IHC Carrier Solutions leases 12,253 square feet of office space in Phoenix, Arizona as its corporate headquarters.
oThe Company reduced AMIC’s deferred tax asset valuation allowance by $20.3 million at December 31, 2017 primarily due to an increase in projected future income and associated utilization of Federal net operating losses. No such adjustment was recorded for the year ended December 31, 2018.
oIncome taxes for the year ended December 31, 2017 include income tax benefits of $11.6 million on a worthless stock deduction representing the Company’s tax basis on its unrecovered investments in that subsidiary.
(A)Loss ratio represents insurance benefits claims and reserves divided by premiums earned.
oThe expense ratio is higher for 2018 primarily due to changes in the mix of products within the Specialty Health segment as hospital indemnity and accident medical premiums tend to have lower loss ratios and higher expense ratios than STM policies.
Income before taxes from the Group disability, life, DBL and PFL segment increased $0.6 million in 2018 compared to prior year results, primarily reflecting lower claims in the LTD line of business; partially offset by higher losses and other expenses in the DBL and the new Paid Family Leave, or “PFL”, rider on the DBL line of business. The financial statements include a reserve for a potential risk adjustment payment of $7.0 million associated with the Company’s PFL product due to expected better than industry claims experience. In the absence of any state reported industry claims experience, the Company has chosen to reserve for a potential risk adjustment payment in an amount that brings the PFL product to a break even profit. An adjustment to this amount will be made sometime during 2019 when industry claims experience is made available.
The Individual life, annuities and other segment in run-off reported losses before income taxes of $0.4 million in 2018 compared with losses of $0.5 million in 2017.
Loss before tax from the Corporate segment for the year ended December 31, 2018 increased $0.8 million over the same period in 2017 primarily due to changes in compensation and related expenses.
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.
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. With respect to PFL, policy benefits and claims associated with the premiums earned are established using a completion factor methodology. As this is the first year of this product, the completion factors used were based on the PFL payment patterns developed during 2018 supplemented with an estimated maturity factor to account for run-out longer than 12 months. Since the NYSDFS established a risk adjustment program, the Company is required to record in its financial statements an accrual for a potential payment to, or recovery from, the risk adjustment program depending on how its loss ratio compares to the industry wide loss ratio. To determine the amount of this risk adjustment, knowledge of industry wide performance is necessary. Unfortunately, the NYSDFS does not share the industry loss ratio data for the current reporting year until the following year. However, the Company uses available unaudited industry information to make its best estimate of its potential payment under the risk adjustment program until actual information is available.
Management believes that the Company's methods of estimating the liabilities for future policy benefits provided appropriate levels of reserves at December 31, 2018 and 2017. Changes in the Company's future policy benefits estimates are recorded through a charge or credit to its earnings.
For the purpose of other-than-temporary impairment evaluations, redeemable preferred stocks are evaluated in a manner similar to debt securities. Declines in the creditworthiness of the issuer of debt securities with both debt and equity-like features are evaluated using the equity model in consideration of other-than-temporary impairment.
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 2018 or 2017.
The annualized investment yields on bonds, equities and short-term investments were 3.1% and 3.0% for the years ended December 31, 2018 and 2017, respectively. IHC has approximately $145.8 million in highly rated securities earning on average 2.0%. The average duration of the Company’s portfolio is 4 years. A portfolio that is shorter in duration enables us, if we deem prudent, the flexibility to reinvest in much higher yielding longer-term securities, which would significantly increase investment income.
Other income decreased $7.9 million in 2018 compared to the same period in 2017 as a result of a $2.3 million impairment loss on an equity investment from its carried cost to its estimated fair value, and $2.1 million in losses in partnership investments in 2018, as well as fees received in 2017 related to the sale and exit of the Medical Stop-Loss business with no comparable amounts in 2018.
In 2018, insurance benefits, claims and reserves increased $9.2 million over the comparable period in 2017. The increase is primarily attributable to: (i) an increase of $30.2 million in benefits, claims and reserves in the Group disability, life, DBL and PFL segment, primarily due to $28.8 million in reserves associated with the new PFL rider (including an accrual for a potential risk adjustment payment of $7.0 million), as well as $3.2 million in increased DBL reserves due to state mandates, and $2.0 million in increased Group Term Life incurred benefits on higher loss ratios; partially offset by a decrease of $4.1 million in LTD reserves primarily due to lower loss ratios in 2018; (ii) an increase of $2.1 million in the Medical Stop Loss segment as a result of better experience on the run-out business in 2017 with no corresponding amount in 2018; and (iii) an increase of $.5 million in the individual life, annuities and other lines; partially offset by (iv) a decrease of $23.6 million in the Specialty Health segment primarily as a result of a decrease of $20.3 million in the STM line of business due to decreased premium volume and lower loss ratios, a decrease in benefits, claims and reserves related to the run-off of certain occupational accident and international lines of business of $5.0 million and $4.6 million, respectively, and a decrease of $1.1 million in the dental line due to lower premiums; partially offset by increases of $6.0 million in the group gap lines of business due to increased premium volume and $1.3 million in the pet lines.
Total selling, general and administrative expenses increased $11.9 million over the comparable period in 2017. The increase is primarily attributable to: (i) an increase of $7.2 million in the Specialty Health line of business due to an increase in administrative and commission expenses related to increased premium volume in hospital indemnity and group gap lines of business, increased agency expenses from PetPartners with only nine months of comparable expenses in 2017, and increased expenses at IHC
Specialty Benefits Inc. related to call center expansion costs; partially offset by a decrease in commissions and administrative fees in the STM and dental lines on lower premium volume and certain occupational accident and international lines of business in run-off; (ii) an increase of $7.0 million in the Group disability, life, DBL and PFL segment primarily due to increased commission expense and premium taxes on PFL, DBL and LTD lines of business; and (iii) an increase of $.5 million in the Corporate segment largely due to changes in compensation and related expenses; partially offset by (iv) a $2.0 million decrease in expenses related to the Medical Stop Loss segment as a result of exiting this line of business and a decrease of (v) $.8 in the individual life, annuities and other segment.
Corporate derives its funds principally from: (i) dividends from the Insurance Group; (ii) management fees from its subsidiaries; and (iii) investment income from Corporate liquidity. Regulatory constraints historically have not affected the Company's consolidated liquidity, although state insurance laws have provisions relating to the ability of the parent company to use cash generated by the Insurance Group. The Insurance Group declared and paid $23.4 million and $18.0 million of cash dividends to Corporate in 2018 and 2017, respectively.
Operating activities provided $36.0 million of cash. Investment activities utilized $27.7 million of cash, primarily for the purchases of investment securities and financing activities utilized $9.7 million of
cash, of which $4.1 million was utilized for treasury share purchases and $3.7 million was utilized for payments of common stock dividends.
At December 31, 2018, the Company had $527.2 million of insurance liabilities that it expects to ultimately 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. For the year ended December 31, 2018, cash received from the maturities and other repayments of fixed maturities was $32.8 million.
The Company had receivables from reinsurers of $368.7 million at December 31, 2018 compared to $380.6 million at December 31, 2017. All of such reinsurance receivables are from highly rated companies or are adequately secured. No allowance for doubtful accounts was necessary at December 31, 2018.
The $17.2 million increase in IHC’s stockholders' equity in 2018 is primarily due to $28.5 million of net income attributable to IHC reduced by $3.4 million of other comprehensive losses net of tax, attributable to IHC, by $4.0 million of treasury stock purchases and by $4.5 million of common stock dividends declared in 2018.
Based upon the goodwill impairment testing performed at December 31, 2018, the fair value of each reporting unit exceeded its carrying value and no impairment charge was required. Fair value exceeded carrying value by more than 10% in the Specialty Health segment.
The following table summarizes the prior year net favorable amount of policy benefits and claims incurred in 2018 according to the year in which it relates, together with the opening balances of the corresponding liability for policy benefits and claims (net of reinsurance recoverable) (in thousands):
The following sections describe, for each segment, the unfavorable (favorable) development in the liability for policy benefits and claims experienced in 2018, together with the key assumptions and changes therein affecting the reserve estimates.
The Specialty Health segment had a net favorable development of $10.7 million related to prior years primarily from: (i) $3.1 million of favorable development on hospital indemnity plan business due to the release of reserves from emerging favorable experience on business written in 2017 as a result of increased sales volume of this product from new production sources in 2017; (ii) $ 3.5 million of favorable development in short-term medical business as inventory levels decreased and paid claim activity was
below the levels anticipated; (iii) $1.3 million of favorable development from the occupational accident and international lines in run-off; and, (iv) favorable development in other lines of Specialty Health business.
The Group Disability segment had a net favorable development of $6.3 million primarily due to $5.2 million of favorable development in LTD business as a result of a lower number of expected claims and greater number of expected terminations. The remaining favorable development is the result of better than expected experience on the DBL business.
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. 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.
Expand on existing “insuretech” capabilities by: (i) developing our controlled distribution through additional call center and career advisor sales representatives and improved sales platforms, (ii) accessing products to be sold to the senior market both underwritten by our carriers and imported from other carriers, (iii) developing new product variations and bundles of ancillary products to meet the needs of individuals and small groups, (iv) expanding the newly acquired My1HR platform for sales of both individual and group products, and (v) expanding the distribution of our pet products and introduce innovative product changes.
Incorporate our new cloud-based technology platforms and quoting and enrollment tools into our distributions. In January 2019, we acquired My1HR, a state-of-the-art quoting and cloud-based enrollment platform utilized by approximately 4,000 active users to manage the health insurance needs of their clients. As a web-based entity, this includes quoting and enrolling individuals in ACA plans as well as ancillary coverages. In addition, My1HR is in the final stage of launching a cloud-based quoting and enrollment tool that is specifically designed for producers in the small group employer market. This new quoting and enrollment system will support group products for all IHC carriers as well as select group ACA and level funded health coverages from leading national health plans.
Subject to making additional repurchases, acquisitions and investments, the Company will remain highly liquid in 2018 as a result of the continuing shorter duration of the portfolio. IHC has approximately $145.8 million in highly rated securities earning on average 2.0%; our portfolio as a whole is rated, on average, AA. The average duration of the Company’s portfolio is 4 years. The low duration of our portfolio enables us, if we deem prudent, the flexibility to reinvest in much higher yielding longer-term securities, which would significantly increase investment income in the future. A low duration portfolio such as ours also mitigates the adverse impact of potential inflation. IHC will continue to monitor the financial markets and invest accordingly.