IHC has entered into a renewable short-term arrangement with Geneve Corporation for the use of 6,750 square feet of office space as its corporate headquarters in Stamford, Connecticut.
IAC leases 49,000 square feet of office space in Phoenix, Arizona as its corporate headquarters, 6,000 square feet in Rockford, Illinois and 1,765 square feet in Golden Valley, Minnesota.
CAIS and IHC Health Solutions lease 7,424 square feet of office space in Bloomington, Minnesota. CAIS leases an additional 1,500 square feet in Boise, Idaho.
Independence Holding Company, a Delaware corporation (NYSE: IHC), is a holding company principally engaged in the life and health insurance business through: (i) its wholly owned insurance companies, Standard Security Life Insurance Company of New York ("Standard Security Life") and Madison National Life Insurance Company, Inc. ("Madison National Life"); and (ii) its marketing and administrative companies, including Insurers Administrative Corporation (“IAC”), managing general underwriters in which it owns a significant voting interest (“Affiliated MGUs”), Health Plan Administrators (“HPA”), GroupLink Inc. (“GroupLink”), IHC Health Solutions, Inc. (“IHC Health Solutions”), and Community America Insurance Services Inc. (“CAIS”). These companies are sometimes collectively referred to as the "Insurance Group," and IHC and its subsidiaries (including the Insurance Group) are sometimes collectively referred to as the "Company." The Company also owns a 48% equity
Revenues of $364.7 million, an increase of 23.0% over 2005; primarily due to an increase in revenues from the Fully Insured Health segment, an increase in net retention of the Company’s direct Medical Stop-Loss line to 51.2% in 2006 from 45.3% in 2005 (“retention” refers to net earned premiums after reinsurance) and the full year impact of life and annuity acquisitions in July 2005;
The following is a summary of key performance information by segment:
The Medical Stop-Loss segment reported a decrease in income before taxes of $5.7 million compared to 2005:
Included in operating results for the Medical Stop-Loss segment in 2005 was $3.5 million of income from a commutation agreement and a loss cover that did not repeat in 2006;
The Fully Insured Health segment reported income before taxes of $1.1 million for 2006 as compared to a pre-tax loss of $.6 million in 2005. Although revenues from this segment have increased, expenses have also increased. This is due, in part, to increased expense from the amortization of intangible assets recorded as a result of the acquisitions of IAC, HPA, GroupLink and CAIS, which will decline over the useful lives of the assets, and from higher selling, general, marketing and legal expenses related to the expansion of staff and product filings in anticipation of upcoming growth in this line. Total intangibles amortization expense was $1.5 million and $.7 million for the years ended December 31, 2006 and 2005, respectively;
The Corporate segment reported an increase in loss before taxes of $1.8 million for 2006, compared to a year earlier, primarily due to share-based compensation expense from the adoption of Statement of Financial Accounting Standards ("SFAS") No. 123R on January 1, 2006. Total pre-tax share-based compensation expense was $1.6 million in 2006, including $1.1 million of incremental share-based compensation expense as a result of the adoption of SFAS No. 123R; and
Net realized investment gains of $.6 million in 2006, a decrease of $1.5 million, as compared to $2.1 million in 2005.
The accounting and reporting policies of the Company conform to U.S. generally accepted accounting principles ("GAAP"). The preparation of the Consolidated Financial Statements in conformity with 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. Management has
Annuities and interest-sensitive life contracts, such as universal life and interest sensitive whole life, are contracts whose terms are not fixed and guaranteed. Premiums from these policies are reported as funds on deposit. Policy charges consist of fees assessed against the policyholder for cost of insurance (mortality risk), policy administration and early surrender. These revenues are recognized when assessed against the policyholder account balance.
Policyholder funds represent interest-bearing liabilities arising from the sale of products, such as universal life, interest-sensitive life and annuities. Policyholder funds are comprised primarily of deposits received and interest credited to the benefit of the policyholder less surrenders and withdrawals, mortality charges and administrative expenses.
The Company believes that its recorded insurance reserves are reasonable and adequate to satisfy its ultimate liability. The Company primarily uses its own loss development experience, but will also supplement that with data from its outside actuaries, reinsurers and industry loss experience as warranted. To illustrate the impact that projected Net Loss Ratios have on the Company’s loss reserves and related expenses, each hypothetical 1% change in the Net Loss Ratio for the health business (i.e., the ratio of benefits, claims and settlement expenses to earned health premiums) for the year ended December 31, 2006, would increase reserves (in the case of a higher ratio) or decrease reserves (in the case of a lower ratio) by approximately $2.4 million with a corresponding increase or decrease in the pre-tax expense for insurance benefits, claims and reserves in the Consolidated Statement of Operations. Depending on the circumstances surrounding a change in the Net Loss Ratio, other pre-tax amounts reported in the Consolidated Statement of Operations could also be affected, such as amortization of deferred acquisition costs and commission expense.
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. Liabilities for first dollar medical reserves and
The primary assumption in the determination of fully insured reserves is that historical claim development patterns tend to be representative of future claim development patterns. Factors which may affect this assumption include changes in claim payment processing times and procedures, 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 impacts of any changes in these factors are minimal. The delay in submission of claims tends to be stable over time and not subject to significant volatility. The Company does not believe that any reasonably likely change in these factors will have a Material Effect.
The primary assumptions used in estimating the Credit A&H reserves relate to: (i) the mix of ages of the insured; (ii) the rate of disability; and (iii) the rate of mortality of disabled lives. If the mix is skewed towards older age groups the probability of disability increases. If the rate of disability increases, the Company would increase reserves. If mortality of disabled lives improves, the Company would have to pay benefits for a longer period of time. Ranges are not used to determine the ultimate amount of reported reserves for Credit A&H. Management records its best estimate based on the Company’s experience. Credit A&H policies are accounted for based on actuarial estimates of the amount of loss inherent in that period’s claims, including losses incurred for which claims have not been reported. The Company establishes reserves for benefit claims that (i) have been reported, but not paid; and (ii) have been incurred, but not reported.
Net income was $14.1 million, or $.93 per share, diluted, for the year ended December 31, 2006, a decrease of $3.2 million compared to net income of $17.3 million, or $1.21 per share, diluted, for the year ended December 31, 2005. The Company's income before taxes decreased $5.4 million to $20.5 million for the year ended December 31, 2006 from $25.9 million for 2005.
Benefits, claims and reserves increased $34.5 million. The increase is due to: (i) $19.8 million in the Medical Stop-Loss segment resulting primarily from a 5.9% increase in retention and an increase in Net Loss Ratios to 95.2% as compared to 93.2% for 2005 (see “Outlook” for a discussion of factors affecting the recent underwriting profitability of the Medical Stop-Loss segment); (ii) an increase of $8.3 million in the Fully Insured segment due to an increase in premium volume; (iii) a $3.3 million increase in the Individual and Other segment due to higher losses on assumed blocks of annuity and life business and surrenders and interest credited on policies due to acquisitions made in 2005; (iv) an increase of $2.6 million in the Group segment primarily due to a $2.7 million increase related to new business written for group A&H in point of service, a $.9 million increase in group term life losses and a $.6 million increase in interest credited in group annuities, partially offset by a $1.8 million decrease in LTD paid claims and net claims reserves; and (v) a $.5 million increase in the Credit Life and Disability segment caused by higher loss ratios and new business. Insurance benefits, claims and reserves for 2006 includes a charge of $3.8 million to reflect loss development from prior years and a corresponding increase in reserves for the current year, primarily related to the Medical Stop-Loss segment. While management sets reserves based on its best estimates of ultimate claim settlement costs, the Company adjusts reserves as claims mature, approach settlement or are otherwise resolved.
Results of Operations for the Year Ended December 31, 2005 Compared to the Year Ended December 31, 2004
Net income was $17.3 million or $1.21 per share, diluted, for the year ended December 31, 2005, a decrease of $5.6 million compared to net income of $22.9 million, or $1.60 per share, diluted, for the year ended December 31, 2004. The Company's income before taxes decreased $7.7 million to $25.9 million for the year ended December 31, 2005 from $33.6 million for 2004.
Total premiums earned grew $62.9 million to $237.0 million in 2005 from $174.1 million in 2004. The increase is due to: (i) the Medical Stop-Loss segment which increased $31.4 million primarily due to $29.8 million in increased retention and a $1.6 million increase due to a Net Loss Ratio cover for the 2004 underwriting year that did not exist in 2004; (ii) the new Fully Insured Health segment (formerly Strategic Health) which had $17.4 million of premiums in 2005; (iii) the Individual and Other segment which increased $7.8 million comprised of an increase in retention in blanket accident and sickness policies, an increase in the ordinary life line primarily due to acquisitions and growth in the military and civilian government employee division; (iv) the Credit segment which increased $1.2 million; and (v) a $5.1 million increase in the Group segment due to a $2.7 million increase in group LTD and group life, a $4.3 million increase in other group A&H due to new Point of Service business, partially offset by a $1.9 million decrease in DBL due to the 20% reinsurance agreement with Independence American effected as of July 1, 2004.
Net realized investment gains were $2.1 million in 2005 compared to $2.4 million in 2004, a decrease of $.3 million. Decisions to sell securities are based on cash flow needs, investment opportunities and economic and market conditions, thus creating fluctuations in gains and losses from period to period.
Total other income increased $4.0 million due primarily to (i) a $1.4 million increase from a commutation agreement, pursuant to which, effective as of January 1, 2005, the reinsurer returned 94% of the net premium collected to date with respect to the 2003 Medical Stop-Loss business ceded to such reinsurer, and the Company has released most future liabilities of such reinsurer with respect to such business; (ii) a $1.4 million increase from the Excess of Loss Agreement related to the expired portion of
Benefits, claims and reserves increased $47.6 million. The increase is due to: (i) $26.8 million in the Medical Stop-Loss segment primarily resulting from an increase in retention in 2005 as well as higher Net Loss Ratios on its Medical Stop-Loss line of business in 2005 (93.2%) as compared to 2004 (86.6%); (ii) an increase of $10.8 million in the Fully Insured Health segment which was not formed until after the third quarter of 2004; (iii) a $7.2 million increase in the Individual and Other segment due to higher losses on the assumed block of annuity and life business in run-off status, and higher mortality losses on the ordinary life line subsequent to the acquisitions; (iv) a $1.0 million increase in Credit claims and reserves due to an increase in premiums; and (v) an increase of $1.8 million in the Group segment primarily due to a $1.3 million increase in the group-term life ("GTL") line caused by increased retention and frequency of claims experienced, a $2.1 million increase in the group A&H line due to new business, and a $.7 million increase in the VFD annuity line due to increased business, partially offset by a $2.3 million decrease in the DBL line due to the 20% reinsurance agreement previously mentioned. Insurance benefits, claims and reserves for 2005 includes a charge of $.6 million to reflect loss development from prior years and a corresponding increase in reserves for the current year. While management sets reserves based on its best estimates of ultimate claim settlement costs, the Company adjusts reserves as claims mature, approach settlement or are otherwise resolved.
Insurance reserves-life and annuity decreased $11.4 million primarily due to the recapture of an ordinary life block of business at Standard Life of $9.5 million, the runoff of acquired blocks of $8.0 million and $4.5 million due to the final settlement of several life and annuity acquisitions made in 2005. Reserves on block acquisitions are subject to change at final settlement. Deferred acquisition costs decreased $7.0 million of which $4.5 million is also due to the final settlement of the 2005 acquisitions.
The Company's gross unrealized losses on fixed maturities totaled $17.8 million at December 31, 2006. Substantially all of these securities were investment grade. The Company holds all fixed maturities as available-for-sale securities and, accordingly, marks all of its fixed maturities to market through accumulated other comprehensive income or loss. The unrealized losses on all available-for-sale securities have been evaluated in accordance with the Company's policy and were determined to be temporary in nature at December 31, 2006.
The Group Disability segment had a favorable development of $2.5 million. This amount consists of a favorable development of $1.7 million on the 2005 reserves primarily due to DBL and a net favorable development of $.6 million for all other years due to LTD.
The Credit A&H unfavorable development for 2006 was $.3 million which relates to 2005 reserves. There were no changes in the Company’s experience factor or the IBNR factor for Credit A&H used in the reserving process from 2005 to 2006.
The Individual A&H and Other segment had a negligible amount of favorable development for 2006. The reserving process used by management was consistent from 2005 to 2006.
IHC has historically been a life and health insurance holding company for two insurance companies, Standard Security Life Insurance Company of New York ("Standard Security Life") and Madison National Life Insurance Company, Inc. ("Madison National Life"), which relied on independent general agents, managing general underwriters (MGUs) and administrators to perform the majority of all marketing, underwriting, claims and administrative functions for its two primary product segments (Medical Stop-Loss and Group disability, life, annuities and DBL).
business. When an excess product experiences several consecutive years of underwriting profitability, it is not unusual for there to be more competitors entering that line
which can increase pressure on pricing and create a "softer" market. The
in its underwriting guidelines in response to the results of its underwriting audits
Based on currently available information, business incepting in 2006, of which a material portion will be earned and recorded in 2007, is projected to achieve a Net Loss Ratio that is meaningfully lower than that of business incepting in 2005, just as the Net Loss Ratio on business incepting in 2005 was meaningfully lower than that of business incepting in 2004.
(including Consumer Driven Health Plans (“CDHPs”)), dental and vision (the “
through alternative distribution methods in addition to general agents. Assuming completion of the acquisition of Actuarial Management Corp., which is contemplated to occur in the second quarter of 2007, the Company will not only bring in-house the actuarial expertise necessary to maintain the profitability of the block, but will add another source of fee income and potentially profit commission.
IHC will continue to look for financially viable life and annuity acquisitions during 200
administrative capabilities to administer large blocks of life and annuities for other carriers for whom this is not a core business.