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.
We are an insurance holding company engaged in the insurance and reinsurance business through our wholly owned insurance company, Independence American Insurance Company ("Independence American"), our wholly owned sales and marketing company, IHC Specialty Benefits, Inc. (“Specialty Benefits”), our wholly owned full service direct writer of medical-stop insurance for self-insured employer groups, IHC Risk Solutions, LLC (“Risk Solutions”), our 92% owned consumer direct sales call center, IPA Direct, LLC (“IPAD”), our 90% owned consumer direct sales agency, IPA Family LLC (“IPA Family”), and our 51% owned lead generation agency, HealthInsurance.org (“HIO”). Since November 2002, AMIC has been affiliated with Independence Holding Company ("IHC"), which owned 90% of AMIC's stock as of December 31, 2014. The senior management of IHC provides direction to the Company through a service agreement between the Company and IHC. In 2014, a significant amount of Independence American’s revenue was from reinsurance premiums. The majority of these premiums are ceded to Independence American from IHC under reinsurance treaties to cede its gross medical stop-loss premiums written to Independence American. In addition, Independence American assumes fully insured health, New York State Disability Benefits Law ("DBL"), and long-term disability (“LTD”) premiums from IHC, and assumes medical stop-loss premiums from unaffiliated carriers. Independence American writes pet insurance, medical stop-loss, short-term medical, occupational accident, dental and other ancillary products. Given its broad licensing, A- (Excellent) rating from A.M. Best, and that it is the only property and casualty company in IHC, Independence American expects to expand the distribution of its specialty health, occupational accident, and pet insurance products.
The following is a summary of key performance information and events (in thousands):
The book value of the Company’s stockholders’ equity increased to $11.34 per share at December 31, 2014 compared to $10.44 per share at December 31, 2013.
At December 31, 2014, 99.5% of the Company's fixed maturities were investment grade.
Consolidated investment yields were 2.9% and 3.2% for the years ended December 31, 2014 and 2013, respectively.
Premiums earned increased 5% to $133.6 million for the year ended December 31, 2014 from $127.2 million for the year ended December 31, 2013, primarily due to higher premiums for pet insurance, and occupational accident business, offset by lower premiums for assumed major medical, and direct individual major medical business due to the run-off of these lines, and direct medical stop-loss due to the cancellation of a product source.
Agency net loss increased $0.8 million from $1.2 million for the year ended December 31, 2013 to $2.0 million for the year ended December 31, 2014 due to the changes in the Affordable Care Act which have disrupted sales in the second and third quarter of 2014, and due to expenses attributable to the start-up of IPAD, our consumer direct sales call center.
The Company recorded a decrease in the combined ratio in the medical stop-loss line of business for the year ended December 31, 2014. This is due to lower profit commissions due to unfavorable claims experience on the run-off of assumed business emanating from a non-owned MGU program that was terminated effective December 31, 2013.
The Company recorded an increase in the combined ratio in the fully insured health line of business for the year ended December 31, 2014 primarily due to an increase in the expense ratio due to a change in the mix of business to lines that have higher commission and expenses structures, partially offset by a
decrease in loss ratio as the Company moves to specialty health lines and moves away from major medical.
While the Company establishes a best estimate of the Projected Net Loss Ratio, actual experience may deviate from this estimate. This was the case with the 2013, 2012 and 2011 underwriting years that increased (decreased) by 0.7, (3.4), and 11.7 Loss Ratio points, respectively. While the Company believes that larger variations are possible, based on the Company’s experience to date, it is reasonably likely that the actual
experience will fall within a range up to five Net Loss Ratio points above or below the expected Projected Net Loss Ratio for the 2014 underwriting year at December 31, 2014. The impact of these reasonably likely changes at December 31, 2014, would be an increase in net reserves (in the case of a higher ratio) or a decrease in net reserves (in the case of a lower ratio) of up to approximately $1.3 million with a corresponding increase or decrease in the pre-tax expense for insurance benefits, claims and reserves.
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 2014, 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, 2014 and 2013, Standard Security Life and Madison National Life ceded an average of approximately 27% and 26%, 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. 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 2014, Independence American ceded 8% of its fully insured health business lines to unaffiliated reinsurers.
The Company has net operating loss carryforwards for federal income tax purposes available to reduce future income subject to income taxes. The net operating loss carryforwards expire between 2018 and 2028.
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
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
Net Realized Investment Gains. The Company recorded a net realized investment gain of $967,000 for the year ended December 31, 2014, compared to a gain of $1,082,000 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.
Amortization and Depreciation. Amortization and depreciation expense decreased $144,000 from 2013 to 2014 due to higher amortization rates in earlier years.
Results of Operations for the Year Ended December 31, 2013 (Successor), compared to the Year Ended December 31, 2012 (Predecessor)
short-term medical business, 20% of IHC’s DBL business, 8% of certain of IHC’s LTD business, and approximately 26% 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, 2013 and December 31, 2012, Independence American assumed approximately 12% and 8%, respectively, of certain of IHC’s group major medical business.
Net Realized Investment Gains and Other-Than-Temporary Impairment Losses. The Company recorded a net realized investment gain of $1,082,000 for the year ended December 31, 2013, compared to a gain of $603,000 for the year ended December 31, 2012. 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. For the years ended December 31, 2013 and 2012, the Company recorded $0 and $189,000, respectively, of other-than-temporary-impairment losses. These credit losses were a result of the expected cash flows of a debt security being less than the debt security’s amortized cost.
Net Income attributable to American Independence Corp. The net income attributable to the Company decreased to $2,882,000, or $.36 per share, diluted, for 2013, compared to $9,592,000, or $1.16 per share, diluted, for 2012.
For the year ended December 31, 2014, operating activities provided the Company with $4.2 million of cash, whereas $3.3 million of cash was utilized by investing activities primarily due to higher net purchases of fixed maturity securities. Financing activities, which utilized $0.7 million for the period, includes a $0.3 million contingent liability payment, and $0.5 million utilized to pay dividends to noncontrolling interests.
account that Risk Solutions can access to reimburse claims in a timely manner. The cash is used by Risk Solutions to pay claims on behalf of the insurance carriers they represent.
The Company had receivables from reinsurers of $5,532,000 at December 31, 2014. All of the business ceded to such reinsurers is of short-duration. All of such receivables are either due from related parties, highly rated companies or are adequately secured. No allowance for doubtful accounts was deemed necessary at December 31, 2014.
The $7,281,000 increase in AMIC’s stockholders' equity is primarily due to net income of $5,250,000 and a decrease in net unrealized losses on investments of $1,998,000. The decrease in net unrealized losses on investments is due to a decrease in interest rates, which increased the value of the Company’s bond portfolio.
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's gross unrealized gains on available-for-sale securities totaled $615,000 at December 31, 2014. Approximately 99.5% of the Company’s fixed maturities were investment grade. The Company marks all of its available-for-sale securities to fair value through accumulated other comprehensive income or loss. Higher grade investments tend to carry less default risk and, therefore, lower interest rates than other types of fixed maturity investments. At December 31, 2014, approximately 0.5% (or $390,000) of the carrying value of fixed maturities was invested in non-investment grade fixed maturities (primarily commercial mortgage obligations) (investments in such securities have different risks than investment grade securities, including greater risk of loss upon default, and thinner trading markets). The Company does not have any non-performing fixed maturity investments at December 31, 2014.
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. The Company did not record
an other-than-temporary impairment loss for the years ended December 31, 2014 and 2013. For the year ended December 31, 2012, the Company recorded a loss of $359,000 for other-than-temporary impairments. Of that impairment loss, $189,000 was recognized in earnings for the year ended December 31, 2012, and $170,000 of impairment loss was recognized in other comprehensive income for the year ended December 31, 2012. At December 31, 2014, the Company did not own securities in which the carrying value was less than 80% of their amortized cost.
The unrealized losses on all available-for-sale securities have been evaluated in accordance with the Company's impairment policy and were determined to be temporary in nature at December 31, 2014. In 2014, the Company experienced a decrease in net unrealized losses of $1,998,000, which increased stockholders' equity by $1,998,000 (reflecting net unrealized losses of $154,000 at December 31, 2014 compared to net unrealized losses of $2,152,000 at December 31, 2013). 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, a continuation of the current imbalances in liquidity that exist in the marketplace, a continuation or worsening of the current economic recession, or additional 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 and the Company may incur additional write-downs.
Independence American, which is domiciled in Delaware, is licensed to write property and/or casualty insurance in all 50 states and the District of Columbia, and has an A- (Excellent) rating from A.M. Best Company, Inc. ("A.M. Best"). An A.M. Best rating is assigned after an extensive quantitative and qualitative evaluation of a company's financial condition and operating performance, and is also based upon factors relevant to policyholders, agents, and intermediaries, and is not directed towards protection of investors. A.M. Best ratings are not recommendations to buy, sell or hold securities of the Company.
The majority of Independence American’s revenue is from reinsurance premiums, although Independence American continues to increase the premiums written on its paper. During 2014, Independence American wrote group major medical, medical stop-loss, pet insurance, major medical plans for individuals and families, hospital indemnity, a small amount of short-term medical, fixed indemnity limited benefit and dental. Independence American has ceased writing major medical plans for individuals and families and has curtailed writing small group major medical. Independence American expects to expand the distribution of its ancillary health products. The majority of major medical plans for individuals and families was written through IPA Family. IPA Family and IPAD have begun to write major medical through well-known national insurance companies while continuing to focus on Independence American’s and IHC’s ancillary products.
We experienced meaningful growth in reinsured medical stop-loss premiums in 2013 as a result of growth in business written by IHC, and this trend continued in 2014. We have also begun writing small group stop-loss on Independence American paper. This increase is attributable to a growing market for medical stop-loss as smaller employers identify the advantages of self-funding, the expansion of IHC as a direct writer, and the emergence of IHC’s captive solution program.
Our individual major medical premiums decreased significantly in 2014 and will continue to reduce in 2015 as a result of having exited this line of business.
The gross medical stop-loss premiums earned by IHC increased by approximately 6%, while premiums earned by AMIC decreased 4% in 2014 as a result of a decrease in stop-loss premiums written by Independence American, offset by an increase in premiums produced by Risk Solutions. Risk Solutions anticipates increasing its production of medical stop-loss business in 2015. IHC has reported that it expects its fully insured and DBL
While maintaining our current profitability levels, we experienced significant growth of our stop-loss business written by Risk Solutions in 2014, our largest core business, which we attribute to the more efficient and controlled model of writing the majority of our medical stop-loss on a direct basis. At present, all indicators point to a continuation of these trends for business produced by Risk Solutions in 2015.
We will continue to focus on our strategic objectives, including expanding our distribution network. However, the success of a portion of our Fully Insured Health business has been affected by the passage of the Patient Protection and Affordable Care Act of 2010, as amended, and its subsequent interpretations by state and federal regulators. While the law has influenced our decision, and that of many other insurers, to exit or reduce their presence in major medical essential health benefit (“EHB”) plans in the small employer and individual markets, non-EHB lines of business and Medical Stop-Loss have been impacted by health care reform minimally or not at all.
We have audited the accompanying consolidated balance sheets of American Independence Corp. and subsidiaries (the Company) as of December 31, 2014 and 2013 (Successor Company), and the related consolidated statements of income, comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2014 (Successor Company), and the year ended December 31, 2012 (Predecessor Company). These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
As discussed in Note 1 to the consolidated financial statements, the Company has elected, beginning with January 1, 2013, the earliest period permitted, to reflect Independence Holding Company’s basis in the assets acquired and liabilities assumed in connection with Independence Holding Company’s acquisition of the Company. As a result of the new basis of accounting, the consolidated financial information for the periods after January 1, 2013 is presented on a different basis than that for the period before the acquisition and, therefore, is not comparable.
The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) and include the accounts of AMIC and its consolidated subsidiaries. All intercompany transactions have been eliminated in consolidation. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect: (i) the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements; and (ii) the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
increased to over 80%. Although by this time, IHC acquired over 80% of AMIC’s shares, management elected not to reflect the impact of the change in control, so AMIC continued to account for its assets and liabilities at historical basis in its separate financial statements. During the second quarter of 2014, the Stock Agreement, dated as of July 30, 2002, that (among other things) placed certain restrictions on IHC’s ability to acquire additional shares of AMIC stock, was terminated and, pursuant to the applicable provisions of AMIC’s certificate of incorporation, AMIC’s Board of Directors granted approval for IHC and its subsidiaries, at any point in the future, to increase their aggregate ownership of AMIC’s outstanding shares of common stock without obtaining prior approval. Due to the lifting of these restrictions and requirements, management evaluated the preferability of accounting for the aforementioned change in control in its separate financial statements and concluded that the accounting change was preferable. Accordingly, AMIC elected to implement the change in control accounting and reflect IHC’s basis in the assets acquired and liabilities assumed in the Company’s separate financial statements. This change was initially implemented during the interim period ended June 30, 2014. As a result of the accounting change, those assets and liabilities as remeasured at their fair value as of the date of IHC’s acquisition of the Company have been “pushed down” to the financial statements of the Company beginning with January 1, 2013, the earliest date “push down” is permitted. “Push down” accounting results in reporting AMIC’s separate financial statements as if it were a new entity with a new basis of accounting. 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.
(b) Securities not held for trading purposes which may or may not be held to maturity ("available-for-sale securities") are carried at fair value. Unrealized gains and losses deemed temporary are credited or charged, as appropriate, directly to accumulated other comprehensive income (a component of stockholders' equity). Premiums and discounts on debt securities purchased at other than par value are amortized and accreted, respectively, to interest income in the Consolidated Statements of Income, using the constant yield method over the period
(ii) Financial instruments sold, but not yet purchased, represent obligations to replace borrowed securities that have been sold. Such transactions occur in anticipation of declines in the fair value of the securities. The Company's risk is an increase in the fair value of the securities sold in excess of the consideration received, but that risk is mitigated as a result of relationships to certain securities owned. Unrealized gains or losses on open transactions are credited or charged, as appropriate, to net realized investment gains in the Consolidated Statements of Income. While the transaction is open, the Company will also incur an expense for any accrued dividends or interest payable to the lender of the securities. When the transaction is closed, the Company realizes a gain or loss in an amount equal to the difference between the price at which the securities were sold and the cost of replacing the borrowed securities. There were no such transactions outstanding at December 31, 2014 and 2013.
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.
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
Management believes that the Company's methods of estimating the liabilities for policy benefits and claims provided appropriate levels of reserves at December 31, 2014 and December 31, 2013. Changes in the Company's reserve estimates are recorded through a charge or credit to its earnings in the period in which they arise.
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 2014 and 2013, 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.
Basic income per common share is computed using the weighted average number of common stock shares outstanding during the period. Diluted income per common share is computed using the weighted average number of common stock shares and common stock equivalent shares outstanding during the period. Common stock equivalents consist of stock options and restricted stock (using the "treasury stock" method). Common stock equivalent shares are excluded from the computation if the effect is anti-dilutive. As a result of the anti-dilutive effect, common stock equivalent shares have been excluded from the computation of diluted earnings per share for periods presented with a net loss. Included in the diluted earnings per share calculation for year ended December 31, 2014 are approximately 26,000 shares from the assumed exercise of options using the treasury stock method. Included in the diluted earnings per share calculation for year ended December 31, 2013 are approximately 8,000 shares from the assumed exercise of options using the treasury stock method. Net income does not change as a result of the assumed dilution.
In July 2013, the Financial Accounting Standards Board (“FASB”), issued guidance for the presentation of unrecognized tax benefits to better reflect the manner in which an entity would settle, at the reporting date, any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. The adoption of this guidance, effective January 1, 2014, did not have an effect on the Company’s consolidated financial statements.
In July 2011, the FASB issued guidance specifying that the liability for the fees paid to the Federal Government by health insurers as a result of recent healthcare reform legislation should be estimated and recorded in full once the entity provides qualifying health insurance in the applicable calendar year in which the fee is payable with a corresponding deferred cost that is amortized to expense using a straight-line method of allocation unless another method better allocates the fee over the calendar year that it is payable. The amendments in this Update became effective January
In February 2015, the FASB issued guidance that modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities or voting interest entities for the purpose of consolidation. For public entities, this guidance is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. Early adoption is permitted. Management has not yet determined the impact that the adoption of this guidance will have on the Company’s consolidated financial statements.
In June 2014, the FASB issued explicit guidance for entities that grant their employees share-based payments in which the terms of the award include a performance target that affects vesting and could be achieved after the requisite service period. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Earlier adoption is permitted. The guidance may be applied either prospectively to all awards granted or modified after the effective date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.
In April 2014, the FASB issued guidance: (i) improving the definition of discontinued operations by limiting the reporting of discontinued operations to disposals of components that represent strategic shifts that have (or will have) a major effect on an entity’s operations and financial results; and (ii) requiring expanded disclosures for discontinued operations. Public entities are required to apply this guidance to: (i) all disposals (or classifications as held for sale) of components of the entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years; and (ii) to all businesses that, on acquisition, are classified as held for sale that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in previously issued financial statements. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.
In July 2012, AMIC acquired the assets and renewal contract rights of a MGU of medical stop-loss business for an aggregate purchase price of $1,825,000. The purchase price consisted of $1,300,000 in cash and $525,000 in contingent consideration which was expected to be paid in early 2013 based on expected growth in the acquired block of business. AMIC recorded other intangible assets representing broker relationships, which will be amortized over a weighted average period of 7.0 years. In accordance with the terms of the agreement, the fair value of the contingent liability was re-measured in the first quarter of 2013 resulting in a cash payment of $342,000 and a $183,000 decrease in the related intangible asset.
The amortized cost and fair value of fixed maturities at December 31, 2014, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. CMOs and MBSs are shown separately, as they are not due at a single maturity.
The following tables summarize, for all securities in an unrealized loss position at December 31, 2014 and December 31, 2013, the aggregate fair value and gross unrealized loss by length of time, those securities that have continuously been in an unrealized loss position (in thousands):
Substantially all of the unrealized losses on fixed maturities at December 31, 2014 and December 31, 2013 were attributable to changes in market interest rates. Because the Company does not intend to sell, nor is it more likely than not that the Company will have to sell, such investments before recovery of their amortized cost bases, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2014.
The following tables present our financial assets measured at fair value on a recurring basis at December 31, 2014 and 2013, respectively (in thousands):
In November 2012, the Company invested $500,000 in exchange for a 3.75% interest in Pets Best Insurance Services, LLC (“Pets Best”), a third party administrator for pet insurance. This investment is carried at cost.
Fixed maturities with a carrying value of $6,156,000 are on deposit with various state insurance departments at December 31, 2014.
The approximate minimum annual rental payments under operating leases that have remaining non-cancelable lease terms in excess of one year at December 31, 2014 are as follows (in thousands):
The Company's net rent expense for years 2014, 2013, and 2012 were $730,000, $403,000, and $276,000, respectively.
Effective July 1, 2009, the Company implemented the 2009 Plan, which the Company's stockholders approved on June 19, 2009. The 2009 Plan was preceded by the 1998 Stock Incentive Plan (“1998 Plan”), which expired by its terms on October 7, 2008. The 2009 Plan provided for the grants of non-statutory and incentive stock options, stock appreciation rights, restricted stock awards, performance shares, and other awards to officers, employee and other individuals. Under the terms of the 2009 Plan, stock options have a maximum term of ten years from the date of grant, and have various vesting criteria depending on the grant with most grants vesting ratably over four years. At December 31, 2014, stock options for 166,616 shares of common stock were outstanding, stock options for 148,837 shares of common stock were vested, and 6,490,553 shares of common stock that had not been issued remained available for future stock options grants and other awards. Awards made under the 1998 Plan prior to its expiration are still in effect.
During 2014, AMIC received $33,000 in cash from the exercise of stock options with an aggregate intrinsic value of $38,000. No options were exercised during the years ended December 31, 2013 or 2012.
The following table summarizes information regarding outstanding and exercisable options as of December 31, 2014:
Independence American assumes premiums from IHC subsidiaries, and records related insurance income, expenses, assets and liabilities. Independence American pays administrative fees and commissions to subsidiaries of IHC in connection with fully insured health and medical stop-loss business written and assumed by Independence American. Additionally, Risk Solutions markets, underwrites and provides administrative services, and also provides medical management and claims adjudication, for a substantial portion of the medical stop-loss business written by the insurance subsidiaries of IHC. Risk Solutions records related income, assets and liabilities in connection with that business. Such related-party information is disclosed on the Consolidated Balance Sheets and Consolidated Statements of Income. The Company also contracts for several types of insurance coverage (e.g. directors and officers and professional liability coverage) jointly with IHC. The cost of this coverage is split proportionally between the Company and IHC according to the type of risk and the Company’s portion is recorded in Selling, General and Administrative Expenses.
The Company and its subsidiaries incurred expense of $891,000 and $921,000 for the twelve months ended December 31, 2014 and 2013, respectively, from service agreements with IHC and its subsidiaries. These payments reimburse IHC and its subsidiaries, at agreed upon rates including an overhead factor, for management services provided to the Company and its subsidiaries, including accounting, legal, compliance, underwriting, and claims.
Effective January 15, 2013, the Company has been included in the consolidated Federal income tax returns of IHC on a June 30 fiscal year as a result of the increase in IHC’s ownership interest in AMIC to over 80%. Accordingly, the Company changed from a September 30 fiscal tax year to a June 30 fiscal tax year in 2013. The provision for income taxes for the periods ended December 31, 2014, 2013 and 2012 are as follows (in thousands):
The tax effect of temporary differences that give rise to significant portions of the net deferred tax assets at December 31, 2014 and 2013 are as follows (in thousands):
Interest expense and penalties related to unrecognized tax benefits for the years ended December 31, 2014, 2013 and 2012 are insignificant.
All of the Company's short-duration contracts are generated from its accident and health business, and are accounted for based on actuarial estimates of the amount of loss inherent in that
Changes in the liability for policy benefits and claims for the years ended December 31, 2014 and 2013 are summarized below (in thousands).
All premiums included in Assumed From Other Companies for 2014, 2013 and 2012 were assumed from subsidiaries of IHC. Included in Ceded To Other Companies for 2014, 2013 and 2012 are premiums of $1,300,000, $108,000, and $1,835,000, respectively, which were ceded to subsidiaries of IHC.
Dividends from Independence American to its parent, a subsidiary of AMIC, are subject to the prior notification to the Delaware Insurance Commissioner, if such dividends, together with the fair market value of other dividends or distributions made within the preceding twelve months, exceed the greater of (i) 10% of surplus as regards policyholders as of the preceding December 31 or (ii) net income, not including realized capital gains, for the twelve-month period ending the December 31 next preceding. Such dividends may be paid as long as they have not been disapproved by the Delaware Insurance Commissioner within 30 days of its receipt of notice thereof. Independence American did not pay a dividend in 2014 and 2013. There are no regulatory restrictions on the ability of our holding company, AMIC, to pay dividends. Under Delaware law, AMIC is permitted to pay dividends from surplus or net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. Dividends to shareholders are paid from funds available at the corporate holding company level. No dividend on the Company’s stock was declared during 2014.
Independence American is required to maintain a certain minimum amount of statutory surplus to satisfy its state insurance department of domicile. Risk-based capital (“RBC”) requirements are designed to assess capital adequacy and to raise the level of protection that statutory surplus provides for policyholders. At December 31, 2014 and 2013, the statutory capital of Independence American was significantly in excess of regulatory RBC requirements.
In 2010, AMIC initiated a program of repurchasing shares of its common stock. In 2012, the Board of Directors authorized the repurchase of up to 962,886 shares of AMIC’s common