Madison National Life leases 28,028 square feet of space in Madison, Wisconsin as its corporate headquarters. Madison National Life also leases 6,504 square feet in Birmingham, Alabama for its military and government individual life and annuity division and 1,260 square feet in Austin, Texas for executive office space.
IHC Health Solutions leases 7,424 square feet of office space in Bloomington, Minnesota and an additional 1,566 square feet in Boise, Idaho.
The following is a summary of selected consolidated financial data of the Company for each of the last five years excluding the credit life and disability segment which is discontinued operations.
Independence Holding Company, a Delaware corporation (NYSE: IHC), is a holding company principally engaged in the life and health insurance business through: (i) its wholly owned insurance companies, Standard Security Life Insurance Company of New York ("Standard Security Life") and Madison National Life Insurance Company, Inc. ("Madison National Life") (these companies are sometimes collectively referred to as the "Insurance Group"); and (ii) its marketing, administrative and actuarial companies, including Insurers Administrative Corporation (“IAC”), Majestic Underwriters LLC, in which it owns a majority interest (“Majestic”), Health Plan Administrators (“HPA”), GroupLink Inc., in which it owns a majority interest (“GroupLink”), IHC Health Solutions, Inc. (“IHC Health Solutions”), Community America Insurance Services Inc. (“CAIS”) and Actuarial Management Corporation ("AMC"). IHC and its subsidiaries (including the Insurance Group) are sometimes collectively referred to as the "Company." The Company currently owns a 49.7% equity interest in American Independence Corp. (NASDAQ:AMIC) which owns Independence American Insurance Company (“Independence American”) and three MGU’s.
IHC’s health insurance products serve all sectors of the commercial market through multiple classes of business and varied distribution channels. Medical Stop-Loss is marketed to large employer groups that self-insure their medical risks; in 2007 the Company’s average case size was 600 covered lives. The small-group major medical product is purchased by employers with between two and 50
covered lives. With regard to those persons in the growing individual market, IHC’s products offer major medical coverage for individuals and families and persons with short-term medical needs Standard Security Life’s limited medical product is primarily purchased by hourly workers and others who are generally not eligible for coverage under their employer’s group medical plan. The dental and vision products are marketed to large and small groups as well as individuals. During 2007, the Company began selling student major medical insurance to colleges and accident medical, disability and AD&D to K-12 programs. The student medical business is written through two MGUs and the student accident business is written through the same two MGUs plus a third MGU that specializes in accident business. With respect to IHC’s life and disability business, Madison National Life has historically sold almost all of this business through one distribution source specializing in serving school districts and municipalities. In 2008, IHC’s expects to have increased success in diversifying the marketing of these products through other channels, including its health insurance distribution.
Income from continuing operations of $1.5 million, or $.10 per share, diluted, for the year ended December 31, 2007 compared to $14.5 million, or $.95 per share, diluted, for the year ended December 31, 2006. This decrease is primarily attributable to reserve strengthening of $11.9 million, before income taxes, in the Medical Stop-Loss segment as more fully described in the
Reserve Strengthening discussion under Results of Operations for the Year Ended December 31, 2007;
Consolidated investment yield of 5.3% in 2007 as compared to 5.5% in 2006;
Revenues of $402.3 million, 17.5% greater than 2006; primarily due to an increase in revenues from the Fully Insured Health segment and an increase in assumed premiums in the Medical Stop-Loss segment;
Book value of $14.63 per common share; a 3.9% decrease from December 31, 2006, primarily reflecting net loss from, and disposition of, discontinued operations, dividends, option exercises and net unrealized losses on securities;
Income (loss) before taxes from the Medical Stop-Loss segment decreased $15.9 million for the year ended December 31, 2007 compared to the same period in 2006 primarily as a result of a $11.9 million charge related to reserve strengthening for the re-estimation of unpaid losses from the prior year and an increase in the Net Loss Ratios for the current year as more fully described in the Reserve Strengthening discussion under Results of Operations for the Year Ended December 31, 2007;
Underwriting experience as indicated by its GAAP Combined Ratios for the Medical Stop-Loss segment are as follows (in thousands):
The Fully Insured Health segment reported a loss before taxes of $(.8) million for the year ended December 31, 2007 as compared to income of $1.1 million for the year ended December 31, 2006.
Premiums earned from this segment have increased $39.4 million for the year ended December 31, 2007 over the comparable period in 2006. The 2007 results include; (i) $1.1 million of adverse development on premiums earned primarily in 2006 on certain fully insured programs, and (ii) an increase from the prior year of $1.4 million in the amortization expense of intangible assets, which resulted from purchase accounting related to acquisitions.
Income before taxes from the Group disability, life annuities and DBL segment decreased $.2 million for the year ended December 31, 2007 primarily due to a refund of DBL premiums as Standard Security Life experienced loss ratios below New York State mandated minimums in this line of business slightly offset by better results in the group life and disability lines;
Net realized investment gains were $1.3 million for the year ended December 31, 2007 compared to $.6 million in 2006; and
Information pertaining to the Company's business segments is provided in Note 20 of Notes to Consolidated Financial Statements included in Item 8.
Policies that do not subject the Company to significant risk arising from mortality or morbidity are considered investment contracts. Deposits received from such contracts are reported as other policyholder funds. Policy charges for investment contracts consist of fees assessed against the policyholder account for maintenance, administration and surrender of the policy prior to contractually specified dates, and are recognized when assessed against the policyholder account balance.
The Company’s Group Disability segment is comprised of Long Term Disability (“LTD”) and Disability Benefits Law (“DBL”). The two “primary” assumptions on which Group Disability reserves are based are: (i) morbidity levels; and (ii) recovery rates. If morbidity levels increase, for example due to an epidemic or a recessionary environment, the Company would increase reserves because there would be more new claims than expected. In regard to the assumed recovery rate, if disabled lives recover more quickly than anticipated then the existing claims reserves would be reduced; if less quickly, the existing
The Company accounts for its investments in debt and equity securities under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. The Company has classified all of its investments as available-for-sale or trading securities. These investments are carried at fair value based on quoted market prices with unrealized gains and losses reported in either accumulated other comprehensive income (loss) in the Consolidated Balance Sheets for available-for-sale securities or as unrealized gains or losses in the Consolidated Statements of Operations for trading securities. Fixed maturities and equity securities available-for-sale totaled $710.4 million and $725.4 million at December 31, 2007 and 2006, respectively. 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 Operations, using the constant yield method over the period to maturity. The Company also had $9.0 million and $8.9 million, on average, in trading accounts during 2007 and 2006, respectively. All such trading securities were liquidated at December 31, 2007 and 2006. Net realized gains and losses on investments are computed using the specific identification method and are reported in the Consolidated Statements of Operations.
Income from continuing operations was $1.5 million, or $.10 per share, diluted, for the year ended December 31, 2007, a decrease of $13.0 million compared to income from continuing operations of $14.5 million, or $.95 per share, diluted, for the year ended December 31, 2006. The Company's income from continuing operations before taxes decreased $19.2 million to $1.9 million for the year ended December 31, 2007 from $21.1million for 2006. The loss from discontinued operations was $.2 million, or $.01 per share, diluted, for the year ended December 31, 2007 compared to $.4 million, or $.02 per share, diluted, for the year ended December 31, 2006. The loss on the disposition of discontinued operations in 2007 was $3.6 million, or $.24 per share, diluted, net of tax benefits of $1.9 million.
Information by business segment for the years ended December 31, 2007 and 2006 is as follows:
As a result of these actions, the Company increased the Projected Net Loss Ratio on the business written in 2007 by 9.8% and increased the Net Loss Ratio (defined as insurance benefits, claims and reserves divided by (premiums earned less underwriting expenses)) on the business written in 2006 by 11.4%. This resulted in a charge of $11.9 million, before income taxes, in 2007 primarily relating to the re-estimation of unpaid losses from the prior year. In addition, the Company booked higher reserves of $5.6 million related to the 2007 business due to the increase of 9.8% in the Projected Net Loss Ratio from
the rate at which new business was reserved for in 2006. The Company recorded Net Loss Ratios for the medical stop-loss line of 108.9%, 95.2% and 93.2% for the years ended December 31, 2007, 2006 and 2005 respectively. The Net Loss Ratio equation primarily differs from the Combined Ratio in that it subtracts out expenses from the premiums prior to dividing by the insurance benefits, claims and reserves. We primarily use Net Loss Ratios from a reserving standpoint and as a management tool to measure the profitability of medical stop-loss with respect to each program. The Company primarily uses Combined Ratios as an accounting measurement for reporting purposes.
Interest expense increased $.3 million primarily as a result of a higher average outstanding principal balance and a higher interest rate paid under a line of credit during 2007 compared to 2006 (an average of 6.7% in 2007 compared to 5.1% in 2006).
Total premiums earned grew $42.4 million to $258.7 million from $216.3 million in 2005. The increase is due to: (i) the Medical Stop-Loss segment which increased $24.6 million primarily due to increased retentions and increased production from business written by other carriers; (ii) the Fully Insured Health segment which had a $15.1 million increase in premiums, comprised of a $3.4 million increase in dental premiums, a $5.3 million increase in short-term medical and a $6.4 million increase in group major medical primarily due to business that was transferred to the Company's carriers during 2006; (iii) an increase of $2.3 million in the Group segment primarily due to a $2.1 million increase in point of service and a $.9 million increase in group term life, partially offset by a $1.1 million decrease in DBL caused by a reduction in statutory rates; and (iv) the Individual and Other segment which increased $.3 million.
Total net investment income increased $7.9 million primarily due to the maintenance of a higher level of invested assets due to the acquisitions of policy blocks in 2005, and an increase in the investment rate of return during the current year. In addition, the Company’s investments in limited partnerships in the Corporate segment contributed more investment income in 2006 than in 2005. The annualized return on total investments was 5.5% for 2006 versus 5.1% for 2005.
Equity income from AMIC decreased $.7 million in 2006 compared to 2005, as lower income earned by AMIC was slightly offset by an increase in IHC's ownership in AMIC. IHC’s average ownership was approximately 48% during 2006 compared to an average of 44% during 2005. The reduction in income is primarily due to an increase in net loss ratios of the Medical Stop-Loss business reinsured by AMIC and lower production from the AMIC MGUs.
Total other income decreased $3.3 million to $2.1 million from $5.4 million in 2005. This was primarily due to the inclusion of $3.5 million of other income in 2005 from a commutation agreement and a loss ratio cover with a reinsurer that have no equivalent in 2006.
Income tax expense decreased $2.1 million to $6.6 million for 2006 from $8.7 million in 2005 primarily due to the decrease in pre-tax income in 2006. The effective tax rates were 31.4% for 2006 and 33.1% for 2005.
The Company had net receivables from reinsurers of $100.1 million at December 31, 2007. Substantially all of the business ceded to such reinsurers is of short duration. All of such receivables are either due from the Company's affiliate, Independence American, highly rated companies or are adequately secured. No allowance for doubtful accounts was necessary at December 31, 2007.
Primarily in the third quarter of 2007, the Company recorded reserve strengthening of $12.2 million primarily related to its 2006 Medical Stop-Loss Business due to emerging Claim Development Patterns. The adverse development to the Claim Development Patterns was due to the frequency of claims reported in that quarter being significantly higher than had been predicted by prior loss development patterns. This frequency of medical stop-loss claims was due, in part, to the increasing severity of primary claims. The Company determined that this increase in claims was an indication of a pattern of higher loss frequency.
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. Of the aggregate carrying value of the Insurance Group's cash and investment assets, approximately 86.5%
The Company's gross unrealized losses on fixed maturities totaled $16.9 million at December 31, 2007. Substantially all of these securities were investment grade. The Company holds all fixed maturities as available-for-sale securities and, accordingly, marks all of its fixed maturities to market through accumulated other comprehensive income or loss. The unrealized losses on all available-for-sale securities have been evaluated in accordance with the Company's policy and were determined to be temporary in nature at December 31, 2007.
The Company experienced net unfavorable development of $11.9 million in the Medical Stop-Loss segment as previously discussed in Reserve Strengthening. The net unfavorable development is based on $10.2 million of negative development in the 2006 reserves and $1.7 million related to prior
years. With respect to the 2006 reserves, the deficiency was primarily due to the continuing deterioration of the business underwritten in 2006. These increases in reserve estimates are generally the result of on-going analysis of recent loss development trends. In the third quarter of 2007, the Company identified a material increase in claims and reserves with respect to business written in 2006. Such adverse development was primarily driven by the frequency of claims relative to the business written in that year proving significantly higher than what would have been predicted by prior loss development patterns. This increased frequency of medical stop-loss claims was due, in part, to increased severity of primary claims.
The Company experienced $1.1 million of net unfavorable development in the Fully Insured Health segment as previously discussed in Reserve Strengthening. The adverse development in the Fully Insured Health segment in 2007 is based on $1.2 million largely related to overestimating the value of the Cost Containment Program started in 2006 and underestimating in 2006 the seasonality patterns that are a result of an increasing portion of the business having HDHPs. The Fully Insured Health line had a favorable variance of $.1 on the 2005 reserves.
Due to the long-term nature of LTD, in establishing loss reserves the Company must make estimates for case reserves, incurred but not reported reserves (“IBNR”), and reserves for Loss Adjustment Expenses (“LAE”). Case reserves generally equal the Company’s best estimate of the present value of the liability for future benefits to be paid on claims incurred as of the balance sheet date. The LAE reserve is calculated based on an actuarial expense study. Since the LTD block of policies is relatively small, results can vary from year to year solely on the basis of one or two policies. It is not uncommon for a reserve of several hundred thousand dollars to be associated with one policy. If a small number of claimants with large policy reserves were to recover or a few large claims were incurred, the results could distort the Company’s reserve estimates from year to year. However, there were no individual factors in 2007 that caused the unfavorable development in LTD. With respect to DBL, reserves for the most recent quarter of earned premium are 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. Reserves 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. The favorable development in the DBL line is due to lower than expected claims.
There were no changes in the Company’s experience factor or the IBNR factor for Group Disability. The reserving process used by management was consistent from 2006 to 2007.
Due to its strong capital ratios, broad licensing and excellent asset quality and credit-worthiness, the Insurance Group remains well positioned to increase or diversify its current activities. It is anticipated that future acquisitions or other expansion of operations will be funded internally from existing capital and surplus and parent company liquidity. In the event additional funds are required, it is expected that they would be borrowed or raised in the public or private capital markets to the extent determined to be necessary or desirable. In November 2004, December 2003 and March 2003, the Company borrowed $15.0 million, $12.0 million and $10.0 million, respectively, through pooled trust preferred issuances by unconsolidated subsidiary trusts. In August 2006, the Company entered into a $15.0 million line of credit, all of which was drawn down at that time. $12.5 million remains outstanding at December 31, 2007 due to a $2.5 million scheduled reduction in this line of credit in August 2007. See Note 12 of the Notes to Consolidated Financial Statements in Item 8 of this report.
IHC enters into a variety of contractual obligations with third-parties in the ordinary course of its operations, including liabilities for insurance reserves, funds on deposit, debt and operating lease obligations. However, IHC does not believe that its cash-flow requirements can be fully assessed based upon an analysis of these obligations. Future cash outflows, whether they are contractual obligations or not, also will vary based upon IHC’s future needs. Although some outflows are fixed, others depend on future events.
The chart below reflects the maturity distribution of IHC’s contractual obligations at December 31, 2007 (in thousands):
In the second quarter of 2008, pursuant to terms set forth in the Limited Liability Company Agreement of Majestic, IHC intends to purchase the remaining 14.7% of the minority interest currently owned by a senior officer of Majestic.
Products”). These products are now approved in the majority of states, although
distribution channels; (ii) improved profitability of its Medical Stop-Loss business; (iii) reduced susceptibility to market cycles due to