIC’s net operating loss carryforwards are available to offset income and therefore necessitated an increase in the valuation allowance;
The Specialty Health segment reported $7.8 million of income before taxes for the year ended December 31, 2019 compared to $28.7 million for the comparable period in 2018. The decrease in 2019 when compared to 2018 is primarily due to lower premium volume in the fixed indemnity limited benefit line, which has lower loss ratios than other lines of business, as well as less favorable prior year loss development in the short-term medical and fixed indemnity limited benefit lines of business. Additionally, the 2019 results of this segment include increased costs related to overall infrastructure improvements in lead generation capabilities and sales automation platforms at IHC Specialty Benefits, Inc., the write-off of an equity method investment and bad debt expense. Results for comparable 2018 periods included more favorable development from prior periods mostly on short term medical and fixed indemnity limited benefit business;
The Individual life, annuities and other segment in run-off reported losses before income taxes of $1.4 million in 2019 compared with losses of $0.4 million in 2018;
Loss before tax from the Corporate segment for the year ended December 31, 2019 decreased $1.6 million over the same period in 2018 primarily due to higher income from equity investments, partially offset by increased expenses due to changes in compensation and related costs.
The accounting and reporting policies of the Company conform to U.S. GAAP. The preparation of the Consolidated Financial Statements in conformity with U.S. GAAP requires the Company's management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. A summary of the Company's significant accounting policies and practices is provided in Note 1 of the Notes to the Consolidated Financial Statements included in Item 8 of this report. Management has identified the accounting policies described below as those that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of the Company's Consolidated Financial Statements and this Management's Discussion and Analysis.
The liability for future policy benefits consists of the liabilities related to insured events for the Company’s long-duration contracts, primarily its life and annuity products. For traditional life insurance products, the Company computes the liability for future policy benefits primarily using the net premium method based on anticipated investment yield, mortality, and withdrawals. These methods are widely used in the life insurance industry to estimate the liabilities for insurance reserves. Inherent in these calculations are management and actuarial judgments and estimates that could significantly impact the ending reserve liabilities and, consequently, operating results. Actual results may differ, and these estimates are subject to interpretation and change.
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; and (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.
In assessing corporate debt securities for other-than-temporary impairment, the Company evaluates the ability of the issuer to meet its debt obligations and the value of the company or specific collateral securing the debt position. For mortgage-backed securities where loan level data is not available, the Company uses a cash flow model based on the collateral characteristics. Assumptions about loss severity and defaults used in the model are primarily based on actual losses experienced and defaults in the collateral pool. Prepayment speeds, both actual and estimated, are also considered. The cash flows generated by the collateral securing these securities are then determined with these default, loss severity and prepayment assumptions. These collateral cash flows are then utilized, along with consideration for the issue’s position in the overall structure, to determine the cash flows associated with the mortgage-backed security held by
Goodwill carrying amounts are evaluated for impairment, at least annually, at the reporting unit level that is equivalent to an operating segment. If the fair value of a reporting unit is less than its carrying amount, further evaluation is required to determine if a write-down of goodwill is required. In determining the fair value of each reporting unit, we used an income approach, applying a discounted cash flow method that included a residual value. Based on historical experience, we make assumptions as to: (i) expected future performance and future economic conditions, (ii) projected operating earnings, (iii) projected new and renewal business as well as profit margins on such business, and (iv) a discount rate that incorporated an appropriate risk level for the reporting unit. Any impairment of goodwill would be charged to expense. No impairment charge for goodwill was required in 2019 or 2018.
Other intangible assets are amortized to expense over their estimated useful lives and are subject to impairment testing. Any impairment of other intangible assets would be charged to expense. No impairment charges for intangible assets were required in 2019 or 2018.
In 2019, premiums earned increased $17.5 million over the comparable period of 2018. The increase in earned premiums is primarily due to: (i) a $24.0 million increase from the Group disability, life, DBL and PFL segment as a result of $13.2 million in increased DBL and PFL premiums primarily due to an increase in rates, a $6.6 million increase in combined LTD/STD premiums primarily from new STD business and increased retentions, a $3.6 million increase in group term life premiums as a result of increased retentions, and $.6 million of other group life business due to new product sales; partially offset by (ii) a $6.5 million decrease in Specialty Health segment premiums, principally due to decreased premiums of $21.1 million in fixed indemnity limited benefit business and $1.6 million in the dental line, partially offset by increased premium volume of $9.2 million from pet lines, $3.0 million in short term medical business, $1.7 million in group gap lines, $.9 million in occupational accident business and $.9 million in ancillary accident & health business.
Total net investment income increased $.6 million. The overall annualized investment yields were 3.0% in 2019 and 2018.
The Company had net investment gains of $4.7 million in 2019 compared to net investment losses of $1.0 million in 2018. These amounts include gains and losses from sales of fixed maturities available-for-sale and equity securities at fair value. Decisions to sell securities are based on management's ongoing evaluation of investment opportunities and economic and market conditions, thus creating fluctuations in gains and losses from period to period.
Fee income decreased $4.9 million in 2019 compared to 2018 primarily due to more business being written by the IHC Agencies with IHC Carriers in 2019.
Total selling, general and administrative expenses increased $6.0 million over the comparable period in 2018. The increase is principally due to: (i) an increase of $7.1 million in the Group disability,
life, DBL and PFL segment primarily due to increased commission expense and other general expenses due to increased premium volume; and (ii) a $2.0 million increase in the Corporate segment due to compensation associated expenses; partially offset by (iii) a decrease of $3.0 million in the Specialty Health line of business due to a decrease in commission and administrative expenses related to decreased premium volume in fixed indemnity limited benefit and lower administrative fees and loss adjustment expenses in the short term medical line, partially offset by an increase in commissions and administrative fees and other general expenses in the pets and group gap lines due to increased premium volume as well as increased lead generation expense, compensation and system development related expenses and bad debt expense in our marketing and administrative companies.
The Company had $24.6 million and $30.8 million of cash, cash equivalents and restricted cash as of December 31, 2019 and 2018, respectively.
Operating activities provided $39.2 million of cash and investment activities utilized $27.1 million of cash, primarily the result of purchases of investment securities, $8.0 million utilized for business acquisitions and $8.0 million in other investments. Financing activities utilized $18.2 million of cash, of
which $5.2 million related to common stock dividend payments, $4.7 million was utilized to acquire noncontrolling interests in subsidiaries, $4.1 million was utilized for treasury share purchases, and $2.4 million related to payments for tax withholdings on share-based compensation.
The Company reviews its investments regularly and monitors its investments continually for impairments, as discussed in Note 1(F) (v) of the Notes to Consolidated Financial Statements in Item 8 of this report. The Company recognized $.6 million of other-than-temporary impairment losses on certain fixed maturities available for sale during the year ended December 31, 2019, as the Company determined that it was more likely than not that the company would sell the securities before the recovery of their amortized cost basis. The Company did not record any other-than-temporary impairment losses in 2018. At December 31, 2019, there were no securities with fair values less than 80% of their amortized cost.
The unrealized losses on fixed maturities 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, 2019. From time to time, as warranted, the Company may employ investment strategies to mitigate interest rate and other market exposures. Further deterioration in credit quality of the companies backing the securities, further deterioration in the condition of the financial services industry, imbalances in liquidity that exist in the marketplace, worsening of current economic conditions, or declines in real estate values may further affect the fair value of these securities and increase the potential that certain unrealized losses be designated as other-than-temporary in future periods which may cause the Company to incur additional write-downs.
At December 31, 2019, our market capitalization was above the sum of our reporting units’ fair values. However, if in the future we were to experience a sustained decline in our results of operations and cash flows, or other indicators of impairment become known, 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 Group Disability segment had a net favorable development of $11.7 million due to $5.2 million of favorable development in LTD business and $6.5 million of favorable development in DBL/PFL business. Favorable development in LTD is primarily the result of better than expected claim development in terms of duration and net payments. Favorable development in the DBL/PFL business is primarily due to $3.9 million of favorable adjustments to prior year DBL premium refund reserves, $1.7 million resulting from better than expected DBL claims experience and $.9 million of favorable development in PFL business.
a small number of claimants with large claim reserves were to recover or several very large claims were incurred, the results could distort the Company’s policy benefits and claims estimates from year to year. With respect to DBL, the liability for policy benefits and claims for the most recent quarter of earned premium is established using a Net Loss Ratio methodology. The Net Loss Ratio is determined by applying the completed prior four quarters of historical Net Loss Ratios to the last quarter of earned premium. Policy benefits and claims associated with the premium earned prior to the last quarter are established using a completion factor methodology. The completion factors are developed using the historical payment patterns for DBL. The NYSDFS can order the Company to refund a portion of the premium, to each policyholder, to meet the mandated minimum loss ratio requirements. The Company adjusts this premium refund reserve each year based on its loss ratio in relation to the mandated minimum loss ratio requirements.
The Company experienced a net favorable development of $.3 million related to the Medical Stop-Loss segment. Our Medical Stop-Loss business is currently in run-off.
Invest both our capital and efforts in continuing to develop a fully integrated D2C division, which can generate leads, has reporting systems and sales automation platforms, and licensed agents servicing products underwritten both by IHC’s carriers and other nationally recognized insurers.
Build on our entry, in the fourth quarter of 2019, into the very large market for senior products by selling Medicare products underwritten by leading national insurance companies with respect to the 2020 Annual Enrollment Period (“AEP”). From this successful launch with a handful of agents, we are now rapidly expanding the hiring, training and licensing of additional agents with a target of having
Incur considerable expenses during this ramp up. We expect to be rewarded through substantial sales of Medicare products during the 2021 AEP, which is anticipated to produce the vast majority of our Medicare sales for this year and generate significant profits in the fourth quarter. In addition, our carrier, Independence American, is expected to commence underwriting Medicare Supplement in the second quarter of this year. We will complement the sale of Medicare products with an impressive portfolio of supplemental insurance such as Dental, Vision, Hearing, Hospital Indemnity, and Critical Illness products, designed to meet the unique needs of seniors, leveraging our deep domain knowledge and experience selling similar products to working individuals and families. We also anticipate increasing sales of our Extend Short-Term Medical product (which provides up to 36 months of coverage in many states) and is a valuable gap-filler for people who are approaching age 65 by bridging the gap until they are eligible for Medicare.
Expand the pet insurance division by generating at least $100 million of gross annualized pet insurance premiums by the end of 2020 with accelerating growth beyond. This is based on several developments in 2019. First, we now own a five percent equity interest in FIGO and are its exclusive underwriter. FIGO has entered into a marketing agreement with a nationally recognized health insurer. Through this relationship, FIGO expects to make Independence American’s pet insurance available as a benefit option to such carrier’s business customers and their millions of employees. MetLife, which recently acquired PetFirst, has also announced that it expects to focus on pet insurance as an employee benefit. Since Independence American is also a leading underwriter for PetFirst, we anticipate that Independence American will become a leading issuer of pet insurance in this rapidly expanding space. We are also continuing to invest in our high value domains (www.petplace.com, www.mypetinsurance.com, www.akcpetinsurance.com and www.petpartners.com) as we emphasize online sales and affinity marketing. PetPartners, our subsidiary that markets and administers pet insurance for IAIC, continues to grow through its exclusive relationship with The American Kennel Club and through new partnerships with insurance agents, employers and affinity groups. PetPartners, which anticipates launching Android and IOS apps this year, has entered into agreements with, and is in discussions with several more, national brands to distribute our pet insurance. We are close to launching Android and IOS apps to purchase pet insurance through www.mypetinsurance.com.
Accomplish increases in life and disability premium by developing additional strategic functional and distribution partnerships, broaden worksite portfolio, and enhance Business to Business and Business to Consumer website functionality.