Madison National Life leases 18,188 square feet of space in Madison, Wisconsin as its corporate headquarters.
Independence American Insurance Company leases 12,253 square feet of office space in Phoenix, Arizona for its actuarial, agency and administrative operations.
IHCSB leases 8,479 square feet of office space in St. Louis Park, Minnesota as its corporate headquarters; 14,209 square feet of office space in Tampa, Florida and 10,297 square feet in Milwaukee, Wisconsin for call center operations.
Torchlight leases 4,600 square feet of office space in Philadelphia, Pennsylvania as its corporate headquarters.
Independence Holding Company, a Delaware corporation (NYSE: IHC), is a holding company principally engaged in underwriting, administering and/or distributing group and individual specialty benefit products, including disability, supplemental health, pet, and group life insurance through: (i) its insurance companies, Standard Security Life, Madison National Life, and Independence American Insurance Company; and (ii) its marketing and administrative companies consisting of IHCSB, IBG, My1HR and a majority interest in PetPartners (collectively the “IHC Agencies”) and its lead generation company, Torchlight. Standard Security Life, Madison National Life and Independence American Insurance Company are sometimes collectively referred to as the “Insurance Group”. IHC and its subsidiaries (including the Insurance Group) are sometimes collectively referred to as the "Company", or “IHC”, or are implicit in the terms “we”, “us” and “our”.
In March 2020, the World Health Organization declared the outbreak of COVID-19, a global health pandemic and the United States declared a national health emergency. COVID-19 has led to large scale disruption in the global economy, market instability and widespread unemployment in the United States.
oNet income for the year ended December 31, 2020 includes the recognition of an Arbitration Award with a former TPA (as described in Note 16) amounting to $3.7 million, net of associated legal expenses and income taxes and includes $3.7 million of expenses, net of taxes, for compliance with the MCE related to our STM, limited medical and fixed indemnity limited benefit health insurance products for the period of January 1, 2014 through September 30, 2017, also discussed in Note 16;
oSelling, general and administrative expenses for the year ended December 31, 2019 include $4.2 million of bad debt expense;
·Results for 2020 in the Specialty Health segment were impacted by COVID-19 during 2020. We expected that sales of STM might have grown more if not for displaced workers taking advantage of Special Enrollment Periods for ACA coverage, and the subsidies provided through Advanced Premium Tax Credits, as well as employers continuing to offer employer sponsored coverage to
furloughed workers. Evolving regulatory mandates for testing and treatment coverage, the length and severity of the outbreak, claims activity, and impacts on payment of premiums have not had a significant impact on the 2020 results to date, however, we may incur additional expenses in 2021 relating to possible COVID-19 related claims activity and possible non-payment of premiums as the full effects of the outbreak continue to unfold. To date, we have experienced lower utilization related to the deferral of services which more than offset the extra incurred costs mentioned previously. It is still unpredictable how this level of deferred utilization will reverse or not in the future but emerging results will continue to be monitored. Results for the Group disability, life, DBL and PFL segment were not materially impacted by COVID-19 from an aggregate claims standpoint. Decreases in incidence rates for disability products earlier in the year returned to near historical averages later in the year. The life incidence rate was not affected by COVID-19 in aggregate. Premiums decreased in the DBL business as a result of higher unemployment and the loss of smaller groups that have gone out of business due to COVID-19.
oPremiums earned increased 7.2% or $12.8 million for the year ended December 31, 2020 over the comparable period in 2019. Increases in premiums from the pet and STM lines were partially offset by decreases in premiums from fixed indemnity limited benefit, group gap, occupational accident and group health modified indemnity lines of business;
(C)The combined ratio is equal to the sum of the loss ratio and the expenses ratio.
expense ratio in 2020 is primarily due to $3.7 million of expenses for compliance with the MCE as well as changes in the mix of products in the Specialty Health segment.
·Income before taxes from the Group disability, life, DBL and PFL segment increased $11.4 million in 2020 compared to the prior year. The increase in 2020 primarily reflects an increase in PFL profitability due to increased premium rates partially offset by benefits recorded for a potential risk adjustment payment amounting to $25.0 million in 2020, as compared to $10.7 million in the 2019, associated with the Company’s PFL product due to estimated amounts that the Company may have to pay into the New York State adjustment pool as a result of IHC’s experience with PFL being significantly better than that of the industry as a whole. In addition, DBL had favorable premium reserve adjustments offset by higher loss ratios and unfavorable loss development in the Group STD line of business and, beginning in third quarter 2020, a decrease in DBL premium volume as a result of higher unemployment due to COVID-19.
·Premiums by principal product for the years indicated are as follows (in thousands):
Information pertaining to the Company's business segments is provided in Note 19 of Notes to Consolidated Financial Statements included in Item 8.
Fee income includes fees and commissions for various sales, marketing and administrative services provided by the IHC Agencies and lead generation company. Revenue is recognized as these services are performed in an amount that reflects the consideration we expect to be entitled to in exchange for these services.
(5)recognition of revenue when, or as, we satisfy a performance obligation.
Revenues for administrative services, such as premium collections, client services and claims processing, all considered to be a single performance obligation, are recognized over time as these services are performed. One of our agencies administers a block of pet business for an unaffiliated pet insurer that is in run-off and, until its sale in June 2020, another one of our agencies administered occupational accident plans including injured-on-duty accident plans and employer liability plans, and self-funded workers’ compensation plans. The Company has identified the unaffiliated insurance carriers as its customers. Some payments are received monthly or quarterly over the underlying policy period which is shorter than the life of the administrative period. A portion of these payments, in addition to any payments that are received as a lump-sum in advance, are recorded as deferred revenues and recognized in income over the life of the administrative contracts.
Revenues for marketing services, primarily STM, Fixed Indemnity Limited Benefit and other ancillary policies, are recognized over time. The Company has identified the unaffiliated insurance carriers as its customers. The Company receives fees for these marketing services each month based on a flat fee times monthly enrollment figures.
in installments or by credit card; and (ii) the submission of online application or enrollment forms for various products. These fees are earned, and simultaneously received, from the policyholder/applicant at the point in time premium payments are made or online applications/enrollments are submitted.
The Company believes that its liability for policy benefits and claims is 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 Loss Ratios have on the Company’s loss reserves and related expenses, each hypothetical 1% change in the Loss Ratio for the health business (i.e., the ratio of insurance benefits, claims and settlement expenses to earned health premiums) for the year ended December 31, 2020, would increase reserves (in the case of a higher ratio) or decrease reserves (in the case of a lower ratio) by approximately $3.7 million with a corresponding increase or decrease in the pre-tax expense for insurance benefits, claims and reserves in the Consolidated Statement of Income. Depending on the circumstances surrounding a change in the Loss Ratio, other pre-tax amounts reported in the Consolidated Statement of Income could also be affected, such as commission expense.
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. With respect to PFL, policy benefits and claims associated with the premiums earned are established using a completion factor methodology. As this is the third year of this product, the completion factors used were based on the PFL payment patterns developed during 2018, 2019 and 2020. 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. 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 or refund under the risk adjustment program until actual information is available.
Management believes that the Company's methods of estimating the liabilities for policy benefits and claims provided appropriate levels of reserves at December 31, 2020. Changes in the Company's policy benefits and claims estimates are recorded through a charge or credit to its earnings.
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 the Company. In addition, the Company evaluates other asset-backed securities for other-than-temporary impairment by examining similar characteristics referenced above for mortgage-backed securities. The Company evaluates U.S. Treasury securities and obligations of U.S. Government corporations, U.S. Government agencies, and obligations of states and political subdivisions for other-than-temporary impairment by examining the terms and collateral of the security. For the purpose of other-than-temporary impairment evaluations, redeemable preferred stocks are evaluated in a manner similar to debt securities.
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 2020 or 2019.
In both years, the reduction in estimated tax benefits from the expected utilization of AMIC’s net operating loss carryforwards is largely due to the reorganization of the Specialty Health segment into specialty health and pet divisions, and the expansion of our D2C and tech-enabled operations, which reduced income for each of the current years and has caused us to reduce our income expectations over the remaining period that AMIC’s net operating loss carryforwards are available to offset income. Accordingly, this necessitated an increase in our valuation allowance in both 2020 and 2019 to reflect our new expectations of reduced tax benefits from AMIC’s net operating loss carryforward.
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 paid cash dividends of $23.5 million and $30.0 million to Corporate in 2020 and 2019, respectively.
On April 24, 2020, IHC commenced a tender offer to purchase up to 1 million shares of its common stock at a price per share of $27.00, net, to the seller in cash. On May 21, 2020, at the close of business, the offer expired and the Company accepted for purchase 36,377 shares of its common stock at $27.00 per share, for an aggregate purchase price of $1.0 million. The tender offer was fully funded through corporate liquidity.
The Company had $377.3 million of liabilities for future policy benefits and policy benefits and claims as of December 31, 2020 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. In 2020, cash received from the maturities and other repayments of fixed maturities was $133.7 million.
Changes in interest rates, credit spreads, and investment quality ratings may cause the market value of the Company’s investments to fluctuate. The Company does not have the intent to sell nor is it more
The following table summarizes the carrying value of securities with fair values less than 80% of their amortized cost at December 31, 2020 by the length of time the fair values of those securities were below 80% of their amortized cost (in thousands):
The unrealized losses on fixed maturities available-for-sale were evaluated in accordance with the Company's impairment policy and were determined to be temporary in nature at December 31, 2020. 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, a worsening of the current economic recession, 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.
Goodwill represents the excess of the amount we paid to acquire subsidiaries and other businesses over the fair value of their net assets at the date of acquisition. The Company tests goodwill for impairment at least annually and between annual tests if an event or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Goodwill is considered impaired when the carrying amount of goodwill exceeds its implied fair value.
All goodwill carrying amounts are evaluated for impairment at the reporting unit level which is equivalent to an operating segment or one level below an operating segment, referred to as a component. Goodwill was allocated to each reporting unit at the time of acquisition. At December 31, 2020, total goodwill was $74.9 million, of which $70.7 million was attributable to the Specialty Health segment and $4.2 million was attributable to the Group component of the Group disability, life, DBL and PFL segment.
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 made assumptions as to: (i) expected future performance and future economic conditions, (ii) projected operating
At December 31, 2020, 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 following table summarizes the prior year net favorable amount of policy benefits and claims incurred in 2020 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 2020, together with the key assumptions and changes therein affecting the reserve estimates.
The Group Disability segment had a net favorable development of $1.7 million Favorable development is primarily due to a reduction in the number of open claims and a reduction in the severity of new claims, specifically, new claims in the LTD line, partially offset by an increase in the overall frequency and severity of claims in the STD line.
·Independence American Insurance Company will continue to act as underwriter for three well-known companies: MetLife, FIGO and Pets Best.
periods. As a result of COVID-19, our agents are currently deployed in a work-from-home model, and although we do expect a majority of our agents to return to our physical call centers when possible, we believe that the work-from-home model has proven to be both safe and reliable, and we expect to be able to hire experienced agents that will work within that model moving forward. This allowed us to recruit talent outside of the geographic confines of our three physical call center locations (Tampa, FL; Milwaukee, WI; St Louis Park, MN), and will help to further accelerate what we believe will be meaningful growth in this line of business. In addition, Independence American Insurance Company has launched its Medicare Supplement product in twenty-nine states, although we do not anticipate substantial sales in the next Annual Enrollment Period (“AEP”) as agents are primarily focused on selling Medicare Advantage at this time.
·Increasingly emphasize sales by IHC Agencies of policies underwritten by non-affiliated carriers, including small group stop-loss, ACA plans and Medicare Advantage and Medicare Supplement plans; for which, they will receive commissions and fees for selling these products and will not bear any of the insurance risk. When they sell products for these other carriers, the IHC Agencies will record revenue based on estimated constrained LTV representing the expected commissions to be received over the lifetime of the policies sold. As these products generally renew for multiple years, and the IHC Agencies do not have any future performance obligations with regards to the renewal process, they will record revenue at the time of sale based on our expected policy duration. Therefore, due to the change in focus to sales of unaffiliated carrier products in 2020, particularly during AEP, we experienced an increase in commission revenues in the fourth quarter of 2020 and we expect to continue to focus on sales from unaffiliated carriers in the coming year. When we do sell our products instead of ACA, we are focusing on our “cover me to open enrollment” Short-Term Medical product, which provides coverage from the day of sale to January 1st of the following year. This allows insureds the option of moving to an ACA plan during an open enrollment period without having to pay for days of coverage they don’t need.
·Continue to increase our DBL/PFL premiums. Effective January 1, 2018, Standard Security Life began selling a new PFL rider as part of our New York DBL policies. This is a result of New York State requiring employers to provide PFL, which would cover job-protected paid leave to care for a new child or sick family member or to assist when someone is called to active military service. The NYSDFS increased the PFL premium rate by 76% for 2020, and further increased the rate by 89% for 2021.
·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.
·Continue to monitor the COVID-19 outbreak as it evolves. The duration of COVID-19 and its potential effects on our business cannot be certain, we currently cannot predict if there will be a material impact
to our business, results of operations or financial condition in 2021. During these unprecedented times of uncertainty and high unemployment surrounding the COVID-19 pandemic, we have fully transitioned our existing sales teams to work from home. Our customer facing agents have transitioned to a full-time work at home model, and although we have implemented enhanced technology solutions, sales may be impacted as COVID-19 continues to develop.
Subject to making additional repurchases, acquisitions and investments, the Company will remain highly liquid as a result of the continuing shorter duration of the investment portfolio. The short 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.