PetPartners leases 7,006 square feet of office space in Raleigh, North Carolina as its corporate headquarters.
While management considers a wide range of factors in its strategic planning and decision-making, underwriting profit is consistently emphasized as the primary goal in all decisions as to whether or not to increase our retention in a core line, expand into new products, acquire an entity or a block of business, or otherwise change our business model. Management's assessment of trends in healthcare and morbidity, with respect to specialty health, disability, DBL and PFL, mortality rates with respect to life insurance, and changes in market conditions in general play a significant role in determining the rates charged, deductibles and attachment points quoted, and the percentage of business retained. IHC also seeks transactions that permit it to leverage its vertically integrated organizational structure by generating fee income from production and administrative operating companies as well as risk income for its carriers. Management has always focused on managing the costs of its operations.
The COVID-19 outbreak continues to be a fluid situation. The business continuity and emergency response plans we implemented in March 2020 continue to ensure we provide a high level of service to our customers and support our everyday business needs. To help protect the safety and wellbeing of our employees and mitigate the spread of COVID-19, we have limited travel and directed our employees to work remotely whenever possible. As the COVID-19 outbreak continues to evolve, the duration of COVID-19 and its potential effects on our business cannot be certain. Regulatory mandates have affected, and we anticipate will continue to impact, the insurance industry. We currently cannot predict if there will be a material impact to our business, results of operations or financial condition in future reporting periods. For more information, see the risk factor under the heading “We face risks related to health epidemics, like the
Coronavirus (COVID-19) that could impact our sales, operating results and financial condition” in Item 1A. Risk Factors.
·Income from operations of $1.28 per share, diluted, for the year ended December 31, 2020 compared to $.83 per share, diluted, for the same period in 2019;
oFor the years ended December 31, 2020 and 2019, the Company accrued $25.0 million and $10.7 million, respectively, of estimated amounts that the Company paid or will potentially pay into the New York State adjustment pool as a result of IHC having significantly better experience with its PFL business than that of the industry as a whole;
·Book value of $32.08 per common share at December 31, 2020 compared to $30.92 at December 31, 2019; and
·The Specialty Health segment reported $4.3 million of income before taxes for the year ended December 31, 2020 compared to $7.8 million for the comparable period in 2019. The decrease in 2020 when compared to 2019 is primarily due to: (i) $3.7 million of expenses for compliance with the MCE; (ii) shift in product mix in 2020 to higher earned premium from somewhat higher loss ratio products than those impacting 2019; (iii) increased costs related to overall infrastructure improvements in lead generation capabilities and sales automation platforms at IHC Specialty Benefits, Inc. without a meaningful increase in sales yet; partially offset by (iv) other income of $5.6 million for the recognition of an arbitration award received in 2020.
oThe higher loss ratios in 2020 primarily reflects the broadening of the mix of business, with a higher concentration of product lines with lower profit margins. The higher
·The Individual life, annuities and other segment in run-off reported an insignificant amount of income before income taxes in 2020 compared with losses before income taxes of $1.1 million in 2019;
·The Corporate segment reported losses before tax of $9.0 million for the year ended December 31, 2020 compared to $7.1 million for the same period in 2019. The change is primarily due to lower annualized yields on investments in 2020 and less income from equity method investments, partially offset by lower compensation expenses in 2020;
The Company utilizes the following five-step approach to recognize revenue from contracts with customers:
(4)allocation of the transaction price to the performance obligations in the contract; and
Commission revenues result from the sales of certain policies by the IHC Agencies on behalf of multiple unaffiliated insurance carriers. The Company has identified the unaffiliated insurance carriers as its customers. A significant portion of our commission revenues are recorded at a point in time based on expected constrained LTV that represent expected commissions to be received over the lifetime of the policies sold. These policies primarily consist of senior products, such as Medicare Advantage, Medicare Part D prescription drug plans and Medicare Supplement plans, as well as ACA plans and small group stop-loss. Commission rates are agreed to in advance with the relevant insurance carrier and vary by carrier and policy type. Other commission revenues are recorded over a period of time commensurate with the performance of certain policy retention and renewal services. In circumstances where the contract is terminable at any time by either party, commission revenues are recorded when consideration is received to the extent it is nonrefundable.
Constrained LTV commissions are recorded at a point in time upon the issuance of a policy by the unaffiliated insurance carrier. It is at this point the performance obligation is considered satisfied. No significant additional performance obligation occurs with renewal of the initial policy. IHC records substantially all of the anticipated revenue from these policies on this date, adjusted for certain expected constraints. Various factors are analyzed to estimate the constrained LTV commissions. These include, but are not limited to, commission rates, carrier mix, contract amendments and terminations, estimated average plan durations, cancellations and non-renewals. After our initial estimate and constraints are made, the Company reassesses its estimates and constraints at the end of each reporting period. We recognize any material impact of changes to commission revenue in the period when the changes are made to the assumptions we use to calculate constrained LTV or previously estimated constrained LTV already recognized as revenue.
Revenues for the use of our INSX cloud-based enrollment platform are recognized over time. This platform enables brokers and agents to quote and enroll consumers in ACA plans as well as ancillary health products. In this case, the independent brokers and agents are the customers and they are charged a monthly fee for the right to use the hosted cloud software. Amounts received in advance (annually or quarterly) are recorded as deferred revenues and recognized in income over the life of the contract.
IHC Agencies also earn fees from policyholders for: (i) the convenience of paying for pet premiums
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
Interest credited to policyholder funds represents interest accrued or paid on interest-sensitive life policies and investment policies. These amounts are reported in insurance benefits, claims and reserves on the Consolidated Statements of Income. Credit rates for certain annuities and interest-sensitive life policies are adjusted periodically by the Company to reflect current market conditions, subject to contractually guaranteed minimum rates.
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. Most of the securities in our portfolio are classified in either Level 1 or Level 2 of the Fair Value Hierarchy.
Goodwill carrying amounts are evaluated for impairment, at least annually, at the reporting unit level that is equivalent to an operating segment or one level below an operating segment, referred to as a component. Goodwill associated with the Specialty Health operating segment and the Group component of the Group disability, life, DBL and PFL operating segment were tested for impairment at December 31, 2020. 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
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 2020 or 2019.
Results of Operations for the Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019
In 2020, premiums earned increased $58.8 million over the comparable period in 2019. The increase is primarily due to: (i) a $46.0 million increase in earned premiums from the Group disability, life, DBL and PFL segment primarily as a result of a $36.0 million increase in PFL premiums due to an increase in rates, a $4.3 million increase in group term life business due to increased retention, a $5.1 million increase in the group STD/LTD lines due to new STD business and increased LTD premium volume, and $2.4 million increase in premiums from other group life business due to a relatively new product (term to 120), partially offset by a $1.8 million decrease in DBL premiums as a result of higher unemployment due to COVID-19; as well as (ii) an increase of $12.8 million in the Specialty Health segment primarily due to increases in earned premiums from the pet and STM lines of $35.8 million and $3.9 million, respectively; partially offset by decreases of $22.3 million in the fixed indemnity limited benefit line, $2.9 million in group gap, $.9 million in occupational accident business and $1.0 million in the group health modified indemnity line.
Total net investment income decreased $3.8 million primarily due to the continued decline in interest rates. The overall annualized investment yields were 2.3% and 3.0% in 2020 and 2019, respectively.
The Company had net investment gains of $1.3 million in 2020 compared to $4.7 million in 2019. These amounts include gains and losses from sales of fixed maturities available-for-sale, equity securities and other investments. Decisions to sell securities are based on management's ongoing evaluation of investment opportunities and economic and market conditions, thus creating fluctuations in gains and losses from period to period.
In 2020, the Company did not recognize any other-than-temporary impairment losses on fixed maturities available-for-sale. In 2019, the Company recognized $.6 million of other-than-temporary impairment losses on fixed maturities available-for-sale as the Company determined that it was more likely than not that we would sell the securities before the recovery of their amortized cost basis.
Fee income increased $10.1 million in 2020 compared to 2019 primarily due to an increase in the sales of insurance products (primarily senior products, ACA plans and small group stop-loss) by the IHC
Other income increased $7.1 million in 2020 compared to the same period in 2019. In 2020, other income includes the recognition of a $5.6 million arbitration award received. In 2019, other income included a $3.6 million pretax gain on the sale of an equity investment and $1.3 million of income from partnership investments offset by a $3.7 million impairment loss on an equity investment in Ebix Health Administration Exchange from its carried value to its estimated fair value.
In 2020, insurance benefits, claims and reserves increased $34.1 million over the comparable period in 2019. The increase is principally attributable to: (i) an increase of $26.0 million in benefits, claims and reserves in the Group disability, life, DBL and PFL segment primarily as a result of a $20.0 million increase in PFL benefits to policyholders due to an increase in PFL premiums as well as a $14.3 million increase in the accrual for a potential risk adjustment payment associated with the NYSDFS risk adjustment program ($25.0 million in 2020 vs. $10.7 million in 2019), a $5.4 million increase in benefits and claims as a result of new STD cases, an increase of $3.3 million in group life business due to increased retentions and $1.0 million in the LTD line, and $3.7 million in reductions on DBL reserves primarily due to lower premium volume and premium refund reserve adjustments; and (ii) an increase of $8.7 million in the Specialty Health segment primarily due to an increase of $18.4 million in pet claims on higher premium volume; partially offset by decreases of $3.9 million in group gap on lower loss ratios and favorable prior year loss development, $3.4 million in the fixed indemnity limited benefit line due to lower premium volume partially offset by higher loss ratios and a $1.4 million unfavorable change in prior year loss development, $.9 million decrease in dental claims assumed as a result of COVID-19 and $1.0 million in the group health modified indemnity business which is in runoff.
Total selling, general and administrative expenses increased $30.8 million over the comparable period in 2019. The increase is principally due to: (i) an increase of $25.1 million in the Specialty Health line of business primarily due to increases in commissions, administrative fees and other general expenses in the STM and pet lines of business from increased premium volume, in addition to increased lead generation expenses for our senior call center, compensation and system development related expenses in our marketing and administrative companies, including the $3.7 million of expenses paid for compliance with the MCE related to our STM, limited benefit and fixed indemnity limited benefit products, partially offset by decreases in commission and administrative expenses related to decreased volume in the fixed indemnity limited benefit line; and (ii) an increase of $8.5 million in the Group disability, life, DBL and PFL segment primarily due to increased commission expenses and other general expenses on PFL, group term life and STD/LTD lines of business on increased premium volume; partially offset by (iii) a decrease of $2.7 million in the Corporate segment primarily due to compensation related expenses.
The effective tax rate was 36.0% in 2020 compared to 49.9% in 2019. Differences between the Federal statutory income tax rate and the Company’s effective income tax rate for 2020 is primarily a result of: (i) the reduction of estimated tax benefits of $4.5 million from the expected utilization of AMIC’s net operating loss carryforwards that either expired in 2020 or are expiring in 2021; (ii) certain non-deductible expenses recorded in connection with the RSA on the MCE discussed in Note 16; reduced by (iii) state and local income tax benefits associated with non-insurance operations; and (iv) the benefit of capital losses attributable to the sale of a subsidiary in 2020. The difference between the Federal statutory income tax rate and the Company’s effective income tax rate in 2019 is primarily a result of the reduction of estimated tax benefits of approximately $7.9 million from the reduction in expected utilization of AMIC’s net operating loss carryforwards that were expiring in 2020 and 2021.
Corporate utilizes cash primarily for the payment of general overhead expenses, common stock dividends, and common stock repurchases.
The Company had $74.8 million and $24.6 million of cash, cash equivalents and restricted cash as of December 31, 2020 and 2019, respectively.
In 2020, operating activities provided $51.4 million of cash, investment activities provided $13.1 million of cash, primarily for net sales of investment securities net of $13.7 million utilized for business acquisitions. Financing activities utilized $14.4 million of cash, of which $7.5 million was utilized for treasury stock purchases and $6.2 million for dividend payments.
There were no material negative impacts on the Company’s cash flows or liquidity with regards to COVID-19 during 2020. Depending on the length and severity of the outbreak, it is possible that cash flows may be negatively impacted due to increased claim activity as a result of mandated testing and treatment coverage, as well as delayed policy payments or an increase in cancelled policies due to non- payment in the future.
The Company had receivables from reinsurers of $357.2 million at December 31, 2020 compared to $363.0 million at December 31, 2019. All of such reinsurance receivables are from highly rated companies or are adequately secured. No allowance for doubtful accounts was necessary at December 31, 2020.
The $10.1 million increase in IHC’s stockholders' equity in 2020 is primarily due to $18.9 million of net income attributable to IHC and $3.0 million of other comprehensive income attributable to IHC reduced by $6.5 million of common stock dividends declared and $7.5 million for treasury stock purchases.
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 has gross unrealized gains of $8.3 million and gross unrealized losses of $3.0 million on its fixed maturities available-for-sale securities at December 31, 2020. All of the Company’s fixed maturities were investment grade and continue to be rated on average AA. The Company marks all of its fixed maturities available-for-sale to fair value through accumulated other comprehensive income or loss. These investments tend to carry less default risk and, therefore, lower interest rates than other types of fixed maturity investments. The Company did not have any non-performing fixed maturities at December 31, 2020.
Certain fixed maturities, primarily municipal obligations, in our investment portfolio are insured by financial guaranty insurance companies. The insurance, however, does not enhance the credit ratings on these securities. The following table summarizes the credit quality of our fixed maturity portfolio, as rated, at December 31, 2020:
likely than not that the Company will have to sell debt securities in unrealized loss positions that are not other-than-temporarily impaired before recovery. In the event that the Company’s liquidity needs require the sale of fixed maturity securities in unfavorable interest rate, liquidity or credit spread environments, the Company may realize investment losses.
The Company reviews its investments regularly and monitors its investments continually for impairments, as discussed in Note 1(G) (v) of the Notes to Consolidated Financial Statements in Item 8 of this report. The Company did not record any other-than-temporary impairment losses in 2020. In 2019, the Company recognized $.6 million of other-than-temporary impairment losses on certain fixed maturities available for sale, 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.
Based upon the goodwill impairment testing performed at December 31, 2020, the fair value of each reporting unit exceeded its carrying value and no impairment charge was required. The Specialty Health operating segment exceeded fair value by approximately 5%. The Group Component exceeded fair value by at least 10%.
The Specialty Health segment had a net favorable development of $4.3 million related to prior years primarily from: (i) $1.4 million of favorable development in STM business due to paid claim activity below anticipated levels as medical investigations were completed and as the reliability of claim payment patterns at a newer claim administrator emerged; (ii) $1.5 million of favorable development in occupational accident with $.7 million due from the occupational accident line in run-off and $.8 million due to the favorable development within the active block of business; and (iii) favorable development in other lines of Specialty Health business; partially offset by (iv) $1.3 million of unfavorable development in the Fixed Indemnity Limited Benefit line due to higher than expected claim severity on a small number of older policies.
DBL and PFL business has net favorable development of $3.7 million is primarily due to $2.4 million of favorable adjustments to prior year DBL premium refund reserves, in addition to better than expected DBL claims experience.
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 pricing assumptions 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.
Due to the long-term nature of LTD, in establishing the liability for policy benefits and claims, the Company must make estimates for case reserves, IBNR, and reserves for Loss Adjustment Expenses (“LAE”). Case reserves generally equal the actuarial present value of the liability for future benefits to be paid on claims incurred as of the balance sheet date. The IBNR reserve is established based upon historical trends of existing incurred claims that were reported after the balance sheet date. The LAE reserve is calculated based on an actuarial expense study. Since the LTD block of policies is relatively small, with the potential for very large claims on individual policies, results can vary from year to year. If a small number of claimants with large claim reserves were to recover or several very large claims were incurred, the results could distort the Company’s policy benefits and claims estimates from year to year.
All other lines, primarily life and other individual health products and including our medical stop-loss business in run-off, experienced favorable development of $3.3 million. The favorable development is primarily related to the group term life business due to continued improvements in experience.
Due to its strong capital ratios, broad licensing and excellent asset quality and credit-worthiness, the Insurance Group remains well positioned to increase or diversify its current activities. It is anticipated that future acquisitions or other expansion of operations will be funded internally from existing capital and surplus and parent company liquidity. In the event additional funds are required, it is expected that they would be borrowed or raised in the public or private capital markets to the extent determined to be necessary or desirable. The Company has no long-term debt outstanding at December 31, 2020 or 2019.
·Continue to invest in the growth of our pet division, which will have underwritten $112 million of premium (approximately 200,000 dogs and cats) as of December 31, 2020, which is a compound annual growth rate of 48% from 2018 to 2020. We expect to continue significant growth in 2021, in particular from our PetPartners distribution channels. The following are highlights of our pet initiatives:
·PetPartners (through its domain www.akcpetinsurance.com) has expanded its relationship with the AKC through extension of their multi-year exclusive license and a multi-year marketing agreement with respect to media outlets owned by the AKC. This relationship provides PetPartners with unique access to AKC breeders, registrants and consumers of various AKC media channels, with a particular focus on educating new pet registrants as
·Pet insurance has now become a highly requested employee benefit, which has led us to make it available through worksite marketing. Independence American Insurance Company has begun filing the first group pet insurance policy designed for the worksite and employer markets. United Healthcare and MetLife, Inc. (“MetLife”) (both of which currently access Independence American Insurance Company as their underwriter), and Aflac, have all announced that they will be marketing pet insurance in the worksite market. We currently have agreements in place, or are negotiating, with several insurers interested in co-branding the new Independence American Insurance Company pet product for sales to existing groups and through proven affinity distribution relationships. In order to prepare for this potentially material growth, we are making significant investments in our pet operations, technology and infrastructure to handle the expected volume, including enhancing automation of claims and customer services.
·We will also accelerate the generation of non-risk revenue through the pet division’s newest brand asset, TailTrax, an all-inclusive subscription-based app with Tele-Vet and other high-touch engagement features. This app will be available without charge to insureds of PetPartners. In addition, we will begin in 2021 to generate advertising and lead revenues from Petplace.com, which is one of the leading sites for veterinarian-curated pet information with one million visitors per month.
·Expand in-house capabilities through the “MarTech” acquisition we made in April, which will accelerate proprietary lead generation and direct to consumer growth. We have rapidly expanded our portfolio of consumer touchpoints across all of our distribution channels, including web domains (www.healthinsurance.org, www.medicareresources.org, www.healthedeals.com, www.marigoldmedicare.com, www.petplace.com, www.petpartners.com, www.akcpetinsurance.com, and www.mypetinsurance.com), call centers, field agents, and social media. This should improve our cost of sale by: (i) harnessing an in-house marketing team to drive media efficiency and effectiveness, (ii) deploying data science and artificial intelligence to improve lead quality and intent; and (iii) leveraging a proprietary lead marketplace to salvage unused leads and recoup costs.
·Continue to build on the knowledge and experience we’ve gained in the very large market for senior products by selling Medicare products underwritten by leading national insurance companies. These companies include United Healthcare, Aetna, Humana, Anthem and others. We have invested a considerable amount of capital entering this market, and with an estimated 10,000 people aging into Medicare every day, there is a significant opportunity to build a formidable footprint in this space. We have enhanced our SalesForce customer relations management platform, as well as our producer licensing, and consumer and web-based enrollment systems. We continue to build our MarTech infrastructure by developing new brands, acquiring and developing vast data assets, via automated remarketing efforts, and with advanced data analytics, all intended to allow us to generate a significant volume of high-intent consumer leads. In conjunction with continuously increasing our proficiency in efficiently generating leads, we will continue to train additional senior-focused customer care center agents for future enrollment periods. We currently have 38 licensed agents focused exclusively in the Medicare related product space, and expect this number to see a meaningful increase during enrollment
·Grow the number of agents using our wholly owned Web Broker, INSX Cloud, to do individual ACA enrollments. When agents utilize the INSX Cloud for enrollments we earn fee income and commission. Additionally, we have specialty health plans on the site that can be enrolled at the same time as the ACA plans which earn underwriting profit for IHC carriers and in certain instances a commission override for the agency.
·Achieve increases in both long-term and short-term disability premiums generated from new distribution relationships.
·Continue to evaluate strategic transactions. We plan to deploy some of our cash to make additional investments and acquisitions that will bolster existing or new lines of business.
We are well positioned for changes to the healthcare market brought by the Biden Administration. It is expected that the administration will work to expand the ACA by increasing the availability of Advance Premium Tax Credits (a.k.a. subsidies) to more Americans and by lowering the cost paid by many consumers by increasing subsidy amounts. The expectation that the Biden Administration will be more favorable to the individual ACA market is expected to encourage more issuers to enter the market.
Our agencies, including My1HR, will be able to take advantage of the expected growth in this market. The agencies are contracted with many ACA carriers and can quickly scale to add additional issuers. My1HR should see increased revenue as more agents engage in the ACA market. We also are investing in a platform designed to administer Individual Coverage Health Reimbursement Arrangements (“ICHRAs”), a funding mechanism that allows employers to pay for their employee’s individual ACA plans with pre-tax dollars.