Risk Solutions leased 6,200 square feet of office space in Marlton, New Jersey, 2,478 square feet of office space in Fort Wayne, Indiana, 1,297 square feet of office space in Downers Grove, IL, 11,230 square feet of office space in Enfield, Connecticut, and 2,437 square feet of office space in Phoenix, AZ. IPA Family leases 7,000 square feet of office space in Tampa, Florida. IPA Direct leases 2,974 square feet of office space in Lake Mary, Florida, and 2,357 square feet of office space in Fort Lauderdale, Florida. Specialty Benefits leases 6,391 square feet of office space in St. Louis Park, Minnesota and 1,566 square feet of office space in Boise, Idaho. GAF subsidiaries leases 11,355 square feet of office space in Dallas, Texas and 11,210 square feet of office space in Marshfield, Massachusetts.
The following is a summary of selected consolidated financial data of the Company for each of the last five years. The consolidated financial statements and financial information of AMIC reported prior to the Form 10-Q for the interim period ended June 30, 2014 are not directly comparable to the financial statements and financial information of AMIC included in this report as a result of the change in accounting principle as noted in the explanatory note to the financial statements. The differences relate to basis differences in goodwill, intangible assets and related amortization, other assets, other investments, non-controlling interests in subsidiaries, taxes and related tax provisions, net income, additional paid-in capital, retained earnings and total shareholders' equity. In accordance with GAAP, due to our new basis of accounting, our financial statements include a black line denoting that our financial statements covering periods prior to the push down date of January 1, 2013 are not comparable to our financial statements as of and subsequent to this date. References to the “Predecessor” Company refer to reporting dates of the Company through December 31, 2012, reflecting results of operations and cash flows of the Company prior to the push down date on our historical accounting basis; subsequent thereto, the Company is referred to as the “Successor” Company, reflecting the impact of push down accounting and the results of operations and cash flows of the Company subsequent to the push down date.
Net income per share amounted to $0.44 per share, diluted, or $3.5 million, for the year ended December 31, 2015, compared to $0.65 per share, diluted, or $5.3 million for the year ended December 31, 2014.
Premiums earned increased 11% to $148.8 million for the year ended December 31, 2015 from $133.6 million for the year ended December 31, 2014, primarily due to higher premiums for assumed medical stop-loss, international medical, occupational accident, pet insurance, and direct small group stop-loss, offset by lower premiums for assumed group major medical, and direct individual health business due to the run-off of these lines.
The Company experienced a decrease in the loss ratio for group disability for the year ended December 31, 2015 as a result of lower losses for the international line of LTD business.
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 2015, 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. These treaties, which were to terminate on December 31, 2014, have been amended to extend the termination date to December 31, 2019. 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 50% to Independence American under most of IHC’s medical stop-loss programs. For each of the twelve months ended December 31, 2015 and 2014, Standard Security Life and Madison National Life ceded an average of approximately 29% and 27%, respectively, of their medical stop-loss business to Independence American. Independence American reinsures 20% of Standard Security Life’s DBL business and 8% of certain of IHC’s LTD business. The Risk Solutions Sale and Coinsurance Transaction closed on March 31, 2016 and as a result, medical stop-loss business will be in run-off in 2016 and will have little or no premium in 2017. Standard Security Life and Madison National Life also ceded approximately 10% of the majority of their fully insured health business lines to Independence American. In addition, in 2015, Independence American ceded 3% of its fully insured health business lines to unaffiliated reinsurers.
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 Income on the trade date.
Declines in value of securities available-for-sale that are judged to be other-than-temporary are determined based on the specific identification method. The Company reviews its investment securities regularly and determines whether other-than-temporary impairments have occurred. The factors considered by management in its regular review include, but are not limited to: the length of time and extent to which the fair value has been less than cost; the Company's intent to sell, or be required to sell, the debt security before the anticipated recovery of its remaining amortized cost basis; the financial condition and near-term prospects of the issuer; adverse changes in ratings announced by one or more rating agencies; subordinated credit support; whether the issuer of a debt security has remained current on principal and interest payments; current expected cash flows; whether the decline in fair value appears to be issuer specific or, alternatively, a reflection of general market or industry conditions including the effect of changes in market interest rates. If the Company intends to sell a debt security, or it is more likely than not that it would be required to sell a debt security before the recovery of its amortized cost basis, the entire difference between the security's amortized cost basis and its fair value at the balance sheet date would be recognized by a charge to total other-than-temporary impairment losses in the Consolidated Statements of Income. If a decline in fair value of a debt security is judged by management to be other-than-temporary and; (i) the Company does not intend to sell the security; and (ii) it is not more likely than not that it will be required to sell the security prior to recovery of the security’s amortized cost, the Company 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 Income, 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 Income for the difference between the carrying value and the fair value of the securities. For the purpose of other-than-temporary impairment evaluations, investment grade 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 requires the use of the equity model in analyzing the security for other-than-temporary impairment.
On April 30, 2015 (the "Acquisition Date"), through a settlement with a former owner, AMIC increased its ownership in Global Accident Facilities, LLC (“GAF) from 40% to 80%. GAF and its subsidiaries are principally engaged in the marketing, underwriting and administration of specialty risk insurance, referred to as Occupational Accident and Injured on Duty for Independence American, which are offered exclusively in Texas and Massachusetts, respectively. Cash of $325,000 and various other non-monetary consideration, with a fair value of $1,195,000, was transferred in exchange for the additional 40% ownership interest. The acquisition resulted in AMIC’s obtaining control of GAF. Immediately preceding the transaction, AMIC’s carrying value of its investment in GAF was $1,908,000.
On the Acquisition Date, the Company recognized a net pre-tax gain of $503,000 as follows: (i) a loss of $692,000 was recognized by AMIC as a result of re-measuring its equity interest in GAF to its fair value of $1,216,000 immediately before the acquisition; and (ii) a gain of $1,195,000 was recognized by AMIC as a result of recording the nonmonetary portion of the consideration transferred at its fair value. The net pre-tax gain of $503,000 is included in the “Other income” line in the Consolidated Statements of Income.
Prior to obtaining control, AMIC recorded its investment in GAF using the equity method. AMIC recorded changes in its investment in GAF in the “Other income” line in the Consolidated Statements of Income. Upon achieving control on April 30, 2015, GAF’s income and expense amounts became consolidated with AMIC’s results. Accordingly, the individual line items on the Consolidated Statements of Income for 2015 reflect approximately eight months of the operations of GAF with no corresponding amounts for 2014.
Premiums Earned. Premiums earned increased 11%, or $15,197,000 from 2014 to 2015. The Company currently has three lines of business. Premiums relating to medical stop-loss business increased $15,890,000 due to an increase of $10,755,000 in small group stop-loss premiums written due to an increase in sales, and an increase of $12,267,000 in medical stop-loss assumed by Independence American due to an increase in volume produced by Risk Solutions, offset by a decrease of $7,131,000 in medical stop-loss premiums written by Independence American through an independent MGU that has been terminated. Premiums relating to fully insured health (consisting of major medical, short-term medical, dental, vision, gap, occupational accident, pet insurance, and international medical) decreased $564,000. The decrease is primarily due to a decrease in major medical premiums written and assumed of $13,950,000, offset by an increase of $4,751,000 in pet premium written due to an increase in sales, an increase of $3,558,000 in occupational accident business written due to the transfer of business from another carrier, an increase in international medical premiums assumed of $3,279,000, an increase of $400,000 in occupational accident premiums assumed, and an increase of $1,399,000 in short-term medical premiums written and assumed. Premiums relating to group disability decreased $129,000 due to lower international LTD premiums assumed of $448,000, offset by higher DBL premiums assumed of $319,000. For the year ended December 31, 2015, Independence American assumed 10% of IHC’s short-term medical business, 20% of IHC’s DBL business, 8% of certain of IHC’s LTD business, and approximately 29% of IHC’s medical stop-loss business. There were no significant changes to these percentages from the prior year. For the years ended December 31, 2015 2014, Independence American assumed approximately 10% of certain of IHC’s group major medical business.
Net Investment Income. Net investment income increased $45,000 from 2014 to 2015 due to an increase in investable assets offset by a lower yield on those assets. The consolidated investment yields were 2.7% and 2.9% for the years ended December 31, 2015 and 2014, respectively.
Net Realized Investment Gains. The Company recorded a net realized investment gain of $260,000 for the year ended December 31, 2015, compared to a gain of $967,000 for the year ended December 31, 2013. 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.
Selling, General and Administrative. Selling, general and administrative expenses increased $6,658,000 from 2014 to 2015. Excluding expenses related to GAF, totaling $5,694,000, total selling, general and administrative expenses decreased $964,000. The decrease is due to lower expenses of $4,116,000 at HIO due to lower referral expenses, lower profit commission expense at Independence American of $1,247,000, lower expenses of $90,000 at IPA, and lower expenses of $870,000 at Specialty benefits, offset by higher commission expense of $622,000 and underwriting expense of $1,875,000 at Independence American due to higher premiums and a change in the mix of business, higher expenses of $2,313,000 at Risk Solutions primarily due to higher salary expense relating to an increase in sales, higher legal expenses of $500,000 due to litigation with regards to our pet business, bad debt expenses of $640,000 due to a write off of an uncollectable loan, and higher expenses of $1,318,000 at IPAD due to an increase in salary and operating expenses corresponding to the increase in sales.
Amortization and Depreciation. Amortization and depreciation expense decreased $87,000 from 2014 to 2015.
Income Taxes. The provision for income taxes increased $3,497,000 to $2,695,000, an effective rate of 43.3%, for 2015, compared to a tax benefit of $802,000, an effective rate of -18.0%, for 2014. Net income for 2015 and 2014 includes a non-cash provision for federal income taxes of $2,052,000 and $1,647,000, respectively. In 2014, the Company further reduced the valuation allowance relating to the deferred tax asset by $2,500,000, 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"). 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 $2,500,000 reduction in the valuation allowance relating to the deferred tax asset, the effective tax rate was 38.2% for 2014. The state tax effective rate increased to 2.7% for 2015, compared to 0.3% for 2014.
Premiums Earned. Premiums earned increased 5%, or $6,403,000 from 2013 to 2014. The Company currently has three lines of business. Premiums relating to medical stop-loss business decreased $2,229,000 due to a decrease of $7,509,000 in medical stop-loss premiums written by Independence American through an independent MGU that has been terminated, offset by an increase of $5,280,000 in medical stop-loss assumed by Independence American. Premiums relating to fully insured health (consisting of major medical, fixed indemnity limited benefit, short-term medical, dental, vision, small group stop-loss, hospital indemnity, occupational accident, pet insurance, international medical, and individual health) increased $8,142,000. The increase is primarily due to an increase of $10,188,000 in pet premium written due to an increase in sales, an increase of $8,691,000 in occupational accident business written due to the transfer of business from another carrier, an increase in international medical premiums assumed of $2,458,000, an increase of $2,658,000 in hospital indemnity premiums written, an increase of $3,622,000 in small group stop-loss written, an increase of $1,481,000 in occupational accident premiums assumed, an increase of $705,000 in short-term medical premiums assumed, and an increase in assumed limited medical of $518,000, offset by a decrease in major
Other Income. Other income decreased $280,000 from 2013 to 2014 due to lower income from our equity investment in GAF for the year ended December 31, 2014, compared to the year ended December 31, 2013.
Income Taxes. The provision for income taxes decreased $2,378,000 to a tax benefit of $802,000, an effective rate of -18.0%, for 2014, compared to a tax provision of $1,576,000, an effective rate of 35.4%, for 2013. Net income for 2014 and 2013 includes a non-cash provision for federal income taxes of $1,647,000 and $1,477,000, respectively. The state tax effective rate increased to 0.3% for 2014, compared to 0.7% for 2013. In 2014, the Company further reduced the valuation allowance relating to the deferred tax asset by $2,500,000, 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"). 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 $2,500,000 reduction in the valuation allowance relating to the deferred tax asset, the effective tax rate was 38.2% for 2014.
Net Income attributable to the non-controlling interest. Net income attributable to the non-controlling interest decreased $886,000 from 2013 to 2014, due to lower income at HIO and IPA. The net income for the year ended December 31, 2014 and 2013 relates to the 49% non-controlling interest in HIO, the 10% non-controlling interest in IPA Family, and the 8% non-controlling interest in IPAD.
Net Income attributable to American Independence Corp. The net income attributable to the Company increased to $5,250,000, or $.65 per share, diluted, for 2014, compared to $2,882,000, or $.36 per share, diluted, for 2013.
At December 31, 2015, the Company had $43,764,000 of policy benefits and claims 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 policy benefits and claims does not coincide with future cash flows.
The Company's future policy benefits and claims by line of business are as follows (in thousands):
The $3,830,000 increase in AMIC’s stockholders' equity is primarily due to net income of $3,529,000 and a $338,000 capital adjustment relating to the acquisition of a 9% ownership interest in IPA Family.
The Company reviews its investments regularly and monitors its investments continually for impairments as discussed in Note 1 (I) (v) of the Notes to Consolidated Financial Statements. The Company did not record an other-than-temporary impairment loss for the years ended December 31, 2015 and 2014. At December 31, 2015, the Company did not own securities in which the carrying value was less than 80% of their amortized cost.
Continued evaluation of strategic transactions. As a result of the sale of Risk Solutions, we have significant cash. We plan to redeploy some of this cash in making investments and acquisitions to bolster existing or new lines of business. Specialty Benefits has made one such investment in a call center which will begin writing substantially all of its specialty health business with carriers affiliated with IHC. We are currently negotiating several similar transactions.
See Index to Consolidated Financial Statements and Schedules on page 54.